<PAGE>
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only
(as permitted by Rule 14a-
6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
STAPLES, INC.
(Name of Registrant as Specified in Its Charter)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction: $
(5) Total fee paid: $
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
STAPLES, INC.
----------------
PROXY STATEMENT
----------------
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1999
Dear Stockholder:
We invite you to attend a Special Meeting of Stockholders of Staples, Inc.
to be held at 9:00 a.m., Eastern Standard Time, on , 1999 at . At
this Special Meeting we will ask you to consider and approve the Tracking Stock
Proposal, as well as related amendments to our existing stock plans, as
described in this Proxy Statement.
The Tracking Stock Proposal would allow us to issue a new series of common
stock intended to reflect the performance of our e-commerce business division,
which is comprised of Staples.com, Quillcorp.com and StaplesLink.com and
operates under the name Staples.com ("Staples.com Group"). Before we first
issue the new series of common stock, Staples' existing common stock would be
reclassified as Staples The Office Superstore Group common stock ("Staples
Stock"), intended to reflect the performance of our other businesses and a
retained interest in Staples.com Group ("Staples The Office Superstore Group"
or "Staples Group").
Specifically, the Tracking Stock Proposal seeks approval of an amendment to
our certificate of incorporation that would (i) authorize a new series of
common stock called Staples.com Group common stock ("Staples.com Stock"),
intended to reflect the performance of Staples.com Group, (ii) increase the
aggregate number of shares of common stock that we may issue from 1,500,000,000
to 1,650,000,000, initially comprised of 1,500,000,000 shares of Staples Stock
and 150,000,000 shares of Staples.com Stock, and (iii) re-classify Staples'
existing common stock as Staples Stock.
We believe the Tracking Stock Proposal is in the best interests of Staples
and its stockholders because the authorization of Staples.com Stock would:
. enable investors to review separate information about Staples.com Group
and separately value Staples.com Stock. This should encourage investors
to focus more attention on Staples.com Group and result in greater
market recognition of the value of Staples.com Group to Staples.
. enable us to issue Staples.com Stock in one or more private or public
financings, thus raising capital for Staples The Office Superstore Group
and/or Staples.com Group and perhaps creating a public trading market
for Staples.com Stock.
. enable us to grant stock options or restricted stock tied to Staples.com
Stock, thereby providing more focused incentives to Staples.com Group
management and employees.
. provide us with greater flexibility in responding to strategic
opportunities, such as acquisitions, by allowing us to issue either
Staples Stock or Staples.com Stock as appropriate under the
circumstances.
. enable us to realize more of the value of Staples.com Group without
losing the financial, tax, operational, strategic and other benefits of
being a single consolidated entity.
Our reasons for proceeding with the Tracking Stock Proposal are outlined
more fully elsewhere in this Proxy Statement.
In addition to the Tracking Stock Proposal, we are asking you to consider
and approve amendments to our 1992 Equity Incentive Plan, 1990 Director Stock
Option Plan and 1998 Employee Stock Purchase Plan that would permit us to issue
Staples.com Stock under those plans.
<PAGE>
The Staples board of directors has carefully considered and unanimously
approved the Tracking Stock Proposal and the Stock Plan Proposals and
recommends that you vote for them. We describe the proposals in more detail in
this Proxy Statement, which you should carefully read in its entirety before
voting.
Thank you for your continued support and interest in Staples.
Sincerely yours,
Thomas G. Stemberg
Chairman and CEO
See "Risk Factors" beginning on page 21 for certain information relating to
an evaluation of these proposals.
The date of this Proxy Statement is , 1999. We are first sending this
Proxy Statement to stockholders on or about that date.
<PAGE>
STAPLES, INC.
500 Staples Drive
Framingham, Massachusetts 01702
Notice of Special Meeting of Stockholders
To Be Held on , 1999
TO THE STOCKHOLDERS OF STAPLES:
A Special Meeting of Stockholders of Staples, Inc. will be held at 9:00
a.m., Eastern Standard Time, on , 1999, at , to
consider and act upon the following matters:
1. The approval of an amendment to our certificate of incorporation to
authorize a new series of common stock called Staples.com Stock, to
increase the aggregate number of shares of common stock that may be issued
and to reclassify the existing Staples common stock into Staples Stock (the
"Tracking Stock Proposal").
2. The approval of amendments to our 1992 Equity Incentive Plan, 1990
Director Stock Option Plan and 1998 Employee Stock Purchase Plan (the
"Stock Plan Proposals").
3. Such other business as may properly come before the meeting.
We describe the proposals in more detail in the accompanying Proxy
Statement, which you should read in its entirety before voting.
Stockholders of record at the close of business on , 1999 will be
entitled to notice of and to vote at the meeting or any adjournment thereof.
The stock transfer books will remain open.
By order of the board of directors,
Jack A. VanWoerkom
Secretary
Framingham, Massachusetts
, 1999
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE AND
SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED ENVELOPE IN ORDER
TO ENSURE REPRESENTATION OF YOUR SHARES. NO POSTAGE NEED BE AFFIXED IF THE
PROXY IS MAILED IN THE UNITED STATES.
"STREET NAME" HOLDERS WHO PLAN TO ATTEND THE MEETING WILL NEED TO BRING A
COPY OF A BROKERAGE STATEMENT REFLECTING STOCK OWNERSHIP AS OF THE RECORD DATE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
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QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING........................... 1
PROXY STATEMENT SUMMARY................................................... 5
GENERAL................................................................... 20
RISK FACTORS.............................................................. 21
Cautionary Statement Regarding Forward-looking Information.............. 26
PROPOSAL 1--THE TRACKING STOCK PROPOSAL................................... 27
General................................................................. 27
Background and Reasons for the Tracking Stock Proposal.................. 27
Description of Staples Stock and Staples.com Stock...................... 28
General............................................................... 28
Dividends............................................................. 29
Mandatory Dividend, Redemption or Exchange on Disposition of All or
Substantially All of the Assets of a Group........................... 31
Optional Exchange of One Series of Common Stock for the Other Series.. 34
Exchange for Stock of a Subsidiary at Staples' Option................. 35
General Dividend, Redemption and Exchange Provisions.................. 36
Voting Rights......................................................... 37
Liquidation........................................................... 38
Staples Group's Retained Interest In Staples.com Group................ 39
Number of Shares Issuable with Respect to Staples Group's Retained
Interest in Staples.com Group........................................ 39
Attribution of Issuances of Staples.com Stock......................... 40
Issuances of Staples.com Stock as Distributions on Staples Stock...... 40
Dividends on Staples.com Stock........................................ 40
Repurchases of Staples.com Stock...................................... 41
Transfers of Cash or Other Property between Staples Group and
Staples.com Group.................................................... 41
Effectiveness of Certain Terms........................................ 41
Determinations by the Board of Directors.............................. 42
Preemptive Rights..................................................... 42
Certain Other Provisions of Our Certificate of Incorporation, By-laws
and Delaware Law....................................................... 42
Preferred Stock....................................................... 42
Rights Plan........................................................... 42
Delaware Law and Certain Charter Provisions........................... 43
Limitation of Liability and Indemnification........................... 44
Cash Management and Allocation Policies................................. 44
Finance Activities.................................................... 44
Shared Services and Support Activities................................ 46
Taxes................................................................. 46
Carrying Charge....................................................... 46
Employee Benefits..................................................... 47
No Appraisal Rights..................................................... 47
Stock Transfer Agent and Registrar...................................... 47
Certain Federal Income Tax Considerations............................... 47
Tax Implications of the Tracking Stock Proposal to Stockholders....... 48
Tax Implications of a Conversion into Different Series of Tracking
Stock................................................................ 48
No Internal Revenue Service Ruling.................................... 48
Clinton Administration Proposal....................................... 48
Back-up Withholding................................................... 48
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
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<S> <C>
PROPOSALS 2, 3 and 4--THE STOCK PLAN PROPOSALS........................... 50
General................................................................ 50
Description of Amendments to Incentive Plan (Proposal 2)............... 50
Description of Amendments to Director Plan (Proposal 3)................ 51
Description of Amendments to Stock Purchase Plan (Proposal 4).......... 53
EXECUTIVE COMPENSATION................................................... 55
Summary Compensation................................................... 55
Performance Accelerated Restricted Stock ("PARS") Awards............... 57
Option Grants.......................................................... 57
Option Exercises and Holdings.......................................... 58
Employment Contracts, Termination of Employment and Change-in-Control
Agreements with Senior Executives..................................... 59
Director Compensation.................................................. 59
Compliance with Section 16(a) of the Securities Exchange Act of 1934... 60
Compensation Committee Interlocks and Insider Participation............ 60
Compensation Committee Report on Executive Compensation................ 61
Stock Performance Graph................................................ 64
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........... 65
WHERE YOU CAN FIND MORE INFORMATION...................................... 66
OTHER MATTERS............................................................ 66
INDEX OF CERTAIN TERMS................................................... 68
ANNEX I
llustration of Certain Terms........................................... I-1
ANNEX II
Amendment to Certificate of Incorporation of Staples, Inc.............. II-1
ANNEX III
Amended 1992 Stock Incentive Plan...................................... III-1
ANNEX IV
Amended 1990 Director Stock Option Plan................................ IV-1
ANNEX V
Amended 1998 Employee Stock Purchase Plan.............................. V-1
ANNEX VI
Staples.com Group Financial Information................................ VI-1
ANNEX VII
Staples Group Combined Financial Information........................... VII-1
</TABLE>
ii
<PAGE>
QUESTIONS AND ANSWERS
ABOUT THE
SPECIAL MEETING
Q: WHAT PROPOSALS ARE COVERED BY THIS PROXY STATEMENT?
A: We are sending you this Proxy Statement in connection with a Special Meeting
of Stockholders to be held at 9:00 a.m., Eastern Standard Time, on ,
1999 at . At this Special Meeting we will ask you to consider
and approve the Tracking Stock Proposal and the Stock Plan Proposals
described in this Proxy Statement.
The Tracking Stock Proposal would allow us to amend our certificate of
incorporation to:
. Create a new series of common stock called Staples.com Stock that could
be issued from time to time by the board of directors.
. Increase the aggregate number of shares of common stock that we may
issue from 1,500,000,000 to 1,650,000,000, initially comprised of
1,500,000,000 shares of Staples Stock and 150,000,000 shares of
Staples.com Stock.
. Re-classify each outstanding share of existing common stock into a share
of Staples Stock.
We intend Staples.com Stock to reflect the performance of Staples.com
Group, our e-commerce business division. We intend Staples Stock to reflect
the performance of Staples The Office Superstore Group, which consists of
our other businesses and a retained interest in Staples.com Group. In this
Proxy Statement, we also refer to Staples The Office Superstore Group as
"Staples Group." We have allocated, for financial reporting purposes, all
of Staples' consolidated assets, liabilities, revenue, expenses and cash
flow between Staples The Office Superstore Group and Staples.com Group. In
the future, we will publish combined financial statements of Staples The
Office Superstore Group, combined financial statements of Staples.com
Group, and consolidated financial statements of Staples covering both
Staples The Office Superstore Group and Staples.com Group.
The Stock Plan Proposals ask you to approve amendments to our 1992 Equity
Incentive Plan, 1990 Director Stock Option Plan and 1998 Employee Stock
Purchase Plan that would provide for the issuance of Staples.com Stock
under those Plans.
Q: WHAT WILL COMPRISE THE STAPLES E-COMMERCE GROUP BUSINESS?
A: Staples' electronic commerce business, or e-business, sells office products
and services over the Internet to Staples' entire spectrum of customers,
including small, medium and large businesses. Our e-business group operates
under the name Staples.com and is comprised of three principal business
units: Staples.com, Quillcorp.com and StaplesLink.com (formerly Staples
Network Advantage Plus, or SNAP), each of which has its own web site and is
specifically designed to serve a target customer base.
We launched our Staples.com web site, the e-business portal of our
traditional retail superstore, in November 1998. Staples.com markets over
6,000 products primarily to home office and small business customers
through its web-based superstore and offers free delivery for orders over
$50. We sold our first products through the Quillcorp.com web site, the e-
business portal of our Quill catalog business, in November 1996.
Quillcorp.com markets products from our direct mail catalog to small to
medium sized businesses customers such as legal and medical offices.
Quill's private label products are among the products we sell on our
Quillcorp.com web site. We established the StaplesLink.com web site, the
e-business portal of our Staples Network Advantage contract stationer
business, in August 1997. Our StaplesLink.com web site focuses on meeting
the needs of medium to large sized business customers by offering simple
order entry and contract pricing.
1
<PAGE>
Q: WHAT IS "TRACKING STOCK"?
A: "Tracking stock", which people sometimes call "alphabet stock", "letter
stock" or "targeted stock", is a type of common stock that the issuing
company intends to reflect (or "track") the performance of a particular
business. As mentioned above, we propose creating a new series of tracking
stock, to be designated as Staples.com Stock, and reclassifying our existing
common stock into a new series of common stock to be designated Staples
Stock.
We cannot assure you that the values of Staples Stock and Staples.com Stock
will in fact reflect the performance of Staples The Office Superstore Group
and Staples.com Group as we intend. Holders of Staples Stock and
Staples.com Stock will continue to be common stockholders of Staples and,
as such, will be subject to all risks associated with an investment in
Staples and all of our businesses, assets and liabilities.
Q: HOW AND WHEN WILL YOU INITIALLY ISSUE STAPLES.COM STOCK?
A: We currently plan to grant options for Staples.com Stock under the 1992
Equity Incentive Plan to all Staples employees who currently receive options
under the Plan shortly following stockholder approval of the proposed
amendment to the Plan. We expect to issue additional shares of Staples.com
Stock in one or more private or public financings within 12 months of
stockholder approval of the Tracking Stock Proposal. The specific terms of
the financings, including whether they are private or public, the amount of
Staples.com Stock we issue, and the timing of the financings, will depend
upon factors such as stock market conditions and the performance of
Staples.com Group.
Q: WHEN WILL YOU IMPLEMENT THE TRACKING STOCK PROPOSAL? WHEN WILL YOU RE-
CLASSIFY MY COMMON STOCK INTO STAPLES STOCK?
A: We expect to file the charter amendment to implement the Tracking Stock
Proposal and re-classify your common stock shortly following the Special
Meeting, assuming the Tracking Stock Proposal is approved.
Q: WHAT HAPPENS TO MY COMMON STOCK WHEN YOU IMPLEMENT THE TRACKING STOCK
PROPOSAL? DO I NEED TO SEND IN MY STOCK CERTIFICATES?
A: The filing of the charter amendment implementing the Tracking Stock Proposal
will automatically re-classify your shares into Staples Stock, and your
existing stock certificates will automatically represent that Staples Stock.
Since the re-classification is automatic, you do not need to send in your
stock certificates or make any notations reflecting the change.
Q: WHY ARE YOU AUTHORIZING STAPLES.COM STOCK?
A: Primarily for the following reasons:
. to enable investors to review separate information about Staples.com
Group and separately value Staples.com Stock. This should encourage
investors to focus more attention on Staples e-Commerce Group and result
in greater market recognition of the value of Staples.com Group to
Staples.
. to enable us to issue Staples.com Stock in one or more private or public
financings, thus raising capital for Staples The Office Superstore Group
and/or Staples.com Group and perhaps creating a public trading market
for Staples.com Stock.
. to enable us to grant stock options or restricted stock tied to
Staples.com Stock, thereby providing more focused incentives to
Staples.com Group management and employees.
2
<PAGE>
. to provide us with greater flexibility in responding to strategic
opportunities, such as acquisitions, by allowing us to issue either
Staples Stock or Staples.com Stock as appropriate under the
circumstances.
. to enable us to realize some of the value of Staples.com Group without
losing the financial, tax, operational, strategic and other benefits of
being a single consolidated entity.
Q: WILL STAPLES STOCK BE LISTED ON NASDAQ? HOW ABOUT STAPLES.COM STOCK?
A: When we re-classify our common stock as Staples Stock, it will continue to
trade on the Nasdaq National Market under the symbol "SPLS". If and when we
decide to issue Staples.com Stock in a public offering, we would expect to
apply for listing of Staples.com Stock on the Nasdaq National Market.
Q: WHAT VOTING RIGHTS WILL I HAVE?
A: Holders of Staples Stock and Staples.com Stock will vote together as a
single class, except in certain limited circumstances. Each share of Staples
Stock will entitle the holder to one vote. Likewise, each share of
Staples.com Stock will entitle the holder to one vote.
Q: DO YOU INTEND TO PAY DIVIDENDS?
A: We currently intend to retain all of our earnings for use in the operation
and expansion of our business. We therefore do not expect to pay any cash
dividends on Staples Stock or Staples.com Stock in the foreseeable future.
Q: WHAT IS THE PURPOSE OF THE STOCK PLAN PROPOSALS?
A: The Stock Plan Proposals are intended to advance the interests of our
stockholders by enabling us to provide management and employees of both
Staples.com Group and Staples The Office Superstore Group with the
opportunity to own an equity interest in Staples.com Group. Because the
value of this equity interest is tied to the performance of Staples.com
Group, we believe those equity awards will help align the interests of our
employees with the holders of Staples.com Stock. We intend to issue
Staples.com Stock under those plans both to Staples.com Group employees, to
provide them with incentives directly tied to their business, and to Staples
The Office Superstore Group employees, to promote cooperation between these
businesses and help ensure that all of our employees are motivated by the
best interests of all of our stockholders.
Q: HOW MANY SHARES OF STAPLES.COM STOCK WILL BE ISSUABLE UNDER THE AMENDED
PLANS?
A: A total of 8,775,000 shares of Staples.com Stock would be issuable under the
1992 Equity Incentive Plan, a total of 250,000 shares of Staples.com Stock
would be issuable under the 1990 Director Stock Option Plan and a total of
600,000 shares of Staples.com Stock would be issuable under the 1998
Employee Stock Purchase Plan. Based upon the expected retained interest of
Staples The Office Superstore Group in Staples.com Group, the total number
of shares issuable under the plans would represent a 16.1% interest in
Staples.com Group, before giving effect to the issuance of shares of
Staples.com Stock in a private or public financing.
Q: WHAT DOES THE BOARD OF DIRECTORS RECOMMEND?
A: The Staples board of directors has carefully considered and unanimously
approved the Tracking Stock Proposal and the Stock Plan Proposals described
in the Proxy Statement and recommends that you vote for them.
3
<PAGE>
Q: WHAT VOTE IS REQUIRED TO APPROVE THE PROPOSALS?
A: The Tracking Stock Proposal requires the affirmative vote of the holders of
a majority of the outstanding shares of Staples common stock. Each of the
Stock Plan Proposals requires the affirmative vote of the holders of a
majority of the shares of Staples common stock voting on the proposal.
Q: WHO DO I CONTACT IF I HAVE ADDITIONAL QUESTIONS?
A: If you have any questions prior to the Special Meeting, please call
.
4
<PAGE>
PROXY STATEMENT SUMMARY
This summary highlights key aspects of the Tracking Stock Proposal and the
Stock Plan Proposals described in more detail elsewhere in this Proxy
Statement. This summary is not a substitute for the more detailed information
contained in the rest of this Proxy Statement. For a more comprehensive
description of the Tracking Stock Proposal and the Stock Plan Proposals, you
should read the rest of this Proxy Statement. Capitalized terms used in this
summary have the meanings given them elsewhere in this Proxy Statement. See
"Index of Certain Terms" on page 68.
STAPLES, STAPLES THE OFFICE SUPERSTORE GROUP AND STAPLES.COM GROUP
Staples
Staples pioneered the office products superstore concept and is a leading
office products distributor, with a total of 1,029 retail stores located in the
United States, Canada, the United Kingdom and Germany as of August 28, 1999. In
addition, Staples has a catalog business, an electronic commerce business and
contract stationer operations.
From an accounting standpoint, we have separated Staples.com Group, our e-
commerce business division, from Staples The Office Superstore Group, which
includes the rest of our businesses and a retained interest in Staples.com
Group. We have allocated all of our consolidated assets, liabilities, revenue,
expenses and cash flow between Staples.com Group and Staples The Office
Superstore Group. These two divisions are sometimes referred to in this Proxy
Statement as "Groups." Staples The Office Superstore Group is also referred to
herein as "Staples Group."
The Tracking Stock Proposal would allow us to issue Staples.com Stock,
intended to reflect the performance of Staples.com Group, and Staples Stock,
intended to reflect the performance of Staples Group. We briefly describe
Staples Group and Staples.com Group below.
Our principal executive offices are located at 500 Staples Drive,
Framingham, Massachusetts 01702. Our telephone number is (508) 253-5000.
Staples The Office Superstore Group
Staples The Office Superstore Group, which we also call Staples Group,
includes Staples' retail stores, catalog business and contract stationer
business and a retained interest in Staples.com Group. This retained interest
is currently 100%, but will decline to reflect issuances of Staples.com Stock
under either our stock plans or in one or more private or public financings.
Staples.com Group
Staples' electronic commerce business, or e-business, sells office products
and services over the Internet to Staples' entire spectrum of customers,
including small, medium and large businesses. Our e-business group operates
under the name Staples.com and is comprised of three principal business units:
Staples.com, Quillcorp.com and StaplesLink.com (formerly Staples Network
Advantage Plus, or SNAP), each of which has its own web site and is
specifically designed to serve a target customer base. All of our web sites
leverage existing resources wherever possible such as offline advertising, call
centers, distribution centers and delivery hubs. Online marketing for our e-
businesses is currently done primarily through major relationships with leading
Internet properties. Each of our web portals has many innovative features and
offers functionality which allows Staples to better serve existing customers as
well as attract a large number of new customers.
5
<PAGE>
SPECIAL MEETING
Time, Date and Place........ 9:00 a.m., Eastern Standard Time, on ,
1999, at .
Record Date................. , 1999.
Proposals to be Vote Required for Approval
Considered..................
. Proposal 1--The Proposal 1 requires the affirmative vote of the
Tracking Stock Proposal holders of a majority of the outstanding shares
of existing common stock.
. Proposals 2, 3 and 4-- Each of Proposals 2, 3 and 4 requires the
The Stock Plan affirmative vote of the holders of a majority of
Proposals the shares of existing common stock voting on the
matter.
Questions If you have any questions prior to the Special
Meeting, please call .
The board of directors has carefully considered and unanimously
approved these proposals and recommends that you vote for them.
6
<PAGE>
PROPOSAL 1--THE TRACKING STOCK PROPOSAL
General
At the Special Meeting, we will ask you to consider and approve the Tracking
Stock Proposal described in this Proxy Statement. The Tracking Stock Proposal
would allow us to amend our certificate of incorporation to:
. Create a new series of common stock called Staples.com Stock that could
be issued from time to time by the board of directors.
. Increase the aggregate number of shares of common stock that we may
issue from 1,500,000,000 to 1,650,000,000, initially comprised of
1,500,000,000 shares of Staples Stock and 150,000,000 shares of
Staples.com Stock.
. Re-classify each outstanding share of existing common stock into a share
of Staples Stock.
We intend Staples.com Stock to reflect the performance of Staples.com Group,
our e-commerce business division. We intend Staples Stock to reflect the
performance of Staples Group, which consists of our other businesses and a
retained interest in Staples.com Group. We have allocated, for financial
reporting purposes, all of Staples' consolidated assets, liabilities, revenue,
expenses and cash flow between Staples Group and Staples.com Group. In the
future, we will publish combined financial statements of Staples Group,
combined financial statements of Staples.com Group, and consolidated financial
statements of Staples covering both Staples Group and Staples.com Group.
We currently plan to grant options for Staples.com Stock under the 1992
Equity Incentive Plan to all Staples employees who currently receive options
under the Plan shortly following stockholder approval of the proposed amendment
to the Plan. We expect to issue additional shares of Staples.com Stock in one
or more private or public financings within 12 months of stockholder approval
of the Tracking Stock Proposal. The specific terms of the financings, including
whether they are private or public, the amount of Staples.com Stock we issue,
and the timing of the financings, will depend upon factors such as stock market
conditions and the performance of Staples.com Group.
We expect to file the charter amendment implementing the Tracking Stock
Proposal and re-classify your common stock shortly following the Special
Meeting, assuming the Tracking Stock Proposal is approved.
Reasons for the Tracking Stock Proposal
We believe the Tracking Stock Proposal is in the best interests of Staples
and its stockholders because the authorization of Staples.com Stock would:
. enable investors to review separate information about Staples.com Group
and separately value Staples.com Stock. This should encourage investors
to focus more attention on Staples.com Group and result in greater
market recognition of the value of Staples.com Group to Staples.
. enable us to issue Staples.com Stock in one or more private or public
financings, thus raising capital for Staples Group and/or Staples.com
Group and perhaps creating a public trading market for Staples.com
Group.
. enable us to grant stock options or restricted stock tied to Staples.com
Group, thereby providing more focused incentives to Staples.com Group
management and employees.
. provide us with greater flexibility in responding to strategic
opportunities (including acquisitions), because it would allow us to
issue either Staples Stock or Staples.com Stock as appropriate under the
circumstances.
7
<PAGE>
. enable us to realize some of the value of Staples.com Group without
losing the financial, tax, operational, strategic and other benefits of
being a single consolidated entity.
If you vote "FOR" the Tracking Stock Proposal at the Special Meeting you may
be forfeiting your right to challenge the Tracking Stock Proposal in the
future.
Summary Comparison of Terms of Existing Common Stock with Terms of Staples
Stock and Staples.com Stock
The following compares certain terms of our existing common stock to the
proposed terms of Staples Stock and Staples.com Stock. This comparison is not
complete and should be read together with the more detailed information
contained in the rest of this Proxy Statement. In particular, see "Proposal 1--
The Tracking Stock Proposal--Description of Staples Stock and Staples.com
Stock."
<TABLE>
<CAPTION>
Tracking Stock Proposal
--------------------------------------------
Existing Common Stock Staples Stock Staples.com Stock
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Basic Investment Our existing common We intend Staples We intend Staples.com
Characteristics: stock reflects the Stock to reflect the Stock to reflect the
performance of all of performance of performance of
our businesses, Staples Group. Staples.com Group,
including: Staples Group our e-commerce
currently includes: business division.
. North American . North American Staples.com sells
superstores superstores office products and
services over the
Internet to Staples'
entire spectrum of
customers, including
small, medium and
large businesses.
Staples.com is
comprised of three
principal business
units: Staples.com,
Quillcorp.com and
StaplesLink.com
(formerly Staples
Network Advantage
Plus, or SNAP), each
of which has its own
web site and is
specifically designed
to serve a target
customer base.
. Delivery . Delivery
operations, operations,
including catalog, including catalog
contract stationer and contract
and e-commerce stationer
businesses businesses, but
excluding
e-commerce
businesses
. International . International
stores stores
. A Retained
Interest in
Staples.com Group,
which is currently
100% but will
decline to reflect
future issuances
of Staples.com
Stock.
We cannot assure you We cannot assure you
that the market value that the market value
of Staples Stock will of Staples e-Commerce
in fact reflect the Stock will in fact
performance of reflect the
Staples Group as we performance of
intend. Holders of Staples.com Group as
Staples Stock will be we intend. Holders of
common stockholders Staples e-Commerce
of Staples and, as Stock will continue
such, will be subject to be common
to all of the risks stockholders of
associated with an Staples and, as such,
investment in Staples will be subject to
and all of our all of the risks
businesses, assets associated with an
and liabilities. investment in Staples
and all of our
businesses, assets
and liabilities.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Tracking Stock Proposal
--------------------------------------------
Existing Common Stock Staples Stock Staples.com Stock
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Issuance: Our existing common The amendment to the We currently plan to
stock is already certificate of grant options for
outstanding incorporation Staples.com Stock
authorizing under the 1992 Equity
Staples.com Stock Incentive Plan to all
would re-classify Staples employees who
each outstanding currently receive
share of existing options under the
common stock into a Plan shortly
share of Staples following stockholder
Stock. approval of the
proposed amendment to
the Plan. We expect
to issue additional
shares of Staples.com
Stock in one or more
private or public
financings within 12
months of stockholder
approval of the
Tracking Stock
Proposal. The
specific terms of the
financings, including
whether they are
private or public,
the amount of
Staples.com Stock we
issue, and the timing
of the financings,
will depend upon
factors such as stock
market conditions and
the performance of
Staples.com Group.
Retained Interest: N/A We would adjust the N/A
Retained Interest of
Staples Group (which
would initially be
100%) as appropriate
to reflect issuances
or repurchases of
Staples.com Stock
capital contributions
to, or returns of
capital from,
Staples.com Group;
and certain other
events.
Authorized and We are currently The Tracking Stock The Tracking Stock
Outstanding Common authorized to issue Proposal will Proposal will
Stock: only one series of authorize us to issue authorize us to issue
common stock. two series of common two series of common
stock--Staples Stock stock -- Staples
and Staples.com Stock and Staples.com
Stock. Stock.
We are currently The Tracking Stock The Tracking Stock
authorized to issue Proposal will Proposal will
up to 1,500,000,000 authorize us to authorize us to
shares of common increase the number increase the number
stock. of authorized shares of authorized shares
to 1,650,000,000 to 1,650,000,000
shares of common shares of common
stock, initially stock, initially
comprised of comprised of
1,500,000,000 shares 1,500,000,000 shares
of Staples Stock and of Staples Stock and
150,000,000 shares of 150,000,000 shares of
Staples.com Stock. Staples.com Stock.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Tracking Stock Proposal
--------------------------------------------
Existing Common Stock Staples Stock Staples.com Stock
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
shares of Immediately following After the Tracking
existing common stock the implementation of Stock Proposal is
were outstanding on the Tracking Stock implemented, we
, 1999. These Proposal, shares expect to issue from
shares count against of Staples Stock will time to time shares
the total number of be outstanding, based of Staples.com Stock.
shares we are on the number of Any shares issued,
authorized to issue. shares of existing and the shares of
common stock Staples Stock then
outstanding on outstanding, will
, 1999. These count against the
shares, and any total number of
shares of Staples.com shares of common
Stock outstanding stock we are
from time to time, authorized to issue.
will count against
the total number of
shares of common
stock we are
authorized to issue.
Dividends: We currently intend We currently intend We currently intend
to retain all of our to retain all of our to retain all of our
earnings for use in earnings for use in earnings for use in
the operation and the operation and the operation and
expansion of our expansion of our expansion of our
business. We do not business. We do not business. We do not
expect to pay any expect to pay any expect to pay any
cash dividends on our cash dividends on cash dividends on
existing common stock Staples Stock in the Staples.com Stock in
in the foreseeable foreseeable future. the foreseeable
future. future.
Although our Although our Although our
revolving credit revolving credit revolving credit
agreement restricts agreement restricts agreement restricts
the payment of cash the payment of cash the payment of cash
dividends, we are dividends, we will dividends, we will
otherwise permitted otherwise be otherwise be
to pay dividends out permitted to pay permitted to pay
of the assets of dividends on Staples dividends on Staples
Staples legally Stock out of the e-Commerce Stock out
available for the assets of Staples of the assets of
payment of dividends legally available for Staples legally
under Delaware law. the payment of available for the
dividends under payment of dividends
Delaware law, but the under Delaware law
total of the amounts (and transfer
paid as dividends on corresponding amounts
Staples Stock cannot to Staples Group in
exceed the Available respect of its
Dividend Amount for Retained Interest),
Staples Group. The but the total of the
Available Dividend amounts paid as
Amount for Staples dividends on Staples
Group is based on the e-Commerce Stock (and
amount that would be the corresponding
legally available for amounts transferred
the payment of to Staples Group in
dividends under respect of its
Delaware law if Retained Interest)
Staples Group were a cannot exceed the
separate Delaware Available Dividend
corporation and Amount for Staples e-
certain other Commerce Group. The
assumptions were Available Dividend
applied. Amount for Staples e-
Commerce Group is
based on the amount
that would be legally
available for the
payment of dividends
under Delaware law if
Staples.com Group
were a separate
Delaware corporation
and Staples Group's
Retained Interest in
Staples.com Group
were represented by
outstanding shares.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Tracking Stock Proposal
--------------------------------------------
Existing Common Stock Staples Stock Staples.com Stock
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Mandatory Dividend, None. If we dispose of All If we dispose of All
Redemption or or Substantially All or Substantially All
Exchange on of the Assets of of the Assets of
Disposition of Staples Group and the Staples.com Group and
Assets: disposition is not an the disposition is
Exempt Disposition, not an Exempt
we would be required Disposition, we would
to choose one of the be required to choose
following three one of the following
alternatives: three alternatives:
. pay a dividend to . pay a dividend to
holders of Staples holders of
Stock in an amount Staples.com Stock
equal to their in an amount equal
Proportionate to their
Interest in the Net Proportionate
Proceeds of such Interest in the Net
disposition; Proceeds of such
disposition;
. redeem from holders . redeem from holders
of Staples Stock, of Staples.com
for an amount equal Stock, for an
to their amount equal to
Proportionate their Proportionate
Interest in the Net Interest in the Net
Proceeds of such Proceeds of such
disposition, disposition,
outstanding shares outstanding shares
of Staples Stock; of Staples e-
or Commerce Stock; or
. issue Staples.com . issue Staples Stock
Stock in exchange in exchange for
for outstanding outstanding
Staples Stock at a Staples.com Stock
10% premium (based at a 10% premium
on the average (based on the
Market Value of average Market
Staples Stock as Value of Staples e-
compared to the Commerce Stock as
average Market compared to the
Value of Staples e- average Market
Commerce Stock over Value of Staples
a specified 20- Stock over a
Trading Day period specified 20-
prior to the Trading Day period
exchange). prior to the
exchange).
At any time within At any time within
one year after one year after
completing a special completing a special
dividend or partial dividend or partial
redemption referred redemption referred
to above, we will to above, we will
have the right to have the right to
issue Staples e- issue Staples Stock
Commerce Stock in in exchange for
exchange for outstanding
outstanding Staples Staples.com Stock at
Stock at a 10% a 10% premium (based
premium (based on the on the average Market
average Market Value Value of Staples.com
of Staples Stock as Stock as compared to
compared to the the average Market
average Market Value Value of Staples
of Staples.com Stock Stock over a
over a specified 20- specified 20-Trading
Trading Day period Day period prior to
prior to the the exchange).
exchange).
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Tracking Stock Proposal
--------------------------------------------
Existing Common Stock Staples Stock Staples.com Stock
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Optional Exchange of None. We will have the We will have the
One Series of Common right, at any time, right, at any time,
Stock for the Other to issue shares of to issue shares of
Series: Staples.com Stock in Staples Stock in
exchange for exchange for
outstanding shares of outstanding shares of
Staples Stock at a Staples e-Commerce
15% premium. Stock at a premium
that will initially
be 25% (for exchanges
occurring in the
first quarter after
issuance) and will
decline ratably each
quarter over a period
of 3 years to 15%.
Notwithstanding the Notwithstanding the
exchange provisions exchange provisions
outlined above, in outlined above, in
the event that the event that
certain adverse tax certain adverse tax
law changes were to law changes were to
take place, we will take place, we will
have the right to have the right to
issue shares of issue shares of
either series of either series of
common stock in common stock in
exchange for exchange for
outstanding shares of outstanding shares of
the other series of the other series of
common stock at a 10% common stock at a 10%
premium, regardless premium, regardless
of when such adverse of when such adverse
tax law changes take tax law changes take
place. place.
The exchange ratio The exchange ratio
that will result in that will result in
the specified premium the specified premium
will be calculated will be calculated
based on the average based on the average
Market Value of Market Value of
Staples Stock as Staples Stock as
compared to the compared to the
average Market Value average Market Value
of Staples.com Stock of Staples.com Stock
during the 20 during the 20
consecutive Trading consecutive Trading
Day period ending on, Day period ending on,
and including, the and including, the
5th Trading Day 5th Trading Day
immediately preceding immediately preceding
the date on which we the date on which we
mail the notice of mail the notice of
exchange to holders exchange to holders
of the outstanding of the outstanding
shares being shares being
exchanged. exchanged.
In addition, we will In addition, we will
have the right, at have the right, at
any time Staples e- any time Staples e-
Commerce Stock Commerce Stock
exceeds the 40% of exceeds the 40% of
Total Market Total Market
Capitalization Capitalization
Threshold but is Threshold but is
below the 60% of below the 60% of
Total Market Total Market
Capitalization Capitalization
Threshold, to issue Threshold, to issue
shares of either shares of either
series of common series of common
stock in exchange for stock in exchange for
outstanding shares of outstanding shares of
the other series of the other series of
common stock on a common stock on a
value for value value for value
basis. basis.
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Tracking Stock Proposal
--------------------------------------------
Existing Common Stock Staples Stock Staples.com Stock
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
The exchange ratio The exchange ratio
that will result in a that will result in a
value for value value for value
exchange will be exchange will be
based on the average based on the average
Market Value of the Market Value of the
series of the common series of the common
stock being exchanged stock being exchanged
as compared to the as compared to the
average Market Value average Market Value
of the other series of the other series
of common stock of common stock
during the 20 during the 20
consecutive Trading consecutive Trading
Day period ending on, Day period ending on,
and including, the and including, the
5th Trading Day 5th Trading Day
immediately preceding immediately preceding
the date on which we the date on which we
mail the notice of mail the notice of
exchange to holders exchange to holders
of the outstanding of the outstanding
shares being shares being
exchanged. exchanged.
Exchange for Stock of None. We will have the We will have the
a Subsidiary at right at any time to right at any time to
Staples' Option: transfer all of the transfer all of the
assets and assets and
liabilities of liabilities of
Staples Group to a Staples e-Commerce
subsidiary and Group to a subsidiary
deliver all of the and deliver all of
stock of that the stock of that
subsidiary in subsidiary in
exchange for all of exchange for all of
the outstanding the outstanding
Staples Stock. Staples e-Commerce
Stock.
Voting Rights: One vote per share. One vote per share. One vote per share.
Holders of Staples Holders of Staples
Stock and Staples.com Stock and Staples.com
Stock will vote Stock will vote
together as a single together as a single
class, except in class, except in
limited limited
circumstances. circumstances.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Tracking Stock Proposal
--------------------------------------------
Existing Common Stock Staples Stock Staples.com Stock
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Liquidation: Upon liquidation of Upon liquidation of Upon liquidation of
Staples, holders of Staples, holders of Staples, holders of
existing common stock Staples Stock and Staples Stock and
are entitled to Staples.com Stock Staples.com Stock
receive the net will be entitled to will be entitled to
assets of Staples, if receive the net receive the net
any, available for assets of Staples, if assets of Staples, if
distribution to any, available for any, available for
stockholders (after distribution to distribution to
payment or provision stockholders (after stockholders (after
for all liabilities payment or provision payment or provision
of Staples and for all liabilities for all liabilities
payment of the of Staples and of Staples and
liquidation payment of the payment of the
preference payable to liquidation liquidation
any holders of preference payable to preference payable to
Preferred Stock). any holders of any holders of
Preferred Stock). Preferred Stock).
Amounts due upon Amounts due upon
liquidation in liquidation in
respect of shares of respect of shares of
Staples Stock and Staples Stock and
shares of Staples.com shares of Staples.com
Stock will be Stock will be
distributed pro rata distributed pro rata
in accordance with in accordance with
the average Market the average Market
Value of Staples Value of Staples
Stock and the average Stock and the average
Market Value of Market Value of
Staples.com Stock Staples.com Stock
over a 20-Trading Day over a 20-Trading Day
period ending 300 period ending 300
days after the days after the
implementation of the implementation of the
Tracking Stock Tracking Stock
Proposal (or if the Proposal (or if the
liquidation occurs liquidation occurs
prior to that date, prior to that date,
the 20-Trading Day the 20-Trading Day
period prior to the period prior to the
liquidation.) In the liquidation.) In the
absence of a public absence of a public
trading market for trading market for
Staples.com Stock, Staples.com Stock,
market value would be market value would be
determined in good determined in good
faith by the board of faith by the board of
directors. directors.
Stock Exchange Nasdaq National Nasdaq National If and when we issue
Listings: Market under the Market under the Staples e-Commerce
symbol "SPLS." symbol "SPLS." Stock in a public
offering, we would
expect to apply for
listing of Staples e-
Commerce Stock on the
Nasdaq National
Market.
</TABLE>
Cash Management and Allocation Policies
Because Staples Group and Staples.com Group are part of a single company, we
have established policies relating to cash management and allocations between
Staples Group and Staples.com Group. For a more complete description of these
policies, see "Proposal 1--The Tracking Stock Proposal--Cash Management and
Allocation Policies."
No Appraisal Rights
Under the Delaware General Corporation Law, you will not have appraisal
rights in connection with the Tracking Stock Proposal.
Certain Federal Income Tax Considerations
We have been advised by Ernst & Young LLP that no gain or loss will be
recognized by you for federal income tax purposes as a result of the
implementation of the Tracking Stock Proposal. However, the Internal
14
<PAGE>
Revenue Service could disagree. There are no court decisions or other
authorities bearing directly on transactions similar to the Tracking Stock
Proposal. In addition, the Internal Revenue Service has announced that it will
not issue rulings on the characterization of stock with characteristics similar
to Staples Stock or Staples.com Stock. Therefore, the tax treatment of the
Tracking Stock Proposal is subject to some uncertainty under current law.
In addition, a recent proposal by the Clinton Administration would impose a
corporate level tax on the issuance of stock similar to Staples Stock or
Staples.com Stock. If this proposal were enacted, we could be subject to tax on
an issuance of Staples Stock or Staples.com Stock after the date of enactment.
If our stockholders approve the Tracking Stock Proposal, our board of directors
currently intends to implement the proposal, subject to further legislative
developments relating to the Clinton Administration tax proposal (or similar
proposals).
In light of the foregoing, you should consult your own tax advisor regarding
the tax consequences of the Tracking Stock Proposal, including the state, local
and any foreign tax consequences.
15
<PAGE>
PROPOSALS 2, 3 and 4--THE STOCK PLAN PROPOSALS
At the Special Meeting, we will also ask you to consider and approve
amendments to our 1992 Equity Incentive Plan, 1990 Director Stock Option Plan
and 1998 Employee Stock Purchase Plan that would permit us to issue Staples.com
Stock under those Plans. For a more detailed description of these proposals,
see "Proposals 2, 3 and 4--The Stock Plan Proposals."
16
<PAGE>
STAPLES
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Six Months Ended Fiscal Year
------------------------------- --------------------------------
July 31, 1999 August 1, 1998(1) 1998(1)(2) 1997(3) 1996
------------- ----------------- ---------- ---------- ----------
(in thousands, except per share and selected operating data)
<S> <C> <C> <C> <C> <C>
Statement of Income
Data:
Sales................... $3,912,176 $3,146,316 $7,123,189 $5,732,145 $4,493,589
Gross profit............ 949,312 728,805 1,726,266 1,354,455 1,060,245
Net income.............. 103,058 44,924 185,370 167,914 144,742
Pro forma net
income(4).............. -- 43,110 183,556 153,128 129,413
Historical basic
earnings per common
share(5)............... $ 0.22 $ 0.11 $ 0.43 $ 0.41 $ 0.36
Historical diluted
earnings per common
share(5)............... $ 0.22 $ 0.10 $ 0.41 $ 0.39 $ 0.35
Pro forma basic earnings
per common
share(4)(5)............ $ -- $ 0.10 $ 0.43 $ 0.38 $ 0.32
Pro forma diluted
earnings per common
share(4)(5)............ $ -- $ 0.10 $ 0.41 $ 0.36 $ 0.31
Selected Operating Data:
Stores open (at period
end)................... 1,009 830 913 742 557
</TABLE>
<TABLE>
<CAPTION>
As of
---------------------------
July 31, 1999 Jan. 30, 1999
------------- -------------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Working capital..................................... $ 677,132 $ 798,768
Total assets........................................ 3,405,246 3,179,266
Total long-term debt, less current portion.......... 263,560 205,015
Stockholders' equity................................ 1,733,678 1,656,886
</TABLE>
- --------
(1) Results of operations for this period include a $41,000,000 charge relating
to costs incurred in connection with the merger with Quill.
(2) Results of operations for this period include a $49,706,000 charge relating
to store closure costs.
(3) Results of operations for this period include a pre-tax charge of $29,665
resulting from the costs incurred in connection with the proposed merger
with Office Depot, Inc.
(4) Pro forma net income and pro forma earnings per share include a provision
for income taxes on the previously untaxed earnings of Quill, which had
been taxed as an S corporation prior to its acquisition by Staples.
(5) Earnings per common share have been restated to reflect 3-for-2 stock
splits effective January 1999, January 1998 and March 1996.
17
<PAGE>
STAPLES THE OFFICE SUPERSTORE GROUP
SUMMARY HISTORICAL COMBINED FINANCIAL DATA
<TABLE>
<CAPTION>
Six Months Ended Fiscal Year Ended(1)
--------------------- --------------------------------
July 31, August 1,
1999 1998(1) 1998(1)(2) 1997(3) 1996
---------- ---------- ---------- ---------- ----------
(in thousands, except per share and selected operating
data)
<S> <C> <C> <C> <C> <C>
Statement of Income
Data:
Sales................... $3,884,874 $3,141,258 $7,106,303 $5,728,439 $4,493,554
Gross profit............ 943,007 727,353 1,722,101 1,353,524 1,060,236
Net income.............. 103,058 44,924 185,370 167,914 144,742
Pro forma net
income(4).............. 103,058 43,110 183,556 153,128 129,413
Dividends............... -- -- -- -- --
Selected Operating Data:
Stores open (at period
end)................... 1,009 830 913 742 557
<CAPTION>
As of
---------------------
January
July 31, 30,
1999 1999
---------- ----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital......... $ 680,723 $ 797,820
Total assets............ 3,404,019 3,179,181
Total long-term debt,
less current portion... 263,560 205,015
Group equity............ 1,733,678 1,656,886
</TABLE>
- --------
(1) Results of operations for this period include a $41,000,000 charge relating
to costs incurred in connection with the merger with Quill.
(2) Results of operations for this period include a $49,706,000 charge relating
to store closure costs.
(3) Results of operations for this period include a $29,665,000 charge relating
to costs incurred with the then proposed merger with Office Depot, Inc.
(4) Pro forma net income includes a provision for income taxes on the
previously untaxed earnings of Quill, which had been taxed as an S
corporation prior to its acquisition by Staples.
18
<PAGE>
STAPLES.COM GROUP
SUMMARY HISTORICAL COMBINED FINANCIAL DATA
<TABLE>
<CAPTION>
Six Months Ended Fiscal Year
------------------ -----------------------------
July
31, August 1,
1999 1998 1998 1997 1996
------- --------- ------- ------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Sales........................ $27,302 $5,058 $16,886 $ 3,706 $ 35
Gross profit................. 6,305 1,352 4,165 931 26
Net loss..................... (3,706) (104) (487) (300) (207)
Pro forma net loss(1)........ (3,706) (92) (475) (180) (124)
Dividends.................... -- -- -- -- --
<CAPTION>
As of
--------------------
July
31, January 30,
1999 1999
------- -----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital.............. $(2,591) $ 948
Total assets................. 23,976 2,047
Total long-term debt, less
current portion -- --
Group equity................. 21,052 1,962
</TABLE>
- --------
(1) Pro forma net loss includes a benefit for income taxes on the previously
untaxed earnings of Quill, which had been taxed as an S Corporation prior
to its acquisition by the Company.
19
<PAGE>
GENERAL
Staples' board of directors is furnishing this Proxy Statement to solicit
proxies in connection with a Special Meeting of Stockholders to be held at 9:00
a.m., Eastern Standard Time, on , 1999 at and at any
adjournments or postponements thereof. We will vote shares represented by the
proxies received and not properly revoked in accordance with the instructions
contained therein. If no choice is specified on an executed form of proxy, the
shares will be voted "FOR" the approval of each of Proposals 1, 2, 3 and 4
described in this Proxy Statement. A stockholder who has given a proxy may
revoke it at any time before it is exercised by filing with the Secretary of
Staples a written revocation or a duly executed proxy bearing a later date or
by voting in person at the Special Meeting. If you vote "FOR" the Tracking
Stock Proposal at the Special Meeting, you may be forfeiting your right to
challenge the Tracking Stock Proposal in the future.
Stockholders of record at the close of business on , 1999 (the "Record
Date") are entitled to notice of and to vote at the Special Meeting. As of the
close of business on the Record Date, a total of shares of common stock
(constituting all of the voting stock of Staples) were outstanding. Holders of
common stock are entitled to one vote per share.
The holders of a majority of the shares of common stock outstanding and
entitled to vote at the Special Meeting will constitute a quorum for the
transaction of business at the Special Meeting. Shares of common stock
represented in person or by proxy (including shares which abstain or do not
vote with respect to one or more of the matters presented for stockholder
approval) will be counted for purposes of determining whether a quorum is
present at the Special Meeting.
The affirmative vote of the holders of a majority of the shares of common
stock outstanding as of the Record Date is required to approve the Tracking
Stock Proposal and the affirmative vote of the holders of a majority of the
shares of Common Stock voting on the matter is required to approve each of the
Stock Plan Proposals.
Shares which abstain from voting as to a particular matter, and shares held
in "street name" by brokers or nominees who indicate on their proxies that they
do not have discretionary authority to vote such shares as to a particular
matter, will not be counted as votes in favor of such matter, and will also not
be counted as shares voting on such matter. Accordingly, abstentions and
"broker non-votes" will have the same effect on the Tracking Stock Proposal as
a vote against such proposal, but will have no effect on the voting on the
Stock Plan Proposals.
20
<PAGE>
RISK FACTORS
You should carefully consider the risk factors described below, as well as
the other information included in this Proxy Statement, before you decide how
to vote on the proposals.
We cannot predict how the issuance of Staples.com Stock will affect the
market price of Staples Stock
We cannot predict the price at which Staples Stock will trade following the
issuance of Staples e-Commerce Stock. The market price of Staples Stock may
not equal or exceed the market price of our existing common stock. Some of the
terms of Staples Stock and Staples.com Stock may adversely affect the trading
price of Staples Stock (or Staples.com Stock, in the event we decide to
undertake an initial public offering of Staples.com Stock in the future).
Examples include:
. the right of the Staples board of directors to issue Staples Stock in
exchange for Staples.com Stock, and
. the discretion of Staples' board of directors in making various
determinations relating to (1) a variety of matters affecting the rights
of the holders of Staples Stock and Staples.com Stock, such as dividends
and the allocation of merger proceeds, and (2) a variety of cash
management and allocation matters.
Holders of Staples Stock and Staples.com Stock will be common stockholders of
Staples and will not have any legal rights relating to specific assets of
Staples
Even though we have allocated, for financial reporting purposes, all of our
consolidated assets, liabilities, revenue, expenses and cash flow between the
two Groups in order to prepare their financial statements, the Tracking Stock
Proposal will not change the legal title to any assets or responsibility for
any liabilities and will not affect the rights of any of our creditors.
Holders of Staples Stock and Staples.com Stock will not have any legal rights
related to specific assets of either Group, and, in any liquidation, will
receive a share of the net assets of Staples based on the relative trading
prices of Staples Stock and Staples.com Stock rather than on any assessment of
the actual value of Staples Group or Staples.com Group. Holders of Staples
Stock and Staples.com Stock will be common stockholders of Staples and, as
such, will be subject to all of the risks associated with an investment in
Staples and all of our businesses, assets and liabilities.
If Staples encounters financial difficulty, the value of either Group's stock
may suffer for reasons unrelated to the prospects of that Group
Financial results of either Group will affect Staples' consolidated results
of operations, financial position and borrowing costs. This could affect the
results of operations or financial position of the other Group or the market
price of shares issued with respect to the other Group.
Existing stockholders of Staples will have a reduced interest in Staples.com
Group
Holders of Staples Stock will participate in the ownership of Staples.com
Group through Staples Group's retained interest in Staples.com Group. Staples
Group's interest in Staples.com Group will decrease as a result of the
issuance of Staples.com Stock. After any issuance of Staples.com Stock, the
existing stockholders of Staples will no longer share in the gains or losses
attributable to the portion of Staples.com Group that is represented by the
outstanding shares of Staples.com Stock. The price at which any shares of
Staples.com Stock may be sold in the future may not reflect accurately the
value of Staples.com Stock and thus holders of Staples Stock may not
appropriately benefit from such issuances. Existing stockholders of Staples
will not have any special rights to subscribe for Staples.com Stock.
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The cost of maintaining separate groups will likely exceed the costs
associated with operating Staples as a single entity
The costs associated with implementing the Tracking Stock Proposal and the
ongoing costs of operating separate Groups will likely exceed the costs
associated with operating Staples as it currently exists. In particular, the
issuance of the Staples.com Stock will result in a complex capital structure
and additional reporting requirements with respect to each Group.
Having two series of common stock could create potential conflicts of interest
and the Staples board of directors could make decisions that adversely affect
stockholders of either Group
Having two series of common stock could give rise to occasions when the
interests of holders of one series might diverge or appear to diverge from the
interests of holders of the other series. In addition, due to the extensive
relationships between, and the similarity of the businesses of, Staples Group
and Staples.com Group, there will likely be inherent conflicts of interest
between the two Groups. The Staples board of directors, in its sole discretion,
will make operational and financial decisions and implement policies that may
affect the businesses of Staples Group and Staples.com Group differently,
potentially favoring one Group at the expense of the other. Examples include:
. decisions as to whether to allocate the proceeds of issuances (or the
costs of repurchases) of Staples.com Stock to Staples Group in respect
of its retained interest in Staples.com Group or to the equity of
Staples.com Group,
. decisions as to how to allocate consideration received in connection
with a merger involving Staples between holders of Staples Stock and
Staples.com Stock,
. decisions as to whether and when to issue Staples Stock in exchange for
Staples.com Stock,
. decisions as to whether and when to approve dispositions of assets of
either Group,
. decisions as to how to allocate available cash between Staples Group and
Staples.com Group and decisions as to whether and how to make transfers
of funds from one Group to another,
. decisions as to how to allocate assets and resources, such as inventory,
distribution and fulfillment services and management time, between the
two Groups, and
. decisions as to whether and to what extent the two Groups compete with
each other and how corporate opportunities are allocated between the two
Groups.
If directors own disproportionate interests (in percentage or value terms)
in Staples Stock and Staples e-Commerce Stock, that disparity could create or
appear to create potential conflicts of interest when they are faced with
decisions that could have different implications for the stockholders of either
Group.
The Staples board of directors has sole discretion to change cash management
and allocation policies and this makes it riskier to be a holder of Staples
Stock or Staples.com Stock than a holder of ordinary common stock
The Staples board of directors has adopted certain policies relating to cash
management and allocations between Staples Group and Staples.com Group.
Although it has no present intention to do so, the board of directors may, in
its sole discretion, modify, rescind or add to any of these policies. The board
of directors' discretion to change these policies makes it riskier to be a
holder of Staples Stock or Staples e-Commerce Stock than a holder of ordinary
common stock. For a more comprehensive description of these policies, see
"Proposal 1--The Tracking Stock Proposal--Cash Management and Allocation
Policies".
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Principles of Delaware law may protect decisions of the Staples board of
directors that have a disparate impact upon holders of Staples Stock and
Staples.com Stock
Delaware law provides that a board of directors owes an equal duty to all
stockholders regardless of class or series and does not have separate or
additional duties to the holders of any particular class or series of stock.
Recent cases in Delaware involving tracking stocks have established that
decisions by directors or officers involving differing treatment of tracking
stocks may be judged under the "business judgment rule." Under these principles
of Delaware law and the "business judgment rule," you may not be able to
challenge board of directors' decisions that have a disparate impact upon
holders of Staples Stock and Staples.com Stock if the board of directors is
adequately informed with respect to such decisions and acts in good faith and
in the honest belief that it is acting in the best interests of Staples'
stockholders and does not have a conflict of interest.
Stockholders will not vote on how to allocate consideration received in
connection with a merger among holders of Staples Stock and holders of
Staples.com Stock
Our charter will not contain any provisions governing how consideration
received in connection with a merger or consolidation involving Staples is to
be allocated between holders of Staples Stock and holders of Staples.com Stock.
Neither holders of Staples Stock nor holders of Staples.com Stock will have a
separate class vote in any merger or consolidation so long as we divide the
type and amount of consideration between holders of Staples Stock and holders
of Staples.com Stock in a manner we determine, in our sole discretion, to be
fair. In any such merger or consolidation, the different ways we may divide the
consideration might have materially different results. As a result, the
consideration to be received by holders of Staples Stock or Staples.com Stock
in any such merger or consolidation may be materially less valuable than the
consideration they would have received if that business had been sold
separately or if they had a separate class vote on such merger or
consolidation.
We have the option to exchange one series of common stock for the other series
and this may be disadvantageous to holders of Staples Stock or the holders of
Staples.com Stock
We will have the right to issue shares of one series of common stock in
exchange for outstanding shares of the other series of common stock. Because
certain exchanges would be at a premium to the market value, and since we could
determine to effect an exchange at a time when either or both of Staples Stock
and Staples.com Stock may be considered to be overvalued or undervalued, any
such exchange may be disadvantageous to holders of Staples Stock or holders of
Staples.com Stock. In addition, such exchange would preclude holders of the
exchanged series of common stock from retaining their investment in a security
that is intended to reflect separately the performance of the corresponding
Group.
We may dispose of assets of either Staples Group or Staples.com Group without
your approval
Delaware law requires stockholder approval only for a sale or other
disposition of all or substantially all of the assets of Staples. As long as
the assets attributed to a Group represent less than substantially all of
Staples' assets, we may approve sales and other dispositions of any amount of
the assets of that Group without any stockholder approval. If we dispose of all
or substantially all of the assets of either Group, we would be required, if
the disposition is not an exempt disposition under the terms of our charter, to
choose one of the following three alternatives:
. declare and pay a dividend,
. redeem shares of the relevant series of stock, or
. exchange shares of one series for outstanding shares of the other series
at a 10% premium.
Consequently, holders of either series of common stock may receive less value
for their shares than the value that a third-party buyer might pay for all or
substantially all of the assets of such Group. The board of directors
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will decide, in its sole discretion, how to proceed and is not required to
select the option that would result in the highest value to holders of Staples
Stock or Staples.com Stock.
