STAPLES INC, 10-Q, 2000-09-11

STAPLES INC
10-Q, 2000-09-11
MISCELLANEOUS SHOPPING GOODS STORES

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

Quarterly Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

For the quarterly period ended: July 29, 2000

Commission File Number: 0-17586

STAPLES, INC.
(Exact name of registrant as specified in its charter)

Delaware		04-2896127
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Five Hundred Staples Drive, Framingham, MA 01702
(Address of principal executive office and zip code)

508-253-5000
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes /x/ No / /

The registrant had 454,094,345 shares of Staples Retail and Delivery Common Stock and 13,867,564 shares of Staples.com Common Stock, both par value $.0006, outstanding as of September 7, 2000.

FORM 10-Q
STAPLES, INC.
July 29, 2000

TABLE OF CONTENTS

		Page
Part I—Financial Information:
Item 1. Financial Statements (unaudited):
	Consolidated Balance Sheets	3
	Consolidated Statements of Income	4
	Consolidated Statements of Cash Flows	5
	Notes to Consolidated Financial Statements	6–22
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		23
Item 3. Quantitative and Qualitative Disclosures about Market Risk		32
Part II—Other Information		34
Signature		35

ITEM 1

STAPLES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Dollar Amounts in Thousands, Except Share Data)

				July 29, 2000 (Unaudited)			January 29, 2000
ASSETS
Current Assets:
	Cash and cash equivalents			$	77,525		$	110,483
	Short-term investments				1,049			1,071
	Merchandise inventories				1,676,571			1,607,516
	Receivables, net				445,564			360,901
	Deferred income taxes				26,941			39,730
	Prepaid expenses and other current assets				82,104			73,750

			Total current assets		2,309,754			2,193,451
Property and Equipment:
	Land and buildings				346,281			328,994
	Leasehold improvements				501,649			442,119
	Equipment				612,542			547,309
	Furniture and fixtures				327,579			286,260

			Total property and equipment		1,788,051			1,604,682
	Less accumulated depreciation and amortization				602,104			509,920

			Net property and equipment		1,185,947			1,094,762
Other Assets:
	Lease acquisition costs, net of amortization				63,934			68,832
	Investments				152,150			34,755
	Goodwill, net of amortization				385,927			387,595
	Deferred income taxes				16,068			34,912
	Other				37,893			31,769

			Total other assets		655,972			557,863

				$	4,151,673		$	3,846,076

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
	Accounts payable			$	907,418		$	897,523
	Accrued expenses and other current liabilities				481,765			545,162
	Debt maturing within one year				34,065			12,219

			Total current liabilities		1,423,248			1,454,904
Long-Term Debt					826,568			500,903
Other Long-Term Obligations					66,588			61,456
Stockholders' Equity:
Preferred stock, $.01 par value 5,000,000 shares authorized; no shares issued					—			—
	Common stock:
		Staples RD Stock, $.0006 par value 1,500,000,000 shares authorized; shares issued: 473,801,951 at July 29, 2000 and 470,752,253 shares at January 29, 2000; outstanding: 453,710,214 shares at July 29, 2000 and 457,083,510 shares at January 29, 2000			283			282
		Staples.com Stock, $.0006 par value 600,000,000 shares authorized; issued: 14,084,239 shares at July 29, 2000 and 13,626,093 at January 29, 2000; outstanding: 13,867,241 shares at July 29, 2000 and 13,626,093 at January 29, 2000			9			8
Additional paid-in capital					1,233,144			1,196,512
Cumulative foreign currency translation adjustments					(7,335	)		(4,473	)
Unrealized gain on investments					41,045			6,651
Retained earnings					1,035,035			948,309
Less: Staples RD treasury stock at cost, 20,091,737 shares at July 29, 2000 and 13,668,743 shares at January 29, 2000					(466,207	)		(318,476	)
		Staples.com treasury stock at cost, 216,998 shares at July 29, 2000 and 0 shares at January 29, 2000			(705	)		—

			Total stockholders' equity		1,835,269			1,828,813

				$	4,151,673		$	3,846,076

See notes to consolidated financial statements.

STAPLES, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(Dollar Amounts in Thousands, Except Per Share Data)

			(Unaudited) 13 Weeks Ended					(Unaudited) 26 Weeks Ended
			July 29, 2000			July 31, 1999		July 29, 2000			July 31, 1999
Sales			$	2,201,297		$	1,840,110	$	4,757,083		$	3,912,176
Cost of goods sold and occupancy costs				1,654,633			1,385,551		3,600,772			2,962,864

	Gross profit			546,664			454,559		1,156,311			949,312
Operating and other expenses:
	Operating and selling			361,796			271,275		781,153			587,004
	Pre-opening			6,545			4,899		14,528			9,407
	General and administrative			90,714			84,972		195,700			173,303
	Amortization of goodwill			3,523			2,971		7,095			5,258
	Store closure credit			—			—		(7,250	)		—
	Interest and other expense, net			11,952			3,976		18,092			5,392

		Total operating and other expenses		474,530			368,093		1,009,318			780,364

	Income before income taxes			72,134			86,466		146,993			168,948
Income tax expense				29,575			33,722		60,267			65,890

	Net income		$	42,559		$	52,744	$	86,726		$	103,058

Net income (loss) attributed to:
	Staples, Inc. Stock		$	—		$	52,744	$	—		$	103,058
	Staples RD Stock			44,571			—		91,580			—
	Staples.com Stock			(2,012	)		—		(4,854	)		—

			$	42,559		$	52,744	$	86,726		$	103,058

*Basic earnings per common share*
	Net income per common share— Staples, Inc. Stock					$	0.11				$	0.22

	Net income per common share— Staples RD Stock		$	0.10				$	0.20

	Net loss per common share— Staples.com Stock		$	(0.14	)			$	(0.35	)

*Diluted earnings per common share*
	Net income per common share— Staples, Inc. Stock					$	0.11				$	0.22

	Net income per common share— Staples RD Stock		$	0.10				$	0.20

	Net loss per common share— Staples.com Stock		$	(0.14	)			$	(0.35	)

See notes to consolidated financial statements.