We are not required to pay dividends equally on Staples Stock and Staples.com
Stock
Although we do not intend to pay cash dividends in the foreseeable future,
the Staples board of directors could elect to pay dividends on Staples Stock or
Staples.com Stock, or both, in equal or unequal amounts. Such a decision would
not necessarily have to reflect:
. the financial performance of either Staples Group or Staples.com Group,
. the amount of assets available for dividends on either series, or
. the amount of prior dividends declared on either series.
Holders of Staples Stock and Staples.com Stock will vote together as a single
class and will have limited separate voting rights
Holders of Staples Stock and Staples.com Stock will vote together as a
single class, except in certain limited circumstances provided under the
Delaware General Corporation Law. When holders of Staples Stock and Staples.com
Stock vote together as a single class, holders of the series of common stock
having a majority of the votes will be in a position to control the outcome of
the vote even if the matter involves a conflict of interest between holders of
Staples Stock and holders of Staples.com Stock.
Having two series of common stock may inhibit or prevent acquisition bids for
Staples, Staples Group or Staples.com Group
If Staples Group and Staples.com Group were separate companies, any person
interested in acquiring either Staples Group or Staples.com Group without
negotiating with management could seek control of that entity by obtaining
control of its outstanding voting stock by means of a tender offer or proxy
contest. Although we intend Staples Stock and Staples.com Stock to reflect the
separate performance of Staples Group and Staples.com Group, a person
interested in acquiring only one Group without negotiation with Staples'
management could obtain control of that Group only by obtaining control of the
outstanding voting stock of Staples.
The existence of two series of common stock could present complexities and
could in certain circumstances pose obstacles, financial and otherwise, to an
acquiring person. The existence of two series of common stock could, under
certain circumstances, prevent stockholders from profiting from an increase in
the market value of their shares as a result of a change in control of Staples
by delaying or preventing such a change in control.
In addition, some of the provisions of our charter, by-laws, and Delaware
law may inhibit changes of control not approved by the board of directors. For
additional anti-takeover constraints, see "Proposal 1--The Tracking Stock
Proposal--Certain Other Provisions of the Certificate of Incorporation and By-
laws" and "--Certain Provisions of Delaware Law".
The values of Staples Stock and Staples.com Stock may decline due to future
issuances of Staples Stock or Staples.com Stock
Our charter will allow the Staples board of directors, in its sole
discretion, to issue authorized but unissued shares of common stock. The board
of directors may issue Staples Stock or Staples.com Stock to, among other
things:
. raise capital,
. provide compensation or benefits to employees,
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. pay stock dividends or
. acquire companies or businesses.
Under the Delaware General Corporation Law, the board of directors would not
need your approval for these issuances. We do not intend to seek your approval
for any such issuances unless:
. stock exchange regulations or other applicable law require approval or
. the board of directors deems it advisable.
We may not offer Staples.com Stock at all
This Proxy Statement describes our current intentions regarding future
issuances of Staples.com Stock. Because such issuances are subject to various
conditions and uncertainties, we cannot assure you that any will occur.
The IRS could assert that the receipt of the tracking stock is taxable
We have been advised by Ernst & Young LLP that no income, gain or loss will
be recognized by you for federal income tax purposes as a result of the
implementation of the Tracking Stock Proposal. However, the Internal Revenue
Service could disagree. There are no court decisions or other authorities
bearing directly on the effect of the features of Staples Stock or Staples.com
Stock. In addition, the Internal Revenue Service has announced that it will not
issue rulings on the characterization of stock with characteristics similar to
Staples Stock and Staples.com Stock. It is possible, therefore, that the
Internal Revenue Service could successfully assert that the issuance or receipt
of Staples Stock, as well as the subsequent conversion of one stock into the
other, could be taxable to you and to us as ordinary income.
A recent Clinton Administration proposal could result in taxation on issuances
of tracking stock
A recent proposal by the Clinton Administration would impose a corporate
level tax on the issuance of stock similar to Staples Stock or Staples.com
Stock. If this proposal is enacted, we would be subject to tax on an issuance
of Staples Stock or Staples.com Stock after the date of enactment. If our
stockholders approve the Tracking Stock Proposal our board of directors
currently intends to implement the proposal subject to further legislative
developments relating to the Clinton Administration tax proposal or similar
proposals.
Under our certificate of incorporation, we may convert Staples Stock or
Staples.com Stock into shares of the other series with a premium if there are
adverse U.S. federal income tax law developments. The proposal of the Clinton
Administration would be such an adverse development if it is implemented or
proposed to be implemented by an applicable federal legislative committee or
its chair. For additional information on the events that could cause us to
effect a conversion, see "Proposal 1--The Tracking Stock Proposal--General
Dividend, Redemption and Exchange Provisions" and "Certain Federal Income Tax
Consequences."
If the Tracking Stock Proposal prevents us from using the pooling-of-interests
method of accounting for acquisitions, we may be constrained in making certain
acquisitions on terms favorable to us
Under currently accepted accounting rules and practices, some acquisitions
may be accounted for using a method of accounting known as the pooling-of-
interests method. Pooling-of-interests transactions are favorable from an
accounting perspective because they avoid the expense associated with goodwill
amortization. The issuance of Staples.com Stock may preclude Staples from
availing itself of the pooling-of-interests method of accounting for future
acquisitions. This could make it less desirable for us to proceed with some
acquisitions.
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Cautionary Statement Regarding
Forward-looking Information
This Proxy Statement 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 similar
expressions, whether in the negative or affirmative. We cannot guarantee that
we actually will achieve these plans, intentions or expectations. Actual
results or events could differ materially from the plans, intentions and
expectations disclosed in the forward-looking statements we make. We have
included important factors in various cautionary statements herein,
particularly under the heading "Risk Factors," 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.
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PROPOSAL 1--THE TRACKING STOCK PROPOSAL
General
At the Special Meeting, we will ask you to consider and approve the Tracking
Stock Proposal described in this Proxy Statement. The Tracking Stock Proposal
would allow us to amend our certificate of incorporation to:
. Create a new series of common stock called Staples.com Stock that could
be issued from time to time by the board of directors.
. Increase the aggregate number of shares of common stock that we may
issue from 1,500,000,000 to 1,650,000,000, initially comprised of
1,500,000,000 shares of Staples Stock and 150,000,000 shares of
Staples.com Stock.
. Re-classify each outstanding share of existing common stock into a share
of Staples Stock.
We intend Staples.com Stock to reflect the performance of Staples.com Group,
our e-commerce business division. We intend Staples Stock to reflect the
performance of Staples Group, which consists of our other businesses and a
retained interest in Staples.com Group. Staples Group's interest in
Staples.com, excluding the interest represented by outstanding shares of
Staples.com Stock, is called its "Retained Interest." We have allocated, for
financial reporting purposes, all of Staples' consolidated assets, liabilities,
revenue, expenses and cash flow between Staples Group and Staples.com Group. In
the future, we will publish combined financial statements of Staples Group,
combined financial statements of Staples.com Group, and consolidated financial
statements of Staples covering both Staples Group and Staples.com Group.
We currently plan to grant options for Staples.com Stock under the 1992
Equity Incentive Plan to all Staples employees who currently receive options
under the Plan shortly following stockholder approval of the proposed amendment
to the Plan. We expect to issue additional shares of Staples.com Stock in one
or more private or public financings within 12 months of stockholder approval
of the Tracking Stock Proposal. The specific terms of the financings, including
whether they are private or public, the amount of Staples.com Stock we issue,
and the timing of the financings, will depend upon factors such as stock market
conditions and the performance of Staples.com Group.
We expect to file the amendment to our certificate of incorporation
implementing the Tracking Stock Proposal and re-classify your common stock
shortly following the Special Meeting, assuming the Tracking Stock Proposal is
approved.
Background and Reasons for the Tracking Stock Proposal
We continually review each of our businesses and Staples as a whole to
determine the best way to realize the inherent value of our business
operations. As a result of this review process, we recently began to evaluate
various alternatives to maximize stockholder value, including the creation of
Staples "tracking stock" intended to reflect the performance of Staples.com
Group.
Upon management's recommendation and after extensive consultation with our
financial and legal advisors, the board of directors determined that the
issuance of tracking stock would be desirable for a number of reasons, as
discussed below. On September 14, 1999, the board of directors carefully
considered the Tracking Stock Proposal and the other proposals described in
this Proxy Statement, determined that those proposals are in the best interests
of Staples and its stockholders, unanimously approved them and resolved to
recommend that you vote for them.
In arriving at its determination and recommendation, Staples' board of
directors, with the assistance of its financial and legal advisors, considered
the following benefits of the authorization of Staples.com Stock:
. enabling investors to review separate information about Staples.com
Group and separately value Staples.com Stock. This should encourage
investors to focus more attention on Staples.com
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Group and result in greater market recognition of the value of
Staples.com Group to Staples.
. enabling us to issue Staples.com Stock in a private or public financing,
thus raising capital for Staples Group and/or Staples.com Group and
perhaps creating a public trading market for Staples.com Group.
. enabling us to grant stock options or restricted stock tied to
Staples.com Group, thereby providing more focused incentives to
Staples.com Group management and employees.
. providing us with greater flexibility in responding to strategic
opportunities (including acquisitions), because it would allow us to
issue either Staples Stock or Staples.com Stock as appropriate under the
circumstances.
. enabling us to realize some of the value of Staples.com Group without
losing the financial, tax, operational, strategic and other benefits of
being a single consolidated entity.
Staples' board of directors also evaluated the potential negative aspects of
the Tracking Stock Proposal, including the following:
. The Tracking Stock Proposal will require a complex capital structure and
additional reporting requirements with respect to each Group.
. The costs associated with implementing the Tracking Stock Proposal and
the ongoing cost of operating separate Groups will likely exceed the
costs associated with operating Staples as it currently exists.
. The Tracking Stock Proposal will expand the board of directors'
responsibility to oversee the interests of two series of common
stockholders.
. The potential diverging or conflicting interests between the holders of
Staples Stock and the holders of Staples.com Stock and issues that the
board of directors may face in resolving any conflicts.
. The pooling-of-interests method of accounting might not be available for
future acquisitions using Staples Stock or Staples.com Stock.
Staples' board of directors determined that the positive aspects of the
Tracking Stock Proposal outweighed the negative aspects and concluded that the
Tracking Stock Proposal and the other proposals are in the best interests of
Staples and its stockholders.
Description of Staples Stock and Staples.com Stock
The following description is not complete and should be read with Annex
II to this Proxy Statement, which contains the full text of the
Certificate of Amendment that will be filed pursuant to the Tracking Stock
Proposal.
General
Our certificate of incorporation (which we call the "Current Certificate of
Incorporation") authorizes us to issue 1,505,000,000 shares, consisting of
1,500,000,000 shares of common stock, par value $.0006 per share, and 5,000,000
shares of preferred stock, par value $.01 per share. Only the preferred stock
is currently issuable in series by our board of directors. As of , 1999,
we had approximately shares of common stock and no shares of preferred
stock issued and outstanding.
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In order to implement the Tracking Stock Proposal, we would file the
Certificate of Amendment (the "Certificate of Amendment") which would amend our
Current Certificate of Incorporation. The Certificate of Amendment would:
. Create a new series of common stock--Staples.com Stock--which could be
issued from time to time by the board of directors.
. Increase the aggregate number of shares of common stock that we may
issue from 1,500,000,000 to 1,650,000,000, initially comprised of
1,500,000,000 shares of Staples Stock and 150,000,000 shares of
Staples.com Stock.
. Re-classify each outstanding share of existing common stock into a share
of Staples Stock.
We intend Staples.com Stock to reflect the performance of Staples.com Group,
our e-commerce business division. We intend Staples Stock to reflect the
performance of Staples Group, which consists of our other businesses and a
retained interest in Staples.com Group. We have allocated, for financial
reporting purposes, all of Staples' consolidated assets, liabilities, revenue,
expenses and cash flow between Staples Group and Staples.com Group. In the
future, we will publish combined financial statements of Staples Group,
combined financial statements of Staples.com Group, and consolidated financial
statements of Staples (covering both Staples Group and Staples.com Group).
The full definitions of the terms "Staples Group" and "Staples.com Group"
are set forth under "--Mandatory Dividend, Redemption or Exchange on
Disposition of All or Substantially All of the Assets of a Group" below.
Before we first issue shares of, or options for shares of, Staples.com
Stock, the board of directors would designate the initial Number of Shares
Issuable with Respect to Staples Group's Retained Interest in Staples.com
Group. See "--Staples Group's Retained Interest in Staples.com Group", "--
Number of Shares Issuable with Respect to Staples Group's Retained Interest in
Staples.com Group" and Annex I for additional information about Staples Group's
Retained Interest in Staples.com Group and the Number of Shares Issuable with
Respect to Staples Group's Retained Interest in Staples.com Group.
The board of directors will have the authority to increase or decrease from
time to time the total number of authorized shares comprising either series of
common stock. However, the board of directors could not increase the number of
authorized shares of a series above a number which, when added to all of the
authorized shares of the other series of common stock, would exceed the total
authorized number of shares of common stock. Likewise, the board of directors
could not decrease the number of authorized shares of a series below the number
of shares of such series then outstanding.
The board of directors will have the authority in its sole discretion to
issue authorized but unissued shares of common stock from time to time for any
proper corporate purpose. The board of directors will have the authority to do
so without your approval, except as provided by Delaware law or the rules and
regulations of any securities exchange on which any series of outstanding
common stock may then be listed.
Dividends
We currently intend to retain all of our earnings for use in the operation
and expansion of our business. We therefore do not expect to pay any cash
dividends on Staples Stock or Staples.com Stock in the foreseeable future.
Although our revolving credit agreement currently restricts the payment of
cash dividends, and in any event, as stated above, we do not expect to pay any
dividends in the foreseeable future on any series of common stock, we will
otherwise be permitted to pay dividends on
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. Staples Stock out of assets of Staples legally available for the payment
of dividends under Delaware law, but the total amounts paid as dividends
on Staples Stock cannot exceed the Available Dividend Amount for Staples
Group, and
. Staples.com Stock out of the assets of Staples legally available for the
payment of dividends under Delaware law, while transferring
corresponding amounts to Staples Group in respect of its Retained
Interest in Staples.com Group. However, the total amounts paid as
dividends on Staples.com Stock and the corresponding amounts transferred
to Staples Group in respect of its Retained Interest in Staples.com
Group cannot exceed the Available Dividend Amount for Staples e-Commerce
Group.
The "Available Dividend Amount" for Staples Group at any time is the amount
that would then be legally available for the payment of dividends on Staples
Group's common stock under Delaware law if (1) Staples Group and Staples.com
Group were each a separate Delaware corporation, (2) Staples Group had
outstanding (a) a number of shares of common stock, par value $0.0006 per
share, equal to the number of shares of Staples Stock that are then outstanding
and (b) a number of shares of preferred stock, par value $0.01 per share, equal
to the number of shares of preferred stock of Staples that have been attributed
to Staples Group and are then outstanding, (3) the assumptions about
Staples.com Group set forth in the next sentence were true and (4) Staples
Group owned a number of shares of Staples.com Group common stock equal to the
Number of Shares Issuable with Respect to Staples Group's Retained Interest in
Staples.com Group. Similarly, the "Available Dividend Amount" for Staples.com
Group at any time is the amount that would then be legally available for the
payment of dividends on Staples.com Group's common stock under Delaware law if
Staples.com Group were a separate Delaware corporation having outstanding (1) a
number of shares of common stock, par value $0.0006 per share, equal to the
number of shares of Staples.com Stock that are then outstanding plus the Number
of Shares Issuable with Respect to Staples Group's Retained Interest in
Staples.com Group and (2) a number of shares of preferred stock, par value
$0.01 per share, equal to the number of shares of preferred stock of Staples
that have been attributed to Staples.com Group and are then outstanding.
The amount legally available for the payment of dividends on common stock of
a corporation under Delaware law is generally limited to (1) the total assets
of the corporation less its total liabilities less (2) the aggregate par value
of the outstanding shares of its common stock and preferred stock. However, if
that amount is not greater than zero, the corporation may also pay dividends
out of the net profits for the corporation for the fiscal year in which the
dividend is declared and/or the preceding fiscal year. As mentioned above,
these restrictions will form the basis for calculating the Available Dividend
Amounts for Staples Group and Staples.com Group. These restrictions will also
form the basis for calculating the aggregate amount of dividends that Staples
as a whole can pay on its common stock, regardless of series. Thus, net losses
of either Group, and any dividends and distributions on, or repurchases of,
either series of common stock, will reduce the assets legally available for
dividends on both series of common stock.
Subject to the foregoing limitations (and to any other limitations set forth
in any future series of preferred stock or in any agreements binding on Staples
from time to time), we have the right to pay dividends on both, one or neither
series of common stock in equal or unequal amounts, notwithstanding the
performance of either Group, the amount of assets available for dividends on
either series, the amount of prior dividends paid on either series, the
respective voting rights of each series or any other factor.
At the time of any dividend on the outstanding shares of Staples.com Stock
(including any dividend required as a result of a disposition of All or
Substantially All of the Assets of Staples.com Group, but excluding any
dividend payable in shares of Staples.com Stock) we will credit to Staples
Group, and charge against Staples.com Group, a corresponding amount in respect
of Staples Group's Retained Interest in Staples.com Group. Specifically, the
corresponding amount will equal (1) the aggregate amount of such dividend
multiplied by (2) a fraction, the numerator of which is the Number of
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Shares Issuable with Respect to Staples Group's Retained Interest in
Staples.com Group and the denominator of which is the number of shares of
Staples.com Stock then outstanding.
Mandatory Dividend, Redemption or Exchange on Disposition of All or
Substantially All of the Assets of a Group
If we dispose of All or Substantially All of the Assets of a Group to one or
more persons or entities, in one transaction or a series of related
transactions (collectively, a "Disposition"), and the Disposition is not an
Exempt Disposition as defined below, we would be required, by the 85th Trading
Day after the consummation of such Disposition, to choose one of the following
three alternatives:
. declare and pay a dividend to holders of the series of common stock that
relates to that Group (in cash, securities (other than common stock of
Staples) or other property, or a combination thereof), in an amount
having a Fair Value equal to their Proportionate Interest in the Net
Proceeds of such Disposition,
. redeem from holders of the series of common stock that relates to that
Group, for cash, securities (other than common stock of Staples) or
other property (or a combination thereof) in an amount having a Fair
Value equal to their Proportionate Interest in the Net Proceeds of such
Disposition, all of the outstanding shares of the relevant series of
common stock (or, if such Group continues after such Disposition to own
any material assets other than the proceeds of such Disposition, a
number of shares of such series of common stock having an aggregate
average Market Value, during the 20 consecutive Trading Day period
beginning on the 16th Trading Day immediately following the date on
which the Disposition is consummated, equal to such Fair Value), or
. issue shares of the series of common stock that does not relate to that
Group in exchange for all of the outstanding shares of the series of
common stock that relates to that Group at a 10% premium (based on the
average Market Value of the relevant series of common stock as compared
to the average Market Value of the other series of common stock during
the 20 consecutive Trading Day period beginning on the 16th Trading Day
immediately following the date on which the Disposition is consummated).
In connection with any special dividend on, or redemption of, Staples.com
Stock as described above, we will credit to Staples Group, and charge against
Staples.com Group, a corresponding amount in respect of Staples Group's
Retained Interest in Staples.com Group. Specifically, the corresponding amount
will equal (1) the aggregate Fair Value of such dividend or redemption
multiplied by (2) a fraction, the numerator of which is the Number of Shares
Issuable with Respect to Staples Group's Retained Interest in Staples.com Group
and the denominator of which is the number of shares of Staples.com Stock then
outstanding. In addition, in connection with any redemption of Staples.com
Stock as described above, we will decrease the Number of Shares Issuable with
Respect to Staples Group's Retained Interest in Staples.com Group by the same
proportion as the proportionate decrease in outstanding shares of Staples.com
Group caused by such redemption.
At any time within one year after completing any dividend or partial
redemption of the sort referred to above, we will have the right to issue
shares of the series of common stock that does not relate to the Group in
question in exchange for outstanding shares of the series of common stock that
relates to that Group at a 10% premium (based on the average Market Value of
the relevant series of common stock as compared to the average Market Value of
the other series of common stock during the 20 consecutive Trading Day period
ending on the 5th Trading Day immediately preceding the date on which Staples
mails the notice of exchange to holders of the relevant series). In determining
whether to effect any such exchange following such a dividend or partial
redemption, we would, in addition to other matters, consider whether the
remaining assets of such Group continue to constitute a viable business, the
number of shares of such common stock remaining issued and outstanding, the per
share market price of such common stock and the ongoing cost of continuing to
have a separate series of such common stock outstanding.
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The following terms used in this document have the meanings specified in the
Certificate of Amendment and are set forth below:
"All or Substantially All of the Assets" of either Group means a portion of
such assets that represents at least 80% of the then-current Fair Value of the
assets of such Group.
"Exempt Disposition" means any of the following:
. a Disposition in connection with the liquidation, dissolution or
winding-up of Staples and the distribution of assets to stockholders,
. a Disposition to any person or entity controlled by Staples, as
determined by the board of directors in its sole discretion,
. a Disposition by either Group for which Staples receives consideration
primarily consisting of equity securities (including, without
limitation, capital stock of any kind, interests in a general or limited
partnership, interests in a limited liability company or debt securities
convertible into or exchangeable for, or options or warrants to acquire,
any of the foregoing, in each case without regard to the voting power or
other management or governance rights associated therewith) of an entity
which is primarily engaged or proposes to engage primarily in one or
more businesses similar or complementary to businesses conducted by such
Group prior to the Disposition, as determined by the board of directors
in its sole discretion,
. a dividend out of Staples.com Group's assets to holders of Staples.com
Stock and a transfer of a corresponding amount to Staples Group in
respect of its Retained Interest in Staples.com Group,
. a dividend out of Staples Group's assets to holders of Staples Stock and
. any other Disposition, if (1) at the time of the Disposition there are
no shares of Staples Stock outstanding, (2) at the time of the
Disposition there are no shares of Staples.com Stock outstanding or (3)
before the 30th Trading Day following the Disposition we have mailed a
notice stating that we are exercising our right to exchange outstanding
shares of either Staples Stock or Staples.com Stock for newly issued
shares of the other series of common stock as contemplated under "--
Optional Exchange of One Series of Common Stock for the Other Series"
below.
"Fair Value" means (1) in the case of cash, the amount thereof, (2) in the
case of capital stock that has been Publicly Traded for a period of at least 15
months, the Market Value thereof and (3) in the case of other assets or
securities, the fair market value thereof as the board of directors shall
determine in good faith. Any good faith determination by the board of directors
of Fair Value shall be conclusive and binding on all stockholders.
"Market Capitalization" of either series of common stock on any date means
the Market Value of a share of such series on such date multiplied by the
number of shares of such series outstanding on such date. Shares issuable with
respect to Staples Group's Retained Interest in Staples.com Group are not
considered to be outstanding unless and until they are in fact issued to third
parties.
"Market Value" of a share of any class or series of capital stock on any
Trading Day generally means the average of the high and low reported sales
prices of a share of such class or series on such Trading Day, subject to
certain exceptions as described in the Certificate of Amendment.
"Nasdaq NMS" means the Nasdaq National Market.
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The "Net Proceeds" of a Disposition of any of the assets of a Group means
the positive amount, if any, remaining from the gross proceeds of such
Disposition after any payment of, or reasonable provision (as determined in
good faith by the board of directors, which determination will be conclusive
and binding on all stockholders) for, (1) any taxes payable by Staples in
respect of such Disposition, (2) any taxes payable by Staples in respect of any
resulting dividend or redemption, (3) any transaction costs, including, without
limitation, any legal, investment banking and accounting fees and expenses and
(4) any liabilities (contingent or otherwise) of, attributed to or related to,
such Group, including, without limitation, any liabilities for deferred taxes,
any indemnity or guarantee obligations which are outstanding or incurred in
connection with the Disposition or otherwise, any liabilities for future
purchase price adjustments and any obligations with respect to outstanding
securities (other than common stock) attributed to such Group.
"Proportionate Interest" of holders of Staples.com Stock in the Net Proceeds
of a Staples e-Commerce Group Disposition (or in the outstanding shares of
common stock of any subsidiaries holding Staples e-Commerce Group's assets and
liabilities) means the amount of such Net Proceeds (or the number of such
shares) multiplied by the number of shares of Staples.com Stock outstanding
divided by the Total Number of Notional Staples.com Group Shares Deemed
Outstanding. "Proportionate Interest" of holders of Staples Stock in the Net
Proceeds of a Staples Group Disposition (or in the outstanding shares of common
stock of any subsidiaries holding Staples Group's assets and liabilities) means
the amount of such Net Proceeds (or the number of such shares).
"Publicly Traded" with respect to any security means (1) registered under
Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") (or any successor provision of law), and (2) listed for trading on the
NYSE (or any other national securities exchange registered under Section 7 of
the Exchange Act (or any successor provision of law)) or listed on the Nasdaq
NMS (or any successor market system).
"Staples Group" means (1) all of the businesses, assets and liabilities of
Staples and its subsidiaries, other than the businesses, assets and liabilities
that are part of Staples.com Group, (2) the rights and obligations of Staples
Group under any inter-Group debt deemed to be owed to or by Staples Group (as
such rights and obligations are defined in accordance with policies established
from time to time by the board of directors) and (3) a proportionate interest
in Staples.com Group (after giving effect to any options, preferred stock,
other securities or debt issued or incurred by Staples and attributed to
Staples.com Group) equal to the Retained Interest Percentage; provided that:
(a) Staples may re-allocate assets from one Group to the other Group in
return for other assets or services rendered by that other Group in the
ordinary course of business or in accordance with policies established by
the board of directors from time to time and
(b) if Staples transfers cash, other assets or securities to holders of
shares of Staples.com Stock as a dividend or other distribution on shares
of Staples.com Stock (other than a dividend or distribution payable in
shares of Staples.com Stock), or as payment in a redemption of shares of
Staples.com Stock effected as a result of a Staples.com Group Disposition,
then the board of directors shall re-allocate from Staples.com Group to
Staples Group cash or other assets having a Fair Value equal to the
aggregate Fair Value of the cash, other assets or securities so transferred
multiplied by a fraction, the numerator of which shall equal the Number of
Shares Issuable with Respect to Staples Group's Retained Interest in
Staples.com Group on the record date for such dividend or distribution, or
on the date of such redemption, and the denominator of which shall equal
the number of shares of Staples.com Stock outstanding on such date.
"Staples.com Group" means (1) the e-commerce business division of Staples,
including all of the businesses, assets and liabilities of Staples and its
subsidiaries that the board of directors has, as of the date on which the
Certificate of Amendment becomes effective under Delaware law (the "Effective
Date"), allocated to Staples.com Group, (2) any assets or liabilities acquired
or incurred by Staples or any of its subsidiaries after the Effective Date in
the ordinary course of business and attributable to Staples.com Group (3) any
businesses,
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assets or liabilities acquired or incurred by Staples or any of its
subsidiaries after the Effective Date that the board of directors has
specifically allocated to Staples.com Group or that Staples otherwise allocates
to Staples.com Group in accordance with policies established from time to time
by the board of directors and (4) the rights and obligations of Staples.com
Group under any inter-Group debt deemed to be owed to or by Staples.com Group
(as such rights and obligations are defined in accordance with policies
established from time to time by the board of directors); provided that:
(a) Staples may re-allocate assets from one Group to the other Group in
return for other assets or services rendered by that other Group in the
ordinary course of business or in accordance with policies established by
the board of directors from time to time and
(b) if Staples transfers cash, other assets or securities to holders of
shares of Staples.com Stock as a dividend or other distribution on shares
of Staples.com Stock (other than a dividend or distribution payable in
shares of Staples.com Stock), or as payment in a redemption of shares of
Staples.com Stock effected as a result of a Staples.com Group Disposition,
then the board of directors shall re-allocate from Staples.com Group to
Staples Group cash or other assets having a Fair Value equal to the
aggregate Fair Value of the cash, other assets or securities so transferred
multiplied by a fraction, the numerator of which shall equal the Number of
Shares Issuable with Respect to Staples Group's Retained Interest in
Staples.com Group on the record date for such dividend or distribution, or
on the date of such redemption, and the denominator of which shall equal
the number of shares of Staples.com Stock outstanding on such date.
"Total Number of Notional Staples.com Group Shares Deemed Outstanding" means
the number of shares of Staples.com Stock outstanding plus the Number of Shares
Issuable with Respect to Staples Group's Retained Interest in Staples.com
Group.
"Trading Day" means each weekday on which the relevant security (or, if
there are two relevant securities, each relevant security) is traded on the
principal national securities exchange on which it is listed or admitted to
trading or on the Nasdaq NMS or, if such security is not listed or admitted to
trading on a national securities exchange or quoted on the Nasdaq NMS, traded
in the principal over-the-counter market in which it trades.
Optional Exchange of One Series of Common Stock for the Other Series
We will have the right, at any time, to issue shares of Staples Stock in
exchange for outstanding shares of Staples.com Stock at a premium. The premium
will initially be 25% (for exchanges occurring in the first quarter after
issuance) and will decline ratably each quarter over a period of 3 years to
15%.
We will also have the right, at any time, to issue shares of Staples.com
Stock in exchange for outstanding shares of Staples Stock at a 15% premium.
Notwithstanding the preceding paragraphs, upon the occurrence of a Tax Event
(as defined below), we will have the right to issue shares of either series of
common stock in exchange for outstanding shares of the other series of common
stock at a 10% premium.
The exchange ratio that will result in the specified premium will be
calculated based on the average Market Value of Staples Stock as compared to
the average Market Value of Staples.com Stock during the 20 consecutive Trading
Day period ending on, and including, the 5th Trading Day immediately preceding
the date on which we mail the notice of exchange to holders of the outstanding
shares being exchanged.
In addition, we will have the right, at any time Staples.com Stock exceeds
the 40% of Total Market Capitalization Threshold (as defined below) but is
below the 60% of Total Market Capitalization Threshold (as defined below), to
issue shares of either series of common stock in exchange for outstanding
shares of the other series of common stock on a value for value basis.
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The exchange ratio that will result in a value for value exchange will be
based on the average Market Value of the series of the common stock being
exchanged as compared to the average Market Value of the other series of common
stock during the 20 consecutive Trading Day period ending on, and including,
the 5th Trading Day immediately preceding the date on which we mail the notice
of exchange to holders of the outstanding shares being exchanged.
"Tax Event" means the receipt by Staples of an opinion of a tax advisor
experienced in such matters, who shall not be an officer or employee of Staples
or any of its affiliates, to the effect that, as a result of any amendment to,
or change in, the laws (or any regulations thereunder) of the United States or
any political subdivision or taxing authority thereof or therein (including any
proposed change in such regulations announced by an administrative agency), or
as a result of any official or administrative pronouncement or action or
judicial decision interpreting or applying such laws or regulations, it is more
likely than not that for United States federal income tax purposes (1) Staples,
its subsidiaries or affiliates, or any of its successors or its stockholders is
or, at any time in the future, will be subject to tax upon the issuance of
shares of either Staples Stock or Staples.com Stock or (2) either Staples Stock
or Staples.com Stock is not or, at any time in the future, will not be treated
solely as stock of Staples. For purposes of rendering such opinion, the tax
advisor shall assume that any administrative proposals will be adopted as
proposed. However, in the event a change in law is proposed, the tax advisor
shall render an opinion only in the event of enactment.
Staples.com Stock will exceed the "40% of Total Market Capitalization
Threshold" if the Market Capitalization of the outstanding Staples.com Stock
exceeds 40% of the Total Market Capitalization of both series of common stock
for 30 Trading Days during the 60 consecutive Trading Day period ending on, and
including, the 5th Trading Day immediately preceding the date on which we mail
the notice of exchange. Staples.com Stock will be below the "60% of Total
Market Capitalization Threshold" if the Market Capitalization of the
outstanding Staples.com Stock is below 60% of the total Market Capitalization
of both series of common stock for 30 Trading Days during the 60 consecutive
Trading Day period ending on, and including, the 5th Trading Day immediately
preceding the date on which we mail the notice of exchange. If we have the
right, on the date on which we mail a notice of exchange as contemplated above,
to issue shares of either series of common stock in exchange for outstanding
shares of the other series of common stock on a value for value basis as
described above, we will not lose that right even if Staples.com Stock
subsequently falls below the 40% of Total Market Capitalization Threshold or
exceeds the 60% of Total Market Capitalization Threshold.
Exchange for Stock of a Subsidiary at Staples' Option
At any time at which all of the assets and liabilities of a Group (and no
other assets or liabilities of Staples or any subsidiary thereof) are held
directly or indirectly by one or more wholly owned subsidiaries of Staples (the
"Group Subsidiaries"), we will have the right to deliver to holders of the
relevant series of common stock their Proportionate Interest in all of the
outstanding shares of the common stock of the Group Subsidiaries in exchange
for all of the outstanding shares of such series of common stock.
. If the series of common stock being exchanged is Staples Stock and the
Number of Shares Issuable with Respect to Staples Group's Retained
Interest in Staples.com Group is greater than zero, we will also issue a
number of shares of Staples.com Stock equal to the then current Number
of Shares Issuable with Respect to Staples Group's Retained Interest in
Staples.com Group and deliver those shares to the holders of Staples
Stock or to one of the Group Subsidiaries, at our option.
. If the series of common stock being exchanged is Staples.com Stock and
the Number of Shares Issuable with Respect to Staples Group's Retained
Interest in Staples.com Group is greater than zero (so that less than
all of the shares of common stock of the Group Subsidiaries are being
delivered to the holders of Staples.com Stock), we may retain the
remaining shares of common stock of the Group Subsidiaries or distribute
those shares as a dividend on Staples Stock, at our option.
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General Dividend, Redemption and Exchange Provisions
If we complete a Disposition of All or Substantially All of the Assets of a
Group (other than an Exempt Disposition), we would be required, not more than
the 10 Trading Days after the consummation of such Disposition, to issue a
press release specifying (1) the Net Proceeds of such Disposition, (2) the
number of shares of the series of common stock related to such Group then
outstanding, (3) the number of shares of such series of common stock issuable
upon conversion, exchange or exercise of any convertible or exchangeable
securities, options or warrants and the conversion, exchange or exercise prices
thereof and (4) if the Group is Staples.com Group, the Number of Shares
Issuable with Respect to Staples Group's Retained Interest in Staples.com
Group. Not more than 40 Trading Days after such consummation, we would be
required to announce by press release which of the actions specified in the
first paragraph under "--Mandatory Dividend, Redemption or Exchange on
Disposition of All or Substantially All of The Assets of a Group" we have
determined to take, and upon making that announcement, that determination would
become irrevocable. In addition, we would be required, not more than 40 Trading
Days after such consummation and not less than 10 Trading Days before the
applicable payment date, redemption date or exchange date, to send a notice by
first-class mail, postage prepaid, to holders of the relevant series of common
stock at their addresses as they appear on our transfer books.
. If we determine to pay a special dividend, we would be required to
specify in the notice (1) the record date for such dividend, (2) the
payment date of such dividend (which cannot be more than 85 Trading Days
after such consummation) and (3) the aggregate amount and type of
property to be paid in such dividend (and the approximate per share
amount thereof).
. If we determine to undertake a redemption, we would be required to
specify in the notice (1) the date of redemption (which cannot be more
than 85 Trading Days after such consummation), (2) the aggregate amount
and type of property to be paid as a redemption price (and the
approximate per share amount thereof), (3) if less than all shares of
the relevant series of common stock are to be redeemed, the number of
shares to be redeemed and (4) the place or places where certificates for
shares of such series of common stock, properly endorsed or assigned for
transfer (unless we waive such requirement), should be surrendered in
return for delivery of the cash, securities or other property to be paid
by Staples in such redemption.
. If we determine to undertake an exchange, we would be required to
specify in the notice (1) the date of exchange (which cannot be more
than 85 Trading Days after such consummation), (2) the number of shares
of the other series of common stock to be issued in exchange for each
outstanding share of such series of common stock and (3) the place or
places where certificates for shares of such series of common stock,
properly endorsed or assigned for transfer (unless we waive such
requirement), should be surrendered in return for delivery of the other
series of common stock to be issued by Staples in such exchange.
If we determine to complete any exchange described under "--Optional
Exchange of One Series of Common Stock for the Other Series" or "--Exchange for
Stock of a Subsidiary at Staples' Option", we would be required, between 10 to
30 Trading Days before the exchange date, to send a notice by first-class mail,
postage prepaid, to holders of the relevant series of common stock at their
addresses as they appear on our transfer books, specifying (1) the exchange
date and the other terms of the exchange and (2) the place or places where
certificates for shares of such series of common stock, properly endorsed or
assigned for transfer (unless we waive such requirement), should be surrendered
for delivery of the stock to be issued or delivered by Staples in such
exchange.
Neither the failure to mail any required notice to any particular holder nor
any defect therein would affect the sufficiency thereof with respect to any
other holder or the validity of any dividend, redemption or exchange.
If we are redeeming less than all of the outstanding shares of a series of
common stock as described above, we would redeem such shares pro rata or by lot
or by such other method as the board of directors determines to be equitable.
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No holder of shares of a series of common stock being exchanged or redeemed
will be entitled to receive any cash, securities or other property to be
distributed in such exchange or redemption until such holder surrenders
certificates for such shares, properly endorsed or assigned for transfer, at
such place as we specify (unless we waive such requirement). As soon as
practicable after our receipt of certificates for such shares, we would deliver
to the person for whose account such shares were so surrendered, or to the
nominee or nominees of such person, the cash, securities or other property to
which such person is entitled, together with any fractional payment referred to
below, in each case without interest. If less than all of the shares of common
stock represented by any one certificate were to be exchanged or redeemed, we
would also issue and deliver a new certificate for the shares of such common
stock not exchanged or redeemed.
We would not be required to issue or deliver fractional shares of any
capital stock or any other fractional securities to any holder of common stock
upon any exchange, redemption, dividend or other distribution described above.
If more than one share of common stock were held at the same time by the same
holder, we may aggregate the number of shares of any capital stock that would
be issuable or any other securities that would be distributable to such holder
upon any such exchange, redemption, dividend or other distribution. If there
are fractional shares of any capital stock or any other fractional securities
remaining to be issued or distributed to any holder, we would, if such
fractional shares or securities were not issued or distributed to such holder,
pay cash in respect of such fractional shares or securities in an amount equal
to the Fair Value thereof, without interest.
From and after the date set for any exchange or redemption, all rights of a
holder of shares of common stock that were exchanged or redeemed would cease
except for the right, upon surrender of the certificates representing such
shares, to receive the cash, securities or other property for which such shares
were exchanged or redeemed, together with any fractional payment as provided
above, in each case without interest (and, if such holder was a holder of
record as of the close of business on the record date for a dividend not yet
paid, the right to receive such dividend). A holder of shares of common stock
being exchanged would not be entitled to receive any dividend or other
distribution with respect to shares of the other series of common stock until
after the shares being exchanged are surrendered as contemplated above. Upon
such surrender, we would pay to the holder the amount of any dividends or other
distributions, without interest, which theretofore became payable with respect
to a record date occurring after the exchange, but which were not paid by
reason of the foregoing, with respect to the number of whole shares of the
other series of common stock represented by the certificate or certificates
issued upon such surrender. From and after the date set for any exchange, we
would, however, be entitled to treat the certificates for shares of common
stock being exchanged that were not yet surrendered for exchange as evidencing
the ownership of the number of whole shares of the other series of common stock
for which the shares of such common stock should have been exchanged,
notwithstanding the failure to surrender such certificates.
We would pay any and all documentary, stamp or similar issue or transfer
taxes that might be payable in respect of the issue or delivery of any shares
of capital stock and/or other securities on any exchange or redemption
described herein. We would not, however, be required to pay any tax that might
be payable in respect of any transfer involved in the issue or delivery of any
shares of capital stock and/or other securities in a name other than that in
which the shares so exchanged or redeemed were registered, and no such issue or
delivery will be made unless and until the person requesting such issue pays to
Staples the amount of any such tax or establishes to our satisfaction that such
tax has been paid.
We may, subject to applicable law, establish such other rules, requirements
and procedures to facilitate any dividend, redemption or exchange contemplated
as described above as the board of directors may determine to be appropriate
under the circumstances.
Voting Rights
Currently, holders of existing common stock have one vote per share on all
matters submitted to a vote of stockholders. Once the Tracking Stock Proposal
is implemented, holders of Staples Stock and Staples.com Stock would vote
together as one class on all matters as to which common stockholders generally
are entitled
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to vote, unless a separate class vote is required by applicable law. On all
such matters for which no separate vote is required, each outstanding share of
Staples Stock would entitle the holder to one vote and each outstanding share
of Staples.com Stock would entitle the holder to one vote.
When holders of Staples Stock and Staples.com Stock vote together as a
single class, the holders of the series of common stock having a majority of
the votes will be in a position to control the outcome of the vote even if the
matter involves a conflict of interest between the holders of Staples Stock and
holders of Staples.com Stock.
The Delaware General Corporation Law requires a separate vote of holders of
shares of common stock of any series on any amendment to the certificate of
incorporation if the amendment would increase or decrease the par value of the
shares of such series or alter or change the powers, preferences or special
rights of the shares of such series so as to affect them adversely.
After Staples.com Stock is issued, we would set forth the number of
outstanding shares of Staples Stock and Staples.com Stock in our annual and
quarterly reports filed pursuant to the Exchange Act, and disclose in any proxy
statement for a stockholder meeting the number of outstanding shares and per
share voting rights of Staples Stock and Staples.com Stock.
Liquidation
Currently, in the event of our liquidation, dissolution or winding up
(whether voluntary or involuntary), after payment, or provision for payment, of
our debts and other liabilities and the payment of full preferential amounts to
which the holders of any preferred stock are entitled, holders of existing
common stock are entitled to share equally in our remaining net assets.
If the Tracking Stock Proposal is approved, in the event of our dissolution,
liquidation or winding up (whether voluntary or involuntary), the holders of
Staples Stock and Staples.com Stock will be entitled to receive our assets
remaining for distribution to holders of common stock on a per share basis in
proportion to the liquidation units per share of such series, after payment or
provision for payment of our debts and other liabilities and the payment of
full preferential amounts to which holders of any preferred stock are entitled.
Neither a merger nor consolidation of Staples into or with any other
corporation, nor any sale, transfer or lease of any part of our assets, will,
alone, be deemed a liquidation or winding up of Staples, or cause the
dissolution of Staples, for purpose of these liquidation provisions.
Each share of Staples.com Group will have one liquidation unit. Each share
of Staples Stock will have a number of liquidation units equal to the quotient
of the average Market Value of a share of Staples Stock over the last 20
consecutive Trading Day period ending 300 days after the Effective Date divided
by the average Market Value of a share of Staples.com Stock over the same
period. If the liquidation, dissolution or winding up occurs prior to such
300th day, the average Market Value will be determined based on the 20
consecutive Trading Day period ending immediately prior to the liquidation,
dissolution or winding up event. In the absence of a public trading market for
the shares of Staples.com Stock, our board of directors will exercise its good
faith judgment to determine the market value of a share of Staples.com Stock
for purposes of this formula.
After the number of liquidation units to which each share of Staples Stock
is entitled has been calculated in accordance with this formula, that number
will not be changed without the approval of holders of the series of common
stock adversely affected except as described below. As a result, after the date
of the calculation of the number of liquidation units to which the Staple Stock
is entitled, the liquidation rights of the holders of the respective series of
tracking stock will likely not bear any relationship to the relative market
values or the relative voting rights of the two series at or near the time of
liquidation. We consider that liquidation is a
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remote contingency, and our financial advisors believe that, in general, these
liquidation provisions will be immaterial to the value of the Staples.com Stock
and the Staples Stock.
No holder of Staples.com Stock will have any special right to receive
specific assets of the Staples e-Commerce Group business and no holder of
Staples Stock will have any special right to receive specific assets of the
Staples Group business upon our dissolution, liquidation or winding up.
If we subdivide or combine the outstanding shares of either series of common
stock or declare a dividend or other distribution of shares of either series of
common stock to holders of that series of common stock, the number of
liquidation units of such series of common stock will be appropriately
adjusted. This adjustment will be made by our board of directors, to avoid any
dilution in the relative liquidation rights of any series of common stock.
Staples Group's Retained Interest in Staples.com Group
The number of shares of Staples.com Stock that Staples may issue for the
account of Staples Group in respect of its Retained Interest is referred to as
the "Number of Shares Issuable with Respect to Staples Group's Retained
Interest in Staples.com Group." At the time that we first issue shares of, or
options for shares of, Staples.com Stock, the board of directors would
designate the initial Number of Shares Issuable with Respect to Staples Group's
Retained Interest in Staples.com Group.
In this document, we call the percentage interest in Staples.com Group
intended to be represented at any time by the outstanding shares of Staples.com
Stock the "Outstanding Interest Percentage", and we call the remaining
percentage interest in Staples.com Group intended to be represented at any time
by Staples Group's Retained Interest in Staples.com Group the "Retained
Interest Percentage." At any time, the Outstanding Interest Percentage equals
the number of shares of Staples.com Stock outstanding divided by the Total
Number of Notional Staples.com Group Shares Deemed Outstanding (expressed as a
percentage) and the Retained Interest Percentage equals the Number of Shares
Issuable with Respect to Staples Group's Retained Interest in Staples.com Group
divided by the Total Number of Notional Staples e-Commerce Group Shares Deemed
Outstanding (expressed as a percentage). The sum of the Outstanding Interest
Percentage and the Retained Interest Percentage always equals 100%.
At the time that we file the Certificate of Amendment, the Retained Interest
Percentage will be 100% and the Outstanding Interest Percentage will be 0%.
Number of Shares Issuable with Respect to Staples Group's Retained Interest in
Staples.com Group.
We currently intend to designate 50,000,000 as the initial Number of Shares
Issuable with Respect to Staples Group's Retained Interest in Staples.com
Group. We currently plan to grant options for approximately shares of
Staples.com Stock under the 1992 Equity Incentive Plan to all Staples employees
who currently receive options under the Plan shortly following stockholder
approval of the proposed amendment to the Plan. Assuming we do so, we intend to
attribute the net proceeds of the exercise of such options to the equity of
Staples.com Group. The issuance of shares of Staples.com Stock upon the
exercise of those options will have no effect on the Number of Shares Issuable
with Respect to Staples Group's Retained Interest in Staples.com Group. Thus,
after giving effect to the grant of those options,
. there would be no shares of Staples.com Stock outstanding, but there
would be shares of Staples.com Stock reserved for issuance upon the
exercise of outstanding options,
. the Number of Shares Issuable with Respect to Staples Group's Retained
Interest in Staples e-Commerce Group would remain 50,000,000,
. the Total Number of Notional Staples.com Group Shares Deemed Outstanding
would be , but would increase to if all such options were
exercised,
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. the Outstanding Interest Percentage would be approximately if all
such options were exercised and
. the Retained Interest Percentage would be approximately if all such
options were exercised.
We expect to issue additional shares of Staples.com Stock in one or more
private or public financings within 12 months of stockholder approval of the
Tracking Stock Proposal. The specific terms of the financings, including
whether they are private or public, the amount of Staples.com Stock we issue,
and the timing of the financings, will depend upon factors such as stock market
conditions and the performance of Staples.com Group. The effect of those
financings on the Retained Interest Percentage and the Outstanding Interest
Percentage would depend upon the number of shares of Staples.com Stock sold and
whether we elect to attribute the net proceeds of such financings to the equity
of Staples.com Group or to Staples Group in respect of its Retained Interest.
Attribution of Issuances of Staples.com Stock. Whenever we decide to issue
shares of Staples e-Commerce Stock, or options therefor, we would determine, in
our sole discretion, whether to attribute that issuance (and the proceeds
thereof) to Staples Group in respect of its Retained Interest in Staples.com
Group (in a manner analogous to a secondary offering of common stock of a
subsidiary owned by a corporate parent) or to Staples.com Group (in a manner
analogous to a primary offering of common stock). If we issue any shares of
Staples.com Stock and attribute that issuance (and the proceeds thereof) to
Staples Group in respect of its Retained Interest in Staples.com Group, the
Number of Shares Issuable with Respect to Staples Group's Retained Interest in
Staples.com Group would be reduced by the number of shares so issued, the
number of outstanding shares of Staples.com Stock would be increased by the
same number, the Total Number of Notional Staples.com Group Shares Deemed
Outstanding would remain unchanged, the Retained Interest Percentage would be
reduced and the Outstanding Interest Percentage would be correspondingly
increased. If we instead attribute that issuance (and the proceeds thereof) to
Staples.com Group, the Number of Shares Issuable with Respect to Staples
Group's Retained Interest in Staples.com Group would remain unchanged, the
number of outstanding shares of Staples.com Stock and the Total Number of
Notional Staples.com Group Shares Deemed Outstanding would be increased by the
number of shares so issued, the Retained Interest Percentage would be reduced
and the Outstanding Interest Percentage would be correspondingly increased.
Issuances of Staples.com Stock as Distributions on Staples Stock. We reserve
the right to issue shares of Staples.com Stock as a distribution on Staples
Stock, although we do not currently intend to do so. If we did so, we would
attribute that distribution to Staples Group in respect of its Retained
Interest in Staples.com Group. As a result, the Number of Shares Issuable with
Respect to Staples Group's Retained Interest in Staples.com Group would be
reduced by the number of shares so distributed, the number of outstanding
shares of Staples.com Stock would be increased by the same number, the Total
Number of Notional Staples.com Group Shares Deemed Outstanding would remain
unchanged, the Retained Interest Percentage would be reduced and the
Outstanding Interest Percentage would be correspondingly increased. If instead
we issued shares of Staples.com Stock as a distribution on Staples.com Stock,
we would attribute that distribution to Staples.com Group, in which case we
would proportionately increase the Number of Shares Issuable with Respect to
Staples Group's Retained Interest in Staples.com Group. As a result, the Number
of Shares Issuable with Respect to Staples Group's Retained Interest in
Staples.com Group and the Total Number of Notional Staples.com Group Shares
Deemed Outstanding would each be increased by the same percentage as the number
of outstanding shares of Staples.com Stock is increased and the Retained
Interest Percentage and Outstanding Interest Percentage would remain unchanged.
Dividends on Staples.com Stock. At the time of any dividend on the
outstanding shares of Staples.com Stock (including any dividend required as a
result of a Disposition of All or Substantially All of the Assets of
Staples.com Group, but excluding any dividend payable in Staples.com Stock), we
will credit to Staples Group, and charge against Staples.com Group, a
corresponding amount in respect of Staples Group's Retained Interest in
Staples.com Group. Specifically, the corresponding amount will equal (1) the
aggregate amount of such dividend multiplied by (2) a fraction, the numerator
of which is the Number of Shares Issuable with Respect to Staples Group's
Retained Interest in Staples.com Group and the denominator of which is the
number of shares of Staples.com Stock then outstanding.
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Repurchases of Staples.com Stock. If we decide to repurchase shares of
Staples.com Stock, we would determine, in our sole discretion, whether to
attribute that repurchase, and the cost thereof, to Staples Group (in a manner
analogous to a purchase of common stock of a subsidiary by a corporate parent)
or to Staples.com Group (in a manner analogous to an issuer repurchase). If we
repurchase shares of Staples.com Stock and attribute that repurchase, and the
cost thereof, to Staples Group, the Number of Shares Issuable with Respect to
Staples Group's Retained Interest in Staples.com Group would be increased by
the number of shares so purchased, the number of outstanding shares of
Staples.com Stock would be decreased by the same number, the Total Number of
Notional Staples.com Group Shares Deemed Outstanding would remain unchanged,
the Retained Interest Percentage would be increased and the Outstanding
Interest Percentage would be correspondingly decreased. If we instead attribute
that repurchase, and the cost thereof, to Staples.com Group, the Number of
Shares Issuable with Respect to Staples Group's Retained Interest in
Staples.com Group would remain unchanged, the number of outstanding shares of
Staples.com Stock and the Total Number of Notional Staples.com Group Shares
Deemed Outstanding would be decreased by the number of shares so repurchased,
the Retained Interest Percentage would be increased and the Outstanding
Interest Percentage would be correspondingly reduced.
Transfers of Cash or Other Property between Staples Group and Staples.com
Group. We may, in our sole discretion, determine to transfer cash or other
property of Staples.com Group to Staples Group in return for a decrease in
Staples Group's Retained Interest in Staples.com Group (in a manner analogous
to a return of capital) or to transfer cash or other property of Staples Group
to Staples.com Group in return for an increase in Staples Group's Retained
Interest in Staples.com Group (in a manner analogous to a capital
contribution). If we determine to transfer cash or other property of
Staples.com Group to Staples Group in return for a decrease in Staples Group's
Retained Interest in Staples.com Group, the Number of Shares Issuable with
Respect to Staples Group's Retained Interest in Staples.com Group and the Total
Number of Notional Staples.com Group Shares Deemed Outstanding would each be
decreased by an amount equal to the Fair Value of such cash or other property
divided by the Market Value of a share of Staples.com Stock on the day of
transfer, the number of outstanding shares of Staples.com Stock would remain
unchanged, the Retained Interest Percentage would be decreased and the
Outstanding Interest Percentage would be correspondingly increased. If we
instead determine to transfer cash or other property of Staples Group to
Staples.com Group in return for an increase in Staples Group's Retained
Interest in Staples.com Group, the Number of Shares Issuable with Respect to
Staples Group's Retained Interest in Staples.com Group and the Total Number of
Notional Staples.com Group Shares Deemed Outstanding would each be increased by
an amount equal to the Fair Value of such cash or other property divided by the
Market Value of a share of Staples.com Stock on the day of transfer, the number
of outstanding shares of Staples.com Stock would remain unchanged, the Retained
Interest Percentage would be increased and the Outstanding Interest Percentage
would be correspondingly decreased.
We may not attribute issuances of Staples.com Stock to Staples Group,
transfer cash or other property of Staples.com Group to Staples Group in return
for a decrease in its Retained Interest in Staples.com Group or take any other
action to the extent that doing so would cause the Number of Shares Issuable
with Respect to Staples Group's Retained Interest in Staples.com Group to
decrease below zero.
For illustrations showing how to calculate the Retained Interest Percentage,
the Outstanding Interest Percentage, the Number of Shares Issuable with Respect
to Staples Group's Retained Interest in Staples.com Group and the Total Number
of Notional Staples.com Group Shares Deemed Outstanding after giving effect to
certain hypothetical dividends, issuances, repurchases and transfers, see Annex
I--"Illustrations of Certain Terms."
Effectiveness of Certain Terms
The terms described under "--Dividends", "--Mandatory Dividend, Redemption
or Exchange on Disposition of All or Substantially All of the Assets of a
Group", "--Optional Exchange of One Series of Common Stock for the Other
Series", "--Exchange for Stock of a Subsidiary at Staples' Option", "--General
Dividend, Redemption and Exchange Provisions", "--Voting Rights" and "--
Liquidation" above apply only when there are shares of both series of common
stock outstanding.
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Determinations by the Board of Directors
The Certificate of Amendment would provide that, subject to applicable law,
any determinations made by the board of directors in good faith under our
certificate of incorporation or in any certificate of designation filed
pursuant thereto would be final and binding on all stockholders of Staples.
The board of directors plans to establish a Business Advisory Board which
will be comprised of individuals who are not directors, officers or employees
of Staples. The Business Advisory Board's members will be appointed by the
board of directors or its chairman and will serve as consultants to Staples.com
Group with respect to its business.
The board of directors also plans to establish a subcommittee comprised of
some of Staples' independent directors to address and resolve, at the request
of Staples' board of directors, any business issues concerning the relationship
between Staples Group and Staples.com Group.
Preemptive Rights
Holders of Staples Stock and Staples.com Stock will not have any preemptive
rights to subscribe for any additional shares of capital stock or securities
that we may issue in the future.
Certain Other Provisions of Our Certificate of Incorporation, By-laws and
Delaware Law
Preferred Stock
We may issue preferred stock from time to time in one or more series and the
board of directors, without further approval of our stockholders, is authorized
to fix the dividend rights and terms, conversion rights, voting rights,
redemption rights, liquidation preferences, sinking funds and any other rights,
preferences, privileges and restrictions applicable to each series of preferred
stock. The purpose of authorizing the board of directors to determine such
rights and preferences is to eliminate delays associated with a stockholder
vote on specific issuances. The issuance of preferred stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes, could, among other things, adversely affect the voting power of
holders of our common stock and make it more difficult for a third party to
gain control of Staples. There are no outstanding shares of preferred stock
and, other than the Series A junior participating preferred stock discussed
below, no designated series of preferred stock.
Rights Plan
In February 1994, we adopted the Staples Rights Plan. Under the Rights Plan,
preferred stock purchase rights were distributed as a dividend, adjusted for
subsequent stock splits, at the rate of 32/243rds of a right for each share of
our common stock outstanding. The rights will expire on February 15, 2004,
unless the rights are redeemed or exchanged before that time. Each right
entitles the holder to purchase one one-hundredth of a share of Series A junior
participating preferred stock at an exercise price of $130 per right, subject
to adjustment.
The rights will be exercisable only if a person or group has acquired
beneficial ownership of 20% or more of the outstanding shares of our common
stock or announces a tender or exchange offer that would result in such person
or group owning 30% or more of the outstanding shares of our common stock. Such
percentages may, in the board of directors' discretion, be lowered, although in
no event below 10%. If any person becomes the beneficial owner of 25% or more
of the shares of our common stock, except pursuant to a tender or exchange
offer for all shares at a fair price as determined by the outside members of
the board of directors, or if a 20% or more stockholder constitutes or merges
into or engages in certain self dealing transactions with Staples, or if there
occurs any reclassification, merger or other transaction or transactions which
increases by more than 1% the proportionate share of our outstanding common
stock held by a 20% or more stockholder,
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each right not owned by a 20% or more stockholder will enable its holder to
purchase that number of shares of our common stock which equals the exercise
price of the right dividend by one-half of the current market price of our
common stock at the date of the occurrence of the event. In addition, if we are
involved in a merger or other business combination transaction with another
person or group in which we are not the surviving corporation or in connection
with which our common stock is changed or converted, or we sell or transfer 50%
or more of our assets or earning power to another person, each right that has
not previously been exercised will entitle its holder to purchase that number
of shares of common stock of such other person which equals the exercise price
of the right divided by one-half of the current market price of such common
stock at the date of the occurrence of the event. We will generally be entitled
to redeem the rights at $.02 per right at any time until the tenth day
following public announcement that a 20% stock position has been acquired and
in certain other circumstances.
Because of the nature of the dividend, liquidation and voting rights of the
Series A junior participating preferred stock, the value of the fraction of a
share of Series A junior participating preferred stock purchasable upon
exercise of the 32/243rds of a right associated with each share of common stock
should approximate the value of one share of our common stock.
The rights have certain anti-takeover effects. The rights may cause
substantial dilution to a person or group that attempts to acquire us on terms
not approved by the board of directors, except under the terms of an offer
conditioned on a substantial number of rights being acquired. The rights should
not interfere with any merger or other business combination approved by the
board of directors since the rights may be redeemed by us at $.02 per right
prior to the tenth day after the public announcement by a person or group of
the acquisition of 20% or more of the outstanding shares of our common stock.
If the Tracking Stock Proposal is approved, the rights would attach to the
Staples Stock, and all terms of the rights relating to our existing common
stock would instead relate to the Staples Stock. We may in the future decide to
adopt a Rights Plan covering the Staples.com Stock.
Delaware Law and Certain Charter Provisions
We are subject to the provisions of Section 203 of the General Corporation
Law of Delaware, an anti-takeover law. In general, Section 203 prevents an
"interested stockholder" of a corporation from engaging in any "business
combination" with the corporation for a period of three years following the
date on which such interested stockholder became an interested stockholder,
unless:
. before the person became an interested stockholder, the board of
directors of the corporation approved either the business combination in
question or the transaction which resulted in the interested stockholder
becoming an interested stockholder;
. upon consummation of the transaction which resulted in the interested
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding, for
purposes of determining the number of shares outstanding, shares held by
directors who are also officers and employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
. following the transaction which resulted in the interested stockholder
becoming an interested stockholder, the business combination is approved
by the board of directors of the corporation and authorized at a meeting
of stockholders by the affirmative vote of the holders of at least 66
2/3% of the outstanding voting stock of the corporation not owned by the
interested stockholder.
A "business combination" includes, mergers, asset sales and other
transactions resulting in a financial benefit to the interested stockholder.
Subject to certain exceptions, an "interested stockholder" is a person who,
together with affiliates and associates, owns, or within three years did own,
15% or more of the corporation's voting stock.
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Our certificate of incorporation requires that holders of two-thirds of our
issued and outstanding stock entitled to vote approve any merger,
consolidation, dissolution or sale of all or substantially all of our assets.
The board of directors is divided into three classes of approximately equal
size, one of which is elected each year. Our certificate of incorporation also
requires all stockholder action to occur at a meeting and prohibits stockholder
action by written consent. Our bylaws provide that special meetings of
stockholders may be called only by the Chairman of the board of directors or
the President.
Limitation of Liability and Indemnification
Our certificate of incorporation and bylaws include provisions to
. eliminate the personal liability of its directors for monetary damages
resulting from breaches of their fiduciary duty as directors to the
fullest extent permitted by the General Corporation Law of Delaware, and
. indemnify its directors and officers to the fullest extent permitted by
the General Corporation Law of Delaware, including under circumstances
in which indemnification is otherwise discretionary.
We believe that these provisions are necessary to attract and retain
qualified persons as directors and officers.
Cash Management and Allocation Policies
In order to prepare separate financial statements for Staples Group and
Staples.com Group, we have allocated, for financial reporting purposes, all of
our consolidated assets, liabilities, revenue, expenses and cash flow between
Staples Group and Staples.com Group. Thus, the financial statements of Staples
Group and Staples.com Group, taken together, comprise all of the accounts
included in the corresponding financial statements of Staples.
The financial statements of Staples Group and Staples.com Group reflect the
application of cash management and allocation policies adopted by the board of
directors. These policies are summarized below. The board of directors may, in
its sole discretion, modify, rescind or add to any of these policies, although
it has no present intention to do so. The decision of the board of directors to
modify, rescind or add to any of these policies would, however, be subject to
the board of directors' general fiduciary duties.
Even though Staples has allocated all of its consolidated assets,
liabilities, revenue, expenses and cash flow between Staples Group and
Staples.com Group, holders of Staples.com Stock will be common stockholders of
Staples and, as such, will be subject to all risks associated with an
investment in Staples and all of its businesses, assets and liabilities. See
"Risk Factors--Holders of Staples Stock and Staples.com Stock will be common
stockholders of Staples and will not have any legal rights relating to specific
assets of Staples."
Finance Activities
We manage most finance activities on a centralized, consolidated basis.
These activities include the investment of surplus cash, the issuance,
repayment and repurchase of short-term and long-term debt, and the issuance and
repurchase of common stock. Staples.com Group generally remits its cash
receipts to Staples Group but is not obligated to do so, and Staples Group
generally funds Staples.com Group's cash disbursements on a regular basis, but
is not obligated to do so.
In the combined financial statements of Staples Group and combined financial
statements of Staples e-Commerce Group, (1) all equity transactions, and the
proceeds thereof, were attributed to Staples Group, (2) whenever Staples.com
Group held cash, that cash was transferred to Staples Group and accounted for
as an inter-Group revolving credit advance and (3) whenever Staples.com Group
had a cash need, that cash need was
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funded by Staples and accounted for as an inter-Group revolving credit advance.
The inter-Group revolving credit arrangement bears interest at a rate at which
the board of directors, in its sole discretion, determines Staples could borrow
such funds on a revolving credit basis, which was 6% for the fiscal years 1997,
1998 and 1999. These inter-Group balances are settled on a regular basis, as
reviewed by the board of directors. After the date on which shares of
Staples.com Stock, or options therefor are first issued, Staples intends to
continue the above practice of transferring cash to Staples.com Group through
an inter-Group revolving credit arrangement. The board of directors, at its
sole discretion, may elect an alternative financing mechanism between the
Groups based upon the facts and circumstances.
After the date on which shares of Staples.com Stock, or options therefor,
are first issued:
(1) Staples will attribute each future incurrence or issuance of
external debt or preferred stock, and the proceeds thereof, to Staples
Group, unless the board of directors determines otherwise. The board of
directors may, but is not required to, attribute an incurrence or issuance
of debt or preferred stock, and the proceeds thereof, to Staples.com Group
to the extent that Staples incurs or issues the debt or preferred stock for
the benefit of Staples.com Group.
(2) Staples will attribute each future issuance of Staples Stock, and
the proceeds thereof, to Staples Group. Staples may attribute any future
issuance of Staples.com Stock, and the proceeds thereof, to Staples Group
in respect of its Retained Interest in Staples.com Group (in a manner
analogous to a secondary offering of common stock of a subsidiary owned by
a corporate parent) or to Staples e-Commerce Group (in a manner analogous
to a primary offering of common stock). Dividends on and repurchases of
Staples Stock will be charged against Staples Group, and dividends on and
repurchases of Staples.com Stock will be charged against Staples.com Group.
In addition, at the time of any dividend on Staples.com Stock, Staples will
credit to Staples Group, and charge against Staples.com Group, a
corresponding amount in respect of Staples Group's Retained Interest in
Staples.com Group. See""--Description of Staples Stock and Staples.com
Stock."
(3) Whenever Staples.com Group holds cash, Staples.com Group will
normally transfer that cash to Staples Group. Conversely, whenever
Staples.com Group has a cash need, Staples Group will normally fund that
cash need. However, the board of directors will determine, in its sole
discretion, whether to provide any particular funds to either Group and
will not be obligated to do so.
(4) Staples will account for all cash transfers from one Group to or for
the account of the other Group (other than transfers in return for assets
or services rendered or transfers in respect of Staples Group's Retained
Interest that correspond to dividends paid on Staples.com Stock), as inter-
Group revolving credit advances unless:
. the board of directors determines that a given transfer, or type of
transfer, should be accounted for as a long-term loan,
. the board of directors determines that a given transfer, or type of
transfer, should be accounted for as a capital contribution
increasing Staples Group's Retained Interest in Staples.com Group or
. the board of directors determines that a given transfer, or type of
transfer, should be accounted for as a return of capital reducing
Staples Group's Retained Interest in Staples.com Group.
There are no specific criteria to determine when Staples will account for a
cash transfer as a long-term loan, a capital contribution or a return of
capital rather than an inter-Group revolving credit advance. The board of
directors would make such a determination in the exercise of its business
judgment at the time of such transfer, or the first of such type of
transfer, based upon all relevant circumstances. Factors the board of
directors would consider include:
. the current and projected capital structure of each Group,
. the relative levels of internally generated funds of each Group,
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. the financing needs and objectives of the recipient Group,
. the investment objectives of the transferring Group,
. the availability, cost and time associated with alternative
financing sources and
. prevailing interest rates and general economic conditions.
(5) Any cash transfer accounted for as an inter-Group revolving credit
advance will bear interest at the rate at which the board of directors, in
its sole discretion, determines Staples could borrow such funds on a
revolving credit basis. Any cash transfer accounted for as a long-term loan
will have interest rate, amortization, maturity, redemption and other terms
that generally reflect the then prevailing terms on which the board of
directors, in its sole discretion, determines Staples could borrow such
funds.
(6) Any cash transfer from Staples Group to Staples.com Group, or for
Staples.com Group's account, accounted for as a capital contribution will
correspondingly increase Staples e-Commerce Group's division equity and
Staples Group's Retained Interest in Staples.com Group. As a result, the
Number of Shares Issuable with Respect to Staples Group's Retained Interest
in Staples e-Commerce Group will increase by the amount of such capital
contribution divided by the Market Value of Staples.com Stock on the date
of transfer.
(7) Any cash transfer from Staples.com Group to Staples Group, or for
Staples Group's account, accounted for as a return of capital will
correspondingly reduce Staples.com Group's division equity and Staples
Group's Retained Interest in Staples.com Group. As a result, the Number of
Shares Issuable with Respect to Staples Group's Retained Interest in
Staples.com Group will decrease by the amount of such return of capital
divided by the Market Value of Staples e-Commerce Stock on the date of
transfer.
Shared Services and Support Activities
The cost of services shared by Staples Group and Staples.com Group,
including general and administrative expenses, has been allocated between
Staples.com Group and Staples Group based upon the use of such services and the
good faith judgment of the board of directors or our management. Where
determinations based on use alone were not practical, other methods and
criteria were used to provide a reasonable allocation of the cost of shared
services, including support activities attributable between Staples Group or
Staples.com Group. Such allocated shared services represent, among other
things, financial and accounting services, information system services, certain
selling and marketing activities, certain merchandising and replenishment
services, transportation and warehouse management services, certain customer
service activities, executive management, human resources, legal and corporate
planning activities.
Taxes
Federal income taxes, which are determined on a consolidated basis, are
allocated between the Groups, and reflected in their respective financial
statements, in accordance with Staples' tax allocation policy. In general, this
policy provides that the consolidated tax provision, deferred tax accounts and
related tax payments or refunds, are allocated between the Groups based
principally upon the financial income, taxable income, credits and other
amounts directly related to the respective Groups. Tax benefits that cannot be
used by the Group generating such attributes, but can be utilized on a
consolidated basis, are allocated to the Group that generated such benefits. As
a result, the allocated Group amounts of taxes payable or refundable are not
necessarily comparable to those that would have resulted if the Groups had
filed separate tax returns. State income taxes generally are computed on a
separate company basis.
Carrying Charge
Staples Group maintains inventory to support Staples.com Group's inventory
needs and the processing of receivables for Staples.com Group. As such, Staples
Group charges Staples.com Group a fee for use of their capital as determined by
the board of directors. The current charge is reflected in Staples.com Group's
financial
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statements as part of operating and selling expenses and in Staples Group's
financial statements as a credit to operating and selling expenses. This charge
is calculated based on the amount of receivables and inventory that Staples
Group is required to carry for Staples e-Commerce Group. In addition,
inventory, shrink, obsolescence and other inventory costs are allocated to
Staples.com Group based on Staples.com Group's share of such costs. The board
of directors may, in its sole discretion, change the fee charged to Staples.com
Group as it deems appropriate in light of the circumstances from time to time.
Employee Benefits
Staples Group and Staples.com Group participate in the following Staples
employee benefit plans: an Employee Stock Purchase Plan, an Employee 401(k)
Savings Plan, a Supplemental Executive Retirement Plan and a contributory
Medical and Dental Plan. The costs of these plans are allocated based on the
benefits received under the plans by the employees comprising Staples Group and
Staples.com Group or such other basis as management believes to be an equitable
and reasonable estimate of such costs.
No Appraisal Rights
Under the Delaware General Corporation Law, you will not have appraisal
rights in connection with the Tracking Stock Proposal.
Stock Transfer Agent and Registrar
ChaseMellon Shareholder Services, L.L.C. is the registrar and transfer agent
for our existing common stock. We expect ChaseMellon Shareholder Services,
L.L.C. to serve as registrar and transfer agent for Staples Stock and
Staples.com Stock.
Certain Federal Income Tax Considerations
The following discussion is a summary of the material United States federal
income tax consequences of the issuance of Staples Stock pursuant to the
Tracking Stock Proposal. This discussion, including the Ernst & Young LLP
opinion discussed below, is based on certain assumptions and representations of
Staples as well as the Internal Revenue Code of 1986, (the "Code") Treasury
Department regulations, published positions of the Internal Revenue Service,
and court decisions now in effect, all of which are subject to change. In
particular, Congress could enact legislation affecting the treatment of stock
with characteristics similar to Staples Stock or Staples e-Commerce Stock or
the Treasury Department could issue regulations or other guidance that change
current law. Any future legislation or regulations (or other guidance) could
apply retroactively to the implementation of the Tracking Stock Proposal and
render the Ernst & Young opinion inaccurate. See""--Clinton Administration
Proposal" below.
This discussion addresses only those of you who hold your existing common
stock and would hold Staples Stock and Staples.com Stock as a capital asset and
did not acquire your shares in a compensatory transaction, including the
exercise of employee stock options. We have included this discussion for
general information only; it does not discuss all aspects of United States
federal income taxation that may be relevant to you in light of your particular
tax circumstances or any future transactions that may be undertaken with
respect to Staples Stock or Staples.com Stock. This discussion does not apply
to you if you are a tax-exempt organization, S corporation or other pass-
through entity, mutual fund, small business investment company, regulated
investment company, insurance company or other financial institution, or
broker-dealer or are otherwise subject to special treatment under the federal
income tax laws. This discussion also does not apply to those of you who hold
your existing common stock as part of a straddle, hedging or conversion
transaction. You should consult your own tax advisor with regard to the
application of the federal income tax laws, as well as to the applicability and
effect of any state, local, or foreign tax laws to which you may be subject.
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Tax Implications of the Tracking Stock Proposal to Stockholders
Ernst & Young LLP has provided us with an opinion that the Tracking Stock
Proposal will qualify as a "reorganization" for federal income tax purposes.
This means that:
. We and you will not recognize any income, gain or loss on the exchange
of your existing common stock for shares of Staples Stock;
. Your basis in the existing common stock held immediately before the
implementation of the Tracking Stock Proposal will be transferred to the
Staples Stock you receive;
. Your holding period for the Staples Stock will include the holding
period of your existing common stock; and
. Any gain or loss recognized upon a subsequent sale or exchange of
Staples Stock will be capital gain or loss.
Tax Implications of a Conversion into Different Series of Tracking Stock
Ernst & Young LLP has advised us that, under current law, if we exercise our
option to convert one series of common stock into the other series of common
stock, that conversion will be tax-free to you. You will have a carry-over
adjusted tax basis in your newly received common stock and generally a holding
period that includes the holding period of the common stock you surrendered in
the exchange.
No Internal Revenue Service Ruling
No ruling has been sought from the Internal Revenue Service. The Internal
Revenue Service has announced that it will not issue any advance rulings on the
classification of an instrument that has certain voting and liquidation rights
in an issuing corporation but whose dividend rights are determined by reference
to the earnings of a segregated portion of the issuing corporation's assets,
including assets held by a subsidiary. In addition, there are no court
decisions or other authorities that bear directly on the effect of the features
of Staples Stock or Staples.com Stock. The opinion of Ernst & Young LLP is not
binding on the Internal Revenue Service or the courts and merely represents its
best judgment based upon existing authorities and certain assumptions and
representations made to Ernst & Young LLP by our management. Therefore, the tax
treatment of the Tracking Stock Proposal is subject to some uncertainty under
current law.
It is possible that the Internal Revenue Service could assert successfully
that the receipt of Staples Stock as well as a subsequent conversion or
exchange of Staples Stock or Staples.com Stock could be taxable to you and to
us. The Internal Revenue Service could also successfully assert that gain from
a subsequent taxable sale of Staples Stock or Staples.com Stock is taxable as
ordinary income rather than capital gain. Once again, you should consult your
own tax advisor.
Clinton Administration Proposal
A recent proposal by the Clinton Administration would impose a corporate
level tax on the issuance of stock similar to Staples Stock or Staples.com
Stock. It would also permit the Internal Revenue Service to treat tracking
stock as an interest other than stock, thereby making such tracking stock
ineligible for the tax free exchange treatment available under the Code in
certain transactions. For a description of the risks associated with this
proposal, see "Risk Factors--A recent Clinton Administration proposal could
result in taxation on issuances of tracking stock."
Back-up Withholding
Certain non-corporate holders of existing common stock and Staples Stock
could be subject to backup withholding at a rate of 31% on the payment of
dividends on or proceeds from the sale of such stock. Backup withholding will
apply only if the stockholder (1) fails to furnish its taxpayer identification
number ("TIN"),
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<PAGE>
which, for an individual, would be his or her social security number, (2)
furnishes an incorrect TIN, (3) is notified by the Internal Revenue Service
that it has failed to properly report payments of interest or dividends or (4)
under certain circumstances, fails to certify under penalties of perjury that
it has furnished a correct TIN and has been notified by the Internal Revenue
Service that it is subject to backup withholding for failure to report payments
of interest or dividends. Stockholders should consult their tax advisors
regarding their qualification for exemption from backup withholding and the
procedures for obtaining such an exemption if applicable. The amount of any
backup withholding from a payment to a stockholder will be allowed as a credit
against such stockholder's federal income tax liability and may entitle such
holder to a refund, provided that the required information is furnished to the
Internal Revenue Service.
----------------
The board of directors recommends a vote FOR the Tracking Stock Proposal.
49
<PAGE>
PROPOSALS 2, 3 and 4--THE STOCK PLAN PROPOSALS
General
At the Special Meeting, we will also ask you to consider and approve
proposals to amend each of Staples' 1992 Equity Incentive Plan (the "Incentive
Plan"), Staples' 1990 Director Stock Option Plan (the "Director Plan") and
Staples' 1998 Employee Stock Purchase Plan (the "Stock Purchase Plan") (1) to
permit grants of awards under each such plan to be made with respect to either
series of common stock of Staples, and (2) to increase the number of shares
authorized for issuance under each Plan.
Description of Amendments to Incentive Plan (Proposal 2)
The proposed amendments to the Incentive Plan will (1) clarify that grants
of options and other stock-based awards under the Incentive Plan may be made
with respect to either Staples Stock or Staples.com Stock, or both, in the same
manner as currently permitted with respect to existing common stock, and (2)
increase the number of shares of common stock, regardless of series, available
for issuance under the Incentive Plan. The following summary of the amendments
to the Incentive Plan is not complete and should be read with the full proposed
text of the Incentive Plan as set forth in Annex III hereto.
Grants of Awards
Under the current Incentive Plan, grants of options and other stock-based
awards may be made with respect to shares of existing common stock. Officers,
employees and consultants of Staples and its subsidiaries are eligible to be
granted awards under the Incentive Plan. Options may be granted at an exercise
price not less than the fair market value of the common stock on the date of
grant or at an exercise price not less than 110% of the fair market value in
the case of incentive stock options granted to optionees holding more than 10%
of the voting power of Staples. Under the amended Incentive Plan, grants of
options and other stock-based awards may be made with respect to either Staples
Stock or Staples.com Stock, or both, in the same manner as currently permitted
with respect to existing common stock.
Shares Available for Issuance under Incentive Plan
Under the current Incentive Plan, up to 87,750,000 shares of existing common
stock may be available for grants of awards, and the shares of common stock
issued under the Incentive Plan may be authorized and unissued shares or
treasury shares, as Staples may from time to time determine. Under the amended
Incentive Plan, up to 96,525,000 shares of common stock (regardless of series)
will be available for issuance out of authorized and unissued or treasury
shares, as Staples may from time to time determine. The maximum number of
shares with respect to which awards may be granted to any one person may not
exceed 3,037,500 shares in any calendar year. Shares subject to an award that
expires unexercised, are forfeited, or terminated, or settled in cash instead
of common stock, and shares tendered to pay for the exercise of an option, will
thereafter again be available for grant under the Incentive Plan.
Types of Awards Under the Incentive Plan
Under the amended Incentive Plan, the incentive compensation plan committee
will, in its discretion, be able to grant awards under the Incentive Plan with
respect to Staples Stock, Staples.com Stock, or both, in such amounts and types
as it determines in accordance with the terms of the Incentive Plan. In
determining whether awards in respect of Staples Stock, Staples.com Stock, or
both, will be made to specific employees, it is anticipated that the incentive
compensation plan committee will consider, among other things, the identity of
the division of Staples to which such employee provides services; provided,
however, that nothing shall prohibit the incentive compensation plan committee
from granting awards with respect to Staples Stock, Staples.com Stock, or both,
to any participant in the Incentive Plan without regard to the division of
Staples for which the participant provides services.
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<PAGE>
Effect on Outstanding Awards
The approval of the amendments to the Incentive Plan will not result in any
adjustment to the outstanding awards under the Incentive Plan. The approval of
the Tracking Stock Proposal will result in each outstanding option for Staples
common stock under the Incentive Plan instead becoming an option for Staples
Stock.
Federal Income Tax Consequences
The following is a brief description of the federal income tax consequences
generally arising with respect to awards under the Incentive Plan.
The grant of an option or a stock appreciation right ("SAR") will create no
tax consequences for the participant or Staples. A participant will not
recognize taxable income upon exercising an incentive stock option (within the
meaning of Section 422 of the Code) ("ISO") (except that the alternative
minimum tax may apply). Upon exercising an option other than an ISO, the
participant generally must recognize ordinary income equal to the difference
between the exercise price and fair market value of the freely transferable and
nonforfeitable shares acquired on the date of exercise. Upon exercising an SAR,
the participant generally must recognize ordinary income equal to the cash or
the fair market value of the freely transferable and nonforfeitable shares
received.
If the participant does not hold the common stock acquired upon exercise of
an ISO for at least one year from the date of exercise and two years from the
date of grant (the "Holding Period"), the participant generally must recognize
ordinary income equal to the lesser of (1) the fair market value of the shares
at the date of exercise of the ISO minus the exercise price, or (2) the amount
realized upon the disposition of the ISO shares minus the exercise price.
Otherwise, a participant's disposition of shares acquired upon the exercise of
an option (including an ISO for which the ISO Holding Periods are met) or SAR
generally will result in short-term or long-term capital gain or loss measured
by the difference between the sale price and the participant's tax basis in
such shares (the tax basis generally being the exercise price plus any amount
recognized as ordinary income in connection with the exercise of the option or
SAR).
We generally will be entitled to a tax deduction equal to the amount
recognized as ordinary income by the participant in connection with an option
or SAR. We generally are not entitled to a tax deduction relating to amounts
that represent a capital gain to a participant. Accordingly, we will not be
entitled to any tax deduction with respect to an ISO if the participant holds
the shares for the ISO Holding Period prior to disposition of the shares.
With respect to awards granted under the Incentive Plan that result in the
payment or issuance of cash or shares or other property that is either not
restricted as to transferability or not subject to a substantial risk of
forfeiture, the participant generally must recognize ordinary income equal to
the cash or the fair market value of shares or other property received. We
generally will be entitled to a deduction in an amount equal to the ordinary
income recognized by the participant.
With respect to awards involving the issuance of shares or other property
that is restricted as to transferability and subject to a substantial risk of
forfeiture (e.g., restricted stock), the participant generally must recognize
ordinary income equal to the fair market value of the shares or other property
at the first time the shares or other property becomes transferable or is not
subject to a substantial risk of forfeiture, whichever occurs earlier. We
generally will be entitled to a deduction in an amount equal to the ordinary
income recognized by the participant.
Description of Amendments to Director Plan (Proposal 3)
The proposed amendments to the Director Plan will (1) clarify that grants of
options or awards of performance accelerated restricted stock ("PARS") under
the Director Plan may be made with respect to either Staples Stock or
Staples.com Stock, or both, in the same manner as currently permitted with
respect to
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<PAGE>
existing common stock, and (2) increase the number of shares of common stock,
regardless of series, available for issuance under the Director Plan. The
following summary of the amendments to the Director Plan is not complete and
should be read with the full proposed text of the Director Plan as set forth in
Annex IV hereto.
Grants of Awards
Under the current Director Plan, grants of options and awards of PARS may be
made with respect to shares of existing common stock. Under the amended
Director Plan, grants of options and awards of PARS made following the approval
of the amendment may be made, at the discretion of the board of directors, with
respect to either Staples Stock or Staples.com Stock, or both, in the same
manner as currently provided for with respect to existing common stock.
Shares Available for Issuance under Director Plan
Under the current Director Plan, up to 2,392,030 shares of existing common
stock are available for grants or awards. Under the amended Director Plan, up
to 2,642,030 shares of common stock, regardless of series, will be available
for grants or awards.
Types of Awards under Director Plan
Under the current Director Plan, each Outside Director automatically
receives (1) upon election as a member of the board of directors, an initial
grant of options to purchase 15,000 shares of common stock and (2) on the date
of the first regularly scheduled board of directors meeting following the end
of each Staples fiscal year a grant of options to purchase 3,000 shares of
common stock for each regularly scheduled meeting day of the board of directors
that such Outside Director attended, up to a maximum of 15,000 shares. In
addition, under the current Director Plan, at the first regularly scheduled
board of directors meeting following the end of each fiscal year of Staples, in
which performance targets are established relating to PARS awarded to executive
officers of Staples, (x) each Outside Director is granted 400 PARS for each
regularly scheduled meeting day of the board of directors attended by such
Director in the previous 12 months (up to a maximum of 2,000 PARS) and (y) in
addition, the Lead Director and the Chairman of each of the Audit,
Compensation, and Governance Committees of the board of directors is granted
200 PARS for each regularly scheduled meeting day of the board of directors
attended by such Director in the previous 12 months (up to a maximum of 1,000
PARS).
All stock options granted under the Director Plan are granted at an exercise
price equal to the fair market value of the common stock on the date of grant,
and generally become exercisable on a cumulative basis in four equal annual
installments, commencing on the first anniversary of the date of grant.
Recipients of PARS own shares of common stock (which may be issued on a
deferred basis) under terms that provide for vesting over a period of time and
a right to repurchase in favor of Staples with respect to unvested stock, at a
price equal to their original purchase price (if any), when the recipient
ceases to be a director of Staples. Except as otherwise determined by the board
of directors, all PARS issued under the Director Plan shall be issued without
the payment of any cash purchase price by the recipient. The restrictions on
transfer and forfeiture provisions of the PARS to be granted to the non-
employee Directors shall lapse on the same basis as PARS awarded to Staples'
executive officers.
Effect on Outstanding Awards
The approval of the amendments to the Director Plan will not result in any
adjustment to the outstanding options under the Director Plan. The approval of
the Tracking Stock Proposal will result in each outstanding option for Staples
common stock under the Director Plan instead becoming an option for Staples
Stock.
Federal Income Tax Consequences
The following is a brief description of the federal income tax consequences
generally arising with respect to options granted under the Director Plan.
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The grant of an option will create no tax consequences for the Outside
Director or Staples. Upon exercising an option, the Outside Director generally
must recognize ordinary income equal to the difference between the exercise
price and fair market value of the shares acquired on the date of exercise, and
we generally will be entitled to a tax deduction equal to the amount recognized
as ordinary income by the participant. The disposition of shares acquired upon
the exercise of an option generally will result in capital gain or loss
measured by the difference between the sale price and the participant's tax
basis in such shares (the tax basis generally being the exercise price plus any
amount recognized as ordinary income in connection with the exercise of the
option).
Description of Amendments to Stock Purchase Plan (Proposal 4)
The proposed amendments to the Stock Purchase Plan will (1) clarify that
grants of options under the Stock Purchase Plan may be made with respect to
either Staples Stock or Staples.com Stock, or both, in the same manner as
currently permitted with respect to existing common stock and (2) increase the
number of shares of common stock, regardless of series, available for issuance
under the plan from 6,000,000 to 6,600,000. The following summary of the
amendments to the Stock Purchase Plan is not complete and should be read with
the full proposed text of the Stock Purchase Plan as set forth in Annex V
hereto.
Sales of Shares
All employees of Staples and certain subsidiaries designated by the board of
directors are eligible to participate in the Stock Purchase Plan if they have
been employed at least three months and are customarily employed for more than
20 hours a week and more than five months a year. Under the current Stock
Purchase Plan, participants may purchase shares of existing common stock. Under
the amended Stock Purchase Plan, participants may purchase either Staples Stock
or Staples.com Stock, or both, in the same manner as currently permitted with
respect to existing common stock.
Shares Available for Issuance under Stock Purchase Plan
Under the current Stock Purchase Plan, up to 6,000,000 shares of existing
common stock are available for sale to participants. Under the amended Stock
Purchase Plan, up to 6,600,000 shares of common stock, regardless of series,
will be available for sale to participants.
Types of Awards under the Stock Purchase Plan
Under the amended Stock Purchase Plan, the committee that administers the
Stock Purchase Plan will, in its discretion, be able to authorize the issuance
of Staples Stock, Staples.com Stock or both, as it determines in accordance
with the terms of the Stock Purchase Plan.
Effect on Outstanding Options
The approval of the amendments to the Stock Purchase Plan will not result in
any adjustment to the outstanding options to purchase common stock under the
Stock Purchase Plan. The approval of the Tracking Stock Proposal will result in
each outstanding option for Staples common stock under the Stock Purchase Plan
instead becoming an option for Staples Stock.
Federal Income Tax Consequences
The following is a brief description of the federal income tax consequences
generally arising with respect to options granted under the Stock Purchase
Plan.
An employee will not recognize ordinary compensation income upon the
exercise of the option granted under the Stock Purchase Plan. If an employee
disposes of the common stock after the expiration of the Holding Period, the
employee will recognize ordinary compensation income in an amount equal to the
lesser of
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(1) the excess of the fair market value of the common stock upon disposition
over the option price thereof or (2) the excess of the fair market value of the
common stock at the time of grant over the option price thereof. Any additional
gain upon the sale of the acquired common stock will be long-term capital gain.
We will not be entitled to a deduction for any income recognized by the
employee pursuant to either the exercise of options granted under the Stock
Purchase Plan or the sale of the acquired common stock.
If the employee disposes of the common stock acquired upon exercise of the
option prior to the end of the Holding Period, the employee will recognize
ordinary compensation income in the year of the disposition in an amount equal
to the difference between the fair market value of the common stock on the date
of exercise over the option price thereof. We will be entitled to an income tax
deduction equal to the amount of the ordinary compensation income recognized by
the employee. Any additional gain (or loss) on the sale of the common stock by
the employee will be taxed as short-term or long-term capital gain (or loss),
as the case may be.
----------------
The board of directors recommends a vote FOR each of Proposals 2, 3 and 4.
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EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth certain information concerning the
compensation for each of the last three fiscal years of Staples' Chief
Executive Officer and the four other most highly compensated executive officers
during the fiscal year ended January 30, 1999 (the "Senior Executives").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Long Term
Compensation(1) Compensation
--------------------- -------------------------
Restricted Common
Name and Principal Fiscal Stock Stock All Other
Position Year Salary Bonus(2) Awards Options(3) Compensation(4)
------------------ ------ -------- -------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Thomas G. Stemberg 1998 $645,833 $673,556 $2,606,250(5) $2,400,000 $ 17,769
Chairman and CEO 1997 587,500 446,172 1,543,434(6) 360,000 13,924
1996 447,917 414,315 1,216,875(7) 360,000 6,304
Ronald L. Sargent 1998 $449,083 $349,261 $1,282,032(8) 1,361,250 $ 32,193
President, Chief 1997 392,084 218,235 1,005,552(9) 375,000 29,583
Operating Office 1996 302,775 208,257 774,375(10) 258,750 21,802
John J. Mahoney 1998 $439,250 $335,880 $1,172,813(11) 585,000 $ 42,848
Exec. Vice President 1997 395,834 220,160 1,033,614(12) 330,000 35,553
Chief Financial
Officer & 1996 171,243 251,210(13) 774,375(14) 348,750 36,433
Chief Administrative
Officer
Joseph S. Vassalluzzo 1998 $439,250 $325,636 $1,064,202(15) 585,000 $ 48,150
President, Realty and 1997 391,250 198,007 776,394(16) 220,312 43,774
Development 1996 312,500 193,347 553,125(17) 157,500 34,884
John C. Bingleman 1998 $410,735 $311,889 $5,460,947(18) 450,000 $150,152(19)
President--Staples 1997 385,883(20) 215,555 -- (21) -- (21) 56,976
International 1996 356,609(22) 243,065 774,375(23) 258,750 43,572
</TABLE>
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(1) In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal benefits
has been omitted because such perquisites and other personal benefits
constituted less than the lesser of $50,000 or 10% of the total annual
salary and bonus for the Senior Executive for each year shown.
(2) Except as noted below, represents amounts paid under Staples' Executive
Officer Incentive plan or executive bonus plan for the relevant fiscal
year.
(3) Amounts reflect the three-for-two stock splits effected on March 25, 1996,
January 30, 1998 and January 28, 1999, as applicable.
(4) Except as noted below, represents an actuarial equivalent benefit to the
Senior Executive from payment of annual premiums by Staples under a split
dollar insurance program. Because of differences in Mr. Stemberg's
insurance policy, Mr. Stemberg's benefit is calculated using a method
that, at this time, results in a lower benefit.
(5) On October 1, 1998, Mr. Stemberg was awarded 150,000 shares of PARS with a
per share value of $17.375. As of January 30, 1999, these restricted
shares owned by Mr. Stemberg had a total value of $4,293,750. See
"Performance Accelerated Restricted Stock Awards."
(6) On October 1, 1997, Mr. Stemberg was awarded 123,750 shares of PARS with a
per share value of $12.4722. As of January 30, 1999, these restricted
shares owned by Mr. Stemberg had a total value of $3,542,343. See
"Performance Accelerated Restricted Stock Awards."
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(7) On October 1, 1996, Mr. Stemberg was awarded 123,750 shares of PARS with a
per share value of $9.8333. As of January 30, 1999, none of these
restricted shares were owned by Mr. Stemberg. See "Performance Accelerated
Restricted Stock Awards."
(8) On October 1, 1998, Mr. Sargent was awarded 67,500 shares of PARS with a
per share value of $17.375. On January 1, 1999, Mr. Sargent was awarded
3,750 shares of PARS with a per share value of $29.125. As of January 30,
1999, these restricted shares owned by Mr. Sargent had a combined total
value of $2,039,531. See "Performance Accelerated Restricted Stock
Awards."
(9) On October 1, 1997, Mr. Sargent was awarded 80,623 shares of PARS with a
per share value of $12.4722. As of January 30, 1999, these restricted
shares owned by Mr. Sargent had a total value of $2,307,833. See
"Performance Accelerated Restricted Stock Awards."
(10) On October 1, 1996, Mr. Sargent was awarded 78,750 PARS shares with a per
share value of $9.8333. As of January 30, 1999, none of these restricted
shares were owned by Mr. Sargent. See "Performance Accelerated Restricted
Stock Awards."
(11) On October 1, 1998, Mr. Mahoney was awarded 67,500 shares of PARS with a
per share value of $17.375. As of January 30, 1999, these restricted
shares owned by Mr. Mahoney had a total value of $1,932,187. See
"Performance Accelerated Restricted Stock Awards."
(12) On October 1, 1997, Mr. Mahoney was awarded 82,873 shares of PARS with a
per share value of $12.4722. As of January 30, 1999, these restricted
shares owned by Mr. Mahoney had a total value of $2,372,239. See
"Performance Accelerated Restricted Stock Awards."
(13) Mr. Mahoney joined Staples in September 1996. Bonus payment for 1996
included a payment of $134,517 pursuant to Mr. Mahoney's offer of
employment.
(14) On October 1, 1996, Mr. Mahoney was awarded 78,750 shares of PARS with a
per share value of $9.8333. As of January 30, 1999, none of these
restricted shares were owned by Mr. Mahoney. See "Performance Accelerated
Restricted Stock Awards."
(15) On October 1, 1998, Mr. Vassalluzzo was awarded 61,249 shares of PARS with
a per share value of $17.375. As of January 30, 1999, these restricted
shares owned by Mr. Vassalluzzo had a total value of $1,753,252. See
"Performance Accelerated Restricted Stock Awards."
(16) On October 1, 1997, Mr. Vassalluzzo was awarded 62,250 shares of PARS with
a per share value of $12.4722. As of January 30, 1999, these restricted
shares owned by Mr. Vassalluzzo had a total value of $1,781,906. See
"Performance Accelerated Restricted Stock Awards."
(17) On October 1, 1996, Mr. Vassalluzzo was awarded 56,250 PARS shares with a
per share value of $9.8333. As of January 30, 1999, none of these
restricted shares were owned by Mr. Vassalluzzo. See "Performance
Accelerated Restricted Stock Awards."
(18) On September 1, 1998, Mr. Bingleman was awarded 281,250 shares of PARS
with a per share value of $19.4167. As of January 30, 1999, these
restricted shares owned by Mr. Bingleman had a total value of $8,050,781.
See "Performance Accelerated Restricted Stock Awards."
(19) Includes reimbursement of $95,886 for relocation expenses.
(20) Includes payment of $25,420 paid to Mr. Bingleman by Staples' Canadian
subsidiary, The Business Depot, Ltd.
(21) Mr. Bingleman was not granted options or PARS during fiscal 1997 as a
result of his assumption of new responsibilities for international
operations. Staples developed a long-term compensation strategy for
certain international executives, including Mr. Bingleman, that was
implemented during fiscal 1998.
(22) Includes payment of $25,993 paid to Mr. Bingleman by Staples' Canadian
subsidiary, The Business Depot, Ltd.
(23) On October 1, 1996, Mr. Bingleman was awarded 78,750 PARS shares with a
per share value of $9.8333. As of January 30, 1999, none of these
restricted shares were owned by Mr. Bingleman. See "Performance
Accelerated Restricted Stock Awards."
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<PAGE>
Performance Accelerated Restricted Stock ("PARS") Awards
In order to maintain Staples' high risk-high reward philosophy, the
Compensation Committee adopted, as part of the 1992 Equity Incentive Plan, a
PARS plan (the "Plan") for certain key executives. Under the Plan, shares of
Staples common stock are granted to executives in consideration for services.
The shares are "restricted" in that they may not be sold or transferred by the
executive until they "vest." Staples' PARS issued in fiscal 1998 will vest on
February 1, 2003 subject to acceleration upon achievement of certain pre-
determined earnings per share ("EPS") growth targets over the next two to five
fiscal years. Staples' PARS issued in fiscal 1997 will vest on May 1, 1999 as a
result of Staples exceeding EPS targets for fiscal 1998.
Staples' PARS that were issued in fiscal 1996 vested on May 1, 1998 as a
result of Staples exceeding target EPS for such PARS for fiscal 1997. EPS
growth targets are determined by the Compensation Committee and approved by the
board of directors each year for grants under the Plan in that year. Once the
PARS have vested, they become "unrestricted" and may be freely sold or
transferred. Generally, the PARS are forfeited if the executive's employment
with Staples terminates prior to vesting.
Option Grants
The following table sets forth certain information concerning grants of
stock options during the fiscal year ended January 30, 1999 for each of the
Senior Executives.
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OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
- -----------------------------------------------------------------------------------------
Percent of Total
Number of Options Granted Exercise Grant Date
Options to Employees in Price per Expiration Present
Name Granted Fiscal Year Share(1)(2) Date Value(1)(3)
---- --------- ---------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Thomas G. Stemberg...... 1,950,000(4) 14.41% $20.0833 7/1/08 $14,608,000
450,000 3.33% $20.0833 7/1/08 $ 3,181,000
Ronald L. Sargent....... 450,000(5) 3.33% $20.0833 7/1/08 $ 3,118,000
135,000 .99% $20.0833 7/1/08 $ 954,000
675,000(6) 4.98% $22.9167 11/16/08 $ 5,337,000
101,250 .74% $29.1250 1/1/09 $ 1,038,000
John J. Mahoney......... 450,000 3.33% $20.0833 7/1/08 $ 3,118,000
135,000 .99% $20.0833 7/1/08 $ 954,000
Joseph S. Vassalluzzo... 450,000(5) 3.33% $20.0833 7/1/08 $ 3,118,000
135,000 .99% $20.0833 7/1/08 $ 954,000
John C. Bingleman....... 450,000(7) 3.33% $20.0833 7/1/08 $ 3,272,000
</TABLE>
- --------
(1) All amounts reflect the three-for-two stock split effected on January 28,
1999. Except as otherwise noted, each of the options granted becomes
exercisable in full on the third anniversary of the date of grant, provided
that the optionee continues to be employed by Staples on such date. The
exercisability of the options is accelerated under certain circumstances.
See "Employment Contracts, Termination of Employment and Change-in-Control
Agreements with Senior Executives."
(2) The exercise price is equal to the fair market value per share of Common
Stock on the date of grant.
(3) The estimated present value at grant date has been calculated using a
Black-Scholes option pricing model, based upon the following assumptions: a
six year expected life of option; a dividend yield of 0.0%; expected
volatility of 34%; and a risk-free interest rate of 4.5%, representing the
interest rate on a U.S. Government zero-coupon bond on the date of grant,
with a maturity corresponding to the expected life of the option. Values
are adjusted to reflect a 5% risk of forfeiture due to vesting
requirements.
(4) This option becomes exercisable in full on July 25, 2000, provided that Mr.
Stemberg continues to be employed by Staples on such date.
(5) Options for 67,500 shares become exercisable on the first anniversary of
the date of grant; options for 67,500 shares become exercisable on the
second anniversary of the date of grant; options for 90,000 shares become
exercisable on the third anniversary of the date of grant; options for
90,000 shares become exercisable on the fourth anniversary of the date of
grant; and options for 135,000 shares become exercisable on the fifth
anniversary of the date of grant; all provided that the optionee continues
to be employed by Staples on such date.
(6) Options for 101,250 shares become exercisable on the first anniversary of
the date of grant; options for 101,250 shares become exercisable on the
second anniversary of the date of grant; options for 135,000 shares become
exercisable on the third anniversary of the date of grant; options for
135,000 shares become exercisable on the fourth anniversary of the date of
grant; and options for 202,500 shares become exercisable on the fifth
anniversary of the date of grant; all provided that Mr. Sargent continues
to be employed by Staples on such date.
(7) Options for 225,000 shares become exercisable on July 1, 2000 and the
remaining 225,000 shares become exercisable on July 1, 2001, provided that
Mr. Bingleman continues to be employed by Staples on such date.
Option Exercises and Holdings
The following table sets forth certain information concerning each exercise
of stock options during the fiscal year ended January 30, 1999 by each of the
Senior Executives and the number and value of unexercised options held by each
of the Senior Executives on January 30, 1999.
58
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR END
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
No. of Shares of Common
No. of Shares of Stock Underlying Value of Unexercised
Common Stock Unexercised Options at In-The-Money Options at
Acquired On Value Fiscal Year End(1) Fiscal Year End(1)(3)
Name Exercise Realized(2) Exercisable/Unexercisable Exercisable/Unexercisable
---- ---------------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Thomas S. Stemberg...... 3,600,000 $63,061,455 2,080,544/3,120,000 $50,038,295/$34,110,060
Ronald L. Sargent....... 513,805 $ 7,387,600 357,813/1,995,000 $ 8,216,662/$20,643,481
John J. Mahoney......... 0 $ 0 0/1,263,750 $ 0/$17,742,236
Joseph S. Vassalluzzo... 488,419 $ 7,151,978 1,097,872/ 962,812 $27,923,242/$11,926,733
John C. Bingleman....... 232,875 $ 4,635,422 675,842/ 708,750 $16,840,610/$ 9,071,110
</TABLE>
- --------
(1) All amounts reflect the three-for-two stock split effected on January 28,
1999.
(2) Represents the difference between the exercise price and the fair market
value of the common stock on the date of exercise.
(3) Based on the fair market value of the common stock on January 30, 1999
($28.625 per share), less the option exercise price.
Employment Contracts, Termination of Employment and Change-in-Control
Agreements with Senior Executives
Staples has entered into Severance Benefit Agreements (the "Severance
Agreements") with each of the Senior Executives. Under the Severance
Agreements, which expire May 31, 2000, the Senior Executives would be entitled
to continuation of salary and other benefits for (i) 18 months in the case of
Mr. Stemberg, and (ii) 12 months in the case of Messrs. Bingleman, Mahoney,
Sargent and Vassalluzzo, following termination of employment by Staples without
cause (or "constructive discharge" as provided in the Severance Agreements).
Each Senior Executive would receive such benefits for an additional period of
six months if such termination occurred within two years following a "change in
control" of Staples (as defined in the Severance Agreements). A change in
control of Staples also results in a partial acceleration of the exercisability
of outstanding options held by the Senior Executives (and all Staples
associates) and a discharge without cause (or resignation for good reason)
within one year after a change in control results in the acceleration in full
of all options and PARS. In the event Mr. Mahoney is terminated without cause
within one year after a change of control, Staples would also guarantee to him
that the sum of all severance payments plus the total gain realized and
realizable upon the sale and/or exercise of his PARS and/or options would equal
at least $2,000,000.
Director Compensation
During the fiscal year ended January 30, 1999, under the Staples 1990
Director Stock Option Plan (the "Director Plan") each non-employee Director
received a fee of $1,000 for each board of directors meeting attended and $300
for each committee meeting attended. All Directors are reimbursed for certain
company-related travel expenses. Pursuant to an agreement with Staples, Senator
Mitchell provides consulting services to Staples in return for a total annual
fee of $75,000.
The Director Plan also provided for a grant to each Outside Director, upon
his or her initial election as a Director, of an option to purchase 10,000
shares of common stock. Accordingly, on September 10, 1998, Senator Mitchell
was granted an option to purchase 15,000 shares of common stock at an exercise
price of $17.33 per share (10,000 shares at an exercise price of $26.00 before
adjustment for the January 28, 1999 stock split).
On January 21, 1999, the stockholders of Staples approved an amendment and
restatement of the Director Plan (the "Amended and Restated Director Plan").
Under the Amended and Restated Director Plan, Directors are compensated
exclusively through equity rather than receiving a portion of their
compensation in cash.
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<PAGE>
Accordingly, non-employee Directors will not receive any fees or other cash
compensation for their services as Directors, other than reimbursement for
expenses incurred in attending meetings of the Directors. Pursuant to the
Amended and Restated Director Plan, each new member of the board of directors
will be granted an option to purchase 15,000 shares of common stock upon such
person's initial election to the board of directors. In addition, the Amended
and Restated Director Plan provides for an annual stock option grant to each
non-employee Director to purchase a number of shares equal to 3,000 multiplied
by the number of regularly scheduled meeting days attended by such non-employee
Director during the preceding year (up to a maximum of 15,000 shares). In
addition, at the first regularly scheduled board of directors meeting following
the end of each fiscal year of Staples in which performance targets are
established relating to Performance Accelerated Restricted Stock ("PARS")
awarded to executive officers of Staples, each non-employee Director is to be
granted 400 PARS for each regularly scheduled meeting day attended by such
Director during the preceding year (up to a maximum of 2,000 PARS); and each of
the Lead Director and the Chairman of the Audit, Compensation and Governance
Committees of the board of directors will be granted 200 PARS for each
regularly scheduled meeting day of the board of directors attended by such
Director during the previous twelve months (up to a maximum of 1,000 PARS).
With respect to the fiscal year ended January 30, 1999 and in accordance
with the Amended and Restated Director Plan, on March 3, 1999 each of Ms.
Burton and Messrs. Anderson, Moody, Moriarty, Nakasone, Romney, Trust and Walsh
was granted an option to purchase 15,000 shares of common stock, Mr. Heisey was
granted an option to purchase 12,000 shares and Senator Mitchell was granted an
option to purchase 3,000 shares of common stock, each at an exercise price of
$28.00 per share. Pursuant to the Amended and Restated Director Plan, at the
next board of directors meeting in which performance targets are established
relating to PARS, the following will be awarded: Mr. Moody will be awarded
3,000 PARS. Messrs. Moriarty, Nakasone and Walsh will be awarded 2,800 PARS.
Mr. Anderson will be awarded 2,200 PARS. Ms. Burton and Messrs. Romney and
Trust will be awarded 2,000 PARS. Mr. Heisey will be awarded 1,600 PARS and
Senator Mitchell will be awarded 400 PARS.
All stock options under the Amended and Restated Director Plan are granted
at an exercise price equal to the fair market value of the common stock on the
date of grant, and generally become exercisable on a cumulative basis in four
equal annual installments, commencing on the first anniversary of the date of
grant.
Recipients of PARS own shares of common stock (which may be issued on a
deferred basis) under terms that provide for vesting over a period of time and
a right to repurchase in favor of Staples with respect to unvested stock, at a
price equal to their original purchase price (if any), when the recipient
ceases to be a Director of Staples. Except as otherwise determined by the board
of directors, all PARS issued under the Amended and Restated Director Plan
shall be issued without the payment of any cash purchase price by the
recipient. The restrictions on transfer and forfeiture provisions of the PARS
to be granted to the non-employee Directors shall lapse on the same basis as
PARS awarded to Staples' executive officers.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Based solely on its review of copies of reports filed by persons ("Reporting
Persons") required to file such reports pursuant to Section 16(a) under the
Exchange Act, Staples believes that all filings required to be made by
Reporting Persons of Staples were timely made in accordance with the
requirements of the Exchange Act, with the exception of the option exercise and
sale of 140,482 shares by Bain & Co., Inc., of which Mr. Romney is a director,
in July 1998 which was reported in November 1998, and the sale in July 1998 by
Mr. Bingleman of 52,500 shares which was reported in August 1998.
Compensation Committee Interlocks and Insider Participation
Messrs. Heisey, Nakasone and Trust, all non-employee Directors of Staples,
served on the Compensation Committee for the entire fiscal year ended January
30, 1999.
60
<PAGE>
Staples leases its Cedar Rapids, Iowa store from Toys "R" Us. Mr. Nakasone
was Chief Executive Officer of Toys "R" Us from February 1998 to August 1999.
The initial term of this lease, which commenced on October 8, 1996, is 15
years. Staples may renew the lease for two additional five year periods.
Compensation Committee Report on Executive Compensation
Staples' executive compensation program is administered by the Compensation
Committee composed of the non-employee Directors listed below. Staples'
executive compensation program is designed to retain and reward executives who
are responsible for leading Staples in achieving its business objectives. All
decisions by the Compensation Committee relating to the compensation of
Staples' executive officers are reviewed by the full board of directors. This
report is submitted by the Compensation Committee and addresses Staples'
compensation policies for fiscal 1998 and forward as they affected the Chief
Executive Officer and the other executive officers of Staples.
Compensation Philosophy
The objectives of the executive compensation program are to (i) align
compensation with business objectives, individual performance and the interests
of Staples' stockholders, (ii) motivate and reward high levels of performance,
(iii) recognize and reward the achievement of Company and/or business unit
goals, and (iv) enable Staples to attract, retain and reward executive officers
who contribute to the long-term success of Staples.
The Committee's executive compensation philosophy is that a significant
portion of executive compensation should be tied directly to the performance of
Staples as a whole. The base salaries paid to executives are targeted by the
Committee to fall at or below the 40th percentile of the pay practices of
publicly traded companies in the retail industry (including companies in the
Standard & Poor's Retail Composite Index contained in the stock performance
graph contained in this Proxy Statement, as determined by The Hay Group
("Hay"), an international compensation and human resource consulting firm). The
Committee seeks, however, to provide its executives with opportunities for
compensation substantially higher than base salary through performance-based
bonuses, stock options and Performance Accelerated Restricted Stock ("PARS").
The Committee also believes that bonus awards tied to achievement of pre-
approved performance goals serve as an influential motivator to its executives
and help to align the executives' interests with those of the stockholders of
Staples. The Committee also continues to believe that a substantial portion of
the compensation of Staples' executives should be linked through Staples' stock
option and PARS program to the success of Staples' stock in the marketplace.
Stock options and PARS further align the interests of management and
stockholders and assist in the retention of valued executives.
Status of the Executive Compensation Program
Based on information provided by Hay and consistent with Staples' objectives
and philosophy, the Committee targeted total annual compensation (salary, cash
bonus and stock) to fall above the median for total annual compensation for
similar positions in the group of retail companies used in the Hay study.
. Salaries: The Compensation Committee targets base annual salary for
executive officers including the Senior Executives to be at the 40th
percentile of the annual base salary for comparable positions in the Hay
study group.
. Bonus: Each of Staples' executive officers, including the Senior
Executives, was eligible to participate in Staples' Executive Officer
Incentive Plan in fiscal 1998 (the "Bonus Plan"). The Bonus Plan
provided for the payment of a range of cash bonuses to executive
officers based on "stretch" objectives relating to company-wide earnings
per share and customer service goals.
The earnings per share and customer service goals for the Bonus Plan were
determined by the Committee and approved by the board of directors at the
beginning of fiscal 1998. In each case, these bonus goals represented
61
<PAGE>
"stretch" objectives, requiring performance in excess of amounts set for budget
purposes to achieve target bonus payouts. The Committee established target
bonus payouts for executives in an attempt to bring the cash portion of total
annual compensation (base salary plus target bonus) to approximately the median
of the cash compensation paid to the Hay comparison group.
For fiscal 1998, Staples exceeded stretch objectives for earnings per share and
fell short of the customer service objective.
. Stock Options: In addition to base salary and bonus, Staples' executives
are also granted annually performance-based long-term incentives
represented by stock options, which have been valued using a modified
Black-Scholes methodology. The exercise price of all options granted is
the fair market value of the common stock on the date of grant. In
general, the options granted under the option program since September 1,
1994 vest in full on the third anniversary of the date of grant to
further encourage retention and promote identity of interest with
Staples' stockholders.
Certain executives, including the Senior Executives, were also granted special
stock options in 1998, subject to a vesting requirement over a two to five year
period and requiring continuous employment with Staples over the vesting
period. A competitive review by Hay served as the basis for these special
option grants. The review demonstrated that Staples' historical level of stock
grants trailed that of its peer group relative to Staples' performance over the
same period. This shortfall can, in part, be attributed to Staples' historical
practice of not adjusting grant levels to reflect stock splits. Based on Hay's
review, the Committee determined it advisable to make these special grants in
order to achieve the objectives of the executive compensation program.
. Performance Accelerated Restricted Stock (PARS): In order to maintain
Staples' high risk-high reward philosophy, help retain key executives,
maintain focus on stockholder returns and deliver the possibility of
total direct compensation above the median of the Hay comparison group,
the Committee has adopted the use of PARS for certain key management,
including its executive officers. The shares are "restricted" in that
they may not be sold or transferred by the executive until they "vest."
Staples' PARS issued in fiscal 1998 will vest on February 1, 2003
subject to acceleration if Staples achieves certain pre-determined
compound EPS growth over the next two to five fiscal years. EPS growth
targets are determined by the Committee and approved by the board of
directors each year for grants of PARS in that year. Once the PARS have
vested, they become "unrestricted" and may be sold or transferred.
In 1998, Staples developed a long term compensation strategy specifically for
Mr. Bingleman, President International. This plan provided Mr. Bingleman with a
restricted stock grant vesting five years from date of grant, subject to
accelerated vesting based on the attainment of certain event based and
financial objectives relating to Mr. Bingleman's responsibilities for certain
of Staples international operations. This grant is in lieu of certain annual
stock options and PARS grants under the stock option/PARS program.
Mr. Stemberg, Staples' Chief Executive Officer, is eligible to participate
in the same executive compensation program available to other Staples
executives, and his total annual compensation, including compensation derived
from the Bonus Plan and stock option/PARS program, was set by the Committee in
accordance with the same criteria. Mr. Stemberg's annual salary was increased
in fiscal 1998 from $600,000 to $650,000. Mr. Stemberg's annual salary remained
below the low end of the base salary range recommended by Hay for Staples'
Chief Executive Officer position and below the 25th percentile of the Hay
comparison group. Under the Bonus Plan, Mr. Stemberg was paid a bonus of
$673,556 placing his total cash compensation below the median of the Hay
comparison group. In fiscal 1998, the Committee granted Mr. Stemberg 150,000
PARS, and options to purchase 450,000 shares of common stock under the
options/PARS program, and special options to purchase 1,950,000 shares of
common stock. These grants were valued and based on the same factors the
Committee considered in fixing the size of other executive PARS and stock
option grants. Using the Hay valuation for options, total annual compensation
to Mr. Stemberg in fiscal 1998 placed him above the median of the Hay
comparison group.
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<PAGE>
Tax Considerations
Under Section 162(m) of the Internal Revenue Code of 1986, as amended,
certain executive compensation in excess of $1 million paid to a public
company's five most highly-paid executives is not deductible for federal income
tax purposes unless the executive compensation is awarded under a performance-
based plan approved by the stockholders. In 1998, the Committee adopted and
Staples shareholders approved the Bonus Plan in compliance with Section 162(m).
Staples' stock option plans are performance based, and accordingly, comply with
Section 162(m). Finally, while Staples' PARS program has a significant
performance component, it cannot be qualified under 162(m) without compromising
valuable executive incentives which the Committee believes outweigh any tax
benefit to Staples.
Compensation Committee:Robert C. Nakasone, Chairman
W. Lawrence Heisey
Martin Trust
63
<PAGE>
Stock Performance Graph
The following graph compares the cumulative total stockholder return on the
common stock of Staples between January 29, 1994 and January 30, 1999 (the end
of fiscal 1998) with the cumulative total return of (i) Standard & Poor's 500
Composite Index and (ii) the Standard & Poor's Retail Store Composite Index.