STAPLES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Dollar Amounts in Thousands)

				(Unaudited) 26 Weeks Ended
				July 29, 2000			July 31, 1999
Operating Activities:
	Net income			$	86,726		$	103,058
	Adjustments to reconcile net income to net cash (used in)/provided by operating activities:
		Depreciation and amortization			109,360			81,577
		Store closure credit			(7,250	)		—
		Expense from 401K and PARS stock contribution			4,478			8,460
		Deferred income tax (benefit)/expense			7,135			(6,208	)
		Change in assets and liabilities, net of companies acquired using purchase accounting:
			Increase in merchandise inventories		(85,531	)		(170,321	)
			Increase in receivables		(88,184	)		(136,723	)
			Increase in prepaid expenses and other assets		(21,184	)		(977	)
			Increase/(Decrease) in accounts payable, accrued expenses and other current liabilities		(20,944	)		32,566
			Increase in other long-term obligations		5,851			2,863

					(96,269	)		(188,763	)

	Net cash used in operating activities				(9,543	)		(85,705	)
Investing Activities:
	Acquisition of property and equipment				(199,392	)		(145,841	)
	Acquisition of businesses, net of cash acquired				—			(137,625	)
	Proceeds from sales and maturities of short-term investments				74			32,765
	Purchase of short-term investments				—			(16,651	)
	Purchase of long-term investments				(58,782	)		(20,906	)
	Other				(226	)		88

	Net cash used in investing activities				(258,326	)		(288,170	)
Financing Activities:
	Proceeds from sale of capital stock				23,982			25,243
	Proceeds from borrowings				2,343,485			316,984
	Payments on borrowings				(1,984,364	)		(248,326	)
	Settlement of equity forward purchase agreement				(78,684	)		—
	Purchase of treasury stock				(66,736	)		(78,246	)

	Net cash provided by financing activities				237,683			15,655
	Effect of exchange rate changes on cash				(2,772	)		227
Net decrease in cash and cash equivalents					(32,958	)		(357,993	)
Cash and cash equivalents at beginning of period					110,483			357,993

Cash and cash equivalents at end of period				$	77,525		$	—

See notes to consolidated financial statements.

STAPLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note A Basis of Presentation

The accompanying interim unaudited consolidated financial statements include the accounts of Staples, Inc. and subsidiaries ("Staples" and the "Company"). These financial statements for the periods covering the thirteen and twenty-six weeks ending July 29, 2000 (also referred to as the "second quarter of 2000" and "first half of 2000", respectively), and the periods covering the thirteen and twenty-six weeks ending July 31, 1999 (also referred to as the "second quarter of 1999" and "first half of 1999", respectively). All intercompany accounts and transactions are eliminated in consolidation.

These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, such interim statements reflect all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position and the results of operations and cash flows for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K/A2 for the year ended January 29, 2000.

On November 9, 1999, the stockholders of Staples approved a proposal ("the Tracking Stock Proposal") which amended the Company's certificate of incorporation to (i) authorize the issuance of a new series of common stock, designated as Staples.com common stock ("Staples.com Stock"), intended to track the performance of Staples.com, the Company's e-commerce business, (ii) increase the aggregate number of shares of common stock that the Company may issue from 1,500,000,000 to 2,100,000,000, initially comprised of 1,500,000,000 shares of Staples Retail and Delivery common stock ("Staples RD Stock") and 600,000,000 shares of Staples.com Stock, and (iii) re-classify Staples' existing common stock as Staples RD Stock, intended to track the performance of Staples RD, which consists of all of the Company's non e-commerce businesses and a retained interest in Staples.com. Despite the Company's intentions, the market value of Staples RD Stock may not track the performance of Staples RD and the market value of Staples.com Stock may not track the performance of Staples.com. The Company filed a registration statement with the Securities and Exchange Commission on February 18, 2000 for a public offering of Staples.com Stock.

The Company consolidates for financial reporting purposes Staples RD and Staples.com. Staples RD is comprised of Staples' retail stores, catalog businesses, contract stationer business and a retained interest in Staples.com. At July 29, 2000 and July 31, 1999, Staples RD had a retained interest in Staples.com of 89% and 100%, respectively. Staples.com includes the operations of Staples' e-commerce sites, Staples.com, Quill.com, StaplesLink.com, and its Canadian e-commerce business. Staples RD's and Staples.com's separate operating results as presented in Note I of the Consolidated Financial Statements reflect the effect of the application of certain cash management and allocation polices adopted by the Board of Directors of Staples (the "Board").

Certain previously reported amounts have been reclassified to conform with the current period presentation.

Note B Comprehensive Income/(Loss)

Staples calculates comprehensive income in accordance with SFAS No. 130 "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires Staples to report comprehensive income which includes net

STAPLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

income, foreign currency translation adjustments and unrealized gains and losses on investments, which are reported separately in stockholders' equity, in the notes to the financial statements for interim periods. During the second quarter of 2000 and first half of 2000, total comprehensive income/(loss) amounted to approximately ($18,835,000) and $118,258,000, respectively, compared to approximately $48,453,000 and $101,920,000, for the corresponding periods in 1999.

Note C Investments

Staples' investments are classified as available for sale and consist of securities purchased in Internet-related companies. Investments that qualify as marketable equity securities are carried at fair value using quoted market prices and all other investments have been accounted for on a cost basis as each investment represents an interest of no greater than fifteen percent of the outstanding stock of that company. Unrealized gains and losses are reported as a separate component of stockholders' equity.

In February 2000, Staples completed an investment in Paperexhange.com of approximately $5,000,000, representing an ownership percentage at July 29, 2000 of approximately 1.0%. Paperexchange.com operates a global e-commerce marketplace for the pulp and paper industry. Also, in February 2000, Staples completed an investment in BizBuyer.com of approximately $19,000,000, representing an ownership percentage at July 29, 2000 of approximately 12%. BizBuyer.com is a business-to-business marketplace where buyers and sellers connect to buy and sell products and services.