This graph assumes the Investment of $100.00 on January 29, 1994 in Staples'
common stock, the Standard & Poor's 500 Composite Index and the Standard &
Poor's Retail Store Composite Index, and assumes dividends are reinvested.
Measurement points are January 28, 1995, February 3, 1996, February 1, 1997,
January 31, 1998 and January 30, 1999 (Staples' last five fiscal year ends).
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
January 29, January 28, February 3, February 1, January 31, January 30,
1994 1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
SPLS.................... 100.00 132.31 208.70 251.66 334.53 790.66
S&P Retail Composite.... 100.00 92.69 99.08 114.86 171.19 279.05
S&P 500................. 100.00 98.26 132.83 164.23 204.78 267.32
</TABLE>
64
<PAGE>
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding beneficial ownership of
our common stock as of September 15, 1999 by:
. each person we know who beneficially owns more than 5% of the
outstanding shares of our common stock;
. each of our directors;
. each of our five most highly compensated executive officers in fiscal
1998; and
. our directors and executive officers as of September 15, 1999 as a
group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and includes voting or investment power
with respect to shares. Shares of common stock issuable under stock options
that are exercisable within 60 days after September 15, 1999 are deemed
outstanding for computing the percentage ownership of the person holding the
options but are not deemed outstanding for computing the percentage ownership
of any other person. Unless otherwise indicated below, to our knowledge, all
persons named in the table have sole voting and investment power with respect
to their shares of common stock, except to the extent authority is shared by
spouses under applicable law. The inclusion of any shares in this table does
not constitute an admission of beneficial ownership for the person named below.
<TABLE>
<CAPTION>
Number of Shares Percentage of
Beneficially Outstanding
Name of Beneficial Owner Owned Common Stock
- ------------------------ ---------------- -------------
<S> <C> <C>
5% Stockholders
FMR Corp.(1)................................... 36,629,910 7.89%
82 Devonshire Street
Boston, MA 02109
Directors and Executive Officers
Thomas G. Stemberg(2).......................... 5,172,829 1.11%
Martin Trust(3)................................ 3,566,427 *
Robert C. Nakasone............................. 490,086 *
Rowland T. Moriarty(4)......................... 380,882 *
Mary Elizabeth Burton.......................... 183,062 *
Paul F. Walsh.................................. 106,400 *
James L. Moody, Jr............................. 72,093 *
W. Lawrence Heisey............................. 59,312 *
W. Mitt Romney................................. 53,782 *
Basil L. Anderson.............................. 28,075 *
Margaret C. Whitman............................ 13,941 *
George J. Mitchell............................. 4,150 *
John C. Bingleman.............................. 1,220,956 *
John J. Mahoney................................ 530,879 *
Ronald L. Sargent.............................. 722,355 *
Joseph S. Vassalluzzo.......................... 1,514,988 *
All directors and executive officers as of
September 15, 1999 as a group (28 persons).... 15,287,014 3.24%
</TABLE>
- --------
* Less than 1%
(1) Based on a Schedule 13G filed with the Securities and Exchange Commission
as of January 7, 1999.
(3) Includes 3,264,594 shares owned by Trust Investments, Inc., with which Mr.
Trust is affiliated. Mr. Trust has shared investment and voting control of
these shares. Also includes 17,083 shares held by Mr. Trust's wife.
(4) Includes 39,480 shares held by trusts for the benefit of Mr. Moriarty's
children. Mr. Moriarty is not a trustee of the trusts for the benefit of
his children.
65
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements, and other
documents with the Securities and Exchange Commission. Our SEC filings are
available to you on the SEC's Internet site at http://www.sec.gov. You may also
read and copy any document we file at the SEC's public reference room at
Judiciary Plaza Building, 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549. You should call 1-800-SEC-0330 for more information on the public
reference room.
The SEC allows us to "incorporate" information that we file with the SEC in
other documents. This means that we can disclose important information to you
by referring to other documents that contain that information. The information
incorporated by reference is considered to be part of this proxy statement.
Information contained in this proxy statement and information that we file with
the SEC in the future and incorporate by reference in this proxy statement
automatically updates and supersedes previously filed information. We
incorporate by reference the documents listed below and any future filings we
make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934, as amended, prior to the Special Meeting.
(1) Our Annual Report on Form 10-K for the fiscal year ended January 30,
1999; and
(2) Our Quarterly Reports on Form 10-Q for the fiscal quarters ended May
1, 1999 and July 31, 1999.
You may request a copy of these documents, which will be provided at no
cost, by contacting: Staples, Inc., 500 Staples Drive, Framingham,
Massachusetts 01702, Attention: Investor Relations; Telephone (508) 253-5000.
OTHER MATTERS
The board of directors does not know of any other matters which may come
before the Special Meeting. However, if any other matters are properly
presented at the Special Meeting, it is the intention of the persons named in
the accompanying proxy to vote, or otherwise act, in accordance with their
judgment on such matters.
All costs of solicitation of proxies will be borne by Staples. In addition
to solicitations by mail, Staples' directors, officers and regular employees,
without additional remuneration, may solicit proxies by telephone, telegraph
and personal interviews. Staples has also engaged to solicit proxies on
behalf of Staples. For these services, Staples will pay a fee of $ plus
reimbursement of its reasonable out-of-pocket expenses. Brokers, custodians and
fiduciaries will be requested to forward proxy soliciting material to the
owners of stock held in their names, and Staples will reimburse them for their
out-of-pocket expenses in this connection.
Proposals of stockholders intended to be presented at the Special Meeting
should be directed to the Corporate Secretary at 500 Staples Drive, Framingham,
MA 01702. A stockholder proposal must be received a reasonable period of time
before the printing and mailing of this Proxy Statement for inclusion in this
Proxy Statement.
In order for a stockholder to present a matter for action at the Special
Meeting (other than matters included in Staples' proxy materials in accordance
with Rule 14a-8 under the Exchange Act), Staples' By-laws require that Staples
be given advance written notice of the matter. The Secretary of Staples must
receive such notice at the address noted above not less than 60 nor more than
90 days prior to the date of the Special Meeting; provided, however, if less
than 70 days' notice or prior public disclosure of the date of the Special
Meeting is given or made to stockholders, such notice shall have been mailed or
delivered to the Secretary not later than the close of business on the 10th day
following the date on which the notice of the Special Meeting was mailed or
public disclosure was made, whichever occurs first. If a stockholder proposal
is not presented
66
<PAGE>
within a reasonable period of time before the mailing of this Proxy Statement,
then management proxies would be allowed to use their discretionary voting
authority to vote on the proposal when the proposal is raised at the Special
Meeting, even though there is no discussion of the proposal in this Proxy
Statement.
Proposals of stockholders intended to be presented at the 2000 Annual
Meeting of Stockholders must be received by the Secretary of Staples not later
than December 22, 1999 for inclusion in the proxy statement for that meeting.
Staples' By-laws require that Staples be given advance written notice of
matters which stockholders wish to present for action at an annual meeting of
stockholders (other than matters included in Staples' proxy materials in
accordance with Rule 14a-8 under the Exchange Act). For the 2000 Annual Meeting
of Stockholders, the Secretary of Staples must receive such notice at the
address noted above on or after January 21, 2000, but prior to February 20,
2000; provided, however, if less than 70 days' notice or prior public
disclosure of the date of the meeting is given or made to stockholders, such
notice shall have been mailed or delivered to the Secretary not later than the
close of business on the 10th day following the date on which the notice of the
meeting was mailed or public disclosure was made, whichever occurs first. If a
stockholder proposal is not presented within these timeframes, then management
proxies would be allowed to use their discretionary voting authority to vote on
the proposal when the proposal is raised at the 2000 Annual Meeting, even
though there is no discussion of the proposal in the 2000 proxy statement.
67
<PAGE>
INDEX OF CERTAIN TERMS
<TABLE>
<CAPTION>
Page on
which term is
defined in
the Proxy
Term Statement
- ---- -------------
<S> <C>
40% of Total Market Capitalization Threshold.................... 35
60% of Total Market Capitalization Threshold.................... 35
All or Substantially All of the Assets.......................... 32
Available Dividend Amount....................................... 30
Certificate of Amendment........................................ 29
Code............................................................ 47
Current Certificate of Incorporation............................ 28
Director Plan................................................... 50
Disposition..................................................... 31
Exempt Disposition.............................................. 32
Fair Value...................................................... 32
Group........................................................... 5
Group Subsidiaries.............................................. 35
Incentive Plan.................................................. 50
Market Capitalization........................................... 32
Market Value.................................................... 32
Nasdaq NMS...................................................... 32
Net Proceeds.................................................... 33
Number of Shares Issuable with Respect to Staples Group's
Retained Interest in Staples e-Commerce Group.................. 39
Outstanding Interest Percentage................................. 39
Proportionate Interest.......................................... 33
Publicly Traded................................................. 33
Record Date..................................................... 20
Retained Interest............................................... 27
Retained Interest Percentage.................................... 39
Staples.com Group............................................... 33
Staples.com Stock............................................... Cover letter
Staples Group................................................... 33
Staples Stock................................................... Cover letter
Stock Plan Proposals............................................ Notice
Stock Purchase Plan............................................. 50
Tax Event....................................................... 35
Total Number of Notional Staples.com Group Shares Deemed
Outstanding.................................................... 34
Trading Day..................................................... 34
Tracking Stock Proposal......................................... Notice
</TABLE>
68
<PAGE>
ANNEX I
Illustration of Certain Terms
The following illustrations show how to calculate the Retained Interest
Percentage, the Outstanding Interest Percentage, the Number of Shares Issuable
with Respect to Staples Group's Retained Interest in Staples.com Group and the
Total Number of Notional Staples.com Shares Deemed Outstanding after giving
effect to hypothetical issuances, repurchases, dividends and transfers, in each
case based on the assumptions set forth herein. In these illustrations, the
Number of Shares Issuable with Respect to Staples Group's Retained Interest in
Staples.com Group is initially assumed to be 100. Unless otherwise specified,
each illustration below should be read independently as if none of the other
transactions referred to below had occurred. These illustrations are not
intended to be complete explanations of the matters covered and are qualified
in their entirety by the more detailed information contained elsewhere in this
Proxy Statement. These illustrations are purely hypothetical and the numbers
used (including assumptions of market values) were chosen to simplify the
calculations and are not intended to represent estimates of actual numbers or
values. Any capitalized terms which are not defined in this Annex I have the
meaning ascribed to them in the Proxy Statement.
"Total Number of Notional Staples.com Shares Deemed Outstanding" means the
number of shares of Staples.com Stock outstanding plus the Number of Shares
Issuable with Respect to Staples Group's Retained Interest in Staples.com
Group.
At any given time, the percentage interest in Staples.com Group intended to
be represented by the outstanding shares of Staples.com Stock (i.e., the
Outstanding Interest Percentage) is equal to:
Number of outstanding shares of Staples.com Stock
------------------------------------------------------
Total Number of Notional Staples.com Shares Deemed Outstanding
and the remaining percentage interest in Staples.com Group intended to be
represented by Staples Group's Retained Interest in Staples.com Group (i.e.,
the Retained Interest Percentage) is equal to:
Number of Shares Issuable with Respect to Staples Group's Retained
Interest in Staples.com Group
------------------------------------------------------
Total Number of Notional Staples.com Shares Deemed Outstanding
The sum of the Outstanding Interest Percentage and the Retained Interest
Percentage will always equal 100%. In the examples below, before the first
issuance of shares of Staples.com Stock, the Number of Shares Issuable with
Respect to Staples Group's Retained Interest in Staples.com Group and the Total
Number of Notional Staples.com Shares Deemed Outstanding are each equal to 100,
the Retained Interest Percentage is 100% and the Outstanding Interest
Percentage is 0%.
Issuance of Staples.com Stock
The following illustrations reflect an assumed issuance by Staples of 15
shares of Staples.com Stock under the 1992 Equity Incentive Plan.
Issuance for Account of Staples Group
Assume the issuance is attributed to Staples Group in respect of its
Retained Interest, with the net proceeds credited solely to Staples Group.
<TABLE>
<S> <C>
Shares previously issued and outstanding.................................. 0
Newly issued shares for account of Staples Group.......................... 15
---
Total issued and outstanding after the issuance......................... 15
===
</TABLE>
I-1
<PAGE>
. The Number of Shares Issuable with Respect to Staples Group's Retained
Interest in Staples.com Group would decrease by the number of shares of
Staples.com Stock sold for the account of Staples Group.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to Staples Group's Retained
Interest in Staples.com Group prior to the issuance..................... 100
Shares issued in the issuance............................................ 15
---
Number of Shares Issuable with Respect to Staples Group's Retained
Interest in Staples.com Group after the Issuance...................... 85
===
</TABLE>
. As a result, the issued and outstanding shares (15) would represent an
Outstanding Interest Percentage of 15%, calculated as follows:
15
----------
15 + 85
The Retained Interest Percentage would accordingly be 85%.
. In this case, in the event of any dividend or other distribution paid on
the outstanding shares of Staples.com Stock (other than a dividend or
other distribution payable in shares of Staples.com Stock), Staples
Group would be credited, and Staples.com Group would be charged, with an
amount equal to approximately 567% (representing the ratio of the Number
of Shares Issuable with Respect to Staples Group's Retained Interest in
Staples.com Group (85) to the total number of shares of Staples.com
Stock issued and outstanding following the issuance (15)) of the
aggregate amount of such dividend or distribution. If, for example, a
dividend of $1.00 per share were declared and paid on the 15 shares of
Staples.com Stock outstanding (an aggregate of $15), Staples Group would
be credited with $85, and Staples.com Group would be charged with that
amount in addition to the $15 dividend paid to the holders of
Staples.com Stock (a total of $100).
Issuance for Account of Staples.com Group
Assume the issuance is attributed to Staples.com Group as an increase in its
equity, with the net proceeds credited solely to Staples.com Group.
<TABLE>
<S> <C>
Shares previously issued and outstanding.................................. 0
Newly issued shares for account of Staples.com Group...................... 15
---
Total issued and outstanding after the issuance......................... 15
===
</TABLE>
. The Number of Shares Issuable with Respect to Staples Group's Retained
Interest in Staples.com Group (100) would remain unchanged.
. As a result, the issued and outstanding shares (15) would represent an
Outstanding Interest Percentage of approximately 13%, calculated as
follows:
15
----------
15 + 100
The Retained Interest Percentage would accordingly be approximately 87%.
. In this case, in the event of any dividend or other distribution paid on
the outstanding shares of Staples.com Stock (other than a dividend or
other distribution payable in shares of Staples.com Stock), Staples
Group would be credited, and Staples.com Group would be charged, with an
amount equal to approximately 667% (representing the ratio of the Number
of Shares Issuable with Respect to Staples Group's Retained Interest in
Staples.com Group (100) to the total number of shares of Staples.com
Stock issued and outstanding following the issuance (15)) of the
aggregate amount of such dividend or distribution.
I-2
<PAGE>
Offerings of Options and Convertible Securities
If we were to grant options for Staples.com Stock or issue securities
convertible into or exercisable for shares of Staples.com Stock, the
Outstanding Interest Percentage and the Retained Interest Percentage would be
unchanged at the time of such grant or issuance. If any shares of
Staples.com Stock were issued upon exercise or conversion of such options or
securities, however, the Outstanding Interest Percentage and the Retained
Interest Percentage would be affected as shown above under "Issuance for
Account of Staples Group," if such securities were attributed to Staples Group,
or under "Issuance for Account of Staples.com Group," if such securities were
attributed to Staples.com Group.
Repurchases of Staples.com Stock
The following illustrations reflect an assumed repurchase by Staples of 5
shares of Staples.com Stock after an assumed initial issuance of 15 shares of
Staples.com Stock for the account of Staples Group.
Repurchase for the Account of Staples Group
Assume the repurchase is attributed to Staples Group as an increase in its
Retained Interest in Staples.com Group, with the cost charged solely against
Staples Group.
<TABLE>
<S> <C>
Shares previously issued and outstanding.................................. 15
Shares repurchased for account of Staples Group........................... 5
---
Total issued and outstanding after repurchase........................... 10
===
</TABLE>
. The Number of Shares Issuable with Respect to Staples Group's Retained
Interest in Staples.com Group would be increased by the number of any
shares of Staples.com Stock repurchased for the account of Staples
Group.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to Staples Group's Retained
Interest in Staples.com Group prior to repurchase................... 85
Number of shares repurchased for the account of Staples Group....... 5
---
Number of Shares Issuable with Respect to Staples Group's Retained
Interest in Staples.com Group after repurchase.................... 90
===
</TABLE>
. As a result, the total issued and outstanding shares (10) would in the
aggregate represent an Outstanding Interest Percentage of 10%,
calculated as follows:
10
----------
10 + 90
The Retained Interest Percentage would accordingly be increased to 90%.
Repurchase for Account of Staples.com Group without Participation by Staples
Group
Assume the repurchase is attributed to Staples.com Group, with the cost
being charged solely against Staples.com Group. Further assume that the board
of directors does not elect to transfer assets from Staples.com Group to
Staples Group to hold constant the Outstanding Interest Percentage and Retained
Interest Percentage.
<TABLE>
<S> <C>
Shares previously issued and outstanding.................................. 15
Shares repurchased for account of Staples.com Group....................... 5
---
Total issued and outstanding after repurchase........................... 10
===
</TABLE>
I-3
<PAGE>
. The Number of Shares Issuable with Respect to Staples Group's Retained
Interest in Staples.com Group (85) would remain unchanged.
. As a result, the total issued and outstanding shares (10) would in the
aggregate represent an Outstanding Interest Percentage of approximately
11%, calculated as follows:
10
----------
10 + 85
The Retained Interest Percentage would accordingly be increased to
approximately 89%.
Repurchase for Account of Staples.com Group with Participation by Staples
Group
Assume the repurchase is attributed to Staples.com Group, with the cost
being charged solely against Staples.com Group. Further assume that the
repurchase is made in connection with a tender offer for 5, or 33%, of the then
outstanding shares at a price of $20 per share, and that the board of directors
elects to transfer cash or other assets from Staples.com Group to Staples Group
to hold constant the Outstanding Interest Percentage and the Retained Interest
Percentage.
<TABLE>
<S> <C>
Shares previously issued and outstanding.................................. 15
Shares repurchased for account of Staples.com Group....................... 5
---
Total issued and outstanding after repurchase........................... 10
===
</TABLE>
. In order to hold constant the Outstanding Interest Percentage and
Retained Interest Percentage, the board of directors determines that the
Market Value of a share of Staples.com Stock in this context is $20 and
transfers from Staples.com Group to Staples Group an amount of cash or
other assets equal to approximately 567% (representing the ratio of the
Number of Shares Issuable with Respect to Staples Group's Retained
Interest in Staples.com Group (85) to the total number of shares of
Staples.com Stock issued and outstanding (15), in each case immediately
prior to the repurchase) of the aggregate amount of the cash paid in the
tender offer to holders of outstanding shares of Staples.com Stock
($100), or a total of $567.
. In that case, the Number of Shares Issuable with Respect to Staples
Group's Retained Interest in Staples.com Group (85) would decrease by
the amount of cash so transferred (approximately $567) divided by the
Market Value per share of Staples.com Stock ($20), or 28 shares.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to Staples Group's Retained
Interest in Staples.com Group prior to transfer....................... 85
Adjustment in respect of Staples Group's Retained Interest to reflect
transfer to Staples Group of funds previously allocated to Staples.com
Group................................................................. 28
---
Number of Shares Issuable with Respect to Staples Group's Retained
Interest in Staples.com Group after transfer........................ 57
===
</TABLE>
. As a result, the total issued and outstanding shares (10) would in the
aggregate continue to represent an Outstanding Interest Percentage of
approximately 15%, calculated as follows:
10
----------
10 + 57
The Retained Interest Percentage would accordingly continue to be
approximately 85%.
I-4
<PAGE>
. Assuming that the board of directors transferred only half of the $567
amount, or $283.50, from Staples.com Group to Staples Group, the Number
of Shares Issuable with Respect to Staples Group's Retained Interest in
Staples.com Group (85) would decrease by the amount of cash so
transferred ($283.50) divided by the Market Value per share of
Staples.com Stock ($20).
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to Staples Group's Retained
Interest in Staples e-Commerce Group prior to transfer.................. 85
Adjustment in respect of Staples Group's Retained Interest to reflect
transfer to Staples Group of funds previously allocated to Staples.com
Group................................................................... 14
---
Number of Shares Issuable with Respect to Staples Group's Retained
Interest in Staples.come Group after transfer......................... 71
===
</TABLE>
. In that case, as a result, the total issued and outstanding shares (10)
would in the aggregate represent an Outstanding Interest Percentage of
approximately 12%, calculated as follows:
10
----------
10 + 71
The Retained Interest Percentage would accordingly be increased to
approximately 88%.
Staples.com Stock Dividends
The following illustrations reflect assumed dividends of Staples.com Stock
on outstanding shares of Staples Stock and outstanding shares of Staples.com
Stock, respectively, after an assumed initial issuance of 15 shares of
Staples.com Stock for the account of Staples Group.
Staples.com Stock Dividend on Staples Stock
Assume 500 shares of Staples Stock are outstanding and Staples declares a
dividend of 1/10 of a share of Staples.com Stock on each outstanding share of
Staples Stock.
<TABLE>
<S> <C>
Shares previously issued and outstanding.................................. 15
Newly issued shares for account of Staples Group.......................... 50
---
Total issued and outstanding after dividend............................. 65
===
</TABLE>
. Any dividend of shares of Staples.com Stock to the holders of shares of
Staples Stock would be treated as a reduction in the Number of Shares
Issuable with Respect to Staples Group's Retained Interest in
Staples.com.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to Staples Group's Retained
Interest in Staples.com Group prior to dividend...................... 85
Number of shares distributed on outstanding shares of Staples Stock
for account of Staples.com 50
---
Number of Shares Issuable with Respect to Staples Group's Retained
Interest in Staples.com Group after dividend....................... 35
===
</TABLE>
. As a result, the total issued and outstanding shares (65) would in the
aggregate represent an Outstanding Interest Percentage of 65%,
calculated as follows:
65
----------
65 + 35
I-5
<PAGE>
The Retained Interest Percentage would accordingly be reduced to 35%. Note,
however, that after the dividend, the holders of Staples Stock would also hold
50 shares of Staples.com Stock, which would be intended to represent a 50%
interest in the value attributable to Staples.com Group.
Staples.com Stock Dividend on Staples.com Stock
Assume Staples declares a dividend of 1/5 of a share of Staples.com Stock on
each outstanding share of Staples.com Stock.
<TABLE>
<S> <C>
Shares previously issued and outstanding.................................. 15
Newly issued shares for account of Staples.com Group...................... 3
---
Total issued and outstanding after dividend............................. 18
===
</TABLE>
. The Number of Shares Issuable with Respect to Staples Group's Retained
Interest in Staples.com Group would be increased proportionately to
reflect the stock dividend payable in shares of Staples.com Stock to
holders of shares of Staples.com Stock. That is, the Number of Shares
Issuable with Respect to Staples Group's Retained Interest in
Staples.com Group would be increased by a number equal to approximately
567% (representing the ratio of the Number of Shares Issuable with
Respect to Staples Group's Retained Interest in Staples.com Group (85)
to the number of shares of Staples.com Stock issued and outstanding
(15), in each case immediately prior to such dividend) of the aggregate
number of shares issued in connection with such dividend (3), or 17.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to Staples Group's Retained
Interest in Staples.com prior to dividend.............................. 85
Adjustment in respect of Staples Group's Retained Interest to reflect
shares distributed on outstanding shares of Staples.com Stock.......... 17
---
Number of Shares Issuable with Respect to Staples Group's Retained
Interest in Staples.com Group after dividend........................... 102
===
</TABLE>
. As a result, the total issued and outstanding shares (18) would in the
aggregate continue to represent an Outstanding Interest Percentage of
approximately 15%, calculated as follows:
18
----------
18 + 102
The Retained Interest Percentage would accordingly continue to be
approximately 85%.
Capital Transfers of Cash or Other Assets between Staples Group and Staples.com
Group
Capital Contribution of Cash or Other Assets from Staples Group to Staples.com
Group
The following illustration reflects the assumed contribution by Staples
Group to Staples.com Group, after an assumed initial issuance of 15 shares of
Staples.com Stock for the account of Staples Group, of $100 of assets allocated
to Staples Group at a time when the Market Value of the Staples.com Stock is
$20 per share.
<TABLE>
<S> <C>
Shares previously issued and outstanding.................................. 15
Newly issued shares....................................................... 0
---
Total issued and outstanding after contribution......................... 15
===
</TABLE>
I-6
<PAGE>
. The Number of Shares Issuable with Respect to Staples Group's Retained
Interest in Staples.com Group would be increased to reflect the
contribution to Staples.com Group of assets previously allocated to
Staples Group by a number equal to the value of the assets contributed
($100) divided by the Market Value of Staples.com Stock at that time
($20), or 5 shares.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to Staples Group's Retained
Interest in Staples.com Group prior to contribution.................. 85
Increase to reflect contribution to Staples.com Group of assets
allocated to Staples Group........................................... 5
---
Number of Shares Issuable with Respect to Staples Group's Retained
Interest in Staples.com Group after contribution................... 90
===
</TABLE>
. As a result, the total issued and outstanding shares (15) would in the
aggregate represent an Outstanding Interest Percentage of approximately
14%, calculated as follows:
15
----------
15 + 90
The Retained Interest Percentage would accordingly be increased to
approximately 86%.
Return of Capital Transfer of Cash or Other Assets from Staples.com Group to
Staples Group
The following illustration reflects the assumed transfer by Staples.com
Group to Staples Group, after an assumed initial issuance of 15 shares of
Staples.com Stock for the account of Staples Group, of $100 of assets allocated
to Staples.com Group on a date on which the Market Value of Staples.com Stock
is $20 per share.
<TABLE>
<S> <C>
Shares previously issued and outstanding.................................. 15
Newly issued shares....................................................... 0
---
Total issued and outstanding after contribution......................... 15
===
</TABLE>
. The Number of Shares Issuable with Respect to Staples Group's Retained
Interest in Staples.com Group would be decreased to reflect the transfer
to Staples Group of assets previously allocated to Staples.com Group by
a number equal to the value of the assets transferred ($100) divided by
the Market Value of Staples.com Stock at that time ($20), or 5 shares.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to Staples Group's Retained
Interest in Staples.com Group prior to contribution................... 85
Decrease to reflect contribution to Staples Group of assets allocated
to Staples.com Group.................................................. 5
---
Number of Shares Issuable with Respect to Staples Group's Retained
Interest in Staples.com Group after contribution.................... 80
===
</TABLE>
. As a result, the total issued and outstanding shares (15) would in the
aggregate represent an Outstanding Interest Percentage of approximately
16%, calculated as follows:
15
----------
15 + 80
The Retained Interest Percentage would accordingly be decreased to
approximately 84%.
I-7
<PAGE>
ANNEX II
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
STAPLES, INC.
Pursuant to Section 242 of the General Corporation Law of the State of
Delaware
Staples, Inc. (the "Corporation"), a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware
(the "DGCL"), does hereby certify as follows:
That the Board of Directors of the Corporation duly adopted, pursuant to
Section 242 of the DGCL, a resolution declaring the advisability of the
amendments to the Amended and Restated Certificate of Incorporation of the
Corporation, as amended to date (the "Certificate"), set forth in this
Certificate of Amendment. The stockholders of the Corporation duly approved,
pursuant to Section 242 of the DGCL, the amendments set forth in this
Certificate of Amendment. The amendments so approved by the Board of Directors
and the stockholders of the Corporation are:
RESOLVED: That ARTICLE IV of the Certificate is hereby deleted in its entirety
and the following ARTICLE IV is inserted in lieu thereof:
ARTICLE IV
Capital Stock
The total number of shares of all classes of stock which the Corporation
shall have authority to issue is 1,655,000,000, consisting of (i) 1,650,000,000
shares of Common Stock, $0.0006 par value per share ("Common Stock"), and (ii)
5,000,000 shares of Preferred Stock, $0.01 par value per share ("Preferred
Stock").
A. Common Stock.
1. Issuance of Common Stock in Series; Designation; Re-Classification.
The Corporation shall have the authority to issue shares of Common Stock in
two series. One series of Common Stock shall be designated as Staples The
Office Superstore Group Common Stock ("Staples Stock"). The second series of
Common Stock shall be designated as Staples.com Group Common Stock
("Staples.com Stock"). When the filing of this Certificate of Amendment becomes
effective, each share of Common Stock outstanding immediately prior thereto
shall automatically be re-classified as one share of Staples Stock (and
outstanding certificates that had theretofore represented shares of Common
Stock shall thereupon represent an equal number of shares of Staples Stock
despite the absence of any indication thereon to that effect).
The total number of shares of Staples Stock which the Corporation shall have
the authority to issue shall initially be 1,500,000,000, and the total number
of shares of Staples.com Stock which the Corporation shall have the authority
to issue shall initially be 150,000,000. The Board of Directors shall have the
authority to increase or decrease from time to time the total number of shares
of Common Stock of either series which the Corporation shall have the authority
to issue, but not above the number which, when added to the total number of
shares of the other series of Common Stock that the Corporation would have the
authority to issue, would exceed the total number of shares of Common Stock
that the Corporation has the authority to issue, and not below the number of
shares of such series then outstanding. The Board of Directors shall have the
authority
II-1
<PAGE>
to designate, prior to the time of the first issuance of the Staples.com Stock,
the number which, immediately prior to such first issuance, will constitute the
Number of Shares Issuable with Respect to Staples' Retained Interest in
Staples.com Group and any other terms which are consistent with applicable law
and the provisions of this Article Fourth.
2. Dividends.
(a) Dividends. Subject to the preferences and other terms of any
outstanding series of Preferred Stock, the holders of either series of Common
Stock shall be entitled to receive dividends on their shares of Common Stock
if, as and when declared by the Board of Directors, out of legally available
funds, but (i) the amount paid as dividends on Staples Stock may not exceed the
Available Dividend Amount for Staples The Office Superstore Group and (ii) the
amount paid as dividends on Staples.com Stock may not exceed the Available
Dividend Amount for Staples.com Group.
(b) Discrimination Between or Among Series of Common Stock. Subject to
paragraph (a) of this Section 2 and subject to the preferences and other terms
of any outstanding series of Preferred Stock, the Corporation shall have the
authority to declare and pay dividends on both, one or neither series of Common
Stock in equal or unequal amounts, notwithstanding the performance of either
Group, the amount of assets available for dividends on either series of Common
Stock, the amount of prior dividends paid on either series of Common Stock, the
respective voting rights of each series of Common Stock or any other factor.
3. Mandatory Dividend, Redemption or Exchange on Disposition of All or
Substantially All of the Assets of a Group; Exchange of One Series of Common
Stock for the Other Series or for Stock of a Subsidiary at the Corporation's
Option.
(a) Mandatory Dividend, Redemption or Exchange.
(i) In the event of a Disposition of All or Substantially All of the
Assets of a Group (other than an Exempt Disposition), the Corporation
shall, on or prior to the 85th Trading Day after the consummation of such
Disposition, either:
(x) declare and pay a dividend to holders of the series of Common
Stock that relates to that Group (in cash, securities (other than
Common Stock) or other property, or a combination thereof), subject to
the limitations on dividends set forth under Section 2 of this Article
IV(A), in an amount having a Fair Value equal to their Proportionate
Interest in the Net Proceeds of such Disposition;
(y) redeem from holders of the series of Common Stock that relates
to that Group, for cash, securities (other than Common Stock) or other
property (or a combination thereof) in an amount having a Fair Value
equal to their Proportionate Interest in the Net Proceeds of such
Disposition, all of the outstanding shares of the relevant series of
Common Stock (or, if such Group continues after such Disposition to own
any material assets other than the proceeds of such Disposition, a
number of shares of such series of Common Stock (rounded, if necessary,
to the nearest whole number) having an aggregate average Market Value,
during the 20 consecutive Trading Day period beginning on (and
including) the 16th Trading Day immediately following the date on which
the Disposition is consummated, equal to such Fair Value); or
(z) issue, in exchange for all of the outstanding shares of the
series of Common Stock that relates to that Group, a number of shares
of the series of Common Stock that does not relate to that Group
(rounded, if necessary, to the nearest whole number) having an
aggregate value equal to 110% of the aggregate value of all of the
outstanding shares of the series of Common Stock that relates to that
Group (with value in each case based on the average Market Value of a
share of the relevant series of Common Stock during the 20 consecutive
Trading Day period beginning on (and including) the 16th Trading Day
immediately following the date on which the Disposition is
consummated).
(ii) At any time within one year after completing any dividend or
partial redemption pursuant to (x) or (y) of the preceding sentence, the
Corporation may issue, in exchange for all of the remaining
II-2
<PAGE>
outstanding shares of the series of Common Stock that relates to the Group
that consummated the applicable Disposition, a number of shares of the
series of Common Stock that does not relate to that Group (rounded, if
necessary, to the nearest whole number) having an aggregate value equal to
110% of the aggregate value of all of the outstanding shares of the series
of Common Stock that relates to that Group (with value in each case based
on the average Market Value of a share of the relevant series of Common
Stock during the 20 consecutive Trading Day period ending on (and
including) the 5th Trading Day immediately preceding the date on which the
Corporation mails the notice of exchange to holders of the relevant
series).
(iii) For purposes of this Section 3, if a Group consummates a
Disposition in a series of related transactions, such Disposition shall not
be deemed to have been completed until consummation of the last of such
transactions.
(b) Optional Exchange of One Series of Common Stock for the Other Series.
(i) The Corporation may, at any time, issue, in exchange for all of the
outstanding shares of Staples.com Stock, a number of shares of Staples
Stock (rounded, if necessary, to the nearest whole number) having an
aggregate value equal to the percentage of the aggregate value of all of
the outstanding shares of Staples.com Stock (the "Applicable Percentage")
specified for the applicable date of exchange below (with value in each
case based on the average Market Value of a share of the relevant series of
Common Stock during the 20 consecutive Trading Day period ending on (and
including) the 5th Trading Day immediately preceding the date on which the
Corporation mails the notice of exchange to holders of Staples.com Stock).
<TABLE>
<CAPTION>
The Applicable
Percentage Will
be the Percentage
If the Exchange Date Falls During the Period Indicated Specified for
Below Such Period Below
------------------------------------------------------ -----------------
<S> <C>
First Quarter........................................... 125%
Second Quarter.......................................... 124.166667%
Third Quarter........................................... 123.333333%
Fourth Quarter.......................................... 122.5%
Fifth Quarter........................................... 121.666667%
Sixth Quarter........................................... 120.833333%
Seventh Quarter......................................... 120%
Eighth Quarter.......................................... 119.166667%
Ninth Quarter........................................... 118.333333%
Tenth Quarter........................................... 117.5%
Eleventh Quarter........................................ 116.666667%
Twelfth Quarter......................................... 115.833333%
After Twelfth Quarter................................... 115%
</TABLE>
For purposes of the foregoing chart, (x) the first "Quarter" is the period
from and including the date of first issuance of shares of Staples.com Group,
or options therefor, Stock to but excluding the third month anniversary of such
date (provided that, if the date of first issuance is the 29th, 30th or 31st
day of any month, the first "Quarter" will be the period from and including
such date of first issuance to but excluding the third month anniversary of the
first day of the month immediately following the month in which such date of
first issuance falls) and (y) each subsequent "Quarter" is the period from and
including the day after the end of the prior Quarter to but excluding the third
month anniversary of such day.
(ii) The Corporation may, at any time, issue, in exchange for all of the
outstanding shares of Staples Stock, a number of shares of Staples.com
Stock (rounded, if necessary, to the nearest whole number) having an
aggregate value equal to 115% of the aggregate value of all of the
outstanding shares
II-3
<PAGE>
of Staples Stock (with value in each case based on the average Market Value
of a share of the relevant series of Common Stock during the 20 consecutive
Trading Day period ending on (and including) the 5th Trading Day
immediately preceding the date on which the Corporation mails the notice of
exchange to holders of Staples Stock).
(iii) The Corporation may, if Staples.com Stock exceeds the 40% of Total
Market Capitalization Threshold but is below the 60% of Total Market
Capitalization Threshold, issue, in exchange for all of the outstanding
shares of either series of Common Stock (the "Series of Common Stock Being
Retired"), a number of shares of the other series of Common Stock (rounded,
if necessary, to the nearest whole number) having an aggregate value equal
to the aggregate value of all of the outstanding shares of the Series of
Common Stock Being Retired (with value in each case based on the average
Market Value of a share of the relevant series of Common Stock during the
20 consecutive Trading Day period ending on (and including) the 5th Trading
Day immediately preceding the date on which the Corporation mails the
notice of exchange to holders of the Series of Common Stock Being Retired).
Staples.com Stock will exceed the "40% of Total Market Capitalization
Threshold" if the Market Capitalization of the outstanding Staples.com Stock
exceeds 40% of the total Market Capitalization of both series of Common Stock
for 30 Trading Days during the 60 consecutive Trading Day period ending on (and
including) the 5th Trading Day immediately preceding the date on which the
Corporation mails the notice of exchange to holders of the Series of Common
Stock being retired. Staples.com Stock will be below the "60% of Total Market
Capitalization Threshold" if the Market Capitalization of the outstanding
Staples.com Stock is below 60% of the total Market Capitalization of both
series of Common Stock for 30 Trading Days during the 60 consecutive Trading
Day period ending on (and including) the 5th Trading Day immediately preceding
the date on which the Corporation mails the notice of exchange to holders of
the Series of Common Stock being retired.
If the Corporation has the right, on the date on which it mails a notice of
exchange as contemplated above, to issue shares of Staples Stock or Staples.com
Stock in exchange for outstanding shares of the other series of Common Stock as
described above, the Corporation will not lose that right if Staples.com Stock
subsequently falls below the 40% of Total Market Capitalization Threshold or
exceeds the 60% of Total Market Capitalization Threshold.
(iv) Notwithstanding the preceding paragraphs, if a Tax Event has
occurred, the Corporation may issue, in exchange for all of the outstanding
shares of either series of Common Stock, a number of shares of the other
series of Common Stock (rounded, if necessary, to the nearest whole number)
having an aggregate value equal to 110% of the aggregate value of all of
the outstanding shares of the Series of Common Stock Being Retired (with
value in each case with value based on the average Market Value of a share
of the relevant series of Common Stock during the 20 consecutive Trading
Day period ending on (and including) the 5th Trading Day immediately
preceding the date on which the Corporation mails the notice of exchange to
holders of the Series of Common Stock Being Retired). "Tax Event" means the
receipt by the Corporation of an opinion of a tax advisor experienced in
such matters, who shall not be an officer or employee of the Corporation or
any of its affiliates, to the effect that, as a result of any amendment to,
or change in, the laws (or any regulations thereunder) of the United States
or any political subdivision or taxing authority thereof or therein
(including any proposed change in such regulations announced by an
administrative agency), or as a result of any official or administrative
pronouncement or action or judicial decision interpreting or applying such
laws or regulations, it is more likely than not that for United States
federal income tax purposes (1) the Corporation, its subsidiaries or
affiliates or any of its successors or its stockholders is or, at any time
in the future, will be subject to tax upon the issuance of shares of either
Staples Stock or Staples.com Stock or (2) either Staples Stock or
Staples.com Stock is not or, at any time in the future, will not be treated
solely as stock of the Corporation. For purposes of rendering such opinion,
a tax advisor shall assume that any administrative proposals will be
adopted as proposed. However, in the event a change in law is proposed, a
tax advisor shall render an opinion only in the event of enactment.
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(c) Optional Exchange for Stock of a Subsidiary.
(i) At any time at which all of the assets and liabilities of a Group
(and no other assets or liabilities of the Corporation or any subsidiary
thereof) are held directly or indirectly by one or more wholly owned
subsidiaries of the Corporation (the "Group Subsidiaries"), the Corporation
may deliver to holders of the relevant series of Common Stock (including
Staples in the case of Staples.com Stock) their Proportionate Interest in
all of the outstanding shares of the common stock of the Group Subsidiaries
in exchange for all of the outstanding shares of such series of Common
Stock.
(ii) If the series of Common Stock being exchanged pursuant to Section
3(c)(i) above is Staples Stock and the Number of Shares Issuable with
Respect to Staples The Office Superstore Group's Retained Interest in
Staples.com Group is greater than zero, the Corporation shall also issue a
number of shares of Staples.com Stock equal to the then current Number of
Shares Issuable with Respect to Staples The Office Superstore Group's
Retained Interest in Staples.com Group and deliver those shares to the
holders of Staples Stock or to one of the Group Subsidiaries, at the option
of the Corporation.
(iii) If the series of Common Stock being exchanged pursuant to Section
3(c)(i) above is Staples.com Stock and the Number of Shares Issuable with
Respect to Staples The Office Superstore Group's Retained Interest in
Staples.com Group is greater than zero (so that less than all of the shares
of common stock of the Group Subsidiaries are being delivered to the
holders of Staples.com Stock), the Corporation may retain the remaining
shares of common stock of the Group Subsidiaries or distribute those shares
as a dividend on Staples Stock.
(d) General Dividend, Exchange and Redemption Provisions.
(i) If the Corporation completes a Disposition of All or Substantially
All of the Assets of a Group (other than an Exempt Disposition), the
Corporation shall, not more than the 10 Trading Days after the consummation
of such Disposition, issue a press release specifying (w) the Net Proceeds
of such Disposition, (x) the number of shares of the series of Common Stock
related to such Group then outstanding, (y) the number of shares of such
series of Common Stock issuable upon conversion, exchange or exercise of
any convertible or exchangeable securities, options or warrants and the
conversion, exchange or exercise prices thereof and (z) if the Group is
Staples.com Group, the Number of Shares Issuable with Respect to Staples
The Office Superstore Group's Retained Interest in Staples.com Group. The
Corporation shall, not more than 40 Trading Days after such consummation,
announce by press release which of the actions specified in Section 3(a)(i)
of this Article IV(A) it has determined to take, and upon making that
announcement, that determination will be irrevocable. In addition, the
Corporation shall, not more than 40 Trading Days after such consummation
and not less than 10 Trading Days before the applicable payment date,
redemption date or exchange date, send a notice by first-class mail,
postage prepaid, to holders of the relevant series of Common Stock at their
addresses as they appear on the transfer books of the Corporation,
specifying:
(1) if the Corporation has determined to pay a special dividend,
(A) the record date for such dividend, (B) the payment date of such
dividend (which cannot be more than 85 Trading Days after such
consummation) and (C) the aggregate amount and type of property to be
paid in such dividend (and the approximate per share amount thereof);
(2) if the Corporation has determined to undertake a redemption,
(A) the date of redemption (which cannot be more than 85 Trading Days
after such consummation), (B) the aggregate amount and type of property
to be paid as a redemption price (and the approximate per share amount
thereof), (C) if less than all shares of the relevant series of Common
Stock are to be redeemed, the number of shares to be redeemed and (D)
the place or places where certificates for shares of such series of
Common Stock, properly endorsed or assigned for transfer (unless the
Corporation waives such requirement), should be surrendered in return
for delivery of the cash, securities or other property to be paid by
the Corporation in such redemption; and
(3) if the Corporation has determined to undertake an exchange, (A)
the date of exchange (which cannot be more than 85 Trading Days after
such consummation), (B) the number of shares of
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the other series of Common Stock to be issued in exchange for each
outstanding share of such series of Common Stock and (C) the place or
places where certificates for shares of such series of Common Stock,
properly endorsed or assigned for transfer (unless the Corporation
waives such requirement), should be surrendered in return for delivery
of the other series of Common Stock to be issued by the Corporation in
such exchange.
(ii) If the Corporation has determined to complete any exchange
described in Section 3(b) or (c) of this Article IV(A), the Corporation
shall, not less than 10 Trading Days and not more than 30 Trading Days
before the exchange date, send a notice by first-class mail, postage
prepaid, to holders of the relevant series of Common Stock at their
addresses as they appear on the transfer books of the Corporation,
specifying (x) the exchange date and the other terms of the exchange and
(y) the place or places where certificates for shares of such series of
Common Stock, properly endorsed or assigned for transfer (unless the
Corporation waives such requirement), should be surrendered for delivery of
the stock to be issued or delivered by the Corporation in such exchange.
(iii) Neither the failure to mail any notice required by this Section
3(d) to any particular holder nor any defect therein would affect the
sufficiency thereof with respect to any other holder or the validity of any
dividend, redemption or exchange contemplated hereby.
(iv) If the Corporation is redeeming less than all of the outstanding
shares of a series of Common Stock pursuant to Section 3(a)(i) of this
Article IV(A), the Corporation shall redeem such shares pro rata or by lot
or by such other method as the Board of Directors determines to be
equitable.
(v) No holder of shares of a series of Common Stock being exchanged or
redeemed shall be entitled to receive any cash, securities or other
property to be distributed in such exchange or redemption until such holder
surrenders certificates for such shares, properly endorsed or assigned for
transfer, at such place as the Corporation shall specify (unless the
Corporation waives such requirement). As soon as practicable after the
Corporation's receipt of certificates for such shares, the Corporation
shall deliver to the person for whose account such shares were so
surrendered, or to the nominee or nominees of such person, the cash,
securities or other property to which such person shall be entitled,
together with any fractional payment referred to below, in each case
without interest. If less than all of the shares of Common Stock
represented by any one certificate is exchanged or redeemed, the
Corporation shall also issue and deliver a new certificate for the shares
of such Common Stock not exchanged or redeemed.
(vi) The Corporation shall not be required to issue or deliver
fractional shares of any capital stock or any other fractional securities
to any holder of Common Stock upon any exchange, redemption, dividend or
other distribution described above. If more than one share of Common Stock
shall be held at the same time by the same holder, the Corporation may
aggregate the number of shares of any capital stock that would be issuable
or any other securities that would be distributable to such holder upon any
such exchange, redemption, dividend or other distribution. If there are
fractional shares of any capital stock or any other fractional securities
remaining to be issued or distributed to any holder, the Corporation shall,
if such fractional shares or securities are not issued or distributed to
such holder, pay cash in respect of such fractional shares or securities in
an amount equal to the Fair Value thereof (without interest).
(vii) From and after the date set for any exchange or redemption
contemplated by this Section 3, all rights of a holder of shares of Common
Stock being exchanged or redeemed shall cease except for the right, upon
surrender of the certificates theretofore representing such shares, to
receive the cash, securities or other property for which such shares were
exchanged or redeemed, together with any fractional payment as provided
above, in each case without interest (and, if such holder was a holder of
record as of the close of business on the record date for a dividend not
yet paid, the right to receive such dividend). A holder of shares of Common
Stock being exchanged shall not be entitled to receive any dividend or
other distribution with respect to shares of the other series of Common
Stock until after certificates theretofore representing the shares being
exchanged are surrendered as contemplated above. Upon such surrender, the
Corporation shall pay to the holder the amount of any dividends or other
distributions (without interest) which theretofore became payable with
respect to a record date occurring after the exchange, but which
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were not paid by reason of the foregoing, with respect to the number of
whole shares of the other series of Common Stock represented by the
certificate or certificates issued upon such surrender. From and after the
date set for any exchange, the Corporation shall, however, be entitled to
treat the certificates for shares of a series of Common Stock being
exchanged that were not yet surrendered for exchange as evidencing the
ownership of the number of whole shares of the other series of Common Stock
for which the shares of such Common Stock should have been exchanged,
notwithstanding the failure to surrender such certificates.
(viii) The Corporation shall pay any and all documentary, stamp or
similar issue or transfer taxes that might be payable in respect of the
issue or delivery of any shares of capital stock and/or other securities on
any exchange or redemption contemplated by this Section 3; provided,
however, that the Corporation shall not be required to pay any tax that
might be payable in respect of any transfer involved in the issue or
delivery of any shares of capital stock and/or other securities in a name
other than that in which the shares so exchanged or redeemed were
registered, and no such issue or delivery will be made unless and until the
person requesting such issue pays to the Corporation the amount of any such
tax, or establishes to the satisfaction of the Corporation that such tax
has been paid.
(ix) The Corporation may, subject to applicable law, establish such
other rules, requirements and procedures to facilitate any dividend,
redemption or exchange contemplated by this Section 3 as the Board of
Directors may determine to be appropriate under the circumstances.
4. Voting Rights.
At every meeting of stockholders, the holders of Staples Stock and the
holders of Staples.com Stock shall vote together as a single class on all
matters as to which common stockholders generally are entitled to vote, unless
a separate vote is required by applicable law. On all such matters for which no
separate vote is required, (a) holders of Staples Stock shall be entitled to
one vote per share of Staples Stock held and (b) holders of Staples.com Stock
shall be entitled to a one vote per share of Staples.com Stock held.
5. Liquidation Rights.
In the event of any voluntary or involuntary liquidation, dissolution or
winding-up of the Corporation, holders of Staples Stock and holders of
Staples.com Stock shall be entitled to receive in respect of shares of Staples
Stock and shares of Staples.com Stock their proportionate interests in the net
assets of the Corporation, if any, remaining for distribution to stockholders
(after payment of or provision for all liabilities, including contingent
liabilities, of the Corporation and payment of the liquidation preference
payable to any holders of Preferred Stock), in proportion to the respective
number of liquidation units per share of Staples Stock and Staples.com Stock.
Each share of Staples.com Stock shall have one liquidation unit and each share
of Staples Stock shall have a number of liquidation units (including a fraction
of one liquidation unit) equal to the quotient (rounded to the nearest five
decimal places) of the average Market Value of one share of Staples Stock
during the 20 consecutive Trading Day period ending 300 days after the
Effective Date, divided by the average Market Value of one share of
Staples.com Stock during such 20 Trading Day period. If the liquidation,
dissolution or winding up of the Corporation occurs prior to such 300th day,
the average Market Value will be determined based on the 20 consecutive Trading
Day period ending immediately prior to the liquidation, dissolution or winding
up event.
If the Corporation shall in any manner subdivide (by stock split,
reclassification or otherwise) or combine (by reverse stock split,
reclassification or otherwise) the outstanding shares of Staples Stock or
Staples.com Stock, or declare a dividend in shares of either series to holders
of such series, the per share liquidation units of such series of Common Stock
specified in the preceding paragraph, as adjusted from time to time, shall be
appropriately adjusted as determined by the Board of Directors, so as to avoid
dilution in the aggregate, relative liquidation rights of the shares of any
series of Common Stock.
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Neither the merger nor consolidation of the Corporation into or with any
other entity, nor a sale, transfer or lease of all or any part of the assets of
the Corporation, shall, alone, be deemed a liquidation or winding up of the
Corporation or cause the dissolution of the Corporation, for purposes of this
Section 5.
6. Adjustments to Number of Shares Issuable with Respect to Staples Group's
Retained Interest in Staples.com Group.
The Number of Shares Issuable with Respect to Staples The Office Superstore
Group's Retained Interest in Staples.com Group, as in effect from time to time,
shall, automatically without action by the Board of Directors or any other
person, be:
(a) adjusted in proportion to any changes in the number of outstanding
shares of Staples.com Stock caused by subdivisions (by stock split,
reclassification or otherwise) or combinations (by reverse stock split,
reclassification or otherwise) of shares of Staples.com Stock or by
dividends or other distributions of shares of Staples.com Stock on shares
of Staples.com Stock (and, in each such case, rounded, if necessary, to the
nearest whole number);
(b) decreased by (i) if the Corporation issues any shares of
Staples.com Stock and the board of Directors attributes that issuance (and
the proceeds thereof) to Staples The Office Superstore Group, the number of
shares of Staples.com Stock so issued, and (ii) if the Board of Directors
re-allocates to Staples The Office Superstore Group any cash or other
assets theretofore allocated to Staples.com Group in connection with a
redemption of shares of Staples.com Stock (as required pursuant to clause
(ii) of the proviso to the definition of Staples The Office Superstore
Group below) or in return for a decrease in the Number of Shares Issuable
with Respect to Staples The Office Superstore Group's Retained Interest in
Staples.com Group, the number (rounded, if necessary, to the nearest whole
number) equal to (x) the aggregate Fair Value of such cash or other assets
divided by (y) the Market Value of one share of Staples.com Stock as of the
date of such re-allocation; and
(c) increased by (i) if the Corporation repurchases any shares of
Staples.com Stock and the Board of Directors attributes that repurchase
(and the consideration therefor) to Staples The Office Superstore Group,
the number of shares of Staples.com Stock so repurchased and (ii) if the
Board of Directors re-allocates to Staples.com Group any cash or other
assets theretofore allocated to Staples The Office Superstore Group in
return for an increase in the Number of Shares Issuable with Respect to
Staples The Office Superstore Group's Retained Interest in Staples.com
Group, the number (rounded, if necessary, to the nearest whole number)
equal to (x) the Fair Value of such cash or other assets divided by (y) the
Market Value of one share of Staples.com Stock as of the date of such re-
allocation.
Neither the Corporation nor the Board of Directors shall take any action
that would, as a result of any of the foregoing adjustments, reduce the Number
of Shares Issuable with Respect to Staples The Office Superstore Group's
Retained Interest in Staples.com Group to below zero. Subject to the preceding
sentence, the Board of Directors may attribute the issuance of any shares of
Staples.com Stock (and the proceeds here from) or the repurchase of Staples.com
Stock (and the consideration therefor) to Staples The Office Superstore Group
or to Staples.com Group, as the Board of Directors determines in its sole
discretion; provided, however, that the Board of Directors must attribute to
Staples The Office Superstore Group the issuance of any shares of Staples.com
Stock that are issued (1) as a dividend or other distribution on, or as
consideration for the repurchase of, shares of Staples Stock or (2) as
consideration to acquire any assets or satisfy any liabilities attributed to
Staples The Office Superstore Group.
7. Additional Definitions.
As used in this Article IV, the following terms shall have the following
meanings (with terms defined in singular having comparable meaning when used in
the plural and vice versa), unless the context otherwise requires:
"All or Substantially All of the Assets" of either Group means a portion of
such assets that represents at least 80% of the then-current Fair Value of the
assets of such Group.
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"Available Dividend Amount" for Staples Group, on any day on which
dividends are paid on shares of Staples Stock, is the amount that would,
immediately prior to the payment of such dividends, be legally available for
the payment of dividends on shares of Staples The Office Superstore Group's
common stock under Delaware law if (a) Staples The Office Superstore Group and
Staples.com Group were each a separate Delaware corporation, (b) Staples The
Office Superstore Group had outstanding (i) a number of shares of common
stock, par value $0.0006 per share, equal to the number of shares of Staples
Stock that are then outstanding and (ii) a number of shares of preferred
stock, par value $0.01 per share, equal to the number of shares of Preferred
Stock that have been attributed to Staples The Office Superstore Group and are
then outstanding, (c) the assumptions about Staples.com Group set forth in the
next sentence were true and (d) Staples The Office Superstore Group owned a
number of shares of Staples.com Group common stock equal to the Number of
Shares Issuable with Respect to Staples The Office Superstore Group's Retained
Interest in Staples.com Group. "Available Dividend Amount" for Staples.com
Group, on any day on which dividends are paid on shares of Staples.com Stock,
is the amount that would, immediately prior to the payment of such dividends,
be legally available for the payment of dividends on shares of Staples.com
Group's common stock under Delaware law if Staples.com Group were a separate
Delaware corporation having outstanding (a) a number of shares of common
stock, par value $0.0006 per share, equal to the number of shares of
Staples.com Stock that are then outstanding plus the Number of Shares Issuable
with Respect to Staples Group's Retained Interest in Staples.com Group and (b)
a number of shares of preferred stock, par value $0.01 per share, equal to the
number of shares of Preferred Stock that have been attributed to Staples.com
Group and are then outstanding.
"Disposition" means a sale, transfer, assignment or other disposition
(whether by merger, consolidation, sale or otherwise) of All or Substantially
All of the Assets of a Group to one or more persons or entities, in one
transaction or a series of related transactions.
"Effective Date" means the date on which this Certificate of Amendment
becomes effective under Delaware law.
"Exempt Disposition" means any of the following:
(a) a Disposition in connection with the liquidation, dissolution or
winding-up of the Corporation and the distribution of assets to
stockholders,
(b) a Disposition to any person or entity controlled by the Corporation
(as determined by the Board of Directors in its sole discretion),
(c) a Disposition by either Group for which the Corporation receives
consideration primarily consisting of equity securities (including, without
limitation, capital stock of any kind, interests in a general or limited
partnership, interests in a limited liability company or debt securities
convertible into or exchangeable for, or options or warrants to acquire,
any of the foregoing, in each case without regard to the voting power or
other management or governance rights associated therewith) of an entity
which is primarily engaged or proposes to engage primarily in one or more
businesses similar or complementary to businesses conducted by such Group
prior to the Disposition, as determined by the Board of Directors in its
sole discretion,
(d) a dividend, out of Staples.com Group's assets, to holders of
Staples.com Stock and a re-allocation of a corresponding amount of
Staples.com Group's assets to Staples The Office Superstore Group as
required pursuant to clause (ii) of the proviso to the definition of
Staples The Office Superstore Group below,
(e) a dividend, out of Staples The Office Superstore Group's assets, to
holders of Staples Stock and
(f) any other Disposition, if (i) at the time of the Disposition there
are no shares of Staples Stock outstanding, (ii) at the time of the
Disposition there are no shares of Staples.com Stock outstanding or
(iii) before the 30th Trading Day following the Disposition the Corporation
has mailed a notice stating that it is exercising its right to exchange all
of the outstanding shares of Staples Stock or Staples.com Stock for newly
issued shares of the other series of Common Stock as contemplated under
Section 3(b) of this Article IV.
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"Fair Value" means (a) in the case of cash, the amount thereof, (b) in the
case of capital stock that has been Publicly Traded for a period of at least 15
months, the Market Value thereof and (c) in the case of other assets or
securities, the fair market value thereof as the Board of Directors shall
determine in good faith (which determination shall be conclusive and binding on
all stockholders).
"Group" means Staples or Staples.com Group.
"Market Capitalization" of either series of Common Stock on any date means
the Market Value of a share of such series on such date multiplied by the
number of shares of such series outstanding on such date.