In March 2000, Register.com, an investment initially recorded at cost by Staples of approximately $33,000,000, completed an initial public offering of its common stock. At July 29, 2000, Staples owned approximately 2,312,000 shares of common stock, and warrants to purchase approximately 1,640,000 additional shares, resulting in an unrealized gain of approximately $71,000,000. As of July 29, 2000, Staples had an ownership percentage of approximately 7.5%.

In June 2000, Staples completed an investment in ICG Commerce of approximately $2,600,000 representing an ownership percentage at July 29, 2000 of approximately 1.0%. ICG Commerce is a comprehensive online procurement service provider for businesses.

In July 2000, Staples completed an investment in NowDocs™, Inc. of approximately $6,000,000, representing an ownership percentage at July 29, 2000 of approximately 10%. NowDocs™, Inc. provides businesses with the ability to upload files for virtual storage and obtain digital printing and binding of documents that can be delivered in a variety of ways.

The following is a summary of equity investments as of July 29, 2000 and January 29, 2000 (in thousands):

	Cost		Gross Unrealized Gain		Estimated Fair Value
July 29, 2000	$	82,562	$	69,588	$	152,150

January 29, 2000	$	23,780	$	10,975	$	34,755

STAPLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Note D Long-Term Debt and Credit Agreements

Long-Term Debt:

On May 3, 2000, Staples entered into a currency swap on its $200,000,000 of 7.125% senior notes issued on August 12, 1997. The Company has swapped the dollar-denominated principal and interest into Canadian dollar denominated obligations. This swap has been designated as a foreign currency hedge on Staples' net investment in Canadian dollar denominated subsidiaries, and gains or losses will be recorded in the cumulative translation adjustment line in stockholders' equity. As of July 29, 2000 the principal was $295,290,000 in Canadian dollars at an interest rate of 6.445%.

On May 24, 2000, Staples issued notes in the aggregate principal amount of $175,000,000. The notes bear interest at a rate equal to the three month LIBOR plus 85 basis points, or 7.67% at July 29, 2000, and are due on November 26, 2001.

Credit Agreement:

On June 26, 2000, Staples entered into a 364 day revolving credit facility, with a syndicate of banks, which provides up to $200,000,000 of borrowings. Borrowings made pursuant to the facility will bear interest at either (a) the higher of the lead bank's prime rate or the federal funds rate plus 0.50%, with such rate in both cases to be increased by 0.125% when the outstanding balance under the facility exceeds $100,000,000, or (b) the LIBOR rate plus a percentage spread based upon certain defined ratios, and this rate was approximately 6.62% at July 29, 2000. The agreement, among other conditions, contains certain restrictive covenants, including net worth maintenance, minimum fixed charge coverage and limitations on indebtedness and sale of assets. As of July 29, 2000, no borrowings were outstanding under this revolving credit facility.

Note E Business Acquisitions

During fiscal years 1999 and 1998, Staples made three acquisitions: Quill Corporation on May 21, 1998, Claricom Holdings, Inc. and certain related entities, now referred to as Staples Communications, on February 26, 1999 and the European Office Supply Companies, which includes Sigma Burowelt in Germany, Office Centre in the Netherlands and Office Centre in Portugal on October 6, 1999. At the time of each acquisition the Company recorded a liability for restructuring, merger-related and integration costs. The activity impacting these liabilities during the first half of 2000 is summarized in the table below (in thousands):

	Balance at January 29, 2000		Charges utilized			Balance at July 29, 2000
Quill Merger Related and Integration Costs
Transaction Costs	$	208	$	(208	)	$	—
Contract and Lease Termination		12,985		(6,286	)		6,699
Other		469		(30	)		439

	$	13,662	$	(6,524	)	$	7,138

STAPLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

European Office Supply Purchase Price Adjustment
Transaction Costs	$	514	$	(514	)	$	—
Incremental Employee		7,165		(1,293	)		5,872
Contract and Lease Termination		6,948		(323	)		6,625
Other		5,295		(2,896	)		2,399

	$	19,922	$	(5,026	)	$	14,896

Claricom Purchase Price Adjustment
Incremental Employee	$	3,770	$	(1,502	)	$	2,268
Other		16		—			16

	$	3,786	$	(1,502	)	$	2,284

All of the above costs will be utilized by the end of fiscal year 2000, except for costs related to contract and lease terminations. The Company believes that the accruals relating to contract and lease terminations will be entirely utilized by fiscal year 2004, although some payments may be made over the remaining lease terms.

Note F Store Closure Charge

In the fourth quarter of 1998, Staples committed to a plan to close certain stores which could not be expanded and upgraded to Staples' current store model and reported a pre-tax store closure charge of $49,706,000. At July 29, 2000, 19 stores were closed, and at January 29, 2000, 10 stores were closed. During the first half of 2000, the Company reversed the portion of the store closure charge related to 18 locations that the Company has either not yet reached an agreement to close or is no longer committed to closing due to changes in market conditions, unexpected landlord concessions and the Company's European acquisition. With respect to the remaining 21 stores, the Company executed lease agreements for new stores and the corresponding old stores will be closed by July 2001. The following table is a rollforward of the store closure charges utilized and reversed during the first half of 2000 (in thousands):

	Balance at January 29, 2000		Charges utilized			Charges reversed			Balance at July 29, 2000
Lease Terminations	$	29,322	$	(2,956	)	$	(6,284	)	$	20,082
Legal and Settlement Costs		4,788		(187	)		(966	)		3,635

	$	34,110	$	(3,143	)	$	(7,250	)	$	23,717

All of the above costs directly relate to long-term lease obligations which the Company is either in the process of obtaining subtenants for or attempting to cancel the lease. Accordingly, the Company believes that the remaining balance will be entirely utilized by fiscal year 2004, although some payments may be made over the remaining lease terms.

STAPLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Note G Segment Reporting

Staples has four reportable segments: North American Retail, Contract and Commercial, European Operations and Staples.com. Staples' North American Retail segment consists of the US and Canadian operating units that operate office supply stores. The Contact and Commercial segment consists of Staples Direct, Contract, Quill Corporation and Staples Communications, each of which sells office products, supplies and services directly to businesses throughout the US and Canada. Staples.com includes the operations of Staples' e-commerce sites: Staples.com, Quill.com, StaplesLink.com, and its Canadian e-commerce business. The European Operations segment consists of six operating units that operate office supply stores in the United Kingdom, Germany, the Netherlands and Portugal and sell office products and supplies directly to businesses throughout the United Kingdom and Germany.

Staples evaluates performance and allocates resources based on profit or loss from operations before income taxes. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Intersegment sales and transfers are recorded at Staples' cost, therefore, there is no intercompany profit or loss recognized on these transactions.

Staples' reportable segments are business units that distribute office products and supplies in different manners. The reportable segments are each managed separately because they distribute products to different classes of customers 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 second quarter of 2000 and first half of 2000 and for the corresponding periods in 1999 (in thousands):

Thirteen weeks ended July 29, 2000:

	N. American Retail		Contract & Commercial		Staples.com			European Operations			Totals
Sales	$	1,374,463	$	583,450	$	95,692		$	147,692		$	2,201,297
Depreciation and amortization	$	35,387	$	9,732	$	1,253		$	4,305		$	50,677
Income/(loss) before income taxes	$	69,252	$	45,255	$	(29,781	)	$	(12,592	)	$	72,134

Thirteen weeks ended July 31, 1999:

	N. American Retail		Contract & Commercial		Staples.com			European Operations			Totals
Sales	$	1,183,168	$	562,562	$	15,610		$	78,770		$	1,840,110
Depreciation and amortization	$	35,801	$	8,411	$	109		$	2,800		$	47,121
Income/(loss) before income taxes	$	65,790	$	38,999	$	(2,684	)	$	(15,639	)	$	86,466

Twenty-six weeks ended July 29, 2000:

	N. American Retail(1)		Contract & Commercial		Staples.com			European Operations			Totals
Sales	$	3,057,514	$	1,201,613	$	171,055		$	326,901		$	4,757,083
Depreciation and amortization	$	78,558	$	19,196	$	2,901		$	8,705		$	109,360
Income/(loss) before income taxes	$	153,402	$	85,358	$	(69,503	)	$	(22,264	)	$	146,993
Capital expenditures	$	159,744	$	18,901	$	63,077		$	16,452		$	258,174

(1): Income/(Loss) before income taxes includes a $7,250,000 store closure credit

STAPLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Twenty-six weeks ended July 31, 1999:

	N. American Retail		Contract & Commercial		Staples.com			European Operations			Totals
Sales	$	2,590,989	$	1,126,995	$	27,302		$	166,890		$	3,912,176
Depreciation and amortization	$	60,491	$	15,659	$	180		$	5,247		$	81,577
Income/(loss) before income taxes	$	134,367	$	64,544	$	(6,075	)	$	(23,888	)	$	168,948
Capital expenditures	$	125,834	$	145,406	$	24,523		$	8,609		$	304,372

Assets:

	July 29, 2000			January 29, 2000
N. American Retail	$	3,610,909		$	3,415,413
Contract & Commercial		732,475			652,494
Staples.com		168,156			72,421
European Operations		585,963			583,096

Totals		5,097,503			4,723,424
Elimination of Intercompany Receivables		(192,711	)		(124,229	)
Elimination of Intercompany Investments		(753,119	)		(753,119	)

Totals	$	4,151,673		$	3,846,076

Geographic Information:

Sales:

	13 Weeks Ended				26 Weeks Ended
	July 29, 2000		July 31, 1999		July 29, 2000		July 31, 1999
North America	$	2,053,605	$	1,761,340	$	4,430,182	$	3,745,286
Europe		147,692		78,770		326,901		166,890

Totals	$	2,201,297	$	1,840,110	$	4,757,083	$	3,912,176

Long-Lived Assets:

	July 29, 2000		January 29, 2000
North America	$	1,691,183	$	1,497,909
Europe		96,775		88,035

Totals	$	1,787,958	$	1,585,944

STAPLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Note H Guarantor Subsidiaries

The 7.125% senior notes due August 15, 2007 are fully and unconditionally guaranteed on an unsecured, joint and several basis by certain wholly owned subsidiaries of the Company (the "Guarantor Subsidiaries"). The following condensed consolidating financial data illustrates the composition of Staples, Inc. (the "Parent Company"), Guarantor Subsidiaries, and non-guarantor subsidiaries as of and for the thirteen and twenty-six weeks ended July 29, 2000 and July 31, 1999. The non-guarantor subsidiaries represent more than an inconsequential portion of the consolidated assets and revenues of the Company. Separate complete financial statements of the respective Guarantor Subsidiaries would not provide additional information which would be useful in assessing the financial condition of the Guarantor Subsidiaries and thus are not presented.

Investments in subsidiaries are accounted for by the Company on the equity method for purposes of the supplemental consolidating presentation. Earnings of subsidiaries are, therefore, reflected in the Company's investment accounts and earnings. The principal elimination entries eliminate the Company's investment in subsidiaries and intercompany balances and transactions.