"Market Value" of a share of any class or series of capital stock on any
Trading Day means the average of the high and low reported sales prices regular
way of a share of such class or series on such Trading Day or, in case no such
reported sale takes place on such Trading Day, the average of the reported
closing bid and asked prices regular way of a share of such class or series on
such Trading Day, in either case as reported on the New York Stock Exchange
("NYSE") Composite Tape or, if the shares of such class or series are not
listed or admitted to trading on the NYSE on such Trading Day, on the principal
national securities exchange on which the shares of such class or series are
listed or admitted to trading or, if not listed or admitted to trading on any
national securities exchange on such Trading Day, on The Nasdaq National Market
of the Nasdaq Stock Market ("Nasdaq NMS") or, if the shares of such class or
series are not listed or admitted to trading on any national securities
exchange or quoted on the Nasdaq NMS on such Trading Day, the average of the
closing bid and asked prices of a share of such class or series in the over-
the-counter market on such Trading Day as furnished by any NYSE member firm
selected from time to time by the Corporation, or, if such closing bid and
asked prices are not made available by any such NYSE member firm on such
Trading Day, or if such class or series of stock is not listed on the NYSE, a
national securities exchange, or the Nasdaq NMS or quoted in the over-the-
counter market, the fair market value of a share of such class or series as the
Board of Directors shall determine in good faith (which determination shall be
conclusive and binding on all stockholders); provided, that, for purposes of
determining the average Market Value of a share of any class or series of
capital stock for any period, (a) the "Market Value" of a share of any class or
series of capital stock on any day prior to any "ex-dividend" date or any
similar date occurring during such period for any dividend or distribution
(other than any dividend or distribution contemplated by clause (b)(ii) of this
sentence) paid or to be paid with respect to such capital stock shall be
reduced by the Fair Value of the per share amount of such dividend or
distribution and (b) the "Market Value" of a share of any class or series of
capital stock on any day prior to (i) the effective date of any subdivision (by
stock split or otherwise) or combination (by reverse stock split or otherwise)
of outstanding shares of such class or series of capital stock occurring during
such period or (ii) any "ex-dividend" date or any similar date occurring during
such period for any dividend or distribution with respect to such capital stock
to be made in shares of such class or series of capital stock, shall be
appropriately adjusted, as determined by the Board of Directors, to reflect
such subdivision, combination, dividend or distribution; and provided further,
if (a) the Corporation repurchases outstanding shares of Staples.com Stock and
the Board of Directors attributes that repurchase (and the consideration
therefor) to Staples.com Group and (b) the Board of Directors determines to re-
allocate to Staples The Office Superstore Group cash or other assets
theretofore allocated to Staples.com Group in order to avoid a change in the
Retained Interest Percentage, the "Market Value" of a share Staples.com Stock
used to compute the corresponding reduction in the Number of Shares Issuable
with Respect to Staples The Office Superstore Group's Retained Interest in
Staples.com Group shall equal the Fair Value of the consideration paid per
share of Staples.com Stock so repurchased; and provided further, if the
Corporation redeems a portion of the outstanding shares of Staples.com Stock
(and the Board of Directors re-allocates to Staples The Office Superstore Group
cash or other assets theretofore allocated to Staples.com Group in the manner
required by clause (ii) of the proviso to the definition of Staples The Office
Superstore Group below), the "Market Value" of a share Staples.com Stock used
to compute the corresponding reduction in the Number of Shares Issuable with
Respect to Staples The Office Superstore Group's Retained Interest in
Staples.com Group shall equal the Fair Value of the consideration paid per
share of Staples.com Stock so redeemed.
"Net Proceeds" of a Disposition of any of the assets of a Group means the
positive amount, if any, remaining from the gross proceeds of such Disposition
after any payment of, or reasonable provision (as
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determined in good faith by the Board of Directors, which determination shall
be conclusive and binding on all stockholders) for, (a) any taxes payable by
the Corporation in respect of such Disposition, (b) any taxes payable by the
Corporation in respect of any resulting dividend or redemption, (c) any
transaction costs, including, without limitation, any legal, investment banking
and accounting fees and expenses and (d) any liabilities (contingent or
otherwise) of, attributed to or related to, such Group, including, without
limitation, any liabilities for deferred taxes, any indemnity or guarantee
obligations which are outstanding or incurred in connection with the
Disposition or otherwise, any liabilities for future purchase price adjustments
and any obligations with respect to outstanding securities (other than
Staples.com Stock) attributed to such Group.
"Number of Shares Issuable with Respect to Staples The Office Superstore
Group's Retained Interest in Staples.com Group" shall initially be a number the
Board of Directors designates prior to the time the Corporation first issues
shares of Staples.com Stock, or options therefor, as the number of shares of
Staples.com Stock that could be issued by the Corporation for the account of
Staples The Office Superstore Group in respect of its Retained Interest in
Staples.com Group; provided, however, that such number as in effect from time
to time shall automatically be adjusted as required by Section 6 of this
Article IV(A).
"Proportionate Interest" of holders of Staples.com Stock in the Net Proceeds
of a Staples.com Group Disposition (or in the outstanding shares of common
stock of any subsidiaries holding Staples.com Group's assets and liabilities)
means the amount of such Net Proceeds (or the number of such shares) multiplied
by the number of shares of Staples.com Stock outstanding divided by the Total
Number of Notional Staples.com Group Shares Deemed Outstanding. "Proportionate
Interest" of holders of Staples Stock in the Net Proceeds of a Staples The
Office Superstore Group Disposition (or in the outstanding shares of common
stock of any subsidiaries holding Staples The Office Superstore Group's assets
and liabilities) means the amount of such Net Proceeds (or the number of such
shares).
"Publicly Traded" with respect to any security means (a) registered under
Section 12 of the Securities Exchange Act of 1934, as amended (or any successor
provision of law), and (b) listed for trading on the NYSE (or any other
national securities exchange registered under Section 7 of the Securities
Exchange Act of 1934, as amended (or any successor provision of law)) or listed
on the Nasdaq NMS (or any successor market system).
"Retained Interest Percentage" means the Number of Shares Issuable with
Respect to Staples The Office Superstore Group's Retained Interest in
Staples.com Group divided by the Total Number of Notional Staples.com Group
Shares Deemed Outstanding.
"Staples The Office Superstore Group" means (a) all of the businesses,
assets and liabilities of the Corporation and its subsidiaries, other than the
businesses, assets and liabilities that are part of Staples.com Group, (b) the
rights and obligations of Staples The Office Superstore Group under any inter-
Group debt deemed to be owed to or by Staples The Office Superstore Group (as
such rights and obligations are defined in accordance with policies established
from time to time by the Board of Directors) and (c) a proportionate interest
in Staples.com Group (after giving effect to any options, Preferred Stock,
other securities or debt issued or incurred by the Corporation and attributed
to Staples.com Group) equal to the Retained Interest Percentage; provided,
however, that:
(i) the Corporation may re-allocate assets from one Group to the other
Group in return for other assets or services rendered by that other Group
in the ordinary course of business or in accordance with policies
established by the Board of Directors from time to time, and
(ii) if the Corporation transfers cash, other assets or securities to
holders of shares of Staples.com Stock as a dividend or other distribution
on shares of Staples.com Stock (other than a dividend or distribution
payable in shares of Staples.com Stock), or as payment in a redemption of
shares of Staples.com Stock required by Section 3(a) of this Article IV(A),
then the Board of Directors shall re-allocate from Staples.com Group to
Staples The Office Superstore Group cash or other assets having a Fair
Value equal to the aggregate Fair Value of the cash, other assets or
securities so transferred multiplied by a fraction, the numerator of which
shall equal the Number of Shares Issuable with Respect to Staples The
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Office Superstore Group's Retained Interest in Staples.com Group on the
record date for such dividend or distribution, or on the date of such
redemption, and the denominator of which shall equal the number of shares
of Staples.com Stock outstanding on such date.
"Staples.com Group" means (a) the e-commerce business division of the
Corporation, including all of the businesses, assets and liabilities of the
Corporation and its subsidiaries that the Board of Directors has, as of the
Effective Date, allocated to Staples.com Group, (b) any assets or liabilities
acquired or incurred by the Corporation or any of its subsidiaries after the
Effective Date in the ordinary course of business and attributable to
Staples.com Group, (c) any businesses, assets or liabilities acquired or
incurred by the Corporation or any of its subsidiaries after the Effective Date
that the Board of Directors has specifically allocated to Staples.com Group or
that the Corporation otherwise allocates to Staples.com Group in accordance
with policies established from time to time by the Board of Directors and (d)
the rights and obligations of Staples.com Group under any inter-Group debt
deemed to be owed to or by Staples.com Group (as such rights and obligations
are defined in accordance with policies established from time to time by the
Board of Directors); provided, however, that:
(i) the Corporation may re-allocate assets from one Group to the other
Group in return for other assets or services rendered by that other Group
in the ordinary course of business or in accordance with policies
established by the Board of Directors from time to time, and
(ii) if the Corporation transfers cash, other assets or securities to
holders of shares of Staples.com Stock as a dividend or other distribution
on shares of Staples.com Stock (other than a dividend or distribution
payable in shares of Staples.com Stock), or as payment in a redemption of
shares of Staples.com Stock required by Section 3(a) of this Article IV(A),
then the Board of Directors shall re-allocate from Staples.com Group to
Staples The Office Superstore Group cash or other assets having a Fair
Value equal to the aggregate Fair Value of the cash, other assets or
securities so transferred multiplied by a fraction, the numerator of which
shall equal the Number of Shares Issuable with Respect to Staples The
Office Superstore Group's Retained Interest in Staples.com Group on the
record date for such dividend or distribution, or on the date of such
redemption, and the denominator of which shall equal the number of shares
of Staples.com Stock outstanding on such date.
"Total Number of Notional Staples.com Group Shares Deemed Outstanding" means
the number of shares of Staples.com Stock outstanding plus the Number of Shares
Issuable with Respect to Staples The Office Superstore Group's Retained
Interest in Staples.com Group.
"Trading Day" means each weekday on which the relevant security (or, if
there are two relevant securities, each relevant security) is traded on the
principal national securities exchange on which it is listed or admitted to
trading or on the Nasdaq NMS or, if such security is not listed or admitted to
trading on a national securities exchange or quoted on the Nasdaq NMS, traded
in the principal over-the-counter market in which it trades.
8. Effectiveness of Sections 2 Through 7 of This Article IV(A).
The terms of Sections 2 through 7, inclusive, of this Article IV(A) shall
apply only when there are shares of both series of Common Stock outstanding.
9. Determinations by the Board of Directors.
Subject to applicable law, any determinations made by the Board of Directors
in good faith under the Certificate of Incorporation, as it may be amended from
time to time, including without limitation any such determinations with respect
to the businesses, assets and liabilities of either Group, transactions between
the Groups or the rights of holders of any series of Common Stock or Preferred
Stock made pursuant to or in the furtherance hereof, shall be final and binding
on all stockholders of the Corporation. A record of all formal determinations
of the Board of Directors made as contemplated hereby shall be filed with the
records of the actions of the Board of Directors.
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B. Preferred Stock.
1. Designation. The Preferred Stock shall be designated and known as
"Preferred Stock." The number of shares constituting such Preferred Stock shall
be 5,000,000.
2. Rights and Preferences.
Preferred Stock may be issued from time to time in one or more series, each
of such series to have such terms as stated or expressed herein and in the
resolution or resolutions providing for the issue of such series adopted by the
Board of Directors of the Corporation as hereinafter provided. Any shares of
Preferred Stock which may be redeemed, purchased or acquired by the Corporation
may be reissued except as otherwise provided by law. Different series of
Preferred Stock shall not be construed to constitute different classes of
shares for the purposes of voting by classes unless expressly provided.
Authority is hereby expressly granted to the Board of Directors from time to
time to issue the Preferred Stock in one or more series, and in connection with
the creation of any such series, by resolution or resolutions providing for the
issue of the shares thereof, to determine and fix such voting powers, full or
limited, or no voting powers, and such designations, preferences and relative
participating, optional or other special rights, and qualifications,
limitations or restrictions thereof, including without limitation thereof,
dividend rights, conversion rights, redemption privileges and liquidation
preferences, as shall be stated and expressed in such resolutions, all to the
full extent now or hereafter permitted by the General Corporation Law of
Delaware. Without limiting the generality of the foregoing, the resolutions
providing for issuance of any series of Preferred Stock may provide that such
series shall be superior or rank equally or be junior to the Preferred Stock of
any other series to the extent permitted by law. Except as otherwise provided
in the Certificate of Incorporation, no vote of the holders of the Preferred
Stock or Common Stock shall be a prerequisite to the designation or issuance of
any shares of any series of the Preferred Stock authorized by and complying
with the conditions of the Certificate of Incorporation, the right to have such
vote being expressly waived by all present and future holders of the capital
stock of the Corporation.
C. Series A Junior Participating Preferred Stock
1. Designation and Amount. One million of the authorized and unissued shares
of Preferred Stock are designated as "Series A Junior Participating Preferred
Stock" (the "Series A Preferred Stock"). Such number of shares may be increased
or decreased by resolution of the Board of Directors; provided, that no
decrease shall reduce the number of shares of Series A Preferred Stock to a
number less than the number of shares then outstanding plus the number of
shares reserved for issuance upon the exercise of outstanding options, rights
or warrants or upon the conversion of any outstanding securities issued by the
Corporation convertible into Series A Preferred Stock.
2. Dividends and Distributions.
(A) Subject to the rights of the holders of any shares of any series of
Preferred Stock (or any similar stock) ranking prior and superior to the
Series A Preferred Stock with respect to dividends, the holders of shares
of Series A Preferred Stock, in preference to the holders of Common Stock,
par value $0.0006 per share, of the Corporation, and of any other junior
stock, shall be entitled to receive, when, as and if declared by the Board
of Directors out of funds of the Corporation legally available for the
payment of dividends, quarterly dividends payable in cash on March 31, June
30, September 30 and December 31 in each year (each such date being
referred to herein as a "Quarterly Dividend Payment Date"), commencing on
the first Quarterly Dividend Payment Date after the first issuance of a
share or fraction of a share of Series A Preferred Stock, in an amount per
share (rounded to the nearest cent) equal to the greater of (a) $1 or (b)
subject to the provision for adjustment hereinafter set forth, 100 times
the aggregate per share amount of all cash dividends, and 100 times the
aggregate per share amount (payable in kind) of all non-cash dividends or
other distributions, other than a dividend payable in shares of Common
Stock or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date or, with respect to
the
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first Quarterly Dividend Payment Date, since the first issuance of any
share or fraction of a share of Series A Preferred Stock. In the event the
Corporation shall at any time declare or pay any dividend on the Common
Stock payable in shares of Common Stock, or effect a subdivision,
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of
Common Stock) into a greater or lesser number of shares of Common Stock,
then in each such case the amount to which holders of shares of Series A
Preferred Stock were entitled immediately prior to such event under clause
(b) of the preceding sentence shall be adjusted by multiplying such amount
by a fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which
is the number of shares of Common Stock that were outstanding immediately
prior to such event.
(B) The Corporation shall declare a dividend or distribution on the
Series A Preferred Stock as provided in paragraph (A) of this Section
immediately after it declares a dividend or distribution on the Common
Stock (other than a dividend payable in shares of Common Stock) and the
Corporation shall pay such dividend or distribution on the Series A
Preferred Stock before the dividend or distribution declared on the Common
Stock is paid or set apart; provided that, in the event no dividend or
distribution shall have been declared on the Common Stock during the period
between any Quarterly Dividend Payment Date and the next subsequent
Quarterly Dividend Payment Date, a dividend of $1 per share on the Series A
Preferred Stock shall nevertheless be payable on such subsequent Quarterly
Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Preferred Stock from the Quarterly Dividend Payment Date
next preceding the date of issue of such shares, unless the date of issue
of such shares is prior to the record date for the first Quarterly Dividend
Payment Date, in which case dividends on such shares shall begin to accrue
from the date of issue of such shares, or unless the date of issue is a
Quarterly Dividend Payment Date or is a date after the record date for the
determination of holders of shares of Series A Preferred Stock entitled to
receive a quarterly dividend and before such Quarterly Dividend Payment
Date, in either of which events such dividends shall begin to accrue and be
cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends shall not bear interest. Dividends paid on the shares of Series A
Preferred Stock in an amount less than the total amount of such dividends
at the time accrued and payable on such shares shall be allocated pro rata
on a share-by-share basis among all such shares at the time outstanding.
The Board of Directors may fix a record date for the determination of
holders of shares of Series A Preferred Stock entitled to receive payment
of a dividend or distribution declared thereon, which record date shall be
not more than 60 days prior to the date fixed for the payment thereof.
3. Voting Rights. The holders of shares of Series A Preferred Stock shall have
the following voting rights:
(A) Subject to the provisions for adjustment hereinafter set forth, each
share of Series A Preferred Stock shall entitle the holder thereof to 100
votes on all matters submitted to a vote of the stockholders of the
Corporation. In the event the Corporation shall at any time declare or pay
any dividend on the Common Stock payable in shares of Common Stock, or
effect a subdivision, combination or consolidation of the outstanding
shares of Common Stock (by reclassification or otherwise than by payment of
a dividend in shares of Common Stock) into a greater or lesser number of
shares of Common Stock, then in each such case the number of votes per
share to which holders of shares of Series A Preferred Stock were entitled
immediately prior to such event shall be adjusted by multiplying such
number by a fraction, the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator
of which is the number of shares of Common Stock that were outstanding
immediately prior to such event.
(B) Except as otherwise provided herein, by law, or in any other
Certificate of Designations creating a series of Preferred Stock or any
similar stock, the holders of shares of Series A Preferred Stock and the
holders of shares of Common Stock and any other capital stock of the
Corporation having general voting rights shall vote together as one class
on all matters submitted to a vote of stockholders of the Corporation.
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<PAGE>
(C) (i) If any time dividends on any Series A Preferred Stock shall be
in arrears in an amount equal to six quarterly dividends thereon, the
holders of the Series A Preferred Stock, voting as a separate series from
all other series of Preferred Stock and classes of capital stock, shall be
entitled to elect two members of the Board of Directors in addition to any
Directors elected by any other series, class or classes of securities and
the authorized number of Directors will automatically be increased by two.
Promptly thereafter, the Board of Directors of this Corporation shall, as
soon as may be practicable, call a special meeting of holders of Series A
Preferred Stock for the purpose of electing such members of the Board of
Directors. Said special meeting shall in any event be held within 45 days
of the occurrence of such arrearage.
(ii) During any period when the holders of Series A Preferred Stock,
voting as a separate series, shall be entitled and shall have exercised
their right to elect two Directors, then and during such time as such
right continues (a) the then authorized number of Directors shall be
increased by two, and the holders of Series A Preferred Stock, voting
as a separate series, shall be entitled to elect the additional
Director so provided for, and (b) each such additional Director shall
not be a member of any existing class of the Board of Directors, but
shall serve until the next annual meeting of stockholders for the
election of Directors, or until his successor shall be elected and
shall qualify, or until his right to hold such office terminates
pursuant to the provisions of this Section 3(C).
(iii) A Director elected pursuant to the terms hereof may be removed
with or without cause by the holders of Series A Preferred Stock
entitled to vote in an election of such Director.
(iv) If, during any interval between annual meetings of stockholders
for the election of Directors and while the holders of Series A
Preferred Stock shall be entitled to elect two Directors, there is no
such Director in office by reason of resignation, death or removal,
then, promptly thereafter, the Board of Directors shall cause a special
meeting of the holders of Series A Preferred Stock for the purpose of
filling such vacancy and such vacancy shall be filled at such special
meeting. Such special meeting shall in any event be held within 45 days
of the occurrence of such vacancy.
(v) At such time as the arrearage is fully cured, and all dividends
accumulated and unpaid on any shares of Series A Preferred Stock
outstanding are paid, and, in addition thereto, at least one regular
dividend has been paid subsequent to curing such arrearage, the term of
this office of any Director elected pursuant to this Section 3(C), or
his successor, shall automatically terminate, and the authorized number
of Directors shall automatically decrease by two, the rights of the
holders of the shares of the Series A Preferred Stock to vote as
provided in this Section 3(C) shall cease, subject to renewal from time
to time upon the same terms and conditions, and the holders of shares
of the Series A Preferred Stock shall have only the limited voting
rights elsewhere herein set forth.
(D) Except as set forth herein, or as otherwise provided by law, holders
of Series A Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to
vote with holders of Common Stock as set forth herein) for taking any
corporate action.
4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or distributions payable
on the Series A Preferred Stock as provided in Section 2 are in arrears,
thereafter and until all accrued and unpaid dividends and distributions,
whether or not declared, on shares of Series A Preferred Stock outstanding
shall have been paid in full, the Corporation shall not:
(i) declare or pay dividends, or make any other distributions, on any
shares of stock ranking junior (either as to dividends or upon liquidation,
dissolutions or winding up) to the Series A Preferred Stock;
(ii) declare or pay dividends, or make any other distributions, on any
shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preferred Stock,
except dividends paid ratably on the Series A Preferred Stock and all such
parity stock on which dividends are payable or in arrears in proportion to
the total amounts to which the holders of all such shares are then
entitled;
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<PAGE>
(iii) redeem or purchase or otherwise acquire for consideration shares
of any stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock, provided that
the Corporation may at any time redeem, purchase or otherwise acquire
shares of any such junior stock in exchange for shares of any stock of the
Corporation ranking junior (either as to dividends or upon dissolution,
liquidation or winding up) to the Series A Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for consideration any
shares of Series A Preferred Stock, or any shares of stock ranking on a
parity with the Series A Preferred Stock, except in accordance with a
purchase offer made in writing or by publication (as determined by the
Board of Directors) to all holders of such shares upon such terms as the
Board of Directors, after consideration of the respective annual dividend
rates and other relative rights and preferences of the respective series
and classes, shall determine in good faith will result in fair and
equitable treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the Corporation to
purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this Section
4, purchase or otherwise acquire such shares at any time and in such matter.
5. Reacquired Shares. Any shares of Series A Preferred Stock purchased or
otherwise acquired by the Corporation in any manner whatsoever shall be retired
and canceled promptly after the acquisition thereof. All such shares shall upon
their cancellation become authorized but unissued shares of Preferred Stock and
may be reissued as part of a new series of Preferred Stock subject to the
conditions and restrictions on issuance set forth herein, in the Restated
Certificate of Incorporation, as amended, or in any other Certificate of
Designations creating a series of Preferred Stock or any similar stock or as
otherwise required by law.
6. Liquidation, Dissolution or Winding Up.
(A) Upon any liquidation, dissolution or winding up of the Corporation, no
distribution shall be made (1) to the holders of shares of stock ranking junior
(either as to dividends or upon liquidation, dissolution or winding up) to the
Series A Preferred Stock unless, prior thereto, the holders of shares of Series
A Preferred Stock shall have received $100 per share, plus an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not
declared, to the date of such payment, provided that the holders of shares of
Series A Preferred Stock shall be entitled to receive an aggregate amount per
share, subject to the provision for adjustment hereinafter set forth, equal to
100 times the aggregate amount to be distributed per share to holders of shares
of Common Stock, or (2) to the holders of shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up) with
the Series A Preferred Stock, except distributions made ratably on the Series A
Preferred Stock and all such parity stock in proportion to the total amounts to
which the holders of all such shares are entitled upon such liquidation,
dissolution or winding up.
(B) Neither the consolidation, merger or other business combination of the
Corporation with or into any other corporation nor the sale, lease, exchange or
conveyance of all or any part of the property, assets or business of the
Corporation shall be deemed to be a liquidation, dissolution or winding up of
the Corporation for purposes of this Section 6.
(C) In the event the Corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision, combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock,
then in each such case the aggregate amount to which holders of shares of
Series A Preferred Stock were entitled immediately prior to such event under
the proviso in clause (1) of paragraph (A) of this Section 6 shall be adjusted
by multiplying such amount by a fraction the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
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<PAGE>
7. Consolidation, Merger, etc. Notwithstanding anything to the contrary
contained herein, in case the Corporation shall enter into any consolidation,
merger, combination or other transaction in which the shares of Common Stock
are exchanged for or changed into other stock or securities, cash and/or any
other property, then in any such case each share of Series A Preferred Stock
shall at the same time be similarly exchanged or changed into an amount per
share, subject to the provision for adjustment hereinafter set forth, equal to
100 times the aggregate amount of stock, securities, cash and/or any other
property (payable in kind), as the case may be, into which or for which each
share of Common Stock is changed or exchanged. In the event the Corporation
shall at any time declare or pay any dividend on the Common Stock payable in
shares of Common Stock, or effect a subdivision, combination or consolidation
of the outstanding shares of Common Stock (by reclassification or otherwise
than by payment of a dividend in shares of Common Stock) into a greater or
lesser number of shares of Common Stock, then in each such case the amount set
forth in the preceding sentence with respect to the exchange or change of
shares of Series A Preferred Stock shall be adjusted by multiplying such amount
by a fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to
such event.
8. No Redemption. The shares of Series A Preferred Stock shall not be
redeemable.
9. Rank. The Series A Preferred Stock shall rank, with respect to the
payment of dividends and the distribution of assets, junior to all series of
any other class of the Preferred Stock issued either before or after the
issuance of the Series A Preferred Stock, unless the terms of any such series
shall provide otherwise.
10. Amendment. The Restated Certificate of Incorporation, as amended, of
the Corporation shall not be amended in any manner which would materially alter
or change the powers, preferences or special rights of the Series A Preferred
Stock so as to affect them adversely without the affirmative vote of the
holders of at least two-thirds of the outstanding shares of Series A Preferred
Stock, voting together as a single class.
11. Fractional Shares. Series A Preferred Stock may be issued in
fractions of a share which are integral multiples of one-hundredth of a share
which shall entitle the holder, in proportion to such holder's fractional
shares, to exercise voting rights, receive dividends, participate in
distributions and have the benefit of all other rights of holders of Series A
Preferred Stock.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment
to be executed as of this day of , 1999.
STAPLES, INC.
By: _________________________________
Jack A. VanWoerkom
Senior Vice President
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ANNEX III
STAPLES, INC.
1992 EQUITY INCENTIVE PLAN
1. Purpose.
The purpose of this plan (the "Plan") is to secure for Staples, Inc. (the
"Company") and its shareholders the benefits arising from capital stock
ownership by employees or officers of, and consultants to, the Company and its
parent and subsidiary corporations who are expected to contribute to the
Company's future growth and success. Except where the context otherwise
requires, the term "Company" shall include the parent and all present and
future subsidiaries of the Company as defined in Sections 424(e) and 424(f) of
the Internal Revenue Code of 1986, as amended or replaced from time to time
(the "Code"). Those provisions of the Plan which make express reference to
Section 422 shall apply only to Incentive Stock Options (as that term is
defined herein).
2. Types of Options and Awards; Administration.
a. Types of Options and Awards. Options granted pursuant to the Plan shall
be authorized by action of the Board of Directors of the Company (or a
Committee designated by the Board of Directors) and may be either incentive
stock options ("Incentive Stock Options") meeting the requirements of Section
422 of the Code or non-statutory options which are not intended to meet the
requirements of Section 422 of the Code. Awards of restricted stock made
pursuant to Section 13 of the Plan shall be authorized by action of the Board
of Directors of the Company (or a Committee designated by the Board of
Directors) and shall meet the requirements of Section 13 of the Plan.
b. Administration.
i. The Plan will be administered by the Board of Directors of the
Company, whose construction and interpretation of the terms and provisions
of the Plan shall be final and conclusive. The Board of Directors may in
its sole discretion (x) grant options to purchase shares of Staples The
Office Superstore Group common stock or Staples.com common stock
(collectively, "Common Stock") and issue shares upon exercise of such
options as provided in the Plan and (y) make restricted stock awards
pursuant to Section 13 of the Plan. The Board shall have authority, subject
to the express provisions of the Plan, to construe the respective option
agreements, awards and the Plan, to prescribe, amend and rescind rules and
regulations relating to the Plan, to determine the terms and provisions of
the respective option agreements and restricted stock awards, which need
not be identical, and to make all other determinations in the judgment of
the Board of Directors necessary or desirable for the administration of the
Plan. The Board of Directors may correct any defect or supply any omission
or reconcile any inconsistency in the Plan or in any option agreement or
restricted stock award in the manner and to the extent it shall deem
expedient to carry the Plan into effect and it shall be the sole and final
judge of such expediency. No director or person acting pursuant to
authority delegated by the Board of Directors shall be liable for any
action or determination under the Plan made in good faith.
ii. The Board of Directors may, to the full extent permitted by or
consistent with applicable laws or regulations and Section 3(b) of this
Plan, delegate any or all of its powers under the Plan to a committee (the
"Committee") appointed by the Board of Directors, and if the Committee is
so appointed all references to the Board of Directors in the Plan shall
mean and relate to such Committee. Unless all members of the Board of
Directors are "outside directors" within the meaning of Section 162(m) of
the Code, as such term is interpreted from time to time, the Board shall
appoint such a Committee of two or more directors, all of whom are outside
directors, and shall delegate to such Committee all of its powers under the
Plan, except that the Board's concurrent approval shall be required for any
amendment to the Plan which may be adopted by the Committee; and provided,
that any failure of any director or Committee member to satisfy the
definition of outside director shall not invalidate any action taken by the
Board or Committee with respect to any participant in the Plan, whether or
not such person is a "covered
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<PAGE>
employee" within the meaning of Section 162(m) of the Code, as such term is
interpreted from time to time.
c. Applicability of Rule 16b-3. Those provisions of the Plan which make
express reference to Rule 16b-3 promulgated under the Securities and Exchange
Act of 1934 (the "Exchange Act") or, any successor rules ("Rule 16b-3") or
which are required in order for certain option transactions to qualify for
exemption under Rule 16b-3 shall apply only to such persons as are required to
file reports under Section 16(a) of the Exchange Act (a "Reporting Person").
3. Eligibility.
a. General. Options and restricted stock awards may be granted or made to
persons who are, at the time of grant, employees or officers of the Company
(including any persons who have entered into an agreement with the Company
under which they will be employed by the Company in the future) or consultants
to the Company; provided, that the class of employees to whom Incentive Stock
Options may be granted shall be limited to employees of the Company. A person
who has been granted an option or award may, if he or she is otherwise
eligible, be granted additional options or awards if the Board of Directors
shall so determine; provided, that the maximum number of shares for which
options or restricted stock awards may be granted to any one employee during
any fiscal year shall be 3,037,500* shares, subject to adjustment as provided
in Section 15 below.
b. Grant of Options to Directors and Officers. The selection of a director
or an officer (as the terms "director" and "officer" are defined for purposes
of Rule 16b-3) as a participant, the timing of the option grant or restricted
stock award, the exercise price of the option or the sale price of the award
and the number of shares for which an option or restricted stock award may be
granted or made to such director or officer shall be determined either (i) by
the Board of Directors, of which all members shall be "disinterested persons"
(as hereinafter defined), or (ii) by a committee of two or more directors
having full authority to act in the matter, of which all members shall be
"disinterested persons." For the purposes of the Plan, a director shall be
deemed to be "disinterested" only if such person qualifies as a "disinterested
person" within the meaning of Rule 16b-3, as such term is interpreted from time
to time.
4. Stock Subject to Plan.
Subject to adjustment as provided in Section 15 below, the maximum number of
shares of Common Stock of the Company which may be issued and sold under the
Plan is 96,525,000 shares* of Common Stock (regardless of series). Except as
prohibited by Rule 16b-3, (i) if an option granted under the Plan shall expire
or terminate for any reason without having been exercised in full, the
unpurchased shares subject to such option shall again be available for
subsequent option grants or awards under the Plan and (ii) if restricted stock
awarded under the Plan shall be repurchased by the Company, the repurchased
shares subject to such award shall again be available for subsequent option
grants or awards under the Plan.
5. Forms of Option Agreements.
As a condition to the grant of an option under the Plan, each recipient of
an option shall execute an option agreement in such form not inconsistent with
the Plan as may be approved by the Board of Directors. Such option agreements
may differ among recipients.
6. Purchase Price Upon Exercise of Options.
a. General. Subject to Section 3(b), the purchase price per share of stock
deliverable upon the exercise of an option shall be determined by the Board of
Directors but shall in no event be less than 100% of the fair market value of
such stock, as determined by the Board of Directors, at the time of grant of
such option, or, in the case of an Incentive Stock Option described in Section
11(b), be less than 110% of such fair market value.
- --------
* Adjusted for stock splits through September 14, 1999
III-2
<PAGE>
b. Payment of Purchase Price. Options granted under the Plan may provide for
the payment of the exercise price by delivery of cash or a check to the order
of the Company in an amount equal to the exercise price of such options, or, to
the extent provided in the applicable option agreement, (i) by delivery to the
Company of shares of Common Stock of the Company already owned by the optionee
having a fair market value equal in amount to the exercise price of the options
being exercised, (ii) by any other means (including, without limitation, by
delivery of a promissory note of the optionee payable on such terms as are
specified by the Board of Directors) which the Board of Directors determines
are consistent with the purpose of the Plan and with applicable laws and
regulations (including, without limitation, the provisions of Rule 16b-3 and
Regulation T promulgated by the Federal Reserve Board) or (iii) by any
combination of such methods of payment. The fair market value of any shares of
Common Stock or other non-cash consideration which may be delivered upon
exercise of an option shall be determined in such manner as may be prescribed
by the Board of Directors.
7. Option Period.
Each option and all rights thereunder shall expire on such date as shall be
set forth in the applicable option agreement, except that, in the case of an
Incentive Stock Option, such date shall not be later than ten years after the
date on which the option is granted (or five years in the case of options
described in Section 11(b)), and, in the case of non-statutory options, in no
event after the expiration of ten years plus 30 days from the date on which the
option is granted, and, in either case, options shall be subject to earlier
termination as provided in the Plan.
8. Exercise of Options.
Each option granted under the Plan shall be exercisable either in full or in
installments at such time or times and during such period as shall be set forth
in the agreement evidencing such option, subject to the provisions of the Plan.
9. Nontransferability of Options.
No option granted under the Plan shall be assignable or transferable by the
person to whom it is granted, either voluntarily or by operation of law, except
by will or the laws of descent and distribution. During the life of the
optionee, the options shall be exercisable only by the optionee.
Notwithstanding the foregoing, non-statutory options may be transferred
pursuant to a qualified domestic relations order (as defined in Rule 16b-3).
10. Effect of Termination of Employment or Other Relationship.
Except as provided in Section 11(d) with respect to Incentive Stock Options,
and subject to the provisions of the Plan, the Board of Directors shall
determine the period of time during which an optionee may exercise an option
following (i) the termination of the optionee's employment or other
relationship with the Company or (ii) the death or disability of the optionee.
Such periods shall be set forth in the agreement evidencing such option.
11. Incentive Stock Options.
Options granted under the Plan which are intended to be Incentive Stock
Options shall be subject to the following additional terms and conditions:
a. Express Designation. All Incentive Stock Options granted under the
Plan shall, at the time of grant, be specifically designated as such in the
option agreement covering such Incentive Stock Options.
b. 10% Shareholder. If any employee to whom an Incentive Stock Option is
to be granted under the Plan is, at the time of the grant of such option,
the owner of stock possessing more than 10% of the total
III-3
<PAGE>
combined voting power of all classes of stock of the Company (after taking
into account the attribution of stock ownership rules of Section 424(d) of
the Code), then the following special provisions shall be applicable to the
Incentive Stock Option granted to such individual:
i. The purchase price per share of the Common Stock subject to such
Incentive Stock Option shall not be less than 110% of the fair market
value of one share of such series of Common Stock at the time of grant;
and
ii. The option exercise period shall not exceed five years from the
date of grant.
c. Dollar Limitation. For so long as the Code shall so provide, options
granted to any employee under the Plan (and any other incentive stock
option plans of the Company) which are intended to constitute Incentive
Stock Options shall not constitute Incentive Stock Options to the extent
that such options, in the aggregate, become exercisable for the first time
in any one calendar year for shares of Common Stock with an aggregate fair
market value (determined as of the respective date or dates of grant) of
more than $100,000.
d. Dermination of Employment, Death or Disability. No Incentive Stock
Option may be exercised unless, at the time of such exercise, the optionee
is, and has been continuously since the date of grant of his or her option,
employed by the Company, except that:
i. an Incentive Stock Option may be exercised within the period of
three months after the date the optionee ceases to be an employee of
the Company (or within such lesser period as may be specified in the
applicable option agreement), provided, that the agreement with respect
to such option may designate a longer exercise period and that the
exercise after such three-month period shall be treated as the exercise
of a non-statutory option under the Plan;
ii. if the optionee dies while in the employ of the Company, or
within three months after the optionee ceases to be such an employee,
the Incentive Stock Option may be exercised by the person to whom it is
transferred by will or the laws of descent and distribution within the
period of one year after the date of death (or within such lesser
period as may be specified in the applicable option agreement); and
iii. if the optionee becomes disabled (within the meaning of Section
22(e)(3) of the Code or any successor provision thereto) while in the
employ of the Company, the Incentive Stock Option may be exercised
within the period of one year after the date the optionee ceases to be
such an employee because of such disability (or within such lesser
period as may be specified in the applicable option agreement).
For all purposes of the Plan and any option or restricted stock award
granted hereunder, "employment" shall be defined in accordance with the
provisions of Section 1.421-7(h) of the Income Tax Regulations (or any
successor regulations). Notwithstanding the foregoing provisions, no stock
option may be exercised after its expiration date.
12. Additional Provisions.
a. Additional Option Provisions. The Board of Directors may, in its sole
discretion, include additional provisions in option agreements covering options
granted under the Plan, including without limitation restrictions on transfer,
repurchase rights, commitments to pay cash bonuses, to make, arrange for or
guaranty loans or to transfer other property to optionees upon exercise of
options, or such other provisions as shall be determined by the Board of
Directors; provided that such additional provisions shall not be inconsistent
with any other term or condition of the Plan and such additional provisions
shall not cause any Incentive Stock Option granted under the Plan to fail to
qualify as an Incentive Stock Option within the meaning of Section 422 of the
Code.
b. Acceleration, Extension, Etc. The Board of Directors may, in its sole
discretion, (i) accelerate the date or dates on which all or any particular
option or options granted under the Plan may be exercised or (ii) extend
III-4
<PAGE>
the dates during which all, or any particular, option or options granted under
the Plan may be exercised; provided, however, that no such extension shall be
permitted if it would cause the Plan to fail to comply with Section 422 of the
Code or with Rule 16b-3.
13. Awards.
A restricted stock award ("award") shall consist of the issuance by the
Company of shares of Common Stock (of either series), and purchase by the
recipient of such shares, subject to the terms, conditions and restrictions
described in the document evidencing the award and in this Section 13 and
elsewhere in the Plan.
a. Execution of Restricted Stock Award Agreement. As a condition to an
award under the Plan, each recipient of an award shall execute an agreement
in such form, which may differ among recipients, as shall be specified by
the Board of Directors at the time of such award.
b. Price. The Board of Directors shall determine the price at which
shares of Common Stock shall be sold to recipients of awards under the
Plan. The Board of Directors may, in its discretion, issue shares pursuant
to awards without the payment of any cash purchase price by the recipients
(in which case the "price per share originally paid" for purposes of
Section 13(d)(3) below shall be zero) or issue shares pursuant to awards at
a purchase price below the then fair market value of such series of Common
Stock. If a purchase price is required to be paid, it shall be paid in cash
or by check payable to the order of the Company at the time that the award
is accepted by the recipient, or by such other means as may be approved by
the Board of Directors.
c. Number of Shares. The award shall specify the number of shares and
series of Common Stock issued thereunder.
d. Restrictions on Transfer. In addition to such other terms, conditions
and restrictions upon awards as shall be imposed by the Board of Directors,
all shares issued pursuant to an award shall be subject to the following
restrictions:
i. All shares of Common Stock subject to an award (including any
shares issued pursuant to paragraph (e) of this Section) shall be
subject to certain restrictions on disposition and obligations of
resale to the Company as provided in subparagraph (2) below for the
period specified in the document evidencing the award, and shall not be
sold, assigned, transferred, pledged, hypothecated or otherwise
disposed of until such restrictions lapse. The period during which such
restrictions are applicable is referred to as the "Restricted Period."
ii. In the event that a recipient's employment with the Company is
terminated within the Restricted Period, whether such termination is
voluntary or involuntary, with or without cause, or because of the
death or disability of the recipient, the Company shall have the right
and option for a period of three months following such termination to
buy for cash that number of the shares of Common Stock purchased under
the award as to which the restrictions on transfer and the forfeiture
provisions contained in the award have not then lapsed, at a price
equal to the price per share originally paid by the recipient. If such
termination occurs within the last three months of the applicable
restrictions, the restrictions and repurchase rights of the Company
shall continue to apply until the expiration of the Company's three
month option period.
iii. Notwithstanding subparagraphs (1) and (2) above, the Board of
Directors may, in its discretion, either at the time that an award is
made or at any time thereafter, waive its right to repurchase shares of
Common Stock upon the occurrence of any of the events described in this
paragraph (d) or remove or modify any part or all of the restrictions.
In addition, the Board of Directors may, in its discretion, impose upon
the recipient of an award at the time of such award such other
restrictions on any shares of Common Stock issued pursuant to such
award as the Board of Directors may deem advisable.
III-5
<PAGE>
e. Additional Shares. Any shares received by a recipient of an award as
a stock dividend on, or as a result of stock splits, combinations,
exchanges of shares, reorganizations, mergers, consolidations or otherwise
with respect to, shares of Common Stock received pursuant to such award
shall have the same status and shall bear the same restrictions, all on a
proportionate basis, as the shares initially purchased pursuant to such
award.
f. Transfers in Breach of Award. If any transfer of shares purchased
pursuant to an award is made or attempted contrary to the terms of the Plan
and of such award, the Board of Directors shall have the right to purchase
for the account of the Company those shares from the owner thereof or his
or her transferee at any time before or after the transfer at the price
paid for such shares by the person to whom they were awarded under the
Plan. In addition to any other legal or equitable remedies which it may
have, the Company may enforce its rights by specific performance to the
extent permitted by law. The Company may refuse for any purpose to
recognize as a shareholder of the Company any transferee who receives any
shares contrary to the provisions of the Plan and the applicable award or
any recipient of an award who breaches his or her obligation to resell
shares as required by the provisions of the Plan and the applicable award,
and the Company may retain and/or recover all dividends on such shares
which were paid or payable subsequent to the date on which the prohibited
transfer or breach was made or attempted.
g. Additional Award Provisions. The Board of Directors may, in its sole
discretion, include additional provisions in any award granted under the
Plan as shall be determined by the Board of Directors.
14. Rights as a Shareholder.
The holder of an option or recipient of an award shall have no rights as a
shareholder with respect to any shares covered by the option or award
(including, without limitation, any rights to receive dividends or non-cash
distributions with respect to such shares) until the date of issue of a stock
certificate to him or her for such shares. No adjustment shall be made for
dividends or other rights for which the record date is prior to the date such
stock certificate is issued.
15. Adjustment Provisions for Recapitalizations and Related Transactions.
a. General. If, through or as a result of any merger, consolidation, sale of
all or substantially all of the assets of the Company, reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split or other similar transaction, (i) the outstanding shares of one or both
series of Common Stock are increased or decreased or are exchanged for a
different number or kind of shares or other securities of the Company, or (ii)
additional shares or new or different shares or other securities of the Company
or other non-cash assets are distributed with respect to such shares of one or
both series of Common Stock or other securities, an appropriate and
proportionate adjustment shall be made in (x) the maximum number and kind of
shares reserved for issuance under the Plan, (y) the number and kind of shares
or other securities subject to any then outstanding options under the Plan for
such series of Common Stock, and (z) the price for each share subject to any
then outstanding options under the Plan or repurchase rights of the Company for
such series of Common Stock, without changing the aggregate purchase price as
to which such options or repurchase rights remain exercisable. Notwithstanding
the foregoing, no adjustment shall be made pursuant to this Section 15 if such
adjustment would cause the Plan to fail to comply with Section 422 of the Code
or with Rule 16b-3.
b. Board Authority to Make Adjustments. Any adjustments under this Section
15 will be made by the Board of Directors, whose determination as to what
adjustments, if any, will be made and the extent thereof will be final, binding
and conclusive. No fractional shares will be issued under the Plan on account
of any such adjustments.
16. Merger, Consolidation, Asset Sale, Liquidation, etc.
a. General. In the event of a consolidation or merger or sale of all or
substantially all of the assets of the Company in which outstanding shares of
one or both series of Common Stock are exchanged for securities,
III-6
<PAGE>
cash or other property of any other corporation or business entity or in the
event of a liquidation of the Company, the Board of Directors of the Company,
or the board of directors of any corporation assuming the obligations of the
Company, may, in its discretion, take any one or more of the following actions,
as to outstanding options for such series of Common Stock: (i) provide that
such options shall be assumed, or equivalent options shall be substituted, by
the acquiring or succeeding corporation (or an affiliate thereof), provided
that any such options substituted for Incentive Stock Options shall meet the
requirements of Section 424(a) of the Code, (ii) upon written notice to the
optionees, provide that all unexercised options will terminate immediately
prior to the consummation of such transaction unless exercised by the optionee
within a specified period following the date of such notice, (iii) in the event
of a merger under the terms of which holders of one or both series of Common
Stock of the Company will receive upon consummation thereof a cash payment for
each share surrendered in the merger (the "Merger Price"), make or provide for
a cash payment to such optionees equal to the difference between (A) the Merger
Price times the number of shares of Common Stock subject to such outstanding
options (to the extent then exercisable at prices not in excess of the Merger
Price) and (B) the aggregate exercise price of all such outstanding options in
exchange for the termination of such options, and (iv) provide that all or any
such outstanding options shall become exercisable in full immediately prior to
such event.
b. Substitute Options. The Company may grant options under the Plan in
substitution for options held by employees of another corporation who become
employees of the Company, or a subsidiary of the Company, as the result of a
merger or consolidation of the employing corporation with the Company or a
subsidiary of the Company, or as a result of the acquisition by the Company, or
one of its subsidiaries, of property or stock of the employing corporation. The
Company may direct that substitute options be granted on such terms and
conditions as the Board of Directors considers appropriate in the circumstances
so long as the ratio of the option exercise price to the fair market value of
the stock for the substitute option is no more favorable to the optionee than
the ratio of the option exercise price to the fair market value of the original
option immediately before such substitution.
17. No Special Employment Rights.
Nothing contained in the Plan or in any option or award shall confer upon
any optionee or any recipient of an award any right with respect to the
continuation of his or her employment by the Company or consulting relationship
with the Company or interfere in any way with the right of the Company at any
time to terminate such employment or consulting relationship or to increase or
decrease the compensation of the optionee.
18. Other Employee Benefits.
Except as to plans which by their terms include such amounts as
compensation, neither the amount of any compensation deemed to be received by
an employee as a result of the exercise of an option or the sale of shares
received upon such exercise nor the value of an award granted to an employee
will constitute compensation with respect to which any other employee benefits
of such employee are determined, including, without limitation, benefits under
any bonus, pension, profit-sharing, life insurance or salary continuation plan,
except as otherwise specifically determined by the Board of Directors.
19. Amendment of the Plan.
a. The Board of Directors may at any time, and from time to time, modify or
amend the Plan in any respect, except that if at any time the approval of the
shareholders of the Company is required as to such modification or amendment
under Section 422 of the Code or any successor provision with respect to
Incentive Stock Options, or under Rule 16b-3, the Board of Directors may not
effect such modification or amendment without such approval.
b. The termination or any modification or amendment of the Plan shall not,
without the consent of an optionee or recipient of an award, affect his or her
rights under an option or award previously granted to him or
III-7
<PAGE>
her. With the consent of the optionee or recipient of an award affected, the
Board of Directors may amend outstanding option agreements or awards in a
manner not inconsistent with the Plan. The Board of Directors shall have the
right to amend or modify (i) the terms and provisions of the Plan and of any
outstanding Incentive Stock Options granted under the Plan to the extent
necessary to qualify any or all such options for such favorable federal income
tax treatment (including deferral of taxation upon exercise) as may be afforded
incentive stock options under Section 422 of the Code and (ii) the terms and
provisions of the Plan and of any outstanding option or award to the extent
necessary to ensure the qualification of the Plan under Rule 16b-3 or is
required to ensure that any compensation attributable to any option under the
Plan is deductible by the Company for federal income tax purposes under Section
162(m), or any successor rule.
20. Withholding.
a. The Company shall have the right to deduct from payments of any kind
otherwise due to the optionee or recipient of an award any federal, state or
local taxes of any kind required by law to be withheld with respect to any
shares issued upon exercise of options under the Plan or upon the expiration or
termination of the Restricted Period relating to shares subject to the award.
Subject to the prior approval of the Company, which may be withheld by the
Company in its sole discretion, the optionee or recipient of an award may elect
to satisfy such obligations, in whole or in part, (i) by causing the Company to
withhold shares of Common Stock otherwise issuable pursuant to the exercise of
an option or upon the expiration or termination of the Restricted Period
relating to shares subject to the award or (ii) by delivering to the Company
shares of Common Stock already owned by the optionee or award recipient. The
shares so delivered or withheld shall have a fair market value equal to such
withholding obligation. The fair market value of the shares used to satisfy
such withholding obligation shall be determined by the Company as of the date
that the amount of tax to be withheld is to be determined. An optionee or award
recipient who has made an election pursuant to this Section 20(a) may only
satisfy his or her withholding obligation with shares of Common Stock which are
not subject to any repurchase, forfeiture, unfulfilled vesting or other similar
requirements.
b. Notwithstanding the foregoing, in the case of a Reporting Person, no
election to use shares for the payment of withholding taxes shall be effective
unless made in compliance with any applicable requirements of Rule 16b-3
(unless it is intended that the transaction not qualify for exemption under
Rule 16b-3).
c. If the recipient of an award under the Plan elects, in accordance with
Section 83(b) of the Code, to recognize ordinary income in the year of
acquisition of any shares awarded under the Plan, the Company will require at
the time of such election an additional payment for withholding tax purposes
based on the difference, if any, between the purchase price of such shares and
the fair market value of such shares as of the date immediately preceding the
date of the award.
21. Cancellation and New Grant of Options, Etc.
The Board of Directors shall have the authority to effect, at any time and
from time to time, with the consent of the affected optionees, (i) the
cancellation of any or all outstanding options under the Plan and the grant in
substitution therefor of new options under the Plan covering the same or
different numbers of shares of Common Stock (of either series) and having an
option exercise price per share which may be lower or higher than the exercise
price per share of the cancelled options or (ii) the amendment of the terms of
any and all outstanding options under the Plan to provide an option exercise
price per share which is higher or lower than the then-current exercise price
per share of such outstanding options.
22. Effective Date and Duration of the Plan.
a. Effective Date. The Plan shall become effective when adopted by the Board
of Directors, but no Incentive Stock Option granted under the Plan shall become
exercisable unless and until the Plan shall have been approved by the Company's
shareholders. If such shareholder approval is not obtained within twelve months
after the date of the Board's adoption of the Plan, no options previously
granted under the Plan shall be
III-8
<PAGE>
deemed to be Incentive Stock Options and no Incentive Stock Options shall be
granted thereafter. Amendments to the Plan not requiring shareholder approval
shall become effective when adopted by the Board of Directors; amendments
requiring shareholder approval (as provided in Section 19) shall become
effective when adopted by the Board of Directors, but no Incentive Stock Option
granted after the date of such amendment shall become exercisable (to the
extent that such amendment to the Plan was required to enable the Company to
grant such Incentive Stock Option to a particular optionee) unless and until
such amendment shall have been approved by the Company's shareholders. If such
shareholder approval is not obtained within twelve months of the Board's
adoption of such amendment, any Incentive Stock Options granted on or after the
date of such amendment shall terminate to the extent that such amendment to the
Plan was required to enable the Company to grant such option to a particular
optionee. Subject to this limitation, options may be granted under the Plan at
any time after the effective date and before the date fixed for termination of
the Plan.
b. Termination. Unless sooner terminated in accordance with Section 16, the
Plan shall terminate, with respect to Incentive Stock Options, upon the earlier
of (i) the close of business on the day next preceding the tenth anniversary of
the date of its adoption by the Board of Directors, or (ii) the date on which
all shares available for issuance under the Plan shall have been issued
pursuant to the exercise or cancellation of options granted under the Plan or
the grant of awards. Unless sooner terminated in accordance with Section 16,
the Plan shall terminate with respect to awards and options which are not
Incentive Stock Options on the date specified in (ii) above. If the date of
termination is determined under (i) above, then options outstanding on such
date shall continue to have force and effect in accordance with the provisions
of the instruments evidencing such options.
23. Provision for Foreign Participants.
The Board of Directors may, without amending the Plan, modify awards or
options granted to participants who are foreign nationals or employed outside
the United States to recognize differences in laws, rules, regulations or
customs of such foreign jurisdictions with respect to tax, securities,
currency, employee benefit or other matters.
Adopted by the Board of Directors on
April 16, 1992 and approved by the
stockholders on June 18, 1992;
amended by the Board of Directors on
March 25, 1993 and approved by the
stockholders on June 25, 1993; as
further amended by the Board of
Directors on June 25, 1993, which
amendment did not require
stockholder approval; as further
amended, restated and renamed by the
Board of Directors on April 27,
1994, and approved by the
stockholders on June 30, 1994; as
further amended on September 3,
1996, and approved by the
stockholders on June 18, 1997; as
further amended on September 14,
1999, and approved by stockholders
on , 1999.
III-9
<PAGE>
ANNEX IV
STAPLES, INC.
AMENDED AND RESTATED 1990 DIRECTOR STOCK OPTION PLAN
1.Purpose.
The purpose of this Amended and Restated 1990 Director Stock Option Plan
(the "Plan") of Staples, Inc. (the "Company") is to encourage ownership in the
Company by the Company's outside directors, whose continued services the
Company considers essential to its future progress, and to provide these
individuals with a further incentive to remain as directors of the Company.
2.Administration.
The Board of Directors shall supervise and administer the Plan. Grants of
stock options ("Options") and awards of performance accelerated restricted
stock ("PARS") under the Plan and the amount and nature of the Options and PARS
to be granted shall be made in accordance with Section 4. All questions
concerning interpretation of the Plan or any Options or PARS issued under it
shall be resolved by the Board of Directors and such resolution shall be final
and binding upon all persons having an interest in the Plan.
3.Participation in the Plan.
Directors of the Company who are not employees of the Company or any
subsidiary of the Company ("outside directors") shall be eligible to receive
Options and PARS under the Plan.
4.Terms, Conditions and Form of Options and PARS.
All Options and PARS granted under the Plan shall be evidenced by a written
agreement in such form as the Board of Directors shall from time to time
approve, which agreements shall comply with and be subject to the following
terms and conditions.
(a) Stock Subject to Plan. Options and PARS may be granted under the
Plan with respect to either Staples The Office Superstore Group common
stock or Staples.com common stock (collectively, "Common Stock"). Subject
to adjustment as provided in the Plan, the maximum number of shares of
Common Stock which may be issued under the Plan is 2,642,030 shares of
Common Stock (regardless of series). All Options or PARS granted under the
Plan, as provided below, shall be granted with respect to either series of
Common Stock, or a combination of both series, as determined in the sole
discretion of the Board of Directors. If an Option shall expire or
terminate for any reason without having been exercised in full, the
unpurchased shares subject to such Option shall again be available for
subsequent Option grants or PARS under the Plan; and if the shares subject
to a PARS shall be repurchased by the Company, the repurchased shares shall
again be available for subsequent Option grants or PARS under the Plan.
(b) Grants of Options and PARS.
(i) Initial Option Grant. An Option to purchase 15,000 shares of
Common Stock, shall be granted automatically to outside directors who
are initially elected to the Board of Directors subsequent to the
approval of the Plan by the Company's stockholders at the close of
business on the date of such director's initial election to the Board
of Directors.
(ii) Annual Option Grants. On the date of the first regularly
scheduled Board of Directors meeting following the end of each fiscal
year of the Company, commencing with the fiscal year ending January 30,
1999, an Option shall be granted automatically to each outside director
to purchase a number of shares of Common Stock equal to 3,000
multiplied by the number of regularly scheduled meeting days of the
Board of Directors attended by such director in the previous 12 months
(up to a maximum of 15,000 shares).
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<PAGE>
(iii) Annual Awards of PARS. At the first regularly scheduled
Board of Directors meeting following the end of each fiscal year of the
Company, at which performance targets are established for PARS awarded
to executive officers of the Company, but no later than July 31 of each
year (each, an "Award Date), (x) the Company shall grant to each
outside director 400 PARS for each regularly scheduled meeting day of
the Board of Directors attended by such director in the previous 12
months (up to a maximum of 2,000 PARS) and (y) in addition, the Company
shall grant to the Lead Director and the Chairman of each of the Audit,
Compensation, and Governance Committee of the Board of Directors 200
PARS for each regularly scheduled meeting day of the Board of Directors
attended by such director in the previous 12 months (up to a maximum of
1,000 PARS).
(c) Terms of Options.
(i) Option Exercise Price. The option exercise price per share for
each Option granted under the Plan shall be determined as follows: if
such series of Common Stock is listed on the Nasdaq National Market on
the date of grant, the option exercise price per share shall be equal
to the last reported sale price per share of such series of Common
Stock on the Nasdaq National Market on the date of grant (or, if no
such price is reported on such date, such price as is reported on the
nearest preceding date); if the applicable series of Common Stock is
not listed on the Nasdaq National Market on the date of grant, the
option exercise price per share shall be the fair market value per
share of such series of Common Stock on the date of grant, as
determined in good faith by the Board of Directors.
(ii) Nature of Options. All Options granted under the Plan shall
be nonstatutory options not entitled to special tax treatment under
Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code").
(iii) Vesting. Except as otherwise provided in the Plan, each
Option shall become exercisable, on a cumulative basis, in four equal
annual installments on each of the first, second, third and fourth
anniversary dates of its date of grant, provided the optionee continues
to serve as a director of the Company on such dates. Notwithstanding
the foregoing, each outstanding Option shall immediately become
exercisable in full in the event (A) a Change in Control (as defined in
Section 8) of the Company occurs or (B) the optionee ceases to serve as
a director of the Company due to his or her death, disability (within
the meaning of Section 22(e)(3) of the Code or any successor provision)
or retires pursuant to a retirement policy adopted by the Company.