Condensed Consolidating Balance Sheet
July 29, 2000
(in thousands)

	Staples, Inc. (Parent Co.)			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
Cash, cash equivalents and short-term investments	$	(9,460	)	$	36,729	$	51,305	$	—		$	78,574
Merchandise inventories		1,793			1,304,672		370,106		—			1,676,571
Other current assets and Intercompany		632,540			450,892		626,803		(1,155,626	)		554,609

Total current assets		624,873			1,792,293		1,048,214		(1,155,626	)		2,309,754
Net property, equipment and other assets		508,246			1,016,176		1,070,615		(753,118	)		1,841,919

Total assets	$	1,133,119		$	2,808,469	$	2,118,829	$	(1,908,744	)	$	4,151,673

Total current liabilities	$	(110,217	)	$	841,671	$	354,820	$	336,974		$	1,423,248
Total long-term liabilities		618,892			241,970		32,294		—			893,156
Total stockholders' equity		624,444			1,724,828		1,731,715		(2,245,718	)		1,835,269

Total liabilities and stockholders' equity	$	1,133,119		$	2,808,469	$	2,118,829	$	(1,908,744	)	$	4,151,673

STAPLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Condensed Consolidating Balance Sheet
January 29, 2000
(in thousands)

	Staples, Inc. (Parent Co.)			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
Cash, cash equivalents and short-term investments	$	23,577		$	24,677	$	63,300	$	—		$	111,554
Merchandise inventories		(925	)		1,239,768		368,673		—			1,607,516
Other current assets and Intercompany		661,084			453,630		553,570		(1,193,903	)		474,381

Total current assets		683,736			1,718,075		985,543		(1,193,903	)		2,193,451
Net property, equipment and other assets		482,668			866,446		1,056,632		(753,121	)		1,652,625

Total assets	$	1,166,404		$	2,584,521	$	2,042,175	$	(1,947,024	)	$	3,846,076

Total current liabilities	$	84,699		$	743,733	$	347,062	$	279,410		$	1,454,904
Total long-term liabilities		300,908			238,961		22,490		—			562,359
Total stockholders' equity		780,797			1,601,827		1,672,623		(2,226,434	)		1,828,813

Total liabilities and stockholders' equity	$	1,166,404		$	2,584,521	$	2,042,175	$	(1,947,024	)	$	3,846,076

Condensed Consolidated Statement of Income
For the thirteen weeks ended July 29, 2000
(in thousands)

	Staples, Inc. (Parent Co.)			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Consolidated
Sales	$	—		$	1,604,700	$	596,597	$	2,201,297
Cost of goods sold and occupancy costs		226			1,209,280		445,127		1,654,633

Gross profit		(226	)		395,420		151,470		546,664
Operating and other expenses		24,405			325,021		125,104		474,530

Income/(loss) before income taxes		(24,631	)		70,399		26,366		72,134
Income tax expense		—			21,130		8,445		29,575

Net income/(loss)	$	(24,631	)	$	49,269	$	17,921	$	42,559

STAPLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Condensed Consolidated Statement of Income
For the thirteen weeks ended July 31, 1999
(in thousands)

	Staples, Inc. (Parent Co.)			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Consolidated
Sales	$	—		$	1,372,395	$	467,715	$	1,840,110
Cost of goods sold and occupancy costs		169			1,038,507		346,875		1,385,551

Gross profit		(169	)		333,888		120,840		454,559
Operating and other expenses		7,855			266,877		93,361		368,093

Income/(loss) before income taxes		(8,024	)		67,011		27,479		86,466
Provision/(Benefit) for income taxes		(3,386	)		26,171		10,937		33,722

Net income/(loss)	$	(4,638	)	$	40,840	$	16,542	$	52,744

Condensed Consolidated Statement of Income
For the twenty-six weeks ended July 29, 2000
(in thousands)

	Staples, Inc. (Parent Co.)			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Consolidated
Sales	$	—		$	3,475,674	$	1,281,409	$	4,757,083
Cost of goods sold and occupancy costs		421			2,635,669		964,682		3,600,772

Gross profit		(421	)		840,005		316,727		1,156,311
Operating and other expenses		42,685			716,461		250,172		1,009,318

Income/(loss) before income taxes		(43,106	)		123,544		66,555		146,993
Income tax expense		—			39,055		21,212		60,267

Net income/(loss)	$	(43,106	)	$	84,489	$	45,343	$	86,726

Condensed Consolidated Statement of Income
For the twenty-six weeks ended July 31, 1999
(in thousands)

	Staples, Inc. (Parent Co.)			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Consolidated
Sales	$	—		$	2,942,037	$	970,139	$	3,912,176
Cost of goods sold and occupancy costs		341			2,238,588		723,935		2,962,864

Gross profit		(341	)		703,449		246,204		949,312
Operating and other expenses		16,365			576,641		187,358		780,364

Income/(loss) before income taxes		(16,706	)		126,808		58,846		168,948
Provision/(Benefit) for income taxes		(6,181	)		52,010		20,061		65,890

Net income/(loss)	$	(10,525	)	$	74,798	$	38,785	$	103,058

STAPLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Condensed Consolidated Statement of Cash Flows
For the twenty-six weeks ended July 29, 2000
(in thousands)

		Staples, Inc. (Parent Co.)			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidated
Net cash provided by/(used in) operating activities		$	(233,742	)	$	190,768		$	33,431		$	(9,543	)
Investing Activities:
	Acquisition of property, equipment and lease rights		(26,525	)		(119,579	)		(53,288	)		(199,392	)
	Other		—			(59,008	)		74			(58,934	)

Cash used in investing activities			(26,525	)		(178,587	)		(53,214	)		(258,326	)
Financing Activities:
	Payments on borrowings		(1,984,364	)		—			—			(1,984,364	)
	Other		2,211,594			(129	)		10,582			2,222,047

Cash provided by/(used in) financing activities			227,230			(129	)		10,582			237,683
Effect of exchange rate changes on cash			—			—			(2,772	)		(2,772	)

Net (decrease)/increase in cash			(33,037	)		12,052			(11,973	)		(32,958	)
Cash and cash equivalents at beginning of period			23,577			24,677			62,229			110,483

Cash and cash equivalents at end of period		$	(9,460	)	$	36,729		$	50,256		$	77,525

Condensed Consolidated Statement of Cash Flows
For the twenty-six weeks ended July 31, 1999
(in thousands)

		Staples, Inc. (Parent Co.)			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidated
Net cash (used in)/provided by operating activities		$	(70,182	)	$	(7,884	)	$	(7,639	)	$	(85,705	)
Investing Activities:
	Acquisition of property, equipment and lease rights		(29,591	)		(79,899	)		(36,351	)		(145,841	)
	Other		(110,367	)		87,464			(119,426	)		(142,329	)

Cash (used in)/provided by investing activities			(139,958	)		7,565			(155,777	)		(288,170	)
Financing Activities:
	Payments on borrowings		(234,505	)		—			(13,821	)		(248,326	)
	Other		230,543			—			33,438			263,981

Cash provided by/(used) in financing activities			(3,962	)		—			19,617			15,655
Effect of exchange rate changes on cash			—			—			227			227

Net decrease in cash			(214,102	)		(319	)		(143,572	)		(357,993	)
Cash and cash equivalents at beginning of period			219,426			16,348			122,219			357,993

Cash and cash equivalents at end of period		$	5,324		$	16,029		$	(21,353	)	$	—

STAPLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Note I Consolidating Information

Below is the consolidating financial information of Staples RD and Staples.com. The financial information reflects the businesses of Staples RD and Staples.com, including the allocation of all the Company's assets, liabilities, revenues, expenses and cash flows between the two businesses in accordance with the Company's cash management and allocation policies adopted by the Board. Allocation policies adopted by the Board can be rescinded or amended at the sole discretion of the Board, 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.

Staples RD is comprised of Staples' retail stores, catalog businesses and contract stationer business and a retained interest in Staples.com. Staples.com includes the operations of Staples' e-commerce sites, Staples.com, Quill.com, StaplesLink.com, and its Canadian e-commerce business.

The allocation policies reflected in the following consolidating financial information are as follows:

1.: 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. Whenever Staples.com holds cash, Staples.com normally transfers that cash to Staples RD. Conversely, whenever Staples.com has a cash need, Staples RD normally funds that cash need. Staples accounts for all cash transfers between one business to or for the account of the other business as temporarily allocated funds unless the Board determines that a given transfer should be accounted for as a long-term loan or as permanently allocated funds to or from Staples.com. The temporarily allocated funds bear 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 first half of 2000 and 1999. Through the quarter ending October 30, 1999, permanently allocated funds to Staples.com of $32,878,000 were made to cover fixed asset and investment purchases through this time as well as operating cash flow losses through January 30, 1999. During the quarter ending July 29, 2000, $30,191,000 of previously classified temporarily allocated funds were converted to permanently allocated funds by the Board. For the quarter ending July 29, 2000, permanently allocated funds to Staples.com of $25,182,000 were made to cover operating cash flow losses, fixed asset and investment purchases and the repurchase of previously exercised employee stock options. The remaining balance in temporarily allocated funds represents the deferred tax liability on the net unrealized gain on Staples.com's equity investments.
2.: Revenue and Expenses: Staples RD and Staples.com's sales and cost of sales are specifically identified based on the origination of the customer's ordering channel. In addition, shrink, obsolescence and other inventory costs are allocated to Staples.com based on Staples.com's share of such costs and distribution and delivery costs are allocated based on orders shipped by business unit. In general, marketing and advertising, call center, and general and administrative expenses are specific by nature and are directly incurred by the business units. A small number of shared costs are not directly attributable to a business unit and are allocated on an activity based cost method as described in item three below. Site development costs are specifically identifiable by business unit.

STAPLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

3.: Shared Services and Support Activities: The cost of services shared by Staples RD and Staples.com, including general and administrative expenses, has been allocated between Staples RD and Staples.com based upon the use of such services. 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 RD or Staples.com. For example, for printed advertisements and commercials that include both Staples RD and Staples.com, Staples.com currently reimburses Staples RD for that amount of space or air time devoted to Staples.com, plus a proportionate part of the total cost of the rest of the advertisements or commercials based on varying metrics, such as the relative sales of Staples RD and Staples.com. In addition, Staples RD sells inventory to Staples.com for resale. The cost per inventory unit purchased by Staples.com equals Staples RD's

product cost. Additionally, Staples RD holds accounts receivable for Staples.com. Staples RD maintains inventory to support Staples.com's inventory needs and processes receivables for Staples.com. Staples RD charges Staples.com a carrying charge for use of their capital for these purposes as determined by the Board. The carrying charge is reflected in Staples.com's financial information as part of interest and other expense and in Staples RD's financial information as a credit to interest and other expense. This charge is calculated based on the amount of receivables and inventory that Staples RD is required to carry for Staples.com.
4.: Taxes: Federal income taxes, which are determined on a consolidated basis, are allocated between the businesses of Staples RD and Staples.com, and reflected in their respective financial information, 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 Staples RD and Staples.com based principally upon the financial income, taxable income, credits and other amounts directly related to their respective businesses. Tax benefits that cannot be used by the business generating such attributes, but can be utilized on a consolidated basis, are allocated to the business that generated such benefits. As a result, the allocated business amounts of taxes payable or refundable are not necessarily comparable to those that would have resulted if Staples RD and Staples.com had filed separate tax returns. State income taxes generally are computed on a separate business basis.
5.: Employee Benefits: Staples RD and Staples.com participate in the following Staples employee benefit plans: an Employee Stock Purchase Pan, 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 RD and Staples.com or such other basis as Staples' management believes to be an equitable and reasonable estimate of such costs.

STAPLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

CONDENSED CONSOLIDATING BALANCE SHEETS
July 29, 2000
(in thousands)

	Staples RD			Staples.com			Adjustments/ Eliminations			Staples, Inc.
Current assets	$	2,307,549		$	2,205		$	—		$	2,309,754
Net funds allocated to Staples.com—temporary		28,531			—			(28,531	)		—
Property and equipment, net		1,167,090			18,857			—			1,185,947
Investments		5,056			147,094			—			152,150
Funds allocated to Staples.com—permanent		88,251			—			(88,251	)		—
Other assets		503,822			—			—			503,822

Total assets	$	4,100,299		$	168,156		$	(116,782	)	$	4,151,673

Current liabilities	$	1,398,654		$	24,594		$	—		$	1,423,248
Net funds allocated from Staples RD—temporary		—			28,531			(28,531	)		—
Long-term debt		826,568			—			—			826,568
Other long-term liabilities		66,588			—			—			66,588
Staples RD Stock		283			—			—			283
Staples.com Stock		—			9			—			9
Additional paid-in capital		1,188,369			44,775			—			1,233,144
Funds allocated from Staples RD—permanent		—			88,251			(88,251	)		—
Cumulative foreign currency translation adjustments		(7,337	)		2			—			(7,335	)
Unrealized gain/(loss) on investments		(12	)		41,057			—			41,045
Retained earnings/(Accumulated deficit)		1,093,393			(58,358	)		—			1,035,035
Treasury stock at cost		(466,207	)		(705	)		—			(466,912	)