(iv) Option Exercise Procedure. An Option may be exercised only by
written notice to the Company at its principal office accompanied by
payment in cash of the exercise price with respect to the Option being
exercised or by the tender (actual or constructive) of shares of Common
Stock owned by the director having a value as of the date of exercise
equal to the exercise price. In the case of a constructive tender of
shares of Common Stock, the optionee and the Company may enter into an
agreement to defer until an agreed-upon date the issuance, transfer and
delivery of shares of Common Stock with a value equal to the difference
between the fair market value of the Common Stock on the date of
exercise and the exercise price of the Option being exercised. The
Board of Directors may impose such restrictions on the tender of shares
as it deems appropriate.
(v) Termination. Each Option shall terminate, and may no longer be
exercised, on the date six months after the optionee ceases to serve as
a director of the Company; provided that, in the event (A) an optionee
ceases to serve as a director due to his or her death or disability
(within the meaning of Section 22(e)(3) of the Code or any successor
provision), or (B) an optionee dies within six months after he or she
ceases to serve as a director of the Company, then the exercisable
portion of the Option may be exercised, within the period of one year
following the date the optionee ceases to serve as a director, by the
optionee or by the person to whom the Option is transferred by will, by
the laws of descent and distribution, or by written notice pursuant to
Section 4(c)(vii). Notwithstanding the foregoing, each Option shall
terminate, and may no longer be exercised, on the date 10 years after
the date of grant.
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(vi) Options Nontransferable. Except as otherwise provided by the
Board of Directors, each Option granted under the Plan by its terms
shall not be transferable by the optionee otherwise than by will or the
laws of descent and distribution, and shall be exercised during the
lifetime of the optionee only by the optionee or his or her legal
representative. No Option or interest therein may be transferred,
assigned, pledged or hypothecated by the optionee during his or her
lifetime, whether by operation of law or otherwise, or be made subject
to execution, attachment or similar process.
(vii) Option Exercise by Representative Following Death of
Director. An optionee, by written notice to the Company, may designate
one or more persons (and from time to time change such designation),
including his or her legal representative, who, by reason of the
optionee's death, shall acquire the right to exercise all or a portion
of the Option. If the person or persons so designated wish to exercise
any portion of the Option, they must do so within the term of the
Option as provided herein. Any exercise by a representative shall be
subject to the provisions of the Plan.
(d) Terms of PARS.
(i) Nature of PARS. All PARS hereunder shall consist of the
issuance by the Company of shares of Common Stock or an agreement for
the future delivery of shares of Common Stock at an agreed-upon date
("PARS Deferred Units") and the purchase by the recipient thereof of
such shares, subject to the terms, conditions and restrictions
described in the document evidencing the PARS and in this Plan.
(ii) Execution of PARS Agreement. In the case of the actual
issuance of Common Stock, the Company shall, upon the date of the PARS
grant, issue the shares of Common Stock subject to the PARS by
registering such shares in book entry form with the Company's transfer
agent in the name of the recipient. No certificate(s) representing all
or a part of such shares shall be issued until the conclusion of the
vesting period described in paragraph (iv) below.
(iii) Price. Except as otherwise determined by the Board of
Directors, all PARS issued hereunder shall be issued without the
payment of any cash purchase price by the recipients (in which case the
"price per share originally paid" for purposes of clause (2) of
paragraph (v) below shall be zero).
(iv) Vesting. Except as otherwise provided in the Plan, the
restrictions on transfer and the forfeiture provisions of each PARS
shall lapse on the same basis as PARS that have been awarded to the
Company's executive officers for the fiscal year in which the Award
Date relating to such PARS occurs. If no PARS have been awarded to any
executive officer of the Company during the six months preceding an
Award Date, then the restrictions on transfer and the forfeiture
provisions of all PARS granted pursuant to this Plan on such Award Date
shall lapse on such terms as shall be determined by the Board of
Directors. Notwithstanding the foregoing, the restrictions on transfer
and the forfeiture provisions of all PARS granted under this Plan shall
immediately lapse in the event (A) a Change in Control of the Company
occurs, or (B) the recipient ceases to serve as a director of the
Company due to his or her death, disability (within the meaning of
Section 22(e)(3) of the Code or any successor provision) or retires
pursuant to a retirement policy adopted by the Company.
(v) Restrictions on Transfer. In addition to such other terms,
conditions and restrictions on PARS contained in the Plan or the
applicable PARS Agreement, all PARS shall be subject to the following
restrictions:
(1) No PARS shall be sold, assigned, transferred, pledged,
hypothecated or otherwise disposed of until they become vested
pursuant to paragraph (iv) above. The period during which such
restrictions are applicable is referred to as the "Restricted
Period."
(2) Except as set forth in the last sentence of paragraph (iv)
above, if a recipient ceases to be a director of the Company within
the Restricted Period for any reason, the Company shall have the
right and option for a period of three months following the date of
such cessation to buy for cash that number of PARS as to which the
restrictions on transfer and the forfeiture
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<PAGE>
provisions contained in the PARS have not then lapsed, at a price
equal to the price per share originally paid by the recipient. If
such cessation occurs within the last three months of the applicable
Restricted Period, the restrictions and repurchase rights of the
Company shall continue to apply until the expiration of the
Company's three month option period.
(3) Notwithstanding subparagraphs (1) and (2) above, the Board
of Directors may, in its discretion, either at the time that PARS
are awarded or at any time thereafter, waive the Company's right to
repurchase shares of Common Stock or PARS Deferred Units upon the
occurrence of any of the events described in this paragraph (v) or
remove or modify any part or all of the restrictions. In addition,
the Board of Directors may, in its discretion, impose upon the
recipient of PARS at the time that such PARS are granted such other
restrictions on any PARS as the Board of Directors may deem
advisable.
(vi) Additional Shares. Any shares received by a recipient of PARS
as a stock dividend or any PARS Deferred Units received in respect of a
stock dividend, or as a result of stock splits, combinations, exchanges
of shares, reorganizations, mergers, consolidations or otherwise with
respect to such PARS shall have the same status and shall bear the same
restrictions, all on a proportionate basis, as the shares or PARS
Deferred Units initially subject to such.
(vii) Transfers in Breach of PARS. If any transfer of PARS is
made or attempted contrary to the terms of the Plan and of such PARS,
the Board of Directors shall have the right to purchase for the account
of the Company those shares from the owner thereof or his or her
transferee at any time before or after the transfer at the price paid
for such shares by the person to whom they were awarded under the Plan.
In addition to any other legal or equitable remedies which it may have,
the Company may enforce its rights by specific performance to the
extent permitted by law. The Company may refuse for any purpose to
recognize as a shareholder of the Company any transferee who receives
any shares contrary to the provisions of the Plan and the applicable
PARS or any recipient of PARS who breaches his or her obligation to
resell shares as required by the provisions of the Plan and the
applicable PARS, and the Company may retain and/or recover all
dividends on such shares which were paid or payable subsequent to the
date on which the prohibited transfer or breach was made or attempted.
(viii) Additional PARS Provisions. The Board of Directors may,
in its sole discretion, include additional provisions in any PARS
granted under the Plan.
5.Limitation of Rights.
(a) No Right to Continue as a Director. Neither the Plan, nor the
granting of an Option or PARS nor any other action taken pursuant to the
Plan, shall constitute or be evidence of any agreement or understanding,
express or implied, that the Company will retain the optionee or recipient
of PARS as a director for any period of time.
(b) Rights as a Stockholder.
(i) Options. An optionee shall have no rights as a stockholder with
respect to the shares covered by his or her Option until the date of
the issuance to him or her of a stock certificate therefor, and no
adjustment will be made for dividends or other rights (except as
provided in Section 6) for which the record date is prior to the date
such certificate is issued.
(ii) PARS. Subject to the limitations set forth in Section 4(d)
and except as otherwise provided herein, a recipient of PARS, other
than PARS Deferred Units, shall have all rights as a shareholder with
respect to the shares subject to such PARS including, without
limitation, any rights to receive dividends or non-cash distributions
with respect to such shares and to vote such shares and act in respect
of such shares at any meeting of shareholders. A recipient of PARS
Deferred Units shall have no rights as a shareholder with respect to
the Common Stock until the date of issuance to him or her of a stock
certificate therefor, but the agreement evidencing the PARS Deferred
Units may include the crediting of additional PARS Deferred Units equal
in value to the cash amount of dividends paid with respect to same
number of shares of Common Stock as the PARS Deferred Units.
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<PAGE>
6.Adjustment Provisions for Recapitalizations and Related Transactions.
(a) If, through or as a result of any merger, consolidation, sale of
all or substantially all of the assets of the Company, reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse
stock split, or other similar transaction, (i) the outstanding shares of
one or both series of Common Stock are increased or decreased or are
exchanged for a different number or kind of shares or other securities of
the Company, or (ii) additional shares or new or different shares or other
securities of the Company or other non-cash assets are distributed with
respect to one or both series of Common Stock or other securities, except
as otherwise determined by the Board of Directors, an appropriate and
proportionate adjustment shall be made in (x) the number and kind of shares
of such series of Common Stock subject to Options or the number and kind of
shares of such series of Common Stock or PARS Deferred Units subject to
PARS to be granted to outside directors after such event pursuant to
Section 4(b), (y) the number and kind of shares of such series of Common
Stock subject to then outstanding Options or the number and kind of shares
of such series of Common Stock or PARS Deferred Units subject to any then
outstanding PARS under the Plan, and (z) the exercise price for each share
of such series of Common Stock subject to any then outstanding Options or
repurchase rights of the Company under the Plan, without changing the
aggregate purchase price as to which such Options or repurchase rights of
the Company remain exercisable. No fractional shares or PARS Deferred Units
will be issued under the Plan on account of any such adjustments.
(b) All share numbers herein have been adjusted to reflect the three-
for-two stock split declared on November 12, 1998.
7.Mergers, Consolidations, Asset Sales, Liquidations, etc.
Subject to the provisions of Section 4(c)(iii) and 4(d)(iv), in the event of
a merger or consolidation or sale of all or substantially all of the assets of
the Company in which outstanding shares of one or both series of Common Stock
are exchanged for securities, cash or other property of any other corporation
or business entity or in the event of a liquidation of the Company, the Board
of Directors of the Company, or the board of directors of any corporation
assuming the obligations of the Company, shall take one or more of the
following actions, as to outstanding Options for such series of Common Stock:
(i) provide that such Options shall be assumed, or equivalent Options shall be
substituted, by the acquiring or succeeding corporation (or an affiliate
thereof); (ii) upon written notice to the optionees, provide that all
unexercised Options shall (A) immediately become exercisable in full and (B)
terminate immediately prior to the consummation of such transaction unless
exercised by the optionee within a specified period following the date of such
notice; or (iii) in the event of a merger under the terms of which holders of
one or both series of Common Stock of the Company will receive upon
consummation thereof a cash payment for each share surrendered in the merger
(the "Merger Price"), make or provide for a cash payment to such optionees
equal to the difference between (A) the Merger Price times the number of shares
of Common Stock subject to such outstanding Options (to the extent then
exercisable) with exercise prices not in excess of the Merger Price and (B) the
aggregate exercise price of all such Options, in exchange for the termination
of such Options.
8.Change in Control.
For purposes of the Plan, a "Change in Control" shall be deemed to have
occurred if (i) any "person", as such term is used in Sections 13(d) and 14(d)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other
than the Company, any trustee or other fiduciary holding securities under an
employee benefit plan of the Company, or any corporation owned directly or
indirectly by the stockholders of the Company in substantially the same
proportion as their ownership of stock of the Company), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing 30% or more of the
combined voting power of the Company's then outstanding securities (other than
pursuant to a merger or consolidation described in clause (A) or (B) of
subsection (iii) below); (ii) during any period of two consecutive years ending
during the term of the Plan (not including any period prior to the adoption of
the Plan), individuals who at the beginning of such period constitute the Board
of Directors of the Company, and any new director (other than a director
designated by a person who has
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<PAGE>
entered into an agreement with the Company to effect any transaction described
in clause (i), (iii) or (iv) of this Section 8) whose election by the Board of
Directors or nomination for election by the Company's stockholders was approved
by a vote of at least two-thirds of the directors then still in office who were
either directors at the beginning of the period or whose election or nomination
for election was previously so approved (collectively, the "Disinterested
Directors"), cease for any reason to constitute a majority of the Board of
Directors; (iii) the closing of a merger or consolidation of the Company or any
subsidiary of the Company with any other corporation, other than (A) a merger
or consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than 50% of the combined voting power of the voting
securities of the Company or such surviving entity outstanding immediately
after such merger or consolidation or (B) a merger or consolidation effected to
implement a recapitalization of the Company (or similar transaction) in which
no "person" (as defined above) acquires more than 30% of the combined voting
power of the Company's then outstanding securities; or (iv) a complete
liquidation of the Company or a sale by the Company of all or substantially all
of the Company's assets.
9.Modification, Extension and Renewal of Options and PARS.
The Board of Directors shall have the power to modify or amend outstanding
Options and PARS; provided, however, that no modification or amendment may (i)
have the effect of altering or impairing any rights or obligations of any
Option or PARS previously granted without the consent of the optionee or holder
thereof, as the case may be, or (ii) modify the number of shares of Common
Stock subject to the Option or number of shares of Common Stock or PARS
Deferred Units subject to the PARS (except as provided in Section 6).
10.Amendment of the Plan.
The Board of Directors may suspend or discontinue the Plan or amend it in
any respect whatsoever; provided, however, that without approval of the
stockholders of the Company, no amendment may (i) materially modify the
requirements as to eligibility to receive Options or PARS under the Plan, or
(ii) materially increase the benefits accruing to participants in the Plan.
11.Withholding.
(a) The Company shall have the right to deduct from payments of any
kind otherwise due to the optionee or recipient of PARS any federal, state
or local taxes of any kind required by law to be withheld with respect to
any shares issued upon exercise of Options under the Plan or upon the
expiration or termination of the Restricted Period relating to the PARS.
Subject to the prior approval of the Company, the optionee or recipient of
PARS may elect to satisfy such obligations, in whole or in part, (i) by
causing the Company to withhold shares of Common Stock otherwise issuable
pursuant to the exercise of an Option or upon the expiration or termination
of the Restricted Period relating to the PARS or (ii) by delivering to the
Company shares of Common Stock already owned by the optionee or PARS
recipient. The shares so delivered or withheld shall have a fair market
value equal to such withholding obligation. The fair market value of the
shares used to satisfy such withholding obligation shall be determined by
the Company as of the date that the amount of tax to be withheld is to be
determined. An optionee or PARS recipient who has made an election pursuant
to this Section 11(a) may only satisfy his or her withholding obligation
with shares of Common Stock which are not subject to any repurchase,
forfeiture, unfulfilled vesting or other similar requirements.
(b) If the recipient of PARS under the Plan elects, in accordance with
Section 83(b) of the Code, to recognize ordinary income in the year of
acquisition of any shares awarded under the Plan, the Company will require
at the time of such election an additional payment for withholding tax
purposes based on the difference, if any, between the purchase price of
such shares and the fair market value of such shares as of the date
immediately preceding the date on which the PARS are awarded.
12.Notice.
Any written notice to the Company required by any of the provisions of the
Plan shall be addressed to the Treasurer of the Company and shall become
effective when it is received.
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<PAGE>
13.Governing Law.
The Plan and all determinations made and actions taken pursuant hereto shall
be governed by the laws of the State of Delaware.
14.Stockholder Approval.
The Plan is conditional upon stockholder approval of the Plan, and the Plan
shall be null and void if the Plan is not so approved by the Company's
stockholders.
Amended and restated by the Board of
Directors on September 10, 1998 and
approved by stockholders on January
21, 1999; amended by the Board of
Directors on September 14, 1999 and
approved by stockholders on ,
1999.
IV-7
<PAGE>
ANNEX V
STAPLES, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
The purpose of this Plan is to provide eligible employees of Staples, Inc.
(the "Company") and certain of its subsidiaries with opportunities to purchase
shares of either of two series of common stock, The Office Superstore Group
common stock ("Staples Stock") or Staples.com common stock ("Staples.com
Stock", and collectively with the Staples Stock, "Common Stock"), commencing on
November 1, 1998. Six million six hundred thousand (6,600,000) shares of Common
Stock (regardless of series) in the aggregate have been approved for this
purpose. Employees participating in the Plan may elect to purchase shares of
either series of Common Stock, or shares of both series, subject to any
limitations that may be imposed by the Board of Directors (the "Board") or the
Committee (as defined below).
1. Administration. The Plan will be administered by the Board or by a
Committee appointed by the Board (the "Committee"). The Board or the Committee
has authority to make rules and regulations for the administration of the Plan
and its interpretation and decisions with regard thereto shall be final and
conclusive.
2. Eligibility. Participation in the Plan will neither be permitted nor
denied contrary to the requirements of Section 423 of the Internal Revenue Code
of 1986, as amended (the "Code"), and regulations promulgated thereunder. All
employees of the Company, including Directors who are employees, and all
employees of any subsidiary of the Company (as defined in Section 424(f) of the
Code) designated by the Board or the Committee from time to time (a "Designated
Subsidiary"), are eligible to participate in any one or more of the offerings
of Options (as defined in Section 9) to purchase Common Stock under the Plan
provided that:
a. they are customarily employed by the Company or a Designated
Subsidiary for more than 20 hours a week and for more than five months in a
calendar year; and
b. they have been employed by the Company or a Designated Subsidiary for
at least three (3) months prior to enrolling in the Plan; and
c. they are employees of the Company or a Designated Subsidiary on the
first day of the applicable Plan Period (as defined below).
No employee may be granted an option hereunder if such employee, immediately
after the option is granted, owns 5% or more of the total combined voting power
or value of the stock of the Company or any subsidiary. For purposes of the
preceding sentence, the attribution rules of Section 424(d) of the Code shall
apply in determining the stock ownership of an employee, and all stock which
the employee has a contractual right to purchase shall be treated as stock
owned by the employee.
3. Offerings. The Company will make one or more offerings ("Offerings") to
employees to purchase stock under this Plan. The first Offering will begin on
November 1, 1998, or the first business day thereafter (the "Offering
Commencement Dates") and end on June 30, 1999. Thereafter, each July 1 and
January 1 or the first business day thereafter will be an Offering Commencement
Date. Each Offering Commencement Date will begin a period (a "Plan Period")
during which payroll deductions will be made and held for the purchase of
Common Stock at the end of the Plan Period. The first Plan Period will be eight
(8) months and thereafter each Plan Period will be six (6) months. The Board or
the Committee may, at its discretion, choose a different Plan Period of twelve
(12) months or less for subsequent Offerings.
4. Participation. An employee eligible on the Offering Commencement Date of
any Offering may participate in such Offering by enrolling at least fourteen
(14) days prior to the applicable Offering Commencement Date in said Offering
in such manner and at such time as the Committee shall approve. The enrollment
will authorize a regular payroll deduction from the Compensation received by
the employee during the Plan Period. Unless an employee changes his enrollment
in a manner prescribed by the Committee from
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<PAGE>
time to time or withdraws from the Plan, his deductions and purchases will
continue at the same rate for future Offerings under the Plan as long as the
Plan remains in effect. The term "Compensation" shall mean regular earnings and
sales rewards or other sales-related payments made to sales associates in lieu
of commissions, and excluding payments for overtime, incentive compensation,
shift premiums, bonuses, contributions to all employee fringe benefits plans
(except employee contributions in lieu of cash earnings pursuant to any "cash
or deferred plan" or "cafeteria plan"), allowances and reimbursements, income
or gains on the exercise of Company stock options or stock appreciation rights,
and other special payments except to the extent that the inclusion of any such
item is specifically approved by the Board.
5. Deductions. The Company will maintain payroll deduction accounts for all
participating employees. With respect to any Offering made under this Plan, an
employee may authorize a payroll deduction in any dollar amount up to a maximum
of ten percent (10%) of the Compensation he or she receives during the Plan
Period or such shorter period during which deductions from payroll are made.
Payroll deductions may be made in any whole percentage up to ten percent (10%).
Each participating employee shall designate what percentage of his or her
payroll deductions during the Offering shall be used to purchase Staples Stock
and what percentage shall be used to purchase Staples.com Stock upon the
completion of such Offering, subject to any limits as may be imposed for such
Offering by the Board or the Committee. Any change in compensation during the
Plan Period will result in an automatic corresponding change in the dollar
amount withheld.
No employee may be granted an Option (as defined in Section 9) which permits
his rights to purchase Common Stock under this Plan and any other employee
stock purchase plan (as defined in Section 423(b) of the Code) of the Company
and its subsidiaries, to accrue at a rate which exceeds $25,000 of the fair
market value of the Common Stock (determined at the Offering Commencement Date
of the Plan Period) for each calendar year in which the Option is outstanding
at any time.
6. Deduction Changes. An employee may discontinue his payroll deduction once
during any Plan Period, up to fifteen (15) days prior to the close of business
on the last business day, in such manner permitted by the Board or Committee.
However, an employee may not increase or decrease his payroll deduction, or
change the allocation between series of Common Stock, during a Plan Period. If
an employee elects to discontinue his payroll deductions during a Plan Period,
amounts previously withheld will be refunded to the employee without interest.
7. Interest. Interest will not be paid on any employee accounts.
8. Withdrawal of Funds. An employee may at any time up to fifteen (15) days
prior to the close of business on the last business day in a Plan Period and
for any reason permanently draw out the balance accumulated in the employee's
account and thereby withdraw from participation in an Offering. Partial
withdrawals are not permitted. The employee may not begin participation again
during the remainder of the Plan Period. The employee may participate in any
subsequent Offering in accordance with terms and conditions established by the
Board or the Committee.
9. Purchase of Shares. On the Offering Commencement Date of each Plan
Period, the Company will grant to each eligible employee who is then a
participant in the Plan an option ("Option") to purchase on the last business
day of such Plan Period (the "Exercise Date"), at the Option Price hereinafter
provided for, the largest number of shares of Common Stock of the Company
(allocated between series as specified in such employee's payroll deduction
authorization, subject to any limits as may be imposed for such Offering by the
Board or the Committee) as does not exceed the number of shares determined by
dividing $12,500 by the closing price (as defined below) on the Offering
Commencement Date of such Plan Period.
The purchase price for each share purchased will be 85% of the Fair Market
Value of such series of Common Stock on (i) the first business day of such Plan
Period or (ii) the Exercise Date, whichever Fair Market Value shall be less.
Such Fair Market Value shall be (a) the mean between the highest and lowest
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<PAGE>
selling price on any national securities exchange on which the Common Stock is
listed, (b) the mean between the highest and lowest selling price of the Common
Stock on the Nasdaq National Market, (c) the average of the mean between the
highest reported bid price and the lowest reported asked price in the over-the-
counter market, whichever is applicable, as published in The Wall Street
Journal, or (d) if such series of Common Stock is not listed on any national
securities exchange, the Nasdaq National Market or quoted in the over-the-
counter market, the fair market value as determined in good faith by the Board
or the Committee. If such series of Common Stock is listed on a national
securities exchange or on the Nasdaq National Market, and if no sales of such
series of Common Stock were made on such a day, the Fair Market Value of such
series of Common Stock for purposes of clauses (a) and (b) above shall be based
on the reported prices for the next preceding day on which sales were made.
Each employee who continues to be a participant in the Plan on the Exercise
Date shall be deemed to have exercised his Option at the Option Price on such
date and shall be deemed to have purchased from the Company the number of
shares of Common Stock (including fractional shares calculated up to 4 decimal
places) reserved for the purpose of the Plan that his accumulated payroll
deductions on such date will pay for (but not in excess of the maximum number
determined in the manner set forth above), allocated between series of Common
Stock in the manner specified in such employee's payroll deduction
authorization, subject to any limits on such allocation as may be imposed by
the Board or the Committee for such Offering.
Any balance remaining in an employee's payroll deduction account at the end
of a Plan Period will be automatically refunded to the employee.
10. Issuance of Certificates. Certificates representing shares of Common
Stock purchased under the Plan may be issued only in the name of the employee,
in the name of the employee and another person of legal age as joint tenants
with rights of survivorship, or (in the Company's sole discretion) in the name
of a brokerage firm, bank or other nominee holder designated by the employee or
in the name of the Plan with appropriate allocation to the participating
employee. The Company may, in its sole discretion and in compliance with
applicable laws, authorize the use of book entry registration of shares in lieu
of issuing stock certificates.
11. Rights on Retirement, Death or Termination of Employment. In the event
of a participating employee's termination of employment prior to the last
business day of a Plan Period, no payroll deduction shall be taken from any pay
due and owing to an employee and the balance in the employee's account shall be
paid to the employee or, in the event of the employee's death, (a) to a
beneficiary previously designated in a revocable notice signed by the employee
(with any spousal consent required under state law) or (b) in the absence of
such a designated beneficiary, to the executor or administrator of the
employee's estate or (c) if no such executor or administrator has been
appointed to the knowledge of the Company, to such other person(s) as the
Company may, in its discretion, designate. If, prior to the last business day
of the Plan Period, the Designated Subsidiary by which an employee is employed
shall cease to be a subsidiary of the Company, or if the employee is
transferred to a subsidiary of the Company that is not a Designated Subsidiary,
the employee shall be deemed to have terminated employment for the purposes of
this Plan.
12. Optionees Not Stockholders. Neither the granting of an Option to an
employee nor the deductions from his pay shall constitute such employee a
stockholder of the shares of Common Stock covered by an Option under this Plan
until such shares have been purchased by and issued to him or to an account for
his benefit.
13. Rights Not Transferable. Rights under this Plan are not transferable by
a participating employee other than by will or the laws of descent and
distribution, and are exercisable during the employee's lifetime only by the
employee.
14. Application of Funds. All funds received or held by the Company under
this Plan may be combined with other corporate funds and may be used for any
corporate purpose.
V-3
<PAGE>
15. Adjustment in Case of Changes Affecting Common Stock. In the event of a
subdivision of outstanding shares of one or both series of Common Stock, or the
payment of a dividend in one or both series of Common Stock, the number of
shares approved for this Plan, and the share limitation set forth in Section 9,
shall be increased proportionately, and such other adjustment shall be made as
may be deemed equitable by the Board or the Committee. In the event of any
other change affecting one or both series of Common Stock, such adjustment
shall be made as may be deemed equitable by the Board or the Committee to give
proper effect to such event.
16. Merger. If the Company shall at any time merge or consolidate with
another corporation and the holders of the capital stock of the Company
immediately prior to such merger or consolidation continue to hold at least 80%
by voting power of the capital stock of the surviving corporation ("Continuity
of Control"), the holder of each Option then outstanding will thereafter be
entitled to receive at the next Exercise Date upon the exercise of such Option
for each share as to which such Option shall be exercised the securities or
property which a holder of such shares of such series of Common Stock was
entitled to upon and at the time of such merger or consolidation, and the Board
or the Committee shall take such steps in connection with such merger or
consolidation as the Board or the Committee shall deem necessary to assure that
the provisions of Section 15 shall thereafter be applicable, as nearly as
reasonably may be, in relation to the said securities or property as to which
such holder of such Option might thereafter be entitled to receive thereunder.
In the event of a merger or consolidation of the Company with or into
another corporation which does not involve Continuity of Control, or of a sale
of all or substantially all of the assets of the Company while unexercised
Options remain outstanding under the Plan, (a) subject to the provisions of
clauses (b) and (c), after the effective date of such transaction, each holder
of an outstanding Option shall be entitled, upon exercise of such Option, to
receive in lieu of shares of one or both series of Common Stock, shares of such
stock or other securities as the holders of shares of such series of Common
Stock received pursuant to the terms of such transaction; or (b) all
outstanding Options may be cancelled by the Board or the Committee as of a date
prior to the effective date of any such transaction and all payroll deductions
shall be paid out to the participating employees; or (c) all outstanding
Options may be cancelled by the Board or the Committee as of the effective date
of any such transaction, provided that notice of such cancellation shall be
given to each holder of an Option, and each holder of an Option shall have the
right to exercise such Option in full based on payroll deductions then credited
to his account as of a date determined by the Board or the Committee, which
date shall not be less than ten (10) days preceding the effective date of such
transaction.
17. Amendment of the Plan. The Board may at any time, and from time to time,
amend this Plan in any respect, except that (a) if the approval of any such
amendment by the shareholders of the Company is required by Section 423 of the
Code, such amendment shall not be effected without such approval, and (b) in no
event may any amendment be made which would cause the Plan to fail to comply
with Section 423 of the Code.
18. Insufficient Shares. In the event that the total number of shares of
Common Stock specified in elections to be purchased in any Offering plus the
number of shares purchased under previous Offerings under this Plan exceeds the
maximum number of shares issuable under this Plan, the Board or the Committee
will allot the shares then available on a pro rata basis. In the event that the
total number of shares of a series of Common Stock specified in elections to be
purchased in any Offering exceeds the maximum number of shares of such series
available for purchase in such Offering (as specified by the Board or the
Committee), the Board or the Committee will allot the shares of such series
available on a pro rata basis or in such other manner as it, in its sole
discretion, deems appropriate.
19. Termination of the Plan. This Plan may be terminated at any time by the
Board. Upon termination of this Plan all amounts in the accounts of
participating employees shall be promptly refunded.
20. Governmental Regulations. The Company's obligation to sell and deliver
Common Stock under this Plan is subject to the approval of all governmental
authorities required in connection with the authorization, issuance or sale of
such stock.
V-4
<PAGE>
21. Governing Law. The Plan shall be governed by Massachusetts law except to
the extent that such law is preempted by federal law.
22. Issuance of Shares. Shares may be issued upon exercise of an Option from
authorized but unissued Common Stock, from shares held in the treasury of the
Company, or from any other proper source.
23. Notification upon Sale of Shares. Each employee agrees, by entering the
Plan, to promptly give the Company notice of any disposition of shares
purchased under the Plan where such disposition occurs within two years after
the date of grant of the Option pursuant to which such shares were purchased.
24. Effective Date and Approval of Shareholders. The Plan shall take effect
on November 1, 1998 subject to approval by the shareholders of the Company as
required by Section 423 of the Code, which approval must occur within twelve
months of the adoption of the Plan by the Board.
Adopted by the Board of Directors on
March 6, 1998 and approved by the
stockholders on June 4, 1998; and
amended by the Board of Directors on
September 14, 1999 and approved by
stockholders on , 1999.
V-5
<PAGE>
ANNEX VI
Staples The Office Superstore Group Combined Financial Information
VI-1
<PAGE>
ANNEX VI
STAPLES THE OFFICE SUPERSTORE GROUP
INDEX TO COMBINED FINANCIAL INFORMATION
<TABLE>
<S> <C>
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... VI-3
Audited Financial Statements
Report of Independent Auditors......................................... VI-15
Combined Balance Sheets -- January 30, 1999 and January 31, 1998....... VI-16
Combined Statements of Income -- Fiscal years ended January 30, 1999,
January 31, 1998 and February 1, 1997................................. VI-17
Combined Statements of Group Equity -- Fiscal years ended January 30,
1999, January 31, 1998 and February 1, 1997........................... VI-18
Combined Statements of Cash Flows -- Fiscal years ended January 30,
1999, January 31, 1998 and February 1, 1997........................... VI-19
Notes to Staples The Office Superstore Group Combined Financial
Statements............................................................ VI-20
Interim Financial Statements (Unaudited)
Combined Balance Sheets -- July 31, 1999 and January 30, 1999.......... VI-40
Combined Statements of Income -- 26 weeks ended July 31, 1999 and
August 1, 1998........................................................ VI-41
Combined Statements of Cash Flows -- 26 weeks ended July 31, 1999 and
August 1, 1998........................................................ VI-42
Notes to Staples The Office Superstore Group Combined Interim Financial
Information........................................................... VI-43
</TABLE>
VI-2
<PAGE>
STAPLES THE OFFICE SUPERSTORE GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read this discussion along with the Staples.com Group Combined
Financial Statements contained in this proxy statement. Historical results and
percentage relationships may not necessarily be indicative of operating results
for any future periods. The combined financial statements of Staples The Office
Superstore Group ("Staples Group") include the balance sheets, statements of
operations, cash flows and group equity of Staples' retail stores, catalog
businesses and contract stationer businesses. The Staples Group combined
financial statements also include its retained interest in Staples.com Group,
currently 100 percent.
The stockholders of Staples, Inc. ("Staples" or the "Company") are scheduled
to vote on a proposal (the "Tracking Stock Proposal") to amend the Company's
certificate of incorporation to (i) create a new class of common stock called
Staples.com Group common stock ("Staples.com Stock"), intended to reflect the
performance of Staples.com Group, the Company's e-commerce business division,
(ii) increase the aggregate number of shares of common stock that the Company
may issue from 1,500,000,000 to 1,650,000,000, initially comprised of
1,500,000,000 shares of Staples The Office Superstore Group common stock
("Staples Stock") and 150,000,000 shares of Staples.com Stock, and (iii) re-
classify Staples' existing common stock as Staples Stock, intended to reflect
the performance of Staples Group, which consists of all of the Company's other
businesses and a retained interest in Staples.com Group.
If the Tracking Stock Proposal is approved by the Company's stockholders,
the filing of the amendment to the Company's certificate of incorporation
implementing the proposal will automatically re-classify each share of existing
common stock into Staples Stock. Subject to stockholder approval of the
Tracking Stock Proposal, the Company expects to issue additional shares of
Staples.com Stock in one or more private or public financings within twelve
months of such approval. The specific terms of the financings, including
whether they are private or public, the amount of Staples.com Stock issued, and
the timing of the financings, will depend upon factors such as stock market
conditions and the performance of Staples.com Group. The effect of any
financings on the retained interest percentage and the outstanding interest
percentage would depend upon the number of shares of Staples.com Stock sold and
whether the Company elects to attribute the net proceeds of such financings to
the equity of Staples.com Group or to Staples Group in respect of its retained
interest.
The Staples Group combined financial statements and Staples.com Group
combined financial statements comprise all of the accounts included in the
consolidated financial statements of Staples. The separate group combined
financial statements give effect to all allocation and related party
transaction policies as adopted by the Board of Directors of Staples (the
"Board"). These policies are described in Note C to the Staples Group combined
financial statements. The Staples Group combined financial statements have been
prepared in a manner which management believes is reasonable and appropriate.
Such combined financial statements include (i) the financial position, results
of operations and cash flows of Staples Group, (ii) the Company's debt and
the effects that such debt had on the related Staples Group statements of
income and cash flows, and (iii) the effects of a 100 percent retained interest
in Staples.com Group on the combined statements of income and combined balance
sheets.
If the Tracking Stock Proposal is approved by the Company's stockholders,
the Company will provide to the holders of Staples Stock separate financial
statements, financial reviews, descriptions of the business, and other relevant
financial information for Staples Group and Staples.com Group as well as
consolidated financial information for the Company. Notwithstanding the
allocation of assets and liabilities, including contingent liabilities, between
Staples Group and Staples.com Group for the purposes of preparing their
respective combined financial statements, this allocation and the change in the
capital structure of the Company as a result of the approval of the Tracking
Stock Proposal will not result in the distribution or spin-off to stockholders
of any of the Company's assets and liabilities and will not affect ownership of
its assets or responsibility for its liabilities or those of its subsidiaries.
Holders of Staples Stock will remain common stockholders of the
VI-3
<PAGE>
Company. The assets the Company attributes to one group will be subject to the
liabilities of the other group, even if such liabilities arise from lawsuits,
contracts or indebtedness that are attributed to the other group. If the
Company is unable to satisfy one group's liabilities out of the assets
attributed to it, the Company may be required to satisfy those liabilities with
assets the Company has attributed to the other group. Further, holders of
Staples Stock and Staples.com Stock will not have any legal rights related to
specific assets of either group and in any liquidation will receive a fixed
share of the net assets of the Company which may not reflect the actual trading
prices, if any, of the respective groups at such time.
Financial effects from one group that affect the Company's consolidated
results of operations or financial condition could, if significant, affect the
results of operations or financial condition of the other group and the market
price of the stock relating to the other group. In addition, net losses of
either group and dividends and distributions on, or repurchases of, either
class of common stock or repurchases of preferred stock at a price per share
greater than par value will reduce the funds we can pay on each class of common
stock under Delaware law. Accordingly, the Staples Group combined financial
statements should be read in conjunction with the Company's audited
consolidated financial information and Annual Report on Form 10-K, and the
combined financial information of Staples.com Group, contained herein.
Results of Operations
Comparison of Fiscal Years Ended January 30, 1999, January 31, 1998, and
February 1, 1997
General. During the fiscal year ended January 30, 1999, Staples Group
acquired, in a pooling of interests transaction, Quill Corporation and certain
related entities, including the operations of Quillcorp.com (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
Staples Group, 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 statements of income
combine Staples Group's historical operating results for the fiscal years ended
January 31, 1998 and February 1, 1997 with corresponding Quill operating
results for the years ended December 31, 1997 and 1996, respectively.
Sales. Sales increased 24.1% to $7,106,303,000 in the fiscal year ended
January 30, 1999 from $5,728,439,000 in the fiscal year ended January 31, 1998.
Sales increased 27.5% in the fiscal year ended January 31, 1998 from
$4,493,554,000 in the fiscal year ended February 1, 1997. 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 delivery operations. In
addition, sales for the fiscal years ended January 30, 1999 and January 31,
1998 (beginning in May 1997) include the consolidation of Staples UK and
Staples (Deutschland) GmbH ("Staples Germany," formerly MAXI-Papier-Markt-
GmbH). Comparable store and delivery sales for the fiscal year ended January
30, 1999 increased 11% over the fiscal year ended January 31, 1998. Comparable
store and delivery hub sales for the year ended January 31, 1998 increased 10%
over the year ended February 1, 1997. As of January 30, 1999, January 31, 1998,
and February 1, 1997, Staples had 913, 742, and 557 open stores, respectively.
The January 30, 1999 total includes 174 stores opened and 3 stores closed
during the twelve months ended January 30, 1999.
Gross Profit. Gross profit as a percentage of sales was 24.2%, 23.6%, and
23.6% for the fiscal years ended January 30, 1999, January 31, 1998, and
February 1, 1997, respectively. The gross profit rate was increased by
continually improving margins in the retail and delivery business segments due
to lower product costs from vendors and increased buying as well as the
leveraging of fixed distribution center and delivery costs over a larger sales
base. This was offset by decreases in the margin rates 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.
VI-4
<PAGE>
Operating and Selling Expenses. Operating and selling expenses, which
consist of payroll, advertising and other operating expenses, were 13.9%,
14.1%, and 14.0% of sales for the fiscal years ended January 30, 1999, January
31, 1998, and February 1, 1997, respectively. The decrease as a percentage of
sales for the year ended January 30, 1999 was primarily due to decreased
advertising as a percentage of sales and increased leveraging of fixed store
payroll expenses and store operating costs as store sales have increased. These
factors were partially offset by increases in store labor and costs incurred
for Staples Group's store remodel program under 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 30, 1999 and the year ended January 31, 1998 (beginning in May
1997) include the results of Staples UK and Staples Germany, which have higher
costs as a percentage of sales.
Pre-opening Expenses. Pre-opening expenses relating to new store openings,
consisting primarily of salaries, supplies, marketing and occupancy costs, are
expensed by Staples Group as incurred and therefore fluctuate from period to
period depending on the timing and number of new store openings. Pre-opening
expenses averaged $80,000, $73,000, and $72,000 per store for the stores opened
in the years ended January 30, 1999, January 31, 1998, and February 1, 1997,
respectively. The increase during the fiscal year ended January 30, 1999 was
due primarily to increased openings outside of the United States which
generally involve higher pre-opening expenses per store.
General and Administrative Expenses. General and administrative expenses as
a percentage of sales were 4.2%, 3.9%, and 3.9% in the years ended January 30,
1999, January 31, 1998, and February 1, 1997, respectively. The increase as a
percentage of sales for the year ended January 30, 1999 as compared to the
years ended January 31, 1998 and February 1, 1997 was primarily due to costs
incurred for Year 2000 compliance projects. In addition, Staples Group has made
other investments in its information systems' ("IS") staffing and
infrastructure, which Staples Group believes will reduce costs as a percentage
of sales in future years. In addition, general and administrative expenses for
the years ended January 30, 1999 and January 31, 1998 include the results of
Staples UK and Staples Germany, which have higher costs as a percentage of
sales. The overall increase in general and administrative costs were partially
offset by Staples Group's ability to increase sales without proportionately
increasing overhead expenses in its core retail and direct business.
Merger-related and Integration Costs. In connection with the acquisition of
Quill, Staples Group recorded a charge to operating expense of $41,000,000
during the year ended January 30, 1999. These costs consist of direct merger-
related and integration costs from the transaction. The merger transaction
costs of approximately $10,500,000 consist primarily of fees for investment
bankers, attorneys, accountants and other related charges. The integration
costs primarily include employee costs of approximately $7,000,000, contract
and lease termination costs of approximately $14,100,000, the write-down of
leasehold improvements of approximately $3,500,000 and other merger-related
costs of approximately $5,900,000. Staples Group paid approximately $14,000,000
in fiscal year 1998, which consists primarily of transaction and employee
related costs. During the year ended January 31, 1998, Staples Group charged to
expense non-recurring costs in connection with the proposed merger with Office
Depot, Inc. of $29,665,000.
Store Closure Charge. In December 1998, Staples Group committed to a plan to
close and relocate stores which cannot be expanded and upgraded to its current
store model. In connection with this plan, Staples Group recorded a charge to
operating expense of $49,706,000. This charge includes $29,620,000 for future
rental payments under operating lease agreements that will be paid after the
store is closed and will not be subsidized by subtenant income, $4,966,000 in
fees, settlement costs and other expenses related to store closure and
$15,120,000 in asset impairment charges. 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. Staples Group made no payments
in fiscal year 1998 related to the store closure charge.
Interest and Other Expense, Net. Net interest and other expense totaled
$17,342,000, $21,947,000, and $22,959,000 in the fiscal years ended January 30,
1999, January 31, 1998, and February 1, 1997, respectively. The interest
expense relates primarily to existing borrowings which were used to fund the
increase in store
VI-5
<PAGE>
inventories related to new store openings 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 Staples UK and Staples Germany as well as the
purchase of them during the fiscal year ended January 31, 1998. The decrease in
interest expense during the year ended January 30, 1999 is due primarily to the
conversion of the Staples Group's $300,000,000 of 4 1/2% Debentures into common
stock in December 1998.
Equity in Loss of Affiliates. Staples Group's Equity in Loss of Affiliates
was $5,953,000 and $11,073,000 respectively, in the years ended January 31,
1998 and February 1, 1997. Staples Group recorded no equity in loss of
affiliates for the year ended January 30, 1999, 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, Staples Group's ownership interest of Staples UK
increased to 100% and its ownership of Staples Germany increased to
approximately 92% which was increased to 100% in December 1998. The
transactions were accounted for in accordance with the purchase method of
accounting and accordingly, the consolidated results of these entities are
reflected in Staples Group's combined 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 Staples Group's
share of losses from operations being included in Equity in Loss of Affiliates.
As of January 30, 1999, Staples UK and Staples Germany operated 48 and 25
stores, respectively.
Retained Interest In Staples.com Group. Staples Group currently has a 100%
retained interest in Staples.com Group, and accordingly, the loss related to
the retained interest in Staples.com Group of $487,000, $300,000 and $207,000
for the years ended January 30, 1999, January 31, 1998 and February 1, 1997,
respectively, represents the net loss of Staples.com Group for each of those
years.
Income Taxes. The provision for income taxes as a percentage of pre-tax
income was 39.6%, 32.8% and 31.5% for the years ended January 30, 1999, January
31, 1998 and February 1, 1997. On a pro forma basis, to reflect a provision for
income taxes on previously untaxed earnings of Quill, Staples Group's effective
tax rate would have been 40.2%, 38.7% and 38.8% respectively for the same
periods. The increase in the pro forma tax rate in fiscal year 1998 was
primarily due to non-deductible merger-related costs.
Comparison of the 26 Weeks Ended July 31, 1999 and August 1, 1998
Sales. Sales increased 23.7% to $3,884,874,000 for the six months ended July
31, 1999 compared to $3,141,258,000 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 the six months ended July
31, 1999 increased 8% over the same period ended August 1, 1998. Comparable
sales in the contract stationer segment, including Quill, increased 10% for the
six months ended July 31, 1999 as compared to the six months ended August 1,
1998. Staples Group 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 96 stores opened during the six months ended July 31, 1999.
Gross Profit. Gross profit as a percentage of sales was 24.3% for the six
months ended July 31, 1999 as compared to 23.2% for the same period 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 (formerly Claricom Holdings, Inc.), with its first full
quarter of operations after being acquired by the Company on February 26, 1999,
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. Operating and selling expenses, which
consist of payroll, advertising and other operating expenses, increased as a
percentage of sales in the six months ended July 31, 1999 to 14.9%, as compared
to 14.5% for the same period in the prior year. The increase was primarily due
to
VI-6
<PAGE>
increased costs of investing in selling operations, particularly retail and
call center personnel, increased marketing costs in delivery operations 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. 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
$98,000 per store for the six months ended July 31, 1999, as compared to
$85,000 per store for the same period in the prior year.
General and Administrative Expenses. General and administrative expenses as
a percentage of sales were 4.4% for the six months ended July 31, 1999 and
August 1, 1998. Higher costs incurred for Year 2000 compliance projects and IS
staffing infrastructure during the six months ended July 31, 1999 and the
addition of Staples Communications which has higher general and administrative
expenses as a percentage of sales were offset by Staples Group's ability to
increase sales without proportionately increasing overhead expenses in its core
retail and direct business.
Amortization of Goodwill. Amortization of goodwill for the six months ended
July 31, 1999 was $5,258,000 as compared to $1,851,000 for the same period 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, Staples Group recorded a charge to operating expense of $41,000,000
during the six 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 six
months ended July 31, 1999 was $5,341,000 as compared to $10,613,000 for the
same period in the prior year. The interest expense relates primarily to
existing borrowings. The decrease in net interest expense during the six months
ended July 31, 1999 was primarily due to the conversion of Staples Group's
$300,000,000 of 4 1/2% Debentures into common stock in December 1998.
Retained Interest in Staples.com Group. Staples Group currently has a 100%
retained interest in Staples.com Group. Accordingly, the loss related to the
retained interest in Staples.com Group of $3,706,000 and $104,000 for the six
months ended July 31, 1999 and August 1, 1998 respectively, represents the net
loss of Staples.com Group for each of those periods.
Income Taxes. The provision for income taxes as a percentage of pre-tax
income was 39.8% for the six months ended July 31, 1999 and 39.6% for the same
period 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 42.1% for the six months ended August 1, 1998.
Liquidity and Capital Resources
Staples manages most finance activities on a centralized, consolidated
basis. These activities include the investment of surplus cash, the issuance,
repayment and repurchase of short-term and long-term debt, and the issuance and
repurchase of common stock. Staples currently attributes each incurrence or
issuance of external debt, and the proceeds thereof, to Staples Group and will
continue to do so in the future unless the Board determines otherwise. Whenever
Staples.com Group holds cash, Staples.com Group will normally, but will not be
obligated to, transfer that cash to Staples Group. Conversely, whenever
Staples.com Group has a cash need, Staples Group will normally, but will not be
obligated to, fund that cash need. The Board will determine, in its sole
discretion, whether either group will provide any particular funds on any
particular occasion to the other group, but will not be obligated to cause such
cash transfers.
VI-7
<PAGE>
All cash transfers from one group to or for the account of the other group
(other than transfers in return of assets or services rendered or transfers in
respect of Staples Group's retained interest that correspond to dividends paid
on Staples.com Stock), will be accounted for as inter-group revolving credit
advances unless:
. the Board determines that a given transfer, or type of transfer, should
be accounted for as a long-term loan,
. the Board determines that a given transfer or type of transfer, should
be accounted for as a capital contribution increasing Staples Group's
retained interest in Staples.com Group,
. the Board determines that a given transfer, or type of transfer, should
be accounted for as a return of capital reducing Staples Group's
retained interest in Staples.com Group.
There are no specific criteria to determine when Staples Group will account
for a cash transfer as a long-term loan, a capital contribution or a return of
capital rather than an inter-group revolving credit advance. The Board would
make such a determination based on its judgment at the time of such transfer,
or at the time of the first of such type of transfer, based upon all relevant
circumstances. Factors the Board would consider include:
. the current and projected capital structure of each group,
. the relative levels of internally generated funds of each group,
. the financing needs and objectives of the recipient group,
. the investment objectives of the transferring group, the availability,
cost and time associated with the alternative financing sources and
prevailing interest rates and general economic conditions.
Any cash transfer accounted for as an inter-group revolving credit advance
will bear interest at a rate at which the Board, in its sole discretion,
determines Staples Group could borrow such funds on a revolving credit basis.
Any cash transfer accounted for as a long-term loan will have interest rate,
amortization, maturity, redemption and other terms that generally reflect the
then prevailing terms on which the Board, in its sole discretion, determines
Staples could borrow such funds.
Any cash transfer from Staples Group to Staples.com Group, or for
Staples.com Group's account, accounted for as a capital contribution will
correspondingly increase Staples.com Group's equity and Staples Group's
retained interest in Staples.com Group. As a result, the number of shares
issuable with respect to Staples Group's retained interest in Staples.com Group
will increase by the amount of such capital contribution divided by the market
value of Staples.com Stock on the date of transfer. Any cash transfer from
Staples.com Group to Staples Group, or for Staples Group's account, accounted
for as a return of capital will correspondingly reduce Staples.com Group's
equity and Staples Group's retained interest in Staples.com Group. As a result,
the number of shares issuable with respect to Staples Group's retained interest
in Staples.com Group will decrease by the amount of such return of capital
divided by the market value of Staples.com Stock on the date of transfer.
As a result of the cash management policies in place between Staples Group
and the Staples.com Group, Staples.com Group is heavily dependent on Staples
Group for its continued funding. Accordingly, Staples Group's liquidity could
be adversely affected by the liquidity needs of Staples.com Group.
Staples Group has traditionally used a combination of cash generated from
operations and debt or equity offerings to fund its expansion and acquisition
activities. Staples Group has also utilized its revolving credit facility to
support various growth initiatives.
Staples Group opened 174 stores, 130 stores, and 115 stores in the years
January 30, 1999, January 31, 1998 and February 1, 1997, respectively, and
closed three stores in the fiscal year ended January 30, 1999 and
VI-8
<PAGE>
one store in each of the fiscal years ended January 31, 1998 and February 1,
1997. 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. Staples
Group 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 Staples Group carry its own receivables from these sales.
As Staples Group expands its contract and direct mail businesses worldwide, it
anticipates that its accounts receivable portfolio will grow. Receivables from
Staples Group's vendors under rebate, cooperative advertising and marketing
programs are a significant percentage of its total receivables and tend to
fluctuate somewhat seasonally. Staples Group also utilized capital equipment
financings to fund current working capital requirements. During the year ended
January 30, 1999, Staples Group paid approximately $14,000,000 of mortgages in
full on five distribution centers acquired from Quill.
As of January 30, 1999, cash, cash equivalents, and short-term investments
totaled $375,421,000, a decrease of $11,569,000 from the January 31, 1998
balance of $386,990,000. The principal sources of funds were primarily cash
from operations, including an increase in accounts payable and accrued expenses
of $273,195,000, which financed the increase in merchandise inventory of
$211,052,000 related to new store openings, expanded product assortment and
improvements in in-stock levels. These sources were offset by the acquisition
of property and equipment of $321,236,000 and cash used in the acquisition of
Quill of $48,102,000.
During the six months ended July 31, 1999, cash, cash equivalents decreased
by $357,993,000. This decrease was primarily attributable to cash used in
investing activities of $289,867,000, including cash used in the acquisition of
Staples Communications (formerly Claricom Holdings, Inc.) of $137,625,000 and
the acquisition of property and equipment of $145,897,000, primarily for the 96
new stores opened; as well as cash used in operating activities of $84,008,000,
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.
Staples Group expects to open approximately 75 stores during the last two
quarters of fiscal 1999. Staples Group estimates that its 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, Staples Group expects to use
approximately $105,000,000 for store openings during this period. In December
1998, Staples Group committed to a plan to close and relocate stores which
cannot be expanded and upgraded to its 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, Staples began a stock repurchase
program intended to provide shares for employee stock programs. Staples expects
to repurchase approximately 6,000,000 shares of Staples common stock annually
and has authorized up to $200,000,000 to be used in fiscal 1999 for these
repurchases. During the six months ended July 31, 1999, Staples 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, Staples entered into an
equity forward purchase agreement to hedge against stock price fluctuations for
the repurchase of its common stock in connection with the annual stock option
grant to employees and directors. Under the agreement, Staples must purchase
2,600,000 shares at an average price of $30.263 or $78,684,000.
Staples Group also plans to continue to make investments in information
systems, distribution centers and store remodeling 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.
VI-9
<PAGE>
Staples Group expects to meet these cash requirements through a combination of
operating cash flow and borrowings from our existing revolving line of credit.
In February 1999, Staples Group completed the acquisition of Claricom Holdings,
Inc. and certain related entities for a purchase price of approximately
$140,000,000.
On August 12, 1997, Staples Group 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
Staples Group revolving credit agreement and for general working capital
purposes, including the financing of new store openings, distribution
facilities and corporate offices.
Staples Group 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 and sales of assets.
As of July 31, 1999, $60,000,000 of borrowings was outstanding under the
revolving credit agreement. Staples Group also has 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.
Staples Group expects that income from operations, together with its current
short-term investments and funds available under our revolving credit facility
will be sufficient to fund its planned store openings, meet the cash needs of
the Staples.com Group and other recurring operating cash needs for at least the
next twelve to eighteen months. Staples Group continually evaluates financing
possibilities, and it may seek to raise additional funds through any one or a
combination of public or private debt or equity-related offerings, depending on
market conditions, or through an additional commercial bank debt arrangement.
Inflation and Seasonality
While neither inflation nor deflation has had, and Staples Group does not
expect either to have, a material impact upon operating results, there can be
no assurance that its businesses will not be affected by inflation or deflation
in the future. Staples Group believes that its businesses are somewhat
seasonal, with sales and profitability slightly lower during the first and
second quarters of the fiscal year.
Future Operating Results
This document 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 the use of the words "believes", "anticipates", "plans",
"expects", "may", "will", "would", "intends", "estimates" and other similar
expressions, whether in the negative or affirmative. Staples Group cannot
guarantee that it actually will achieve these plans, intentions or expectations
disclosed in the forward looking statements Staples Group makes. Staples Group
has included important factors in the cautionary statements below that it
believes could cause its actual results to differ materially from the forward-
looking statements that Staples Group makes. The forward-looking statements do
not reflect the potential impact of any future acquisitions, mergers or
dispositions. Staples Group does not assume any obligation to update any
forward-looking statement it makes.
VI-10
<PAGE>
Staples' market is highly competitive and Staples Group may not continue to
compete successfully. Staples competes in a highly competitive marketplace
with a variety of retailers, dealers and distributors. In most of Staples
Group's geographic markets, it competes 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 Staples.
Staples Group also competes with mass merchants, such as Wal-Mart, warehouse
clubs, computer and electronic superstores, and other discount retailers. In
addition, Staples Group's retail stores and delivery and contract businesses
compete with numerous mail order firms, contract stationer businesses and
direct manufacturers. Many of Staples Group's competitors, including Office
Depot, OfficeMax and Wal-Mart, have in recent years significantly increased the
number of stores they operate within Staples Group's markets. Some of Staples
Group's current and potential competitors are larger than Staples and have
substantially greater financial resources. It is possible that increased
competition or improved performance by Staples Group's competitors may reduce
Staples Group's market share, may force Staples Group to charge lower prices
than it otherwise would, and may adversely affect Staples Group's business and
financial performance in other ways.
Staples Group may be unable to continue to successfully open new stores. An
important part of Staples Group's business plan is to aggressively increase the
number of our stores. Staples Group opened 174 stores in the United States,
Canada and Europe in fiscal 1998 and plans to open approximately 170 new stores
in fiscal 1999. For Staples Group's growth strategy to be successful, it must
identify and lease favorable store sites, hire and train employees and adapt
its management and operational systems to meet the needs of its expanded
operations. These tasks may be difficult to accomplish successfully. If Staples
Group is unable to open new stores as quickly as planned, its future sales and
profits could be materially adversely affected. Even if Staples Group succeeds
in opening new stores, these new stores may not achieve the same sales or
profit levels as Staples Group's existing stores. Also, Staples Group's
expansion strategy includes opening new stores in markets where it already has
a presence so it 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.
Staples Group's quarterly operating results are subject to significant
fluctuation. Staples Group's operating results have fluctuated from quarter to
quarter in the past, and it expects that they will continue to do so in the
future. Staples Group's 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 Staples Group
expenses 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 Staples Group's operating expenses, such as rent expense,
advertising expense and employee salaries, do not vary directly with the amount
of Staples Group's sales and are difficult to adjust in the short term. As a
result, if sales in a particular quarter are below Staples Group's expectations
for that quarter, it may not be able to proportionately reduce operating
expenses for that quarter, and therefore this sales shortfall would have a
disproportionate effect on Staples Group's net income for the quarter.
VI-11
<PAGE>
The market price of Staples Group's common stock is based in large part on
professional securities analysts' expectations that its business will continue
to grow and that it will achieve certain levels of net income. If Staples
Group's 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 Staples Group's growth potential and
future financial performance. If the securities analysts that regularly follow
Staples Group's common stock lower their rating of the common stock or lower
their projections for Staples Group's future growth and financial performance,
the market price of its common stock is likely to drop significantly. In
addition, in those circumstances the decrease in Staples Group's common stock
price would probably be disproportionate to the shortfall in financial
performance.
Staples Group's rapid growth may continue to strain its operations, which
could adversely affect its business and financial results. Staples Group's
business, including sales, number of stores and number of employees, has grown
dramatically over the past several years. In addition, Staples Group has
acquired a number of significant companies in the last few years and may make
additional acquisitions in the future. This growth has placed significant
demands on Staples Group's management and operational systems. If Staples Group
is not successful in upgrading its operational and financial systems, expanding
its management team and increasing and effectively managing its employee base,
this growth is likely to result in operational inefficiencies and ineffective
management of Staples Group's business and employees, which will in turn
adversely affect Staples Group's business and financial performance.
Staples Group's international operations may not become profitable. Staples
Group currently operates in international markets through The Business Depot
Ltd. in Canada, Staples UK in the United Kingdom and Staples Deutschland in
Germany. Staples Group has signed a definitive agreement to acquire three
European companies with operations in Germany, the Netherlands and Portugal.
Staples Group's consolidated European operations are currently unprofitable,
and Staples Group cannot guarantee that they will become profitable. Staples
Group may seek to expand further into other international markets in the
future. Staples Group's 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.
Staples Group may be unable to obtain adequate future financing. It is
possible that Staples Group will require additional sources of financing
earlier than it anticipates, 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.
For a discussion of other factors that may affect results, see "Risk
Factors" included in the Proxy Statement.
Year 2000 Readiness Disclosure
Staples Group has completed a comprehensive assessment of its internal
computer systems and applications, including those attributable to either
group, 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").
Staples Group has used internal personnel as well as external contractors and
consultants to identify those systems and applications which are affected by
the Year 2000 issue. Those systems and applications identified as needing
remediation 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 Staples Group's
most critical systems is expected to be finished during the third quarter of
1999.
VI-12
<PAGE>
Staples Group has also finished its assessment of non-IT related systems and
applications. 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. Assessment
regarding the status of third parties' Year 2000 compliance continues to be
ongoing and may carry into early 2000. Staples Group is also working with third
parties, primarily major vendors but also customers, to ensure that they will
be Year 2000 compliant as Staples Group's schedule requires. Responses have
been received from the majority of vendors, but not all vendors have assured
Staples Group 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. Staples Group has completed its
enterprise wide inventory review and has 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
Staples Group is scheduled to be performed on a continuous basis throughout
1999.
Staples Group 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 Staples Group's current 1999 IT budgets. The inclusion of Year
2000 compliance has not caused any critical IT projects to be delayed or
eliminated.
Staples Group is currently preparing a "what steps to follow" contingency
plan in the event that an area of its 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 Staples Group's systems or at a critical third
party. Staples Group is developing these procedures for all of its sites and
listing those to contact in the event a "Year 2000 suspected" issue is
encountered. Although Staples Group expects to achieve Year 2000 compliance as
scheduled, there are potential risks if it does not become, or is late in
becoming, Year 2000 compliant. Such risks include impairing Staples Group's
ability to process and deliver customer orders and payments, procure saleable
merchandise, and perform other critical business functions which could have a
material impact on financial performance. Staples Group has yet to analyze the
effect that an instance of critical non-compliance by it 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
Staples Group in the event of our non-compliance or the non-compliance of the
products and services which it sells. The costs of defending and settling such
claims could have a material impact on Staples Group's 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 Staples Group 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.
Staples Group has evaluated the potential impact on its business, including
the ability of its information systems to handle euro-denominated transactions
and the impact on exchange costs and currency exchange rate risks. Based on the
results of this evaluation, Staples Group does not expect the conversion to the
euro to have a material impact on its operations or financial position.
VI-13
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Staples, Inc.
We have audited the accompanying combined balance sheets of Staples The
Office Superstore Group (as described in Notes A and C) as of January 30, 1999
and January 31, 1998, and the related combined statements of income, group
equity, and cash flows for each of the three years in the period ended January
30, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the 1996 and 1997 financial
statements of Quill Corporation, a wholly owned subsidiary, which statements
reflect 6% of total assets as of January 31, 1998 and 22% and 27% of net income
of Staples The Office Superstore Group for the years ended January 31, 1998 and
February 1, 1997, respectively. Those statements were audited by other auditors
whose reports have been furnished to us, and our opinion, insofar as it relates
to data included in Staples The Office Superstore Group as it relates to Quill
Corporation is based solely on the report 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, for 1996 and 1997, the reports of
other auditors, the financial statements referred to above present fairly, in
all material respects, the financial position of Staples The Office Superstore
Group at January 30, 1999 and January 31, 1998 and the results of its
operations and its cash flows for each of the three years in the period ended
January 30, 1999 in conformity with generally accepted accounting principles.
As more fully described in Notes A and C to these financial statements,
Staples The Office Superstore Group is a business group of Staples, Inc.,
accordingly, the combined financial statements of Staples The Office Superstore
Group should be read in conjunction with the audited financial statements of
Staples, Inc.
Ernst & Young LLP
Boston, Massachusetts
September 21, 1999
VI-14
<PAGE>
STAPLES THE OFFICE SUPERSTORE GROUP
COMBINED BALANCE SHEETS
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
January 30, January 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................. $ 357,993 $ 381,088
Short-term investments................................ 17,428 5,902
Merchandise inventories............................... 1,340,432 1,124,642
Receivables, net...................................... 221,836 203,143
Deferred income taxes................................. 75,261 33,108
Prepaid expenses and other current assets............. 50,117 38,257
---------- ----------
Total current assets................................ 2,063,067 1,786,140
Property and Equipment:
Land and buildings.................................... 231,378 150,947
Leasehold improvements................................ 372,451 292,128
Equipment............................................. 399,153 304,177
Furniture and fixtures................................ 239,755 173,711
---------- ----------
Total property and equipment........................ 1,242,737 920,963
Less accumulated depreciation and amortization........ 403,462 310,701
---------- ----------
Net property and equipment.......................... 839,275 610,262
Other Assets:
Retained interest in Staples.com Group................ 1,962 --
Lease acquisition costs, net of amortization.......... 75,127 43,244
Investments........................................... -- 16,450
Goodwill, net of amortization......................... 148,201 139,753
Deferred income taxes................................. 28,735 15,451
Other................................................. 22,814 27,562
---------- ----------
Total other assets.................................. 276,839 242,460
---------- ----------
$3,179,181 $2,638,862
========== ==========
LIABILITIES AND GROUP EQUITY
Current Liabilities:
Accounts payable...................................... $ 794,427 $ 672,956
Accrued expenses and other current liabilities........ 438,226 266,023
Debt maturing within one year......................... 32,594 43,501
---------- ----------
Total current liabilities........................... 1,265,247 982,480
Long-Term Debt.......................................... 205,015 218,959
Other Long-Term Obligations............................. 52,033 42,803
Convertible Debentures.................................. -- 300,000
Minority Interest....................................... -- 135
Group Equity............................................ 1,656,886 1,094,485
---------- ----------
$3,179,181 $2,638,862
========== ==========
</TABLE>
See notes to group financial statements.
VI-15
<PAGE>
STAPLES THE OFFICE SUPERSTORE GROUP
COMBINED STATEMENTS OF INCOME
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------
January January February
30, 31, 1,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Sales...................................... $7,106,303 $5,728,439 $4,493,554
Cost of goods sold and occupancy costs..... 5,384,202 4,374,915 3,433,318
---------- ---------- ----------
Gross profit............................. 1,722,101 1,353,524 1,060,236
Operating and other expenses:
Operating and selling.................... 990,239 807,880 628,423
Pre-opening.............................. 13,836 9,443 8,299
General and administrative............... 299,187 225,001 175,621
Amortization of goodwill................. 3,739 3,581 2,291
Merger-related and integration costs..... 41,000 29,665 --
Store closure charge..................... 49,706 -- --
Interest and other expense, net.......... 17,342 21,947 22,959
---------- ---------- ----------
Total operating and other expenses..... 1,415,049 1,097,517 837,593
---------- ---------- ----------
Income before equity in loss of affiliates,
retained interest and income taxes........ 307,052 256,007 222,643
Equity in loss of affiliates............... -- (5,953) (11,073)
Loss related to retained interest in
Staples.com Group......................... (487) (300) (207)
---------- ---------- ----------
Income before income taxes............. 306,565 249,754 211,363
Income tax expense......................... 121,330 81,924 66,621
---------- ---------- ----------
Net income before minority interest.... 185,235 167,830 144,742
Minority interest........................ 135 84 --
---------- ---------- ----------
Net income............................. $ 185,370 $ 167,914 $ 144,742
========== ========== ==========
Pro forma:
Historical net income.................... $ 185,370 $ 167,914 $ 144,742
Provision for income taxes on previously
untaxed earnings of pooled S-Corporation
income.................................. 1,814 14,786 15,329
---------- ---------- ----------
Pro forma net income................... $ 183,556 $ 153,128 $ 129,413
========== ========== ==========
</TABLE>
See notes to group financial statements.
VI-16
<PAGE>
STAPLES THE OFFICE SUPERSTORE GROUP
COMBINED STATEMENTS OF GROUP EQUITY
(Dollar Amounts in Thousands)
For the Fiscal Years Ended January 30, 1999, January 31, 1998,
and February 1, 1997
<TABLE>
<CAPTION>
Group Comprehensive
Equity Income
---------- -------------
<S> <C> <C>
Balances at February 3, 1996........................ $ 712,141
Net income for the year............................. 144,742 144,742
Other comprehensive income.......................... 1,914 1,914
Issuance of common stock for stock options
exercised.......................................... 13,729
Tax benefit on exercise of options.................. 16,773
Dividends to shareholders of acquired S-Corp........ (24,908)
Sale of common stock under Employee Stock Purchase
Plan............................................... 8,980
Contribution of common stock to Employees' 401(k)
Savings Plan....................................... 1,998
Other equity changes, net........................... 454
---------- --------
Balances at February 1, 1997........................ $ 875,823 $146,656
========== ========
Net income for the year............................. 167,914 167,914
Other comprehensive income.......................... (9,132) (9,132)
Issuance of common stock for stock options
exercised.......................................... 32,183
Tax benefit on exercise of options.................. 32,873
Dividends to shareholders of acquired S-Corp........ (25,175)
Sale of common stock under Employee Stock Purchase
Plan............................................... 10,499
Issuance of Performance Accelerated Restricted
Stock.............................................. 7,182
Contribution of common stock to Employees' 401(k)
Savings Plan....................................... 2,318
---------- --------
Balances at January 31, 1998........................ $1,094,485 $158,782
========== ========
Net income for the year............................. 185,370 185,370
Other comprehensive income.......................... (2,409) (2,409)
Issuance of common stock for conversion of
debentures, net of interest and deferred charges... 298,533
Issuance of common stock for stock options
exercised.......................................... 50,123
Tax benefit on exercise of options.................. 74,157
Dividends to shareholders of acquired S-Corp........ (15,904)
Purchase and retirement of S-Corp shares............ (48,102)
Sale of common stock under Employee Stock Purchase
Plan............................................... 13,210
Issuance of Performance Accelerated Restricted
Stock.............................................. 10,654
Purchase of treasury shares......................... (7,892)
Contribution of common stock to Employees' 401(k)
Savings Plan....................................... 3,288
Other equity changes, net........................... 1,373
---------- --------
Balances at January 30, 1999........................ $1,656,886 $182,961
========== ========
</TABLE>
See notes to group financial statements.
VI-17
<PAGE>
STAPLES THE OFFICE SUPERSTORE GROUP
COMBINED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------
January 30, January 31, February 1,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Operating Activities:
Net income.............................. $ 185,370 $ 167,914 $ 144,742
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Minority interest....................... (135) (84) --
Retained interest in loss of Staples.com
Group.................................. 487 300 207
Depreciation and amortization........... 99,149 90,714 61,497
Merger-related and integration costs.... 41,000 29,665 --
Store closure charge.................... 49,706 -- --
Expense from 401K and PARS stock
contribution........................... 12,764 10,409 2,715
Equity in loss of affiliates............ -- 5,953 11,073
Deferred income taxes
(benefit)/expense...................... (55,569) 3,877 3,137
Change in assets and liabilities, net of
companies acquired using purchase
accounting:
Increase in merchandise inventories.... (211,052) (227,076) (171,593)
Decrease (increase) in receivables..... (15,993) 17,569 (41,905)
Increase in prepaid expenses and other
assets................................ (8,806) (5,026) (7,026)
Increase in accounts payable, accrued
expenses and other current
liabilities........................... 273,195 293,831 179,803
Increase in other long-term
obligations........................... 9,597 5,074 6,303
--------- --------- -----------
194,343 225,206 44,211
--------- --------- -----------
Net cash provided by operating
activities............................. 379,713 393,120 188,953
Investing Activities:
Acquisition of property and equipment... (321,236) (190,659) (212,007)
Acquisition of businesses, net of cash
acquired............................... (13,500) (79,325) --
Proceeds from sales and maturities of
short-term investments................. 10,338 13,618 8,800
Purchase of short-term investments...... (22,913) (4,500) (9,595)
Proceeds from sales and maturities of
long-term investments.................. 18,995 265 --
Purchase of long-term investments....... (2,545) (5,714) (10,036)
Capital contribution to Staples.com
Group.................................. (2,449) -- --
Investment in affiliates................ -- (4,088) (18,836)
Acquisition of lease rights............. (37,182) (2,717) (5,534)
Other................................... 1,208 (11,998) 2,657
--------- --------- -----------
Net cash used in investing activities... (369,284) (285,118) (244,551)
Financing Activities:
Proceeds from sale of capital stock..... 63,996 48,043 21,773
Proceeds from borrowings................ 392,261 965,921 1,171,174
Payments on borrowings.................. (417,323) (830,018) (1,120,670)
Purchase of dissenting shareholder S-
Corporation stock...................... (48,102) -- --
Purchase of treasury stock.............. (7,892) -- --
Dividends to shareholders of acquired S-
Corp................................... (15,904) (25,175) (24,908)
--------- --------- -----------
Net cash (used in) provided by financing
activities............................. (32,964) 158,771 47,369
Effect of exchange rate changes on
cash................................... (560) (2,720) 643
--------- --------- -----------
Net (decrease) increase in cash and cash
equivalents............................. (23,095) 264,053 (7,586)
Cash and cash equivalents at beginning of
period.................................. 381,088 117,035 124,621
--------- --------- -----------
Cash and cash equivalents at end of
period.................................. $ 357,993 $ 381,088 $ 117,035
========= ========= ===========
</TABLE>
See notes to group financial statements.
VI-18
<PAGE>
STAPLES THE OFFICE SUPERSTORE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE A Basis of Presentation
These combined financial statements and notes to combined financial
statements of Staples The Office Superstore Group ("Staples Group") should be
read in conjunction with the audited consolidated financial statements and
Annual Report on Form 10K of Staples, Inc. ("Staples" or the "Company") for the
year ended January 30, 1999 and the combined financial information of
Staples.com Group contained in this proxy statement. The combined financial
statements of Staples Group include the balance sheets, statements of income,
cash flows and group equity of Staples' retail stores, catalog businesses and
contract stationer businesses. The Staples Group combined financial statements
also include its retained interest in Staples.com Group, currently 100%.
The stockholders of Staples, Inc. are scheduled to vote on a proposal (the
"Tracking Stock Proposal") to amend Staples, Inc.'s certificate of
incorporation to (i) authorize the issuance of a new series of common stock, to
be designated as Staples.com Group common stock ("Staples.com Stock"), intended
to reflect the performance of Staples.com Group, the Company's e-commerce
business division, (ii) increase the aggregate number of authorized shares of
common stock that the Company may issue from 1,500,000,000 to 1,650,000,000,
initially comprised of 1,500,000,000 shares of Staples Group common stock
("Staples Stock") and 150,000,000 shares of Staples.com Stock, and (iii) re-
classify Staples existing common stock as Staples Stock, intended to reflect
the performance of Staples Group, which consists of all of the Company's other
businesses and a retained interest in Staples.com Group.
Staples Group currently has a 100% retained interest in Staples.com Group.
The Company expects to issue additional shares of Staples.com Stock in one or
more private or public financings within twelve months of stockholder approval
of the Tracking Stock Proposal. The specific terms of the financings, including
whether they are private or public, the amount of Staples.com Stock issued, and
the timing of the financings, will depend upon factors such as stock market
conditions and the performance of Staples.com Group. The effect of the
financings on the retained interest percentage and the outstanding interest
percentage would depend upon the number of shares of Staples.com Stock sold and
whether the Company elects to attribute the net proceeds of such financing to
the equity of Staples.com Group or to Staples Group in respect of its retained
interest. The book value associated with Staples Group's retained interest in
Staples.com Group will be increased proportionately for net income (or
decreased proportionately for net loss) of Staples.com Group.
In order to prepare separate financial statements for Staples Group and
Staples.com Group, the Company has allocated, for financial reporting purposes,
all of its consolidated assets, liabilities, revenue, expenses and cash flow
between Staples Group and Staples.com Group. Thus, the combined financial
statements of Staples Group and Staples.com Group, taken together, comprise all
of the accounts included in the corresponding consolidated financial statements
of Staples. Staples Group's combined financial statements reflect the
application of certain cash management and allocation policies adopted by the
Board of Directors of Staples (the "Board"). These policies are summarized in
Note C under "Corporate Activities." Staples Group's combined financial
statements include the financial position, statements of income, cash flows of
Staples Group and the effects of a 100 percent retained interest in Staples.com
Group on the statements of income, balance sheets and statements of cash flows.
These financial statements do not represent Staples primary financial statement
presentation, these group financial statements are not intended to represent a
complete set of general purpose financial statements.
Allocation and related party transaction policies adopted by the Board can
be rescinded or amended at the sole discretion of the Board without approval by
the stockholders, although no such changes are currently contemplated. Any such
changes adopted by the Board would be made in its good faith business judgement
of the Company's best interests, taking into consideration the interests of all
stockholders.
VI-19
<PAGE>
STAPLES THE OFFICE SUPERSTORE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
If the Tracking Stock Proposal is approved by the stockholders and
implemented by the Board, the Company will provide to the holders of both
Staples Stock and Staples.com Stock separate financial statements, management's
discussion and analysis of the results of operations and financial condition,
and other relevant information for Staples Group and Staples.com Group, as well
as consolidated financial information of the Company. Even though Staples has
allocated all of its consolidated assets, liabilities, revenue, expenses and
cash flow between Staples Group and Staples.com Group, holders of Staples Stock
will continue to be common stockholders of Staples and, as such, will be
subject to the risks associated with an investment in Staples and all of its
businesses, assets and liabilities. Assets attributed to one group are subject
to the liabilities of the other group, whether such liabilities arise from
lawsuits, contracts or indebtedness attributed to the other group. Holders of
Staples Stock and Staples.com Stock will not have any legal rights related to
specific assets of either group and in any liquidation will receive a fixed
share of the net assets of the Company which may not reflect the actual trading
prices, if any of the respective groups at such time.
Financial impacts which occur that affect Staples' consolidated results of
operations or financial position could affect the results of operations or
financial condition of Staples Group or the market price of Staples Stock. In
addition, net losses of Staples.com Group, and any dividends or distributions
on, or repurchases of, Staples.com Stock will reduce the assets of Staples
legally available for dividends on Staples Stock. Accordingly, financial
information for Staples Group should be read in conjunction with the financial
information for Staples.com Group and financial information for Staples.
NOTE B Summary of Significant Accounting Policies
Nature of Operations: Staples Group operates a chain of office supply stores
and contract stationer/delivery warehouses throughout North America and in the
United Kingdom and Germany. Staples.com Group is the division of Staples that
sells product through web-based superstores and portals. Staples Group
represents the other businesses of Staples, including its retail stores,
catalog businesses and contract stationer businesses.
Fiscal Year: Staples Group's fiscal year is the 52 or 53 weeks ending the
Saturday closest to January 31. Fiscal years 1998, 1997 and 1996, consisted of
the 52 weeks ended January 30, 1999, January 31, 1998 and February 1, 1997
respectively. As more fully described in Note N, the statements of income
combine Staples Group's historical operating results for the fiscal years with
the corresponding Quill Corporation ("Quill") operating results for the
calendar years ended December 31, 1997 and 1996. Accordingly, to conform fiscal
years for 1998, an adjustment for Quill's operating results for January 1998
was made to group equity.
Use of Estimates: The preparation of combined financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the combined
financial statements and accompanying notes. Actual results could differ from
those estimates.
Cash Equivalents: Staples Group considers all highly liquid investments with
an original maturity of three months or less to be cash equivalents.
Short-Term Investments: Staples Group'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 Staples Group's 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 Staples Group.
VI-20
<PAGE>
STAPLES THE OFFICE SUPERSTORE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
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 Staples Group's large number of
customers and their dispersion across many industries and geographic regions.
Advertising: Staples Group expenses the production costs of advertising the
first time the advertising takes place, except for the direct-response
advertising, which is capitalized and amortized 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. Direct catalog production costs included in prepaid and other
assets totaled $9,854,000 at January 30, 1999 and $7,667,000 at January 31,
1998. Total advertising and marketing expense was $355,333,000, $288,341,000,
and $220,872,000 for the years ended January 30, 1999, January 31, 1998, and
February 1, 1997, 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 30, 1999 and
January 31, 1998 totaled $24,674,000 and $19,483,000, respectively.
Retained Interest in Staples.com Group: Staples Group currently has a 100%
retained interest in Staples.com Group. The Company expects to issue additional
shares of Staples.com Stock in one or more private or public financings within
twelve months of stockholder approval of the Tracking Stock Proposal. The
specific terms of the financings, including whether they are private or public,
the amount of Staples.com Stock issued, and the timing of the financings, will
depend upon factors such as stock market conditions and the performance of
Staples.com Group. The effect of the financings on the retained interest
percentage and the outstanding interest percentage would depend upon the number
of shares of Staples.com Stock sold and whether we elect to attribute the net
proceeds of such financing to the equity of Staples.com Group or to Staples
Group in respect of its retained interest.
Staples Group accounts for its investment in Staples.com Group in a manner
similar to the method prescribed under APB No. 18, "The Equity Method of
Accounting for Investments in Common Stock." For the purposes of these separate
group financial statements, Staples Group's interest in the equity and net
income or loss of Staples.com Group has been included in Staples Group's
balance sheets and statements of income as "retained interest in Staples.com
Group." The amount included in the balance sheets and statements of income as
retained interest in Staples.com Group represents Staples Group's proportional
interest in the assets and liabilities and revenue and expenses of Staples.com
Group. The carrying value of Staples Group's retained interest in Staples.com
Group is increased or decreased by Staples Group's proportional interest in the
net
VI-21
<PAGE>
STAPLES THE OFFICE SUPERSTORE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
income or loss of Staples.com Group. Additionally, if dividends or other
distributions are made on Staples.com Group Stock, including deemed dividends
in respect of the Staples Group's retained interest in Staples.com Group, an
amount representing Staples Group's proportional interest in such distributions
would be transferred to Staples Group from Staples.com Group and would reduce
the book value of Staples Group's retained interest in Staples.com Group.
Goodwill: Goodwill arising from business acquisitions is amortized on a
straight-line basis over 40 years. Accumulated amortization was $13,053,000 and
$10,622,000 as of January 30, 1999 and January 31, 1998, 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: Staples Group offers a private label
credit card which is managed by a financial services company. Under the terms
of the agreement, Staples Group is obligated to pay fees which approximate the
financial institution's cost of processing and collecting the receivables,
which are primarily non-recourse to Staples Group.
Foreign Currency Translation: The assets and liabilities of Staples Group's
foreign subsidiaries, The Business Depot Ltd. ("Business Depot"), Staples UK,
and Staples Germany, are 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
Staples Group's foreign subsidiaries during the years ended January 30, 1999,
January 31, 1998 and February 1, 1997, are recorded in a separate section of
group 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: Historical earnings per share is omitted from the
statements of operations since the Staples Stock was not part of the capital
structure of the Company for the periods presented. Following the
implementation of the Tracking Stock Proposal, basic earnings per share for
Staples Group would be computed by dividing the earnings or losses of Staples
Group, including Staples Group's retained interest in the earnings or losses of
Staples.com Group, by the weighted average number of shares of Staples Stock.
Diluted earnings per share will include the effects of applying the treasury
stock method to outstanding stock options, performance accelerated restricted
stock ("PARS") and derivative instruments.
Fair Value of Financial Instruments: Pursuant to Statement of Financial
Accounting Standards No. 107, "Disclosure About Fair Value of Financial
Instruments" ("FAS 107"), Staples Group 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;
VI-22
<PAGE>
STAPLES THE OFFICE SUPERSTORE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
-- 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 Staples Group's debt approximates fair value,
estimated by discounted cash flow analyses based on Staples Group's
current incremental borrowing rates for similar types of borrowing
arrangements.
Long-Lived Assets: Staples Group 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. Staples
Group's policy is to evaluate long-lived assets for impairment at a store
level.
Comprehensive Income: Effective February 1, 1998, Staples Group adopted SFAS
No. 130 "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new
rules for the reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. SFAS 130 requires
Staples Group to report comprehensive income which includes net income, foreign
currency translation adjustments and unrealized gains and losses on short-term
investments, separately in group equity.
Segment Reporting: Effective February 1, 1998, Staples Group adopted the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("Statement 131"). Statement 131 superseded FASB Statement No. 14,
"Financial Reporting for Segments of a Business Enterprise." Statement 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports. Statement 131 also establishes standards
for related disclosures about products and services, geographic areas, and
major customers. The adoption of Statement 131 did not affect the results of
operations or financial position, but did affect the disclosure of segment
information, see note P.
NOTE C Corporate Activities
Staples Group's combined financial statements reflect the application of the
management and allocation policies adopted by the Board to various corporate
activities, as described below:
Finance Activities: Staples Group manages most finance activities on a
centralized, consolidated basis. These activities include the investment of
surplus cash, the issuance, repayment and repurchase of short-term and long-
term debt, and the issuance and repurchase of common stock. Staples.com Group
generally remits its cash receipts to Staples Group, and Staples Group
generally funds Staples.com Group's disbursements on a regular basis.
In the combined financial statements of Staples Group and the combined
financial statements of Staples.com Group, (1) all equity transactions, and the
proceeds thereof, were attributed to Staples Group, (2) whenever Staples.com
Group held cash, that cash was transferred to Staples Group and accounted for
as an inter-group revolving credit advance and (3) whenever Staples.com Group
had a cash need, that cash need was funded by Staples Group and accounted for
as an inter-group revolving credit advance. The inter-group revolving credit
arrangement bears interest at a rate at which the Board, in its sole
discretion, determines Staples could borrow such funds on a revolving credit
basis, which was 6% for the fiscal years ended January 30, 1999, January 31,
1998 and February 1, 1997. These inter-group balances are settled on a regular
basis as
VI-23
<PAGE>
STAPLES THE OFFICE SUPERSTORE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
reviewed by the Board. After the date on which shares of Staples.com Stock, or
options therefor are first issued, Staples Group intends to continue the above
practice of transferring cash to Staples.com Group through an inter-group
revolving credit arrangement.
The Board, at its sole discretion, may elect an alternative financing
mechanism between the groups based upon the facts and circumstances.
Shared Services and Support Activities: The cost of services shared by
Staples Group and Staples.com Group, including general and administrative
expenses, has been allocated between Staples Group and Staples.com Group based
upon the use of such services and the good faith judgment of the Board or
management. Where determinations based on use alone were not practical, other
methods and criteria were used to provide a reasonable allocation of the cost
of shared services, including support activities attributable to the group.
Such allocated shared services represent, among other things, financial and
accounting services, information system services, certain selling and marketing
activities, certain merchandising and replenishment services, transportation
and warehouse management services, certain customer service activities,
executive management, human resources, legal and corporate planning activities.
Taxes: Federal income taxes, which are determined on a consolidated basis,
are allocated between the groups, and reflected in their respective financial
statements, in accordance with Staples' tax allocation policy. In general, this
policy provides that the consolidated tax provision, deferred tax accounts and
related tax payments or refunds, are allocated between the groups based
principally upon the financial income, taxable income, credits and other
amounts directly related to the respective groups. Tax benefits that cannot be
used by the group generating such attributes, but can be utilized on a
consolidated basis, are allocated to the group that generated such benefits. As
a result, the allocated group amounts of taxes payable or refundable are not
necessarily comparable to those that would have resulted if the groups had
filed separate tax returns. State income taxes generally are computed on a
separate group basis.
Employee Benefits: Staples Group participated in the following Company
employee benefit plans: an Employee Stock Purchase Plan, an Employee 401(k)
Savings Plan, a Supplemental Executive Retirement Plan and a contributory
Medical and Dental Plan. The costs of these plans are allocated based on the
benefits received under the plans by the employees comprising Staples Group or
another basis as management believes to be an equitable and reasonable estimate
of such costs.
Carrying Charge: Staples Group maintains inventory to support Staples.com
Group's inventory needs and processes receivables for Staples.com Group. As
such, Staples Group charges Staples.com Group a fee for use of their capital as
determined by the Board. The current charge is reflected in Staples.com Group's
combined financial statements as part of operating and selling expenses and in
Staples Group's combined financial statements as a reduction in operating and
selling expenses. The charge is calculated based on the amount of receivables
and inventory that Staples Group is required to carry for Staples.com Group. In
addition, shrink, obsolescence and other inventory costs are allocated to
Staples.com Group based on Staples.com Group's share of such costs. The Board
may, in its sole discretion, change this fee as it deems appropriate in light
of the circumstances from time to time.
NOTE D Related Party Transactions
The Staples Group sells inventory to Staples.com Group based on Staples
Group's product cost. Staples Group does not include these transactions in its
reported sales. Inventory purchased by Staples.com Group totaled $10,796,000,
$2,364,000, and $22,000 for the fiscal years ended January 30, 1999, January
31, 1998
VI-24
<PAGE>
STAPLES THE OFFICE SUPERSTORE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
and February 1, 1997, respectively. Had these sales been included in Staples
Group's combined financial statements, Staples Group would have reported sales
of $7,117,099,000, $5,730,803,000, and $4,493,576,000 and gross profit of
24.2%, 23.6% and 23.6% for the fiscal years ended January 30, 1999, January 31,
1998 and February 1, 1997, respectively.
NOTE E Investments
The following is a summary of available-for-sale investments as of January
30, 1999 and January 31, 1998 (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
January 30, 1999
Short-term:
Municipal obligations................ $10,515 $ 46 $-- $10,561
Agency Bonds......................... 6,902 7 (42) 6,867
------- ------ ---- -------
Total short-term................... $17,417 $ 53 $(42) $17,428
======= ====== ==== =======
<CAPTION>
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
January 31, 1998
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 $ 125 $ (7) $10,104
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>
Proceeds from the sale of investment securities were $14,599,000 and
$265,000 during the years ended January 30, 1999 and January 31, 1998,
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 investments included as a separate component of
stockholders' equity totaled $(1,049,000) and $1,036,000 for the years ended
January 30, 1999 and January 31, 1998, respectively.
The amortized cost and estimated fair value of debt and marketable equity
securities at January 30, 1999, by contractual maturity, are shown below.
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................................... $17,417 $17,428
</TABLE>
VI-25
<PAGE>
STAPLES THE OFFICE SUPERSTORE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE F Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
January 30, 1999 January 31, 1998
---------------- ----------------
<S> <C> <C>
Taxes..................................... $114,179 $ 76,118
Acquisition and store closure reserves.... 91,484 16,596
Employee related.......................... 88,551 63,126
Advertising and direct marketing.......... 30,458 24,845
Other..................................... 113,554 85,338
-------- --------
Total................................. $438,226 $266,023
======== ========
</TABLE>
NOTE G Long-Term Debt and Credit Agreement
Staples Group manages most financial activities on a centralized basis. Such
financial activities include the issuance and repayment of short-term and long-
term debt. Staples currently attributes each incurrence or issuance of external
debt, and the proceeds thereof, to Staples Group and will continue to do so in
the future unless the Board determines otherwise. The Board may, but is not
required to, attribute an incurrence or issuance of debt, and the proceeds
thereof, to Staples.com Group at an incremental borrowing rate of 6%, to the
extent that Staples incurs or issues the debt for the benefit of Staples.com
Group.
Long-term debt on the books of Staples Group consists of the following (in
thousands):
<TABLE>
<CAPTION>
January 30, 1999 January 31, 1998
---------------- ----------------
<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.............................. $ 7,760 $ 14,909
Note payable with a fixed rate of
6.16%.................................. -- 25,000
Senior notes with a fixed rate of
7.125%................................. 200,000 200,000
Mortgage notes at various rates......... -- 13,805
Lines of credit......................... 29,849 8,746
-------- --------
$237,609 $262,460
Less current portion.................... 32,594 43,501
-------- --------
$205,015 $218,959
======== ========
</TABLE>
Aggregate annual maturities of long-term debt and capital lease obligations
are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal year: Total
------------ --------
<S> <C>
1999................................ $ 32,594
2000................................ 1,579
2001................................ 434
2002................................ 308
2003................................ 311
Thereafter.......................... 202,383
--------
$237,609
========
</TABLE>
VI-26
<PAGE>
STAPLES THE OFFICE SUPERSTORE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Included in property and equipment are capital lease obligations for
equipment recorded at the net present value of the minimum lease payments of
$20,664,000. Future minimum lease payments of $3,001,000, excluding $201,000 of
interest, are included in aggregate annual maturities shown above. Staples did
not enter into any new capital lease agreements during the fiscal year ended
January 30, 1999. New capital lease agreements totaling $2,770,000 were entered
into during the fiscal year ended January 31, 1998.
Senior Notes: Staples Group 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 Staples Group's Notes were used for repayment of
indebtedness under Staples Group's revolving credit facility and for general
working capital purposes, including the financing of new store openings,
distribution facilities and corporate offices.
Credit Agreements: Effective November 13, 1997, Staples Group entered into a
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 and sales of assets. As of
January 30, 1999, no borrowings were outstanding under the revolving credit
facility. Staples Group also has available $35,000,000 in uncommitted, short-
term bank credit lines, of which no borrowings were outstanding as of January
30, 1999. Staples UK has a $50,000,000 line of credit which had an outstanding
balance of $29,849,000 at January 30, 1999 and Business Depot has a $16,545,000
line of credit which had no outstanding balance at January 30, 1999.
Interest paid by Staples Group totaled $29,600,000, $23,012,000 and
$22,501,000 for the fiscal years ended January 30, 1999, January 31, 1998, and
February 1, 1997, respectively. Capitalized interest totaled $2,254,000,
$1,387,000 and $611,000 in the years ended January 30, 1999, January 31, 1998
and February 1, 1997, respectively.
NOTE H Convertible Debentures
On October 5, 1995, Staples Group 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"). During fiscal 1998, $299,995,000 of Staples Group's
$300,000,000 of 4 1/2% Debentures were converted into an aggregate of
30,674,276 shares of common stock at a conversion price of $9.78 per share. The
remaining $5,000 were called at par value plus a premium of 1.8% and accrued
interest. 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.
NOTE I Group Equity
Staples stockholders will be reclassified as Staples Group common stock
holders if the Tracking Stock Proposal is approved by Staples stockholders.
Additional shares may be issued from time to time upon exercise of stock
options or at the discretion of the Board.
VI-27
<PAGE>
STAPLES THE OFFICE SUPERSTORE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
On November 12, 1998, December 30, 1997, March 5, 1996 and June 29, 1995,
the Board of Directors approved three-for-two splits of Staples' common stock
to be effected in the form of 50% stock dividends. The dividends were
distributed on January 28, 1999 to shareholders of record as of January 18,
1999, 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.
During fiscal year 1998, Staples purchased treasury stock of $7,892,000 from
employees and directors to fund the income taxes incurred by those employees
and directors associated with the vesting of performance accelerated restricted
stock (PARS).
At January 30, 1999, 72,614,501 shares of common stock were reserved for
issuance under Staples' stock option, 401(k), employee stock purchase and
director stock option plans.
NOTE J Employee Benefit Plans
Staples Group 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 Staples' 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
Staples' 1998 Employee Stock Purchase Plan authorizes a total of up to
6,000,000 shares of Staples' 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. Staples' 1994 Employee Stock Purchase Plan
expired during 1998.
Stock Option Plans
Under Staples' 1992 Equity Incentive Plan ("1992 Plan"), Staples may grant
to management and key employees incentive and nonqualified options to purchase
up to 87,750,000 shares of Staples common stock and Performance Accelerated
Restricted Stock ("PARS"). This amount was approved by the stockholders of
Staples on June 18, 1997. As of February 27, 1997, Staples' 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 Staples' 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.
Staples' Amended and Restated 1990 Director Stock Option Plan ("Director's
Plan") authorizes shares of Staples common stock to be issued to non-employee
directors. The exercise price of options granted is equal to the fair market
value of Staples' 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.
VI-28
<PAGE>
STAPLES THE OFFICE SUPERSTORE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
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 Staples 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 1996,
1997, and 1998: risk-free interest rates ranging from 5.21% to 6.12%;
volatility factor of the expected market price of Staples Stock of .30 for
fiscal year 1996, .35 for fiscal year 1997, and .36 for fiscal year 1998; 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.
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. Staples' pro forma information, which
includes the pro forma results of Quill, follows (in thousands except for
earnings per share information):
<TABLE>
<CAPTION>
January 30, January 31, February 1,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Pro forma net income................... $156,265 $138,983 $122,116
Pro forma basic earnings per common
share................................. $ 0.36 $ 0.34 $ 0.31
Pro forma diluted earnings per common
share................................. $ 0.35 $ 0.33 $ 0.30
</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.
Information with respect to options granted under the above plans is as
follows:
<TABLE>
<CAPTION>
Weighted-Average
Number of Exercise Price
Shares Per Share
----------- ----------------
<S> <C> <C>
Outstanding at February 3, 1996................ 47,220,579 $ 3.29
Granted...................................... 7,171,937 8.82
Exercised.................................... (6,140,543) 2.29
Canceled..................................... (2,357,118) 4.89
----------- ------
Outstanding at February 1, 1997................ 45,894,855 $ 4.26
Granted...................................... 9,656,558 10.43
Exercised.................................... (10,147,409) 2.78
Canceled..................................... (2,807,883) 7.43
----------- ------
Outstanding at January 31, 1998................ 42,596,121 $ 5.34
Granted...................................... 13,698,644 20.22
Exercised.................................... (13,965,713) 3.64
Canceled..................................... (1,938,669) 11.55
----------- ------
Outstanding at January 30, 1999................ 40,390,383 $11.58
=========== ======
</TABLE>
VI-29
<PAGE>
STAPLES THE OFFICE SUPERSTORE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------- --------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- ----------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.53-$ 3.56............. 5,083,310 4.14 $ 2.76 5,083,310 $ 2.76
$ 3.65-$ 5.56............. 4,542,693 5.67 $ 4.10 4,509,999 $ 4.09
$ 5.70-$ 8.30............. 4,800,123 6.45 $ 8.06 3,392,963 $ 8.12
$ 8.37-$ 9.17............. 4,623,599 7.56 $ 9.11 22,627 $ 8.57
$ 9.47-$ 9.83............. 229,980 8.10 $ 9.64 0 $ 0.00
$10.28-$10.28............. 5,734,482 8.57 $10.28 1,125 $10.28
$10.44-$19.42............. 3,004,779 8.72 $12.92 26,928 $10.82
$20.08-$20.08............. 10,699,422 9.42 $20.08 0 $ 0.00
$20.75-$27.71............. 1,511,123 9.83 $23.10 0 $ 0.00
$29.13-$29.13............. 160,872 10.01 $29.13 0 $ 0.00
---------- ----- ------ ---------- ------
$ 0.53-$29.13............. 40,390,383 7.60 $11.58 13,036,952 $ 4.64
</TABLE>
The weighted-average fair values of options granted during the years ended
January 30, 1999, January 31, 1998 and February 1, 1997 were $7.18, $3.80 and
$3.81, respectively. Exercise prices for the options outstanding as of January
30, 1999 ranged from $0.53 to $29.13.
Performance Accelerated Restricted Stock ("PARS")
PARS are shares of Staples common stock granted outright to employees and
non-employee directors without cost to the employee or director. The shares,
however, are restricted in that they are not transferable (e.g. they may not
be sold) by the employee or director until they vest, generally after the end
of five years. Such vesting date may accelerate if Staples achieves certain
compound annual earnings per share growth over a certain number of interim
years. If the employee leaves Staples, or the director ceases to serve as a
director of Staples, prior to the vesting date for any reason, the PARS shares
will be forfeited by the employee or director, as the case may be, and will be
returned to Staples. Once the PARS have vested, they become unrestricted and
may be transferred and sold like any other Staples common stock.
PARS issued in the fiscal year ended January 30, 1999 totaling
approximately 1,381,000 shares which have a weighted average fair value of
$17.56, initially vest on February 1, 2003 or will accelerate on May 1, in
2000, 2001, or 2002 upon attainment of certain compound annual earnings per
share targets in the prior fiscal year. PARS totaling approximately 798,000
shares which have a weighted average fair value of $12.47, issued in fiscal
year 1997 will vest on May 1, 1999 as a result of Staples achieving its target
earnings goal for the fiscal year ended January 30, 1999.
In connection with the issuance of the PARS, Staples included $9,796,000,
$7,496,000 and $532,000 in compensation expense for the fiscal years ended
January 30, 1999, January 31, 1998 and February 1, 1997, respectively.
Employees' 401(k) Savings Plan
Under Staples' Employees' 401(k) Savings Plan (the "401(k) Plan"), and
Supplemental Executive Retirement Plan (the "SERP Plan"), Staples may
contribute up to a total of 2,503,125 shares of common stock to these plans.
The 401(k) Plan is available to all employees of Staples who meet minimum age
and length of
VI-30
<PAGE>
STAPLES THE OFFICE SUPERSTORE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
service requirements. Company contributions are based upon a matching formula
applied to employee contributions, with additional contributions made at the
discretion of the Board.
NOTE K 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 Staples Group's deferred tax assets and
liabilities as of January 30, 1999 and January 31, 1998, are as follows (in
thousands):
<TABLE>
<CAPTION>
January 30, January 31,
1999 1998
----------- -----------
<S> <C> <C>
Deferred Tax Assets:
Inventory.......................................... $ 27,328 $ 20,116
Deferred rent...................................... 19,713 14,797
Acquired NOL's..................................... 8,743 7,132
Other net operating loss carryforwards............. 27,259 22,907
Insurance.......................................... 7,639 5,967
Employee benefits.................................. 9,746 5,569
Merger related charges............................. 10,823 --
Store closure charge............................... 20,274 --
Other--net......................................... 17,712 13,660
-------- --------
Total Deferred Tax Assets.......................... 149,237 90,148
-------- --------
Deferred Tax Liabilities:
Depreciation....................................... (2,312) (6,687)
Other--net......................................... (5,164) (4,835)
-------- --------
Total Deferred Tax Liabilities..................... (7,476) (11,522)
-------- --------
Total Valuation Allowance............................ (37,765) (30,067)
-------- --------
Net Deferred Tax Assets.............................. $103,996 $ 48,559
======== ========
</TABLE>
Net deferred tax assets of approximately $4,500,000 attributable to
businesses acquired during the fiscal year ended January 31, 1998 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 $36,002,000, have been fully reserved 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, Staples Group will not have a consolidated
tax benefit, as Staples Group 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 30, January 31, February 1,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Pretax income:
United States.......................... $262,371 $213,549 $187,644
Foreign................................ 44,194 36,205 23,719
-------- -------- --------
$306,565 $249,754 $211,363
======== ======== ========
</TABLE>
VI-31
<PAGE>
STAPLES THE OFFICE SUPERSTORE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------
January 30, January 31, February 1,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current tax expense:
Federal................................ $136,226 $53,248 $50,546
State.................................. 18,875 10,707 12,337
Foreign................................ 21,798 14,092 601
-------- ------- -------
176,899 78,047 63,484
Deferred tax expense (benefit)........... (55,569) 3,877 3,137
-------- ------- -------
Total................................ $121,330 $81,924 $66,621
======== ======= =======
</TABLE>
A reconciliation of the federal statutory tax rate to Staples Group's
effective tax rate on historical net income is as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------
January 30, January 31, February 1,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Federal statutory rate.................. 35.0% 35.0% 35.0%
State taxes, net of federal benefit..... 6.0% 6.0% 6.3%
Tax exempt interest..................... (0.5%) (0.5%) (0.4%)
Tax benefit of loss carryforward........ (0.0%) (0.0%) (0.2%)
Income of S-Corporation................. (0.6%) (5.7%) (7.0%)
Other................................... (0.3%) (2.0%) (2.2%)
---- ---- ----
Effective tax rate...................... 39.6% 32.8% 31.5%
==== ==== ====
</TABLE>
A reconciliation of the federal statutory tax rate to Staples Group's
effective tax rate on pro forma net income is as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------
January 30, January 31, February 1,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Federal statutory rate.................. 35.0% 35.0% 35.0%
State taxes, net of federal benefit..... 6.0% 6.0% 6.3%
Tax exempt interest..................... (0.5%) (0.5%) (0.4%)
Tax benefit of loss carryforward........ (0.0%) (0.0%) (0.2%)
Other................................... (0.3%) (1.8%) (1.9%)
---- ---- ----
Effective tax rate...................... 40.2% 38.7% 38.8%
==== ==== ====
</TABLE>
Income tax payments were $94,729,602, $23,487,877, and $45,925,276 during
fiscal years ended January 30, 1999, January 31, 1998, and February 1, 1997,
respectively. Staples Group has net operating losses of approximately
$101,300,000 that can be carried forward indefinitely, $21,900,000 of which is
attributable to Staples Group's increased ownership in Staples UK and Staples
Germany.
Undistributed earnings of Staples Group's foreign subsidiaries amounted to
approximately $54,700,000 at January 30, 1999. 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
VI-32
<PAGE>
STAPLES THE OFFICE SUPERSTORE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
of dividends or otherwise, Staples Group 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 $1,800,000 would be payable upon remittance of all
previously unremitted earnings at January 30, 1999.
NOTE L Leases and other Off-Balance Sheet Commitments
Staples Group leases certain retail and support facilities under long-term
noncancellable lease agreements. Most lease agreements contain renewal options
and rent escalation clauses and require Staples Group 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 30, 1999 include $49,000,000 relating
to future rent escalation clauses and lease incentives under certain existing
store operating lease arrangements. These rent expenses are recognized
following the straight-line basis over the respective terms of the leases.
Future minimum lease commitments for retail and support facilities (including
lease commitments for 116 retail stores not yet opened at January 30, 1999)
under noncancellable operating leases are due as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal year:
------------
<S> <C>
1999.............................. $ 271,741
2000.............................. 294,675
2001.............................. 290,547
2002.............................. 280,104
2003.............................. 276,425
Thereafter........................ 2,439,592
----------
$3,853,084
==========
</TABLE>
Rent expense approximated $234,609,000, $193,990,000, and $142,508,000, for
the fiscal years ended January 30, 1999, January 31, 1998, and February 1,
1997, respectively.
Letters of credit are issued by Staples Group during the ordinary course of
business through major financial institutions as required by certain vendor
contracts. As of January 30, 1999, Staples Group had available open letters of
credit totaling $7,923,000.
NOTE M Quarterly Summary (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Fiscal Year Ended January
30, 1999
Sales.................. $1,668,367 $1,472,890 $1,895,724 $2,069,322
Gross Profit........... 380,209 347,144 466,690 528,058
Net income............. 35,950 8,974(1) 69,186 71,260(4)
Pro forma net income... 34,136(2) 8,974(1) 69,186 71,260(3)
</TABLE>
VI-33
<PAGE>
STAPLES THE OFFICE SUPERSTORE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Fiscal Year Ended
January 31, 1998
Sales................. $1,292,477 $1,191,720 $1,551,222 $1,693,020
Gross Profit.......... 298,319 280,760 368,749 405,696
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)
</TABLE>
- --------
(1) Net income for the quarter ended August 1, 1998 includes a pre-tax charge
of $41,000 resulting from costs incurred in connection with the merger with
Quill Corporation. 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 then 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) Net income for the quarter ended January 30, 1999 includes a pre-tax charge
of $49,706 resulting from a store closure charge.
NOTE N Business Acquisitions
On May 21, 1998, Staples acquired Quill. The merger was structured as an
exchange of shares in which the stockholders of Quill received approximately
26,000,000 shares of Staples' common stock, at an exchange ratio established at
a combination of fixed and variable prices, and cash paid a dissenting
stockholder of approximately $48,000,000, which equates to a purchase price of
approximately $690,000,000. The merger was accounted for as a pooling of
interests and, accordingly, Staples' consolidated financial statements have
been restated to include the operations of Quill for all periods prior to the
merger. The statements of income combine Staples' historical operating results
for the fiscal years ended January 31, 1998 and February 1, 1997 with the
corresponding Quill operating results for the years ended December 31, 1997 and
1996, 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 Staples' U.S. federal
income tax return subsequent to the date of the acquisition. Pro forma
adjustments have been made to the restated statements of operations to reflect
the income taxes that would have been provided had Quill been subject to income
taxes.
In connection with the acquisition of Quill, Staples committed to a plan
that results in the integration of the two businesses. As a result of the
acquisition and integration plan, Staples recorded a charge to operating
expense of $41,000,000 during the year ended January 30, 1999. These costs
consist of direct merger-related and integration costs from the transaction.
The merger transaction costs of approximately $10,500,000 consist primarily of
fees for investment bankers, attorneys, accountants, and other related charges.
The integration costs primarily include employee costs of approximately
$7,000,000, contract and lease termination costs of approximately $14,100,000,
the write-down of leasehold improvements of approximately $3,500,000 and other
merger-related costs of approximately $5,900,000. Through January 30, 1999,
Staples paid approximately $14,000,000, which consisted primarily of
transaction and employee related costs.
VI-34
<PAGE>
STAPLES THE OFFICE SUPERSTORE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Separate net sales and net income of the merged entities prior to the merger
are presented in the following table (in thousands):
<TABLE>
<CAPTION>
January 31, 1998 February 1, 1997
---------------- ----------------
<S> <C> <C>
Net sales:
Staples.................................. $5,181,035 $3,967,665
Quill.................................... 551,110 525,924
---------- ----------
Combined............................... $5,732,145 $4,493,589
========== ==========
Net income
Staples.................................. $ 130,949 $ 106,420
Quill.................................... 36,965 38,322
---------- ----------
Combined............................... $ 167,914 $ 144,742
========== ==========
Pro forma net income
Staples.................................. $ 130,949 $ 106,420
Quill(1)................................. 22,179 22,993
---------- ----------
Combined............................... $ 153,128 $ 129,413
========== ==========
</TABLE>
- --------
(1) Reflects adjustment for provision for income taxes on previously untaxed
earnings.
NOTE O Store Closure Charge
In the fourth quarter of 1998, Staples Group committed to a plan to relocate
certain stores which cannot be expanded and upgraded to Staples Group's current
stores model and reported a pre-tax store closure charge of $49,706,000. The
charge includes $29,620,000 for future rental payments under operating lease
agreements that will be paid after the store is closed and will not be
subsidized by subtenant income, $4,966,000 in fees, settlement costs and other
expenses related to store closure, and $15,120,000 in asset impairment charges.
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.
As a result of Staples Group's commitment to exit these stores, the Company
evaluated the long-lived assets at each location in accordance with FAS 121.
The analysis indicated that the long-lived assets of the designated stores were
impaired. Accordingly, Staples Group estimated the fair value of these assets
based on discounted cash flows and recorded an impairment charge of
$15,120,000, which is included in the store closure charge. Staples Group will
continue to depreciate these assets based on their revised useful life.
NOTE P Segment Reporting
Staples Group has three reportable segments: North American Retail, North
American Delivery Operations, and European Operations. Staples Group's North
American Retail division consists of two operating units that operate stores
throughout the US and Canada. Staples Group's North American Delivery
Operations division consists of three operating units that sell office products
and supplies directly to businesses. The European Operations segment consists
of two 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 Group evaluates performance and allocates resources based on profit
or loss from operations before income taxes, not including gains and losses on
Staples Group's investment portfolio. The accounting
VI-35
<PAGE>
STAPLES THE OFFICE SUPERSTORE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
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 Group's cost, therefore there is no intercompany profit
or loss recognized on these transactions.
Factors Management Used to Identify the Enterprise's Reportable Segments
Staples Group's 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.
Information about segment profit/loss and segment assets (in thousands)
Year ended January 30, 1999:
<TABLE>
<CAPTION>
N. American N. American Delivery European
Retail Operations Operations All Other(1) Totals
----------- -------------------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Revenues from external
customers.............. $4,867,124 $1,898,089 $341,090 $ -- $7,106,303
Merger and store
closure................ 49,706 41,000 -- -- 90,706
Depreciation expense.... 67,208 5,106 6,818 -- 79,132
Segment profit (loss)... 381,900 118,075 (17,077) (175,846) 307,052
Segment assets.......... 2,886,114 448,367 162,693 -- 3,497,174
Expenditures for long-
lived assets........... 307,817 2,252 13,129 -- 323,198
</TABLE>
- --------
(1) All other includes corporate general and administrative expenses.
Year ended January 31, 1998:
<TABLE>
<CAPTION>
N. American N. American Delivery European
Retail Operations Operations All Other(1) Totals
----------- -------------------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Revenues from external
customers.............. $3,854,745 $1,648,509 $225,185 $ -- $5,728,439
Merger expenses......... -- -- -- 29,665 29,665
Depreciation expense.... 52,479 3,908 4,358 -- 60,745
Segment profit (loss)... 319,939 112,011 (8,049) (173,847) 250,054
Segment assets.......... 2,432,696 386,053 130,088 -- 2,948,837
Expenditures for long-
lived assets........... 173,767 7,527 43,932 -- 225,226
</TABLE>
- --------
(1) All other includes corporate general and administrative expenses and merger
related costs in connection with the then proposed merger with Office
Depot, Inc.
<TABLE>
<CAPTION>
January 30, January 31,
Assets 1999 1998
- ------ ----------- -----------
<S> <C> <C>
Total assets for reportable segments.................. $3,497,174 $2,948,837
Elimination of intercompany receivables............... (89,664) (114,504)
Elimination of intercompany investments............... (228,329) (195,471)
---------- ----------
Total consolidated assets........................... $3,179,181 $2,638,862
========== ==========
</TABLE>
VI-36
<PAGE>
STAPLES THE OFFICE SUPERSTORE GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Geographic Information
Year ended January 30, 1999:
<TABLE>
<CAPTION>
Long-Lived
Revenues Assets
---------- ----------
<S> <C> <C>
North American........................................... $6,765,213 $1,028,652
Europe................................................... 341,090 35,913
---------- ----------
Consolidated Total....................................... $7,106,303 $1,064,565
========== ==========
Year ended January 31, 1998:
<CAPTION>
Long-Lived
Revenues Assets
---------- ----------
<S> <C> <C>
North American........................................... $5,503,253 $ 762,371
Europe................................................... 225,186 30,888
---------- ----------
Consolidated Total....................................... $5,728,439 $ 793,259
========== ==========
</TABLE>
NOTE Q Subsequent Events
On February 26, 1999, Staples Group completed the acquisition of Claricom
Holdings, Inc. and certain related entities ("Claricom") for a purchase price
of approximately $140,000,000. The acquisition will be accounted for using the
purchase method. Claricom is a full-service supplier of telecommunications
services to small and medium sized businesses in the United States.
On March 4, 1999, the Board approved a stock repurchase program intended to
provide shares for employee stock programs. Staples expects to repurchase
approximately 6,000,000 shares annually. Additionally, on September 15, 1999,
Staples announced that its Board of Directors authorized the Company to
purchase an additional $100,000,000 of its common stock bringing the total
amount of the Company's stock repurchase program to approximately $300,000,000.
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.
On September 15, 1999, the Company announced the proposed restructuring of
the existing common stock of the Company into two classes, intended to track
the separate performances of the retail and delivery business of the Company
(Staples Group) and the e-commerce business of the Company (Staples.com Group).
The Company expects to issue shares of Staples.com Stock in one or more private
or public financings within twelve months of stockholder approval of the
Tracking Stock Proposal. The specific terms of the financings, including
whether they are private or public, the amount of Staples.com Stock issued, and
the timing of the financings, will depend upon factors such as stock market
conditions and the performance of Staples.com Group.
VI-37
<PAGE>
STAPLES THE OFFICE SUPERSTORE GROUP
The following interim financial information is unaudited but, in the opinion
of the Company, includes all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation. Operating results for the interim
period are not necessarily indicative of the results that may be expected for
the full year. The financial information should be read in conjunction with
Staples Group's audited combined financial statements as of January 30, 1999
included herein and Staples, Inc.'s audited consolidated financial statements
and Annual Report on Form 10-K as of January 30, 1999 and unaudited interim
results on Form 10-Q.
VI-38
<PAGE>
STAPLES THE OFFICE SUPERSTORE GROUP
COMBINED BALANCE SHEETS
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
July 31, January 30,
1999 1999
----------- -----------
(Unaudited)
<S> <C> <C>
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
Inter-group receivable from Staples.com Group......... 1,697 --
Deferred income taxes................................. 79,397 75,261
Prepaid expenses and other current assets............. 51,367 50,117
---------- ----------
Total current assets................................ 2,030,595 2,063,067
Property and Equipment:
Land and buildings.................................... 246,948 231,378
Leasehold improvements................................ 407,722 372,451
Equipment............................................. 457,826 399,153
Furniture and fixtures................................ 260,868 239,755
---------- ----------
Total property and equipment........................ 1,373,364 1,242,737
Less accumulated depreciation and amortization........ 449,538 403,462
---------- ----------
Net property and equipment.......................... 923,826 839,275
Other Assets:
Retained interest in Staples.com Group................ 21,052 1,962
Lease acquisition costs, net of amortization.......... 70,098 75,127
Goodwill, net of amortization......................... 301,323 148,201
Deferred income taxes................................. 30,819 28,735
Other................................................. 26,306 22,814
---------- ----------
Total other assets.................................. 449,598 276,839
---------- ----------
$3,404,019 $3,179,181
========== ==========
LIABILITIES AND GROUP EQUITY
Current Liabilities:
Accounts payable...................................... $ 863,878 $ 794,427
Accrued expenses and other current liabilities........ 442,997 438,226
Debt maturing within one year......................... 43,997 32,594
---------- ----------
Total current liabilities........................... 1,350,872 1,265,247
Long-Term Debt.......................................... 263,560 205,015
Other Long-Term Obligations............................. 55,909 52,033
Group Equity............................................ 1,733,678 1,656,886
---------- ----------
$3,404,019 $3,179,181
========== ==========
</TABLE>
See notes to group interim financial statements.