Total liabilities and stockholders' equity	$	4,100,299		$	168,156		$	(116,782	)	$	4,151,673

STAPLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

CONDENSED CONSOLIDATING BALANCE SHEETS
January 29, 2000
(in thousands)

	Staples RD			Staples.com			Adjustments/ Eliminations			Staples, Inc.
Current assets	$	2,191,873		$	1,578		$	—		$	2,193,451
Net Funds allocated to Staples RD, temporary		—			23,660			(23,660	)		—
Property and equipment, net		1,082,334			12,428			—			1,094,762
Investments		—			34,755			—			34,755
Funds allocated to Staples.com—permanent		32,878			—			(32,878	)		—
Other assets		523,108			—			—			523,108

Total assets	$	3,830,193		$	72,421		$	(56,538	)	$	3,846,076

Current liabilities	$	1,447,438		$	7,466		$	—		$	1,454,904
Net funds allocated from Staples.com—temporary		23,660			—			(23,660	)		—
Long-term debt		500,903			—			—			500,903
Other long-term liabilities		61,456			—			—			61,456
Staples RD Stock		282			—			—			282
Staples.com Stock		—			8			—			8
Additional paid-in capital		1,153,784			42,728			—			1,196,512
Funds allocated from Staples RD—permanent		—			32,878			(32,878	)		—
Cumulative foreign currency translation adjustments		(4,473	)		—			—			(4,473	)
Unrealized gain/(loss) on investments		(44	)		6,695			—			6,651
Retained earnings/(Accumulated deficit)		965,663			(17,354	)		—			948,309
Treasury stock at cost		(318,476	)		—			—			(318,476	)

Total liabilities and stockholders' equity	$	3,830,193		$	72,421		$	(56,538	)	$	3,846,076

STAPLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

CONSOLIDATING STATEMENTS OF INCOME
For the thirteen weeks ended July 29, 2000
(in thousands)

			Staples RD		Staples.com			Reclassifications/ Eliminations			Staples, Inc.
Sales			$	2,105,605	$	95,692		$	—		$	2,201,297
Cost of goods sold and occupancy costs				1,579,453		75,180			—			1,654,633

		Gross profit		526,152		20,512			—			546,664
Operating and other expenses:
	Operating and selling			320,448		33,021			8,327			361,796
	Pre-opening			6,545		—			—			6,545
	Site development			—		8,327			(8,327	)		—
	General and administrative			82,401		8,313			—			90,714
	Amortization of goodwill			3,523		—			—			3,523
	Store closure credit			—		—			—			—
	Interest and other expense, net			11,320		632			—			11,952

		Total operating and other expenses		424,237		50,293			—			474,530

		Income/(Loss) before income taxes		101,915		(29,781	)		—			72,134
Income tax expense/(benefit)				41,785		(12,210	)		—			29,575

		Net income/(loss)	$	60,130	$	(17,571	)	$	—		$	42,559

CONDSOLIDATING STATEMENTS OF INCOME
For the thirteen weeks ended July 31, 1999
(in thousands)

			Staples RD		Staples.com			Reclassifications/ Eliminations			Staples, Inc.
Sales			$	1,824,500	$	15,610		$	—		$	1,840,110
Cost of goods sold and occupancy costs				1,373,576		11,975			—			1,385,551

		Gross profit		450,924		3,635			—			454,559
Operating and other expenses:
Operating and selling				267,578		3,096			601			271,275
	Pre-opening			4,899		—			—			4,899
	Site development			—		601			(601	)		—
	General and administrative			82,521		2,451			—			84,972
	Amortization of goodwill			2,971		—			—			2,971
	Interest and other expense, net			3,805		171			—			3,976

		Total operating and other expenses		361,774		6,319			—			368,093

		Income/(Loss) before income taxes		89,150		(2,684	)		—			86,466
Income tax expense/(benefit)				34,769		(1,047	)		—			33,722

		Net income/(loss)	$	54,381	$	(1,637	)	$	—		$	52,744

STAPLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

CONSOLIDATING STATEMENTS OF INCOME
For the twenty-six weeks ended July 29, 2000
(in thousands)

			Staples RD			Staples.com			Reclassifications/ Eliminations			Staples, Inc.
Sales			$	4,586,028		$	171,055		$	—		$	4,757,083
Cost of goods sold and occupancy costs				3,464,985			135,787			—			3,600,772

		Gross profit		1,121,043			35,268			—			1,156,311
Operating and other expenses:
	Operating and selling			699,358			65,815			15,980			781,153
	Pre-opening			14,528			—			—			14,528
	Site development			—			15,980			(15,980	)		—
	General and administrative			173,896			21,804			—			195,700
	Amortization of goodwill			7,095			—			—			7,095
	Store closure credit			(7,250	)		—			—			(7,250	)
	Interest and other expense, net			16,920			1,172			—			18,092

		Total operating and other expenses		904,547			104,771			—			1,009,318

		Income/(Loss) before income taxes		216,496			(69,503	)		—			146,993
		Income tax expense/(benefit)		88,763			(28,496	)		—			60,267

		Net income/(loss)	$	127,733		$	(41,007	)	$	—		$	86,726

CONDSOLIDATING STATEMENTS OF INCOME
For the twenty-six weeks ended July 31, 1999
(in thousands)

			Staples RD		Staples.com			Reclassifications/ Eliminations			Staples, Inc.
Sales			$	3,884,874	$	27,302		$	—		$	3,912,176
Cost of goods sold and occupancy costs				2,941,867		20,997			—			2,962,864

		Gross profit		943,007		6,305			—			949,312
Operating and other expenses:
	Operating and selling			579,213		6,672			1,119			587,004
	Pre-opening			9,407		—			—			9,407
	Site development			—		1,119			(1,119	)		—
	General and administrative			169,007		4,296			—			173,303
	Amortization of goodwill			5,258		—			—			5,258
	Interest and other expense, net			5,099		293			—			5,392

		Total operating and other expenses		767,984		12,380			—			780,364

	Income/(Loss) before income taxes			175,023		(6,075	)		—			168,948
Income tax expense/(benefit)				68,259		(2,369	)		—			65,890

Net income/(loss)			$	106,764	$	(3,706	)	$	—		$	103,058

Note J Equity Forward Purchase Agreement

In July 2000. Staples settled its forward equity purchase agreement through the purchase of 2,600,000 shares of Staples RD Stock for approximately $78,700,000.