VI-39
<PAGE>
STAPLES THE OFFICE SUPERSTORE GROUP
COMBINED STATEMENTS OF INCOME
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
26 Weeks Ended
----------------------
July 31, August 1,
1999 1998
---------- ----------
(Unaudited)
<S> <C> <C>
Sales.................................................. $3,884,874 $3,141,258
Cost of goods sold and occupancy costs................. 2,941,867 2,413,905
---------- ----------
Gross profit....................................... 943,007 727,353
Operating and other expenses:
Operating and selling................................ 578,971 454,771
Pre-opening.......................................... 9,407 7,584
General and administrative........................... 169,007 137,283
Amortization of goodwill............................. 5,258 1,851
Merger-related and integration costs................. -- 41,000
Store closure charge................................. -- --
Interest and other expense, net...................... 5,341 10,613
---------- ----------
Total operating and other expenses................. 767,984 653,102
---------- ----------
Income before equity in loss of affiliates,
retained interest and income taxes................ 175,023 74,251
Loss related to the retained interest in Staples.com
Group............................................... (3,706) (104)
---------- ----------
Income before income taxes........................... 171,317 74,147
Income tax expense..................................... 68,259 29,383
---------- ----------
Net income before minority interest................ 103,058 44,764
Minority interest.................................... -- 160
Net income......................................... $ 103,058 $ 44,924
========== ==========
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
==========
</TABLE>
See notes to group interim financial statements.
VI-40
<PAGE>
STAPLES THE OFFICE SUPERSTORE GROUP
COMBINED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
26 Weeks Ended
--------------------
July 31, August 1,
1999 1998
--------- ---------
(Unaudited)
<S> <C> <C>
Operating Activities:
Net income............................................. $ 103,058 $ 44,924
Adjustments to reconcile net income to net cash used in
operating activities:
Minority interest.................................... -- (160)
Retained interest in loss of Staples.com Group....... 3,706 104
Depreciation and amortization........................ 81,410 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............................................ (1,677) 8,616
Increase in accounts payable, accrued expenses and
other current liabilities......................... 31,424 37,706
Increase in other long-term obligations............ 2,863 6,242
--------- ---------
(187,066) (77,299)
--------- ---------
Net cash used in operating activities.................. (84,008) (32,375)
Investing Activities:
Acquisition of property and equipment.................. (145,897) (149,227)
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...................... -- (2,545)
Capital contributions to Staples.com Group............. (22,796) (410)
Inter-group revolver advances to Staples.com Group..... (1,697) (104)
Acquisition of lease rights............................ 1,946 (36,690)
Other.................................................. 88 (1,619)
--------- ---------
Net cash used in investing activities.................. (289,867) (167,141)
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
========= =========
</TABLE>
See notes to group interim financial statements.
VI-41
<PAGE>
STAPLES THE OFFICE SUPERSTORE GROUP
NOTES TO COMBINED INTERIM FINANCIAL STATEMENTS
(Unaudited)
NOTE A Basis of Presentation
The accompanying interim unaudited combined financial statements include the
accounts of Staples The Office Superstore Group ("Staples Group"). All
intercompany accounts and transactions are eliminated in consolidation. In
order to prepare separate financial statements for Staples Group and
Staples.com Group, the Company has allocated, for financial reporting purposes,
all of its consolidated assets, liabilities, revenue, expenses and cash flow
between Staples Group and Staples.com Group. These financial statements of
Staples Group and Staples.com Group, taken together, comprise all of the
accounts included in the corresponding consolidated financial statements of
Staples. Staples Group's financial statements reflect the application of
certain cash management and allocation policies adopted by the Board. Staples
Group financial statements include the financial position, results of
operations and cash flows of Staples Group and the effects of a 100 percent
retained interest in Staples.com Group on the statements of income, balance
sheets and cash flows. These financial statements should be read in conjunction
with the audited consolidated financial statements and footnotes of Staples,
Inc. included in the Company's Annual Report on Form 10-K for the year ended
January 30, 1999 and the combined financial statements and footnotes of Staples
Group for the year ended January 30, 1999 included elsewhere in this document.
NOTE B Comprehensive Income
Staples Group 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 Group's net income or group
equity. SFAS 130 requires Staples Group 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
group equity, in the notes to the financial statements for interim periods.
During the six months ended July 31, 1999, total comprehensive income amounted
to approximately $101,920,000 compared to $41,393,000 for the corresponding
period ended August 1, 1998.
NOTE C Description of The Types of Products and Services from Which Each
Reportable Segment Derives Its Revenues
Staples Group has three reportable segments: North American Retail, North
American Delivery Operations, and European Operations. Staples' North American
Retail division consists of two operating units that operate stores throughout
the US and Canada. Staples' North American 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 Group evaluates performance and allocates resources based on profit
or loss from operations before income taxes, not including gains and losses on
Staples Group's investment portfolio. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies. Inter-segment sales and transfers are recorded at Staples
Group's cost, therefore there is no intercompany profit or loss recognized on
these transactions.
Factors Management Used to Identify the Enterprise's Reportable Segments
Staples Group's 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
VI-42
<PAGE>
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 twenty-six weeks ended July 31, 1999 and August 1,
1998:
Twenty-six weeks ended July 31, 1999:
<TABLE>
<CAPTION>
N. American N. American European All
Retail Delivery Operations Operations Other(1) Totals
----------- ------------------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Revenues from external
customers.............. $2,590,989 $1,126,995 $166,890 $ -- $3,884,874
Depreciation and amorti-
zation expense......... 60,491 15,672 5,247 -- 81,410
Segment profit (loss)... 206,538 88,314 (19,354) (100,475) 175,023
Expenditures for long-
lived assets........... $ 125,834 $ 169,929 $ 8,609 $ -- $ 304,372
Twenty-six weeks ended August 1, 1998:
<CAPTION>
N. American N. American European All
Retail Delivery Operations Operations Other(1) Totals
----------- ------------------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Revenues from external
customers.............. $2,088,478 $ 901,099 $151,681 $ -- $3,141,258
Merger and Integration
Costs.................. -- 41,000 -- -- 41,000
Depreciation and amorti-
zation expense......... 44,856 10,006 3,787 -- 58,649
Segment profit (loss)... 145,780 20,623 (10,631) (81,521) 74,251
Expenditures for long-
lived assets........... $ 169,965 9,325 7,037 -- 186,327
</TABLE>
- --------
(1) All other is composed of corporate general and administrative expenses.
<TABLE>
<CAPTION>
Total Assets ($ in 000's)
------------------------------
July 31, 1999 January 30, 1999
------------- ----------------
<S> <C> <C>
N. American Retail............................... $2,981,101 $2,886,114
N. American Delivery............................. 589,338 448,367
European Operations.............................. 185,025 162,693
---------- ----------
Totals........................................... 3,755,464 3,497,174
Elimination of Intercompany Receivables.......... (94,696) (89,664)
Elimination of Intercompany Investments.......... (256,749) (228,329)
---------- ----------
Total Consolidated Assets........................ $3,404,019 $3,179,181
========== ==========
Geographic Information:
<CAPTION>
Revenues from External
Customers ($ in 000's)
26 Weeks Ended
------------------------------
July 31, 1999 August 1, 1998
------------- ----------------
<S> <C> <C>
N. American...................................... $3,717,984 $2,989,577
European......................................... 166,890 151,681
---------- ----------
Totals........................................... $3,884,874 $3,141,258
========== ==========
<CAPTION>
Long-lived Assets ($ in 000's)
------------------------------
July 31, 1999 January 30, 1999
------------- ----------------
<S> <C> <C>
N. American...................................... $1,274,545 $1,028,652
European......................................... 41,754 35,913
---------- ----------
Totals........................................... $1,316,299 $1,064,565
========== ==========
</TABLE>
VI-43
<PAGE>
NOTE D Acquisitions
On February 26, 1999, Staples Group 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 Group 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 E 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 F Subsequent Events
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 Group 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.
On September 15, 1999, Staples announced that its Board authorized the
Company to purchase an additional $100,000,000 of its common stock bringing the
total amount of the Company's stock repurchase program to approximately
$300,000,000.
On September 15, 1999, the Company announced the proposed restructuring of
the existing common stock of the Company into two classes, intended to track
the separate performances of the retail and delivery business of the Company
(Staples Group) and the e-commerce business of the Company (Staples.com Group).
The Company expects to issue shares of Staples.com Stock in one or more private
or public financings within twelve months of stockholder approval of the
Tracking Stock Proposal. The specific terms of the financings, including
whether they are private or public, the amount of Staples.com Stock issued, and
the timing of the financings, will depend upon factors such as stock market
conditions and the performance of Staples.com Group.
VI-44
<PAGE>
ANNEX VII
Staples.com Group Combined Financial Information
VII-1
<PAGE>
ANNEX VII
STAPLES.COM GROUP
INDEX TO COMBINED FINANCIAL INFORMATION
<TABLE>
<S> <C>
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... VII-3
Audited Financial Statements
Report of Independent Auditors........................................ VII-10
Combined Balance Sheets -- January 30, 1999 and January 31, 1998...... VII-11
Combined Statements of Operations -- Fiscal years ended January 30,
1999, January 31, 1998 and February 1, 1997.......................... VII-12
Combined Statements of Group Equity -- Fiscal years ended January 30,
1999, January 31, 1998 and February 1, 1997.......................... VII-13
Combined Statements of Cash Flows -- Fiscal years ended January 30,
1999, January 31, 1998 and February 1, 1997.......................... VII-14
Notes to Staples.com Group Combined Financial Statements.............. VII-15
Interim Financial Statements (unaudited)
Combined Balance Sheets -- July 31, 1999 and January 30, 1999......... VII-23
Combined Statements of Operations -- 26 weeks ended July 31, 1999 and
August 1, 1998....................................................... VII-24
Combined Statements of Cash Flows -- 26 weeks ended July 31, 1999 and
August 1, 1998....................................................... VII-25
Notes to Staples.com Group Interim Combined Financial Information..... VII-26
</TABLE>
VII-2
<PAGE>
STAPLES.COM GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read this discussion along with the Staples The Office Superstore
Group ("Staples Group") Combined Financial Statements contained in this proxy
statement. Historical results and percentage relationships may not necessarily
be indicative of operating results for any future periods. The combined
financial statements of Staples.com Group include the balance sheets,
statements of operations, cash flows and group equity of Staples' e-commerce
businesses, including Staples.com, Quillcorp.com and StaplesLink.com.
The stockholders of Staples, Inc. ("Staples" or the "Company") are scheduled
to vote on a proposal (the "Tracking Stock Proposal") to amend the Company's
certificate of incorporation to (i) create a new class of common stock called
Staples.com Group common stock ("Staples.com Stock"), intended to reflect the
performance of Staples.com Group, the Company's e-commerce business division,
(ii) increase the aggregate number of shares of common stock that the company
may issue from 1,500,000,000 to 1,650,000,000, initially comprised of
1,500,000,000 shares of Staples Stock and 150,000,000 shares of Staples.com
Stock, and (iii) re-classify Staples existing common stock as Staples The
Office Superstore Stock, intended to reflect the performance of Staples Group,
which consists of all of the Company's other businesses and a retained interest
in Staples.com Group.
If the Tracking Stock Proposal is approved by the Company's stockholders,
the filing of the amendment to the Company's certificate of incorporation
implementing the proposal will automatically re-classify each share of existing
common stock into Staples Stock. Subject to stockholder approval of the
Tracking Stock Proposal, the Company expects to issue additional shares of
Staples.com Stock in one or more private or public financings within twelve
months of such approval. The specific terms of the financings, including
whether they are private or public, the amount of Staples.com Stock issued, and
the timing of the financings, will depend upon factors such as stock market
conditions and the performance of Staples.com Group. The effect of any
financings on the retained interest percentage and the outstanding interest
percentage will depend upon the number of shares of Staples.com Stock sold and
whether the Company elects to attribute the net proceeds of such financings to
the equity of Staples.com Group or to Staples Group in respect of its retained
interest.
The combined financial statements of Staples.com Group and the combined
financial statements of Staples Group comprise all of the accounts included in
the consolidated financial statements of Staples. The separate group financial
statements give effect to all allocation and related party transaction policies
adopted by the Board of Directors of Staples, Inc. (the "Board"). These
policies are described in Note C to the Staples.com Group combined financial
statements. The Staples.com Group combined financial statements have been
prepared in a manner which management believes is reasonable and appropriate.
Such financial statements include the financial position, results of operations
and cash flows of Staples.com Group presented to give effect to the accounting
policies that will be applicable upon implementation of the Tracking Stock
Proposal.
If the Tracking Stock Proposal is approved by the Company's stockholders,
the Company will provide to the holders of Staples.com Stock separate financial
statements, financial reviews, descriptions of the business, and other relevant
financial information for Staples Group and Staples.com Group as well as
consolidated financial information for the Company. Notwithstanding the
allocation of assets and liabilities, including contingent liabilities, between
Staples.com Group and Staples Group for the purposes of preparing their
respective combined financial statements, this allocation and the change in the
capital structure of the Company as a result of the approval of the Tracking
Stock Proposal will not result in the distribution or spin-off to stockholders
of any of the Company's assets or liabilities and will not affect ownership of
its assets or responsibility for its liabilities or those of its subsidiaries.
Holders of Staples.com Stock will be common stockholders of the Company. The
assets the Company attributes to one group will be subject to the liabilities
of the other group, even if such liabilities arise
VII-3
<PAGE>
from lawsuits, contracts or indebtedness that are attributed to the other
group. If the Company is unable to satisfy one group's liabilities out of the
assets attributed to it, the Company may be required to satisfy those
liabilities with assets the Company has attributed to the other group. Further,
holders of Staples.com Stock and Staples Stock will not have any legal rights
related to specific assets of either group and in any liquidation will receive
a fixed share of the net assets of the Company which may not reflect the actual
trading prices, if any, of the respective groups at such time.
Financial effects from one group that affect the Company's consolidated
results of operations or financial condition could, if significant, affect the
results of operations or financial condition of the other group and the market
price of the common stock relating to the other group. In addition, net losses
of either group and dividends and distributions on, or repurchases of, either
class of common stock or repurchases of preferred stock at a price per share
greater than par value will reduce the funds we can pay on each class of common
stock under Delaware law. Accordingly, the Staples.com Group combined financial
statements should be read in conjunction with the Company's audited
consolidated financial information and Annual Report on Form 10-K and the
combined financial information of Staples Group contained in Annex VI.
Results of Operations
Comparison of Fiscal Years ended January 30, 1999, January 31, 1998, and
February 1, 1997
General. Staples' electronic commerce business, or e-business, sells office
products and services over the Internet to Staples' entire spectrum of
customers, including small, medium and large businesses. Our e-business group
operates under the name Staples.com and is comprised of three principal
business units, Staples.com, Quillcorp.com and StaplesLink.com (formerly
Staples Network Advantage Plus, or SNAP), each of which has its own web site
and is specifically designed to serve a target customer base. We launched the
Staples.com website, the e-business portal of our traditional retail
superstore, in November 1998. Staples.com markets over 6,000 products to
primarily home office and small business customers through its web-based
superstore and offers free delivery for orders over $50. Quill sold its first
products through Quillcorp.com, the e-business portal of our Quill catalog
business, in November 1996. Quillcorp.com markets products from our direct mail
catalog to small to medium sized business customers such as legal and medical
offices. Quill's private label products are among the products we sell on our
Quillcorp.com web site. Staples established the StaplesLink.com website, the
e-business portal of our Staples Network Advantage contract stationer business,
in August 1998. The StaplesLink.com website focuses on meeting the needs of
medium to large sized business customers by offering simple order entry and
contract pricing.
During the fiscal year ended January 30, 1999, Staples acquired, in a
pooling of interests transaction, Quill Corporation and certain related
entities, including the operations of Quillcorp.com, which had 1997 net sales
of approximately $3,700,000. The financial information set forth below includes
adjustments to give effect to the acquisition of the operations of
Quillcorp.com for all periods presented. Prior to its acquisition by Staples,
Quill elected to be treated as an S Corporation under the Internal Revenue
Code, and accordingly, its earnings and the earnings of Quillcorp.com were not
subject to taxation at the corporate level. Pro forma adjustments have been
made to reflect an income tax benefit on such previously untaxed earnings for
each period presented at an assumed rate of 40%. The statements of operations
combine Staples.com Group's historical operating results for the fiscal years
ended January 31, 1998 and February 1, 1997 with corresponding Quill operating
results for the years ended December 31, 1997 and 1996.
Sales. Sales increased to $16,886,000 in the fiscal year ended January 30,
1999 as compared to $3,706,000 and $35,000 in the fiscal years ended January
31, 1998 and February 1, 1997, respectively, as the roll out of our e-commerce
businesses grew. The fiscal year ended January 30, 1999 includes sales from all
three e-commerce businesses, Staples.com, Quillcorp.com, and StaplesLink.com,
while the previous years included only Quillcorp.com which launched in November
1996.
VII-4
<PAGE>
Gross Profit. Gross profit as a percentage of sales was 24.7%, 25.1%, and
25.7% for the fiscal years ended January 30, 1999, January 31, 1998, and
February 1, 1997, respectively. The decrease in the fiscal year ended January
30, 1999 is attributable to product and customer mix during our continued
rollout of e-commerce activities. This decrease was partially offset by the
benefit provided by the inter-group allocation agreement which passed on the
benefit of lower product costs from vendors.
Operating and Selling Expenses. Operating and selling expenses, which
consist of payroll, advertising and other operating expenses, were 14.7%,
17.2%, and 371% of sales for the fiscal years ended January 30, 1999, January
31, 1998, and February 1, 1997, respectively. These expenses have decreased as
a percentage of sales as sales volume has increased, leveraging fixed and start
up expenses over time.
General and Administrative Expenses. General and administrative expenses as
a percentage of sales were 14.4%, 15.8%, and 237% in the fiscal years ended
January 30, 1999, January 31, 1998, and February 1, 1997, respectively. The
primary drivers of these expenses are investments in staffing and
infrastructure. Included in general and administrative expenses was an
allocation of certain Staples Group services provided on a centralized basis
amounting to $1,264,000, $320,000, and $3,000 for the fiscal years ended
January 30, 1999, January 31, 1998, and February 1, 1997, respectively. These
costs decreased as a percentage of sales primarily due to economies of scale.
Interest and Other Expense, Net. Net interest and other expense totaled
$28,000, $8,000, and $3,000 in the fiscal years ended January 30, 1999, January
31, 1998, and February 1, 1997, respectively. The interest expense is
calculated based upon the inter-group credit advance and an incremental
borrowing rate of 6% for the fiscal years ended January 30, 1999, January 31,
1998 and February 1, 1997. These credit advances from Staples Group fund the
operating needs of Staples.com Group as most finance activities are managed on
a centralized basis and attributed to Staples Group. These advances are funded
as a capital contribution by Staples Group at the end of each fiscal year.
Income Taxes. The income tax benefit as a percentage of pre-tax income was
38.4%, for the year ended January 30, 1999 and 0% for the fiscal years ended
January 31, 1998 and February 1, 1997. On a pro forma basis, to reflect a
provision for income taxes on previously untaxed earnings of Quill, Staples.com
Group's effective tax rate would have been 41% for the years ended January 30,
1999, January 31, 1998 and February 1, 1997.
Comparison of the 26 Weeks ended July 31, 1999 and August 1, 1998
Sales. Sales increased to $27,302,000 for the six months ended July 31, 1999
as compared to $5,058,000 for the six months ended August 1, 1998. This growth
is attributable to the continued rollout of our e-commerce business as the
results for the six months ended July 31, 1999 include all three of our
internet channels, Staples.com, Quillcorp.com and StaplesLink.com, while the
results for the same period in the prior year only include the operations of
Quillcorp.com. Staples.com and StaplesLink.com were launched in the quarters
ended January 31, 1999 and October 31, 1998, respectively.
Gross Profit. Gross profit as a percentage of sales was 23.1% and 26.7% for
the six months ended July 31, 1999 and August 1, 1998, respectively. The
decrease is attributable to product and customer mix during our continued
rollout of e-commerce activities. This decrease was offset by the benefit
provided by the inter-group allocation principles which passed on the benefit
of lower product costs from vendors.
Operating and Selling Expenses. Operating and selling expenses, which
consist of payroll, advertising and other operating expenses, increased as a
percentage of sales in the six months ended July 31, 1999 to 26.0% compared to
12.1% for the six months ended August 1, 1998. The increase was primarily due
to increased marketing expenses which represented 19.2% of sales for the six
months ended July 31, 1999 as compared to 7.6% of sales for the same period
ended August 1, 1998.
VII-5
<PAGE>
General and Administrative Expenses. General and administrative expenses as
a percentage of sales were 19.2% and 17.7% for the six months ended July 31,
1999 and August 1, 1998, respectively. Included in general and administrative
expenses was an allocation of the costs of certain Staples Group services
provided on a centralized basis amounting to $1,373,000 and $488,000 for the
six months ended July 31, 1999 and August 1, 1998, respectively. The increase
in general and administrative costs as a percentage of sales reflects the
building of the infrastructure for the continued rollout of e-commerce
activities.
Interest and Other Expense, Net. Net interest and other expense totaled
$51,000 and $1,000 for the six months ended July 31, 1999 and August 1, 1998,
respectively. The interest expense relates to the inter-group revolving credit
advances from Staples Group to fund the operating needs of Staples.com Group
as most treasury activities are managed on a centralized basis and attributed
to Staples Group unless the Board determines otherwise. These advances were
funded as a capital contribution by Staples Group at the end of each fiscal
year.
Income Taxes. Income tax benefit as a percentage of pre-tax income was
39.0% for the six months ended July 31, 1999 as compared to 33.8% for the six
months ended August 1, 1998. On a pro forma basis, to reflect a provision for
income taxes on previously untaxed earnings of Quill, Staples.com Group's
effective tax rate would have been 41.4% for the six months ended August 1,
1998.
Liquidity and Capital Resources
Staples manages most finance activities on a centralized, consolidated
basis. These activities include the investment of surplus cash, the issuance,
repayment and repurchase of short-term and long-term debt, and the issuance
and repurchase of common stock. Staples currently attributes each incurrence
or issuance of external debt, and the proceeds thereof, to Staples Group and
will continue to do so in the future unless the Board determines otherwise.
Whenever Staples.com Group holds cash, Staples.com Group will normally, but
will not be obligated to, transfer that cash to Staples Group. Conversely,
whenever Staples.com Group has a cash need, Staples Group will normally, but
will not be obligated to, fund that cash need. The Board will determine, in
its sole discretion, whether either group will provide any particular funds on
any particular occasion to the other group, but will not be obligated to cause
such cash transfers.
All cash transfers from one group to or for the account of the other group
(other than transfers in return of assets or services rendered or transfers in
respect of Staples Group's retained interest that correspond to dividends paid
on Staples.com Stock), will be accounted for as inter-group revolving credit
advances unless:
. the Board determines that a given transfer, or type of transfer, should
be accounted for as a long-term loan,
. the Board determines that a given transfer, or type of transfer, should
be accounted for as a capital contribution increasing Staples Group's
retained interest in Staples.com Group.
. the Board determines that a given transfer, or type of transfer, should
be accounted for as a return of capital reducing Staples Group's
retained interest in Staples.com Group.
There are no specific criteria to determine when Staples Group will account
for a cash transfer as a long-term loan, a capital contribution or a return of
capital rather than an inter-group revolving credit advance. The Board would
make such a determination based on its judgement at the time of such transfer,
or at the time of the first of such type of transfer, based upon all relevant
circumstances. Factors the Board would consider include:
. the current and projected capital structure of each group,
. the relative levels of internally generated funds of each group,
. the financing needs and objectives of the recipient group,
. the investment objectives of the transferring group, the availability,
cost and time associated with the alternative financing sources and
prevailing interest rates and general economic conditions.
VII-6
<PAGE>
Any cash transfer accounted for as an inter-group revolving credit advance
will bear interest at a rate at which the Board, in its sole discretion,
determines Staples could borrow such funds on a revolving credit basis. Any
cash transfer accounted for as a long-term loan will have interest rate,
amortization, maturity, redemption and other terms that generally reflect the
then prevailing terms on which the Board, in its sole discretion, determines
Staples could borrow such funds.
Any cash transfer from Staples Group to Staples.com Group, or for
Staples.com Group's account, accounted for as a capital contribution will
correspondingly increase Staples.com Group's group equity and Staples Group's
retained interest in Staples.com Group. As a result, the number of shares
issuable with respect to Staples Group's retained interest in Staples.com Group
will increase by the amount of such capital contribution divided by the market
value of Staples.com Stock on the date of transfer. Any cash transfer from
Staples.com Group to Staples Group, or for Staples Group's account, accounted
for as a return of capital will correspondingly reduce Staples.com Group's
group equity and Staples Group's retained interest in Staples.com Group. As a
result, the number of shares issuable with respect to Staples Group's retained
interest in Staples.com Group will decrease by the amount of such return of
capital divided by the market value of Staples.com Stock on the date of
transfer.
As a result of the cash management policies in place between Staples Group
and Staples.com Group, Staples.com Group is heavily dependent on Staples Group
for its continued funding. Accordingly, Staples.com Group's liquidity could be
adversely affected by the liquidity needs of Staples Group.
During the years ended January 30, 1999, January 31, 1998 and February 1,
1997, Staples Group also utilized its revolving credit facility to support its
various growth initiatives. Staples.com Group is dependent on continued funding
from Staples Group. Any deterioration in the financial condition of the Company
or Staples Group could have an adverse impact on Staples.com Group's ability to
fund operations.
During the year ended January 30, 1999, cash used in operations was
$1,377,000, primarily due to an increase in prepaid and other current assets
and the net loss from operations. Cash used in investing activities was
$1,072,000 due to the acquisition of equipment. Cash provided by financing
activities was $2,449,000, representing capital contributions from Staples
Group.
During the six months ended July 31, 1999, cash used in operations was
$1,697,000, primarily due to the net loss from operations of $3,706,000 offset
by an increase in accounts payable, accrued expenses and other liabilities of
$1,142,000 and a decrease in prepaid and other current assets of $700,000. Cash
used in investing activities of $22,796,000 represents investments made in
internet related companies of $20,906,000 and acquisitions of property and
equipment of $1,890,000. Cash provided by financing activities of $24,493,000
represents capital contributions from Staples Group of $22,796,000 and proceeds
from borrowings under the inter-group revolver of $1,697,000.
Inflation and Seasonality
While inflation or deflation has not had, and Staples.com Group does not
expect it to have, a material impact upon operating results, there can be no
assurance that Staples.com Group's business will not be affected by inflation
or deflation in the future. Staples.com Group 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
This document 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
VII-7
<PAGE>
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.
Staples.com Group has a limited operating history on which to assess its
future prospects. Staples.com Group has a limited history upon which to base an
evaluation of its prospects. Staples.com Group's prospects must be considered
in light of the risks, expenses and difficulties frequently encountered by
start-up companies in the new and rapidly evolving e-commerce market.
Staples.com Group's sales and cost of operations have grown substantially and
Staples.com Group has incurred cumulative net losses since inception. These
losses reflect expenditures necessary to develop, launch and acquire
Staples.com Group's site and services. Staples.com Group believes that newly
launched sites and services require a certain period of growth before they
begin to achieve adequate sales to support their operations. There can be no
assurance that Staples.com Group's sales will increase or even continue at its
current level, or that Staples.com Group will achieve or maintain profitability
or generate cash from operations in future periods.
Staples.com Group's market is highly competitive and it may not continue to
compete successfully. Staples.com Group competes in a highly competitive
marketplace with a variety of retailers, dealers, distributors and other
e-commerce operations. These include other high-volume office supply chains,
such as Office Depot, OfficeMax and Office World, that have pricing strategies
and product selections that are similar to Staples.com Group. Staples.com Group
also competes with online and other mass merchants, such as Wal-Mart, warehouse
clubs, computer and electronic superstores, and other discount retailers. In
addition, Staples.com Group competes with numerous mail order firms, contract
stationer businesses and direct manufacturers. Some of Staples.com Group's
current and potential competitors are larger and have substantially greater
financial resources than Staples.com Group. It is possible that increased
competition or improved performance by competitors may reduce Staples.com
Group's market share, may force Staples.com Group to charge lower prices than
it otherwise would, and may adversely affect its business and financial
performance in other ways. Sales and profitability are also influenced by
product mix and additional investments Staples.com Group makes in its business.
Staples.com Group's quarterly operating results are subject to significant
fluctuation. Staples.com Group's operating results have fluctuated from quarter
to quarter in the past, and it expects that they will continue to do so in the
future. Staples.com Group's earnings may fall short of either a prior fiscal
period or investors' expectations. Factors that could cause these quarterly
fluctuations include the following:
. the mix of products sold;
. pricing actions of competitors;
. the level of advertising and promotional expenses;
. seasonality, primarily because sales and profitability is typically
slightly lower in the first and second quarter of our fiscal year than
in other quarters; and
. charges associated with acquisitions.
Most of Staples.com Group's operating expenses, such as rent expense,
advertising expense and employee salaries, do not vary directly with the amount
of sales and are difficult to adjust in the short term. As a result, if sales
in a particular quarter are below expectations for that quarter, Staples.com
Group may not proportionately reduce operating expenses for that quarter, and
therefore this sales shortfall would have a disproportionate effect on
Staples.com Group's net income for the quarter.
Staples.com Group's rapid growth may continue to strain its operations,
which could adversely affect its business and financial results. Staples.com
Group's business, including sales, and number of employees, has grown
dramatically since its inception. This growth has placed significant demands on
its management and
VII-8
<PAGE>
operational systems. If Staples.com Group is not successful in upgrading its
operational and financial systems, expanding its management team and increasing
and effectively managing its employee base, this growth is likely to result in
operational inefficiencies and ineffective management of Staples.com Group's
business and employees, which will in turn adversely affect its business and
financial performance.
Staples.com Group as a new business enterprise may not be able to manage
many general business risks faced by other more mature e-Commerce
businesses. Staples.com Group must, among other things, effectively develop new
relationships and maintain existing relationships with its customers,
advertisers, and other on-line partners; provide a wide variety of products,
services, and content; develop and upgrade its technology; respond to
competitive developments; and attract, retain and motivate qualified personnel.
There can be no assurance that Staples.com Group will succeed in addressing
such risks and the failure to do so could have a material adverse effect on
Staples.com Group's business, financial condition or results of operations.
Year 2000 Readiness Disclosure
The Company has completed an assessment of the internal computer systems and
applications of Staples.com Group. Because these systems were developed
recently, the Company does not believe that these systems will be directly
impacted by the "Year 2000 issue" as described below. The operations of
Staples.com Group as a whole, however, are directly reliant upon the compliance
of the systems and applications of Staples Group. Staples.com Group's
operations could also be affected by the compliance of various third parties
including internet hosting and routing services, vendors, telephone providers
and the systems of their customers who must use their systems to place orders
on Staples.com Group's various e-commerce platforms. For a discussion of Year
2000 compliance activities of Staples Group, which are being managed on a
corporate wide basis, see the "Year 2000 Readiness Disclosure" for Staples
Group contained in Annex VI of this document.
VII-9
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Staples, Inc.
We have audited the accompanying combined balance sheets of Staples.com
Group (as described in Notes A and C) as of January 30, 1999 and January 31,
1998, and the related combined statements of operations, group equity and cash
flows for each of the three years in the period ended January 30, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements referred to above present fairly,
in all material respects, the financial position of Staples.com Group at
January 30, 1999 and January 31, 1998 and the results of its operations and its
cash flows for each of the three years in the period ended January 30, 1999 in
conformity with generally accepted accounting principles.
As more fully described in Notes A and C to these financial statements,
Staples.com Group is a business group of Staples, Inc., accordingly, the
combined financial statements of the Staples.com Group should be read in
conjunction with the audited financial statements of Staples, Inc.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Boston, Massachusetts
September 21, 1999
VII-10
<PAGE>
STAPLES.COM GROUP
COMBINED BALANCE SHEETS
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
January 30, January 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................. $ -- $--
Prepaid expenses and other current assets............. 1,033 --
------ ----
Total current assets................................ 1,033 --
Equipment:
Equipment............................................. 1,072 --
Less accumulated depreciation......................... 58 --
------ ----
Net equipment....................................... 1,014 --
------ ----
$2,047 $--
====== ====
LIABILITIES AND GROUP EQUITY
Current Liabilities:
Accrued expenses and other current liabilities........ $ 85 $--
------ ----
Total current liabilities........................... 85 --
Group equity............................................ 1,962 --
------ ----
$2,047 $--
====== ====
</TABLE>
See notes to group financial statements.
VII-11
<PAGE>
STAPLES.COM GROUP
COMBINED STATEMENTS OF OPERATIONS
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------
January 30, January 31, February 1,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Sales...................................... $16,886 $3,706 $ 35
Cost of goods sold and occupancy costs..... 12,721 2,775 26
------- ------ -----
Gross profit............................. 4,165 931 9
Operating and other expenses:
Operating and selling.................... 2,488 637 130
General and administrative............... 2,440 586 83
Interest and other expense, net.......... 28 8 3
------- ------ -----
Total operating and other expenses..... 4,956 1,231 216
------- ------ -----
Loss before income taxes................... (791) (300) (207)
Income tax benefit......................... (304) -- --
------- ------ -----
Net loss................................. $ (487) $ (300) $(207)
======= ====== =====
Pro forma:
Historical net loss...................... $ (487) $ (300) $(207)
Provision for income tax benefit on
previously untaxed earnings of pooled S-
Corporation income...................... (12) (120) (83)
------- ------ -----
Pro forma net loss....................... $ (475) $ (180) $(124)
======= ====== =====
</TABLE>
See notes to group financial statements.
VII-12
<PAGE>
STAPLES.COM GROUP
COMBINED STATEMENTS OF GROUP EQUITY
(Dollar Amounts in Thousands)
For the Fiscal Years Ended January 30, 1999, January 31, 1998,
and February 1, 1997
<TABLE>
<CAPTION>
Group
Equity
------
<S> <C>
Balances at February 3, 1996............................................ $ --
Capital contribution by Staples Group................................... $ 207
Net loss for the year................................................... (207)
------
Balances at February 1, 1997............................................ $ --
Capital contribution by Staples Group................................... $ 300
Net loss for the year................................................... (300)
------
Balances at January 31, 1998............................................ $ --
Capital contribution by Staples Group................................... 2,449
Net loss for the year................................................... (487)
------
Balances at January 30, 1999............................................ $1,962
======
</TABLE>
See notes to group financial statements.
VII-13
<PAGE>
STAPLES.COM GROUP
COMBINED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------
January 30, January 31, February 1,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Operating Activities:
Net loss.................................. $ (487) $(300) $(207)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization............. 58 -- --
Change in assets and liabilities
Increase in prepaid expenses and other
assets................................. (1,033) -- --
Increase in accounts payable, accrued
expenses and other current
liabilities............................ 85 -- --
------- ----- -----
(890) -- --
------- ----- -----
Net cash used in operating activities....... (1,377) (300) (207)
Investing Activities:
Acquisition of property and equipment..... (1,072) -- --
------- ----- -----
Net cash used in investing activities..... (1,072) -- --
Financing Activities:
Proceeds from borrowings.................. 1,377 300 207
Repayment of borrowings................... (1,377) (300) (207)
Capital contributions from Staples Group.. 2,449 300 207
------- ----- -----
Net cash provided by financing
activities............................... 2,449 300 207
Net (decrease) increase in cash and cash
equivalents................................ -- -- --
Cash and cash equivalents at beginning of
period..................................... -- -- --
------- ----- -----
Cash and cash equivalents at end of period.. $ -- $ -- $ --
======= ===== =====
</TABLE>
See notes to group financial statements.
VII-14
<PAGE>
STAPLES.COM GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE A Basis of Presentation
Staples.com Group is comprised of the e-commerce operations of Staples.
These combined financial statements and notes to combined financial statements
of Staples Group should be read in conjunction with the audited consolidated
financial statements and Annual Report on Form 10-K of Staples, Inc. ("Staples"
or "the Company") for the year ended January 30, 1999 and the combined
financial information of Staples The Office Superstore Group ("Staples Group")
contained in Annex VI. These operations consist of three principal business
units, Staples.com, Quillcorp.com and StaplesLink.com (formerly Staples Network
Advantage Plus, or SNAP), each of which operates its own web site and serves a
separate target customer base.
The stockholders of Staples, Inc. are scheduled to vote on a proposal (the
"Tracking Stock Proposal") to amend the Company's certificate of incorporation
to (i) create a new class of common stock, to be designated as Staples.com
Group common stock ("Staples.com Stock"), intended to reflect the performance
of Staples.com Group, (ii) increase the aggregate number of shares of common
stock that the Company may issue from 1,500,000,000 to 1,650,000,000, initially
comprised of 1,500,000,000 shares of Staples The Office Superstore Group common
stock ("Staples Stock") and 150,000,000 shares of Staples.com Stock, and
(iii) re-classify Staples existing common stock as Staples Stock, intended to
reflect the performance of Staples Group, which consists of all of the
Company's other businesses and a retained interest in Staples.com Group.
Staples Group currently has a 100% retained interest in Staples.com Group.
The Company expects to issue additional shares of Staples.com Stock in one or
more private or public financings within twelve months of stockholder approval
of the Tracking Stock Proposal. The specific terms of the financings, including
whether they are private or public, the amount of Staples.com Stock issued, and
the timing of the financing, will depend upon factors such as stock market
conditions and the performance of Staples.com Group. The effect of the
financing on the Staples.com Group financial statements will depend upon the
number of shares of Staples.com Group sold and whether the Company elects to
attribute the net proceeds of such financing to the equity of Staples.com Group
or to Staples Group in respect of its retained interest.
In order to prepare separate financial statements for Staples.com Group and
Staples Group, the Company has allocated, for financial reporting purposes, all
of its consolidated assets, liabilities, revenue, expenses and cash flow
between Staples.com Group and Staples Group. Thus, the combined financial
statements of Staples.com Group and Staples Group, taken together, comprise all
of the accounts included in the corresponding consolidated financial statements
of Staples. Staples.com Group's combined financial statements reflect the
application of certain cash management and allocation policies adopted by the
Board of Directors of Staples, Inc. (the "Board"). These policies are
summarized in Note C under "Corporate Activities."
Allocation and related party transaction policies adopted by the Board can
be rescinded or amended at the sole discretion of the Board without approval by
the stockholders, although no such changes are currently contemplated. Any such
changes adopted by the Board would be made in its good faith business judgement
of the Company's best interests, taking into consideration the interests of all
stockholders.
If the Tracking Stock Proposal is approved by the stockholders and
implemented by the Board, the Company will provide to the holders of both
Staples Stock and Staples.com Stock separate financial statements, management's
discussion and analysis of the results of operations and financial condition,
and other relevant information of the Company. Even though Staples has
allocated all of its consolidated assets, liabilities, revenue, expenses and
cash flow between Staples Group and Staples.com Group, holders of Staples.com
Stock will be common stockholders of Staples and, as such, will be subject to
the risks associated with an investment in Staples and all of its businesses,
assets and liabilities. Assets attributed to one group are subject to the
liabilities of the other group, whether such liabilities arise from lawsuits,
contracts or indebtedness attributed to the other group. Holders of Staples
Stock and Staples.com Stock will not have any legal rights related to specific
assets of either group and in any liquidation will receive a fixed share of the
net assets of the Company which may not reflect the actual trading prices, if
any, of the respective groups at such time.
VII-15
<PAGE>
STAPLES.COM GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Financial impacts which occur that affect Staples consolidated results of
operations or financial position could affect the results of operations or
financial condition of Staples.com Group. In addition, any dividends or
distributions on, or repurchases of, Staples Stock will reduce the assets of
Staples legally available for dividends on Staples.com Stock. Accordingly,
financial information for Staples.com Group should be read in conjunction with
the financial information for Staples Group and financial information for
Staples.
NOTE B Summary of Significant Accounting Policies
Nature of Operations: Staples operates a chain of office supply stores and
contract stationer/delivery warehouses throughout North America and in the
United Kingdom and Germany. Staples.com Group represents the e-business of
Staples and is comprised of three principal business units, including
Staples.com, Quillcorp.com and StaplesLink.com, each of which has its own
website. Staples Group represents the remainder of Staples, including its
retail stores, catalog businesses and contract stationer businesses.
Fiscal Year: Staples.com Group's fiscal year is the 52 or 53 weeks ending
the Saturday closest to January 31. Fiscal years 1998, 1997 and 1996, consisted
of the 52 weeks ended January 30, 1999, January 31, 1998 and February 1, 1997,
respectively. As more fully described in Note J, the statements of income
combine Staples' historical operating results for the fiscal years with the
corresponding Quill Corporation ("Quill") operating results for the calendar
years ended December 31, 1997 and 1996.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management of Staples.com
Group to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
Concentration of Credit Risk: Staples.com Group does not carry any inventory
or receivables and is solely reliant upon Staples Group and its ability to
fullfill Staples.com Group's sales. Staples.com Group is also dependent on
Staples to provide funding for its operations, and the Board will determine, in
its sole discretion, whether to provide any particular funds on any particular
occasion to either group, but will not be obligated to do so.
Advertising: Advertising production costs are expensed the first time the
advertising takes place. Total advertising and promotion expenses were
$1,595,000, $497,000 and $128,000 for the years ended January 30, 1999, January
31, 1998, and February 1, 1997, respectively. Included in prepaid and other
assets was $1,033,000 and $0 at January 30, 1999 and January 31, 1998,
respectively, relating to prepaid advertising and promotion expenses.
Equipment: Equipment is recorded at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets.
Depreciation periods for equipment are three to five years.
Stock Option Plans: Staples has adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). As
permitted by FAS 123, Staples 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: Historical Earnings per Share for Staples.com Group has
been omitted from the statements of operations since Staples.com Stock was not
part of the capital structure of the Company for the periods presented.
Following the implementation of the Tracking Stock Proposal, earnings per share
for
VII-16
<PAGE>
STAPLES.COM GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Staples.com Group will be computed by dividing (i) the product of the earnings
of Staples.com Group multiplied by the "Outstanding Staples.com Group
Fraction" by (ii) the weighted average number of shares of Staples.com Stock
and dilutive Staples.com Stock equivalents outstanding during the applicable
period. The "Outstanding Staples.com Group Fraction" is a fraction, the
numerator of which is such number of shares of Staples.com Stock outstanding
and the denominator of which is the number of shares of Staples.com Stock
that, if issued, would represent 100 percent of the equity of Staples.com
Group.
Long-Lived Assets: Staples.com Group 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.
Segment Reporting: The Staples.com Group reports segment information under
Financial Accounting Standards Board issued Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information" (FAS 131). 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 Staples.com Group holds assets
and reports revenues. The Staples.com Group holds assets and reports revenues
in one operating segment.
NOTE C Corporate Activities
Staples.com Group's financial statements reflect the application of the
management and allocation policies adopted by the Board to various corporate
activities, as described below:
Finance Activities: Staples manages most finance activities on a
centralized, consolidated basis. These activities include the investment of
surplus cash, the issuance, repayment and repurchase of short-term and long-
term debt, and the issuance and repurchase of common stock. Staples.com Group
generally remits its cash receipts to Staples Group, and Staples Group
generally funds Staples.com Group's disbursements on a regular basis.
In the combined financial statements of Staples.com Group and Staples Group,
(1) all equity transactions, and the proceeds thereof, were attributed to
Staples Group, (2) whenever Staples.com Group held cash, that cash was
transferred to Staples Group and accounted for as an inter-group revolving
credit advance and (3) whenever Staples.com Group had a cash need, that cash
need was funded by Staples Group and accounted for as an inter-group revolving
credit advance. Staples intends to continue these practices until shares of
Staples.com Stock, or options therefor, are issued or the Board determines an
alternative method appropriate. The inter-group revolving credit arrangement
bears interest at a rate at which the Board, in its sole discretion,
determines Staples could borrow such funds on a revolving credit basis which
was 6% for the fiscal years ended January 30, 1999, January 31, 1998 and
February 1, 1997. At the date on which the shares of Staples.com Stock, or
options therefor are first issued, the Company intends to continue the above
practice of transferring cash between groups through an inter-group revolving
credit arrangement. As and when determined by the Board, this revolving credit
arrangement will be settled between the groups through a capital contribution
or a return of capital, increasing or decreasing Staples Group's retained
interest in Staples.com Group.
The Board, at its sole discretion, may elect an alternative financing
mechanism between the groups based upon the facts and circumstances.
VII-17
<PAGE>
STAPLES.COM GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Shared Services and Support Activities: The cost of services shared by
Staples Group and Staples.com Group, including general and administrative
expenses, has been allocated between Staples.com Group and Staples Group based
upon the use of such services and the good faith judgement of the Board or
management. Where determinations based on use alone were not practical, other
methods and criteria were used to provide a reasonable allocation of the cost
of shared services, including support activities attributable to the group.
Such allocated shared services represent, among other things, financial and
accounting services, information system services, certain selling and marketing
activities, certain merchandising and replenishment services, transportation
and warehouse management services, certain customer service activities,
executive management, human resources, legal and corporate planning activities.
Carrying Charge: Staples Group maintains inventory and receivables to
support Staples.com Group's inventory needs and the processing of receivables
for Staples.com Group. As such, Staples Group charges Staples.com Group a fee
for use of their capital as determined by the Board. The current charge is
reflected in Staples.com Group's financial statements as part of operating and
selling expenses and is calculated based on the amount of receivables and
inventory that Staples Group is required to carry for Staples.com Group. The
Board may, in its sole discretion, change this fee as it deems appropriate in
light of the circumstances from time to time. In addition, shrink, obsolescence
and other inventory costs are allocated to Staples.com Group based on
Staples.com Group's share of such costs.
Taxes: Federal income taxes, which are determined on a consolidated basis,
are allocated between the groups, and reflected in their respective financial
statements, in accordance with Staples' tax allocation policy. In general, this
policy provides that the consolidated tax provision, and related tax payments
or refunds, are allocated between the groups based principally upon the
financial income, taxable income, credits and other amounts directly related to
the respective groups. Tax benefits that cannot be used by the group generating
such attributes, but can be utilized on a consolidated basis, are allocated to
the group that generated such benefits. As a result, the allocated group
amounts of taxes payable or refundable are not necessarily comparable to those
that would have resulted if the groups had filed separate tax returns. State
income taxes generally are computed on a separate group basis.
Employee Benefits: Staples.com Group participated in the following Company
employee benefit plans: an Employee Stock Purchase Plan, an Employee 401(k)
Savings Plan, a Supplemental Executive Retirement Plan and a contributory
Medical and Dental Plan. The costs of these plans are allocated based on the
benefits received under the plans by the employees comprising the Staples.com
Group or another basis as management believes to be an equitable and reasonable
estimate of such costs.
NOTE D Related Party Transactions
The Staples Group sells inventory to Staples.com Group for resale. Under
this arrangement, Staples.com Group purchases inventory from Staples Group for
resale. The cost per inventory unit purchased by Staples.com Group is based on
Staples Group's product cost. Inventory purchased by Staples.com Group totaled
$10,796,000, $2,364,000, and $22,000 for the fiscal years ended January 30,
1999, January 31, 1998 and February 1, 1997, respectively.
NOTE E Long-Term Debt and Credit Agreement
Staples Group manages most financial activities on a centralized basis. Such
financial activities include the issuance and repayment of short-term and long-
term debt. Staples currently attributes each incurrence or issuance of external
debt, and the proceeds thereof, to Staples Group and will continue to do so in
the future unless the Board determines otherwise. The Board may, but is not
required to, attribute an incurrence or issuance of debt, and the proceeds
thereof, to Staples.com Group, at an incremental borrowing rate of 6%, to the
extent that Staples incurs or issues the debt for the benefit of Staples.com
Group.
VII-18
<PAGE>
STAPLES.COM GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE F Group Equity
Staples.com Stock will represent a separate class of Staples's stock if the
Tracking Stock Proposal is approved by Staples' stockholders. Shares of
Staples.com Stock may be issued from time to time at the discretion of the
Board.
NOTE G Employee Benefit Plans
Staples 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 Staples' 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
Staples' 1998 Employee Stock Purchase Plan authorizes a total of up to
6,000,000 shares of Staples' 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. Staples' 1994 Employee Stock Purchase Plan
expired during 1998.
Stock Option Plans
Under Staples' 1992 Equity Incentive Plan ("1992 Plan"), Staples may grant
to management and key employees incentive and nonqualified options to purchase
up to 87,750,000 shares of Staples common stock and Performance Accelerated
Restricted Stock ("PARS"). This amount was approved by the stockholders of
Staples on June 18, 1997. As of February 27, 1997, Staples' 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 Staples' 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.
Staples' Amended and Restated 1990 Director Stock Option Plan ("Director's
Plan") authorizes shares of common stock to be issued to non-employee
directors. The exercise price of options granted is equal to the fair market
value of Staples' 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.
Performance Accelerated Restricted Stock ("PARS")
PARS are shares of Staples' common stock granted outright to employees and
non-employee directors without cost to the employee or director. The shares,
however, are restricted in that they are not transferable (e.g. they may not be
sold) by the employee or director until they vest, generally after the end of
five years. Such vesting date may accelerate if Staples achieves certain
compound annual earnings per share growth over a
VII-19
<PAGE>
STAPLES.COM GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
certain number of interim years. If the employee leaves Staples, or the
director ceases to serve as a director of Staples, prior to the vesting date
for any reason, the PARS shares will be forfeited by the employee or director,
as the case may be, and will be returned to Staples. Once the PARS have vested,
they become unrestricted and may be transferred and sold like any other Staples
common stock.
Employees' 401(k) Savings Plan
Under Staples' Employees' 401(k) Savings Plan (the "401(k) Plan"), and
Supplemental Executive Retirement Plan (the "SERP Plan"), Staples may
contribute up to a total of 2,503,125 shares of common stock to these plans.
The 401(k) Plan is available to all employees of Staples 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.
NOTE H Income Taxes
The provision (benefit) for income taxes and related assets and liabilities
attributed to Staples.com Group are determined in accordance with Staples' tax
allocation policy. In general, this policy provides that the consolidated tax
provision, and related tax payments or refunds, are allocated between the
groups based principally upon the financial income, taxable income, credits and
other amounts directly related to the respective groups. Tax benefits that
cannot be used by the group generating such attributes, but can be utilized on
a consolidated basis, are allocated to the group that generated such benefits.
As a result, the allocated group amounts of taxes payable or refundable are not
necessarily comparable to those that would have resulted if the groups had
filed separate tax returns.
Deferred income taxes reflect the 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. Staples.com Group's
temporary differences primarily consist of a net operating loss of $761,000 and
basis differences related to equipment. Because the Staples.com Group has been
fully reimbursed for the benefit of the net operating loss under Staples,
Inc.'s tax allocation policy, no valuation allowance has been provided on the
net operating loss and the balance is included in the inter-group revolver
balance. The provision for income tax for the fiscal year ended January 30,
1999 is comprised solely of an income tax benefit of $304,000.
VII-20
<PAGE>
STAPLES.COM GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
NOTE I Quarterly Summary (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
Fiscal Year Ended January 30,
1999
Sales........................ $2,244 $2,815 $4,046 $7,781
Gross Profit................. 569 783 1,077 1,736
Net loss..................... (53) (50) (99) (285)
Pro forma net loss........... (41)(1) (50) (99) (285)
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
Fiscal Year Ended January 31,
1998
Sales........................ $ 244 $ 619 $1,171 $1,672
Gross Profit................. 61 158 290 422
Net loss..................... (22) (95) (122) (61)
Pro forma net loss........... (13)(1) (57)(1) (73)(1) (37)(1)
</TABLE>
- --------
(1) Pro forma net income includes the earnings of Quill with provision for
income taxes on previously untaxed earnings of pooled S-Corporation
income.
NOTE J Business Acquisitions
On May 21, 1998, Staples acquired Quill Corporation and certain related
entities, including the operations of QuillCorp.com. The merger was structured
as an exchange of shares in which the stockholders of Quill received
approximately 26,000,000 shares of Staples' common stock, at an exchange ratio
established at a combination of fixed and variable prices, and cash paid to a
dissenting stockholder of approximately $48,000,000, which equates to a
purchase price of approximately $690,000,000. The merger was accounted for as a
pooling of interests and, accordingly, Staples.com Group's consolidated
financial statements have been restated to include the operations of
Quillcorp.com for all periods prior to the merger. The statements of income
combine Staples.com Group's historical operating results for the fiscal years
ended January 31, 1998 and February 1, 1997 with the corresponding
Quillcorp.com operating results for the years ended December 31, 1997 and 1996
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 Quillcorp.com was taxable to its shareholders who were responsible
for the payment of taxes thereon. Quill will be included in Staples' 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 Quillcorp.com's income been
subject to income taxes.
VII-21
<PAGE>
STAPLES.COM GROUP
INTERIM FINANCIAL STATEMENTS
The following interim financial information is unaudited but, in the opinion
of the Company, includes all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation. Operating results for the interim
period are not necessarily indicative of the results that may be expected for
the full year. The financial information should be read in conjunction with
Staples.com Group's audited combined financial statements as of January 30,
1999 included herein and the Staples, Inc. audited consolidated financial
statements and Annual Report on Form 10-K as of January 30, 1999, and unaudited
interim results on Form 10-Q.
VII-22
<PAGE>
STAPLES.COM GROUP
COMBINED BALANCE SHEETS
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
July 31,
1999 January 30,
(Unaudited) 1999
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................. $ -- $ --
Prepaid expenses and other current assets............. 333 1,033
------- ------
Total current assets................................ 333 1,033
Equipment:
Equipment............................................. 2,962 1,072
Less accumulated depreciation......................... 225 58
------- ------
Net equipment....................................... 2,737 1,014
Other Assets:
Investments........................................... 20,906 --
------- ------
Total other assets.................................. 20,906 --
------- ------
$23,976 $2,047
======= ======
LIABILITIES AND GROUP EQUITY
Current Liabilities:
Inter-group payable to Staples Group.................. $ 1,697 $ --
Accrued expenses and other current liabilities........ 1,227 85
------- ------
Total current liabilities........................... 2,924 85
Group equity.......................................... 21,052 1,962
------- ------
$23,976 $2,047
======= ======
</TABLE>
See notes to group interim financial statements.
VII-23
<PAGE>
STAPLES.COM GROUP
COMBINED STATEMENTS OF OPERATIONS
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
26 Weeks Ended
-------------------
July 31, August 1,
1999 1998
-------- ---------
(Unaudited)
<S> <C> <C>
Sales....................................................... $27,302 $5,058
Cost of goods sold and occupancy costs...................... 20,997 3,706
------- ------
Gross profit............................................ 6,305 1,352
Operating and other expenses:
Operating and selling..................................... 7,086 611
General and administrative................................ 5,243 897
Interest and other expense, net........................... 51 1
------- ------
Total operating and other expenses...................... 12,380 1,509
------- ------
Loss before income taxes.................................. (6,075) (157)
Income tax benefit.......................................... (2,369) (53)
------- ------
Net loss.................................................. $(3,706) $ (104)
======= ======
Pro forma:
Historical net loss....................................... $ (104)
Provision for income taxes on previously untaxed earnings
of pooled S-Corporation income........................... (12)
------
Pro forma net loss...................................... $ (92)
======
</TABLE>
See notes to group interim financial statements.
VII-24
<PAGE>
STAPLES.COM GROUP
COMBINED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
26 Weeks Ended
-------------------
July 31, August 1,
1999 1998
-------- ---------
(Unaudited)
<S> <C> <C>
Operating Activities:
Net income................................................. $(3,706) $(104)
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................ 167 --
Change in assets and liabilities:
(Increase)/Decrease in prepaid expenses and other
assets................................................ 700 --
Increase in accounts payable, accrued expenses and
other current liabilities............................. 1,142 --
------- -----
2,009 --
------- -----
Net cash used in operating activities...................... (1,697) (104)
Investing Activities:
Acquisition of property and equipment...................... (1,890) (410)
Purchase of long-term investments.......................... (20,906) --
------- -----
Net cash used in investing activities...................... (22,796) (410)
Financing Activities:
Proceeds from borrowings................................... 1,697 104
Capital contributions from Staples Group................... 22,796 410
------- -----
Net cash provided by financing activities.................. 24,493 514
Net decrease in cash and cash equivalents.................. -- --
Cash and cash equivalents at beginning of period........... -- --
------- -----
Cash and cash equivalents at end of period................. $ -- $ --
======= =====
</TABLE>
See notes to group interim financial statements.
VII-25
<PAGE>
NOTE A Basis of Presentation
The accompanying interim unaudited combined financial statements include the
accounts of Staples.com Group. All intercompany accounts and transactions are
eliminated in consolidation. In order to prepare separate financial statements
for Staples Group and Staples.com Group, the Company has allocated, for
financial reporting purposes, all of its consolidated assets, liabilities,
revenue, expenses and cash flow between Staples Group and Staples.com Group.
The financial statements of Staples Group and Staples.com Group, taken
together, comprise all of the accounts included in the corresponding
consolidated financial statements of Staples. Staples.com Group financial
statements reflect the application of certain cash management and allocation
policies adopted by the Board, Staples.com Group financial statements include
the historical financial position, results of operations, and cash flows of
Staples.com Group. These combined financial statements should be read in
conjunction with the audited consolidated financial statements and footnotes of
Staples, Inc., included in the Company's Annual Report on Form 10-K for the
year ended January 30, 1999 and the combined financial statements and footnotes
of Staples The Office Super Store Group for the year ended January 30, 1999
included in Annex VI.
NOTE B Computation of Earnings Per Common Share
Historical Earnings per Share for Staples.com Group has been omitted from
the statements of operations since Staples.com Stock was not part of the
capital structure of the Company for the periods presented. Following the
implementation of the Tracking Stock Proposal, earnings per share for
Staples.com Group will be computed by dividing (i) the product of the earnings
of Staples.com Group multiplied by the "Outstanding Staples.com Fraction" by
(ii) the weighted average number of shares of Staples.com Stock and dilutive
Staples.com Stock equivalents outstanding during the applicable period. The
"Outstanding Staples.com Fraction" is a fraction, the numerator of which is
such number of shares of Staples.com Stock outstanding and the denominator of
which is the number of shares of Staples.com Stock that, if issued, would
represent 100 percent of the equity of Staples.com Group.
NOTE C 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.
VII-26