STAPLES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Note K Computation of Earnings Per Common Share

Staples calculates earnings per share in accordance with Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("FAS 128") which requires disclosure of basic and diluted earnings per share. Basic earnings per share exclude any dilutive effects of options, warrants, and convertible securities, while diluted earnings per share include such effects. Subsequent to the approval of the Tracking Stock Proposal on November 9, 1999, the Company has calculated earnings per share under the two class method. Accordingly, earnings per share has been presented for Staples, Inc. common stock for the second quarter of 1999 and first half of 1999 and Staples RD Stock and Staples.com Stock for the second quarter of 2000 and first half of 2000. Also, net loss per share for Staples.com Stock has been retroactively restated to reflect the effect of a recapitalization effected through a one-for-two reverse stock split approved by the Board on March 7, 2000 and effective April 5, 2000. The computation of earnings/(loss) per common share for the for the second quarter of 2000 and first half of 2000 and for the corresponding periods in 1999 is as follows (in thousands, except per share data):

								13 Weeks Ended July 31, 1999 Staples, Inc.
		13 Weeks Ended July 29, 2000
		Staples RD			Staples.com
Numerator:
Net income/(loss) before adjustment for equity loss		$	60,130		$	(17,571	)	$	52,744
	Adjustment for Staples.com losses attributed to Staples RD Stock		(15,559	)		15,559			—

Net income/(loss) attributed to each class of stock			44,571			(2,012	)		52,744
Denominator:
	Weighted-average shares—Basic		455,183			14,075			462,422
	Weighted-average shares—Diluted		462,819			14,075			476,032
Basic earnings/(loss) per common share		$	0.10		$	(0.14	)	$	0.11

Diluted earnings/(loss) per common share		$	0.10		$	(0.14	)	$	0.11

								26 Weeks Ended July 31, 1999 Staples, Inc.
		26 Weeks Ended July 29, 2000
		Staples RD			Staples.com
Numerator:
Net income/(loss) before adjustment for equity loss		$	127,733		$	(41,007	)	$	103,058
	Adjustment for Staples.com losses attributed to Staples RD Stock		(36,153	)		36,153			—

Net income/(loss) attributed to each class of stock			91,580			(4,854	)		103,058
Denominator:
	Weighted-average shares—Basic		455,805			13,938			462,627
	Weighted-average shares—Diluted		464,004			13,938			476,417
Basic earnings/(loss) per common share		$	0.20		$	(0.35	)	$	0.22

Diluted earnings/(loss) per common share		$	0.20		$	(0.35	)	$	0.22

ITEM 2.

STAPLES, INC. AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and
Results of Operations

The change in the capital structure of the Company as a result of the approval of the Tracking Stock Proposal did 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 RD Stock and Staples.com Stock are common stockholders of the Company and as such will be subject to the risks associated with an investment in Staples and all of its businesses, assets and liabilities. The assets the Company attributes to one business are subject to the liabilities of the other business, even if such liabilities arise from lawsuits, contracts or indebtedness attributed to the other business. If the Company is unable to satisfy one business' liabilities out of the assets attributed to it, the Company may be required to satisfy those liabilities with the assets the Company has attributed to the other business. Further, holders of Staples RD Stock and Staples.com Stock will not have any legal rights related to specific assets of either business 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 businesses at such time.

Financial effects from one business 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 business and the market price of the stock relating to the other business. In addition, net losses of either business and dividends and distributions on, or repurchases of, either class of common stock or repurchases of common stock at a price per share greater than par value will reduce the funds the Company can pay on each class of common stock under Delaware Law.

Staples RD's and Staples.com's separate operating results, as presented in Note I of the Consolidated Financial Statements, reflect the effect of the application of certain cash management and allocation polices adopted by the Board. While the Company believes such allocations to be reasonable they are not necessarily indicative of, and it is not practical for the Company to estimate, the levels of expenses that would have resulted had Staples RD and Staples.com been operating as independent companies. Staples.com has relied upon Staples RD to provide financing for its operations. Therefore, Staples.com's

STAPLES, INC. AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)

financial position is not necessarily indicative of the financial position that would have resulted had Staples.com been operating as an independent company. However, management believes that the level of expenses would not have been materially different if these services had been provided by third parties. 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.

Results of Operations

Sales

		13 Weeks Ended July 29, 2000		13 Weeks Ended July 31, 1999		Increase %
		(Amounts in thousands)
North American Retail		$	1,374,463	$	1,183,168	16	%
Contract and Commercial			583,450		562,562	4	%
European Operations			147,692		78,770	87	%

	Total Staples RD		2,105,605		1,824,500	15	%
	Total Staples.com		95,692		15,610	513	%

	Total Staples, Inc.	$	2,201,297	$	1,840,110	20	%

		26 Weeks Ended July 29, 2000		26 Weeks Ended July 31, 1999		Increase %
		(Amounts in thousands)
North American Retail		$	3,057,514	$	2,590,989	18	%
Contract and Commercial			1,201,613		1,126,995	7	%
European Operations			326,901		166,890	96	%

	Total Staples RD		4,586,028		3,884,874	18	%
	Total Staples.com		171,055		27,302	527	%

	Total Staples, Inc.	$	4,757,083	$	3,912,176	22	%

Total worldwide comparable sales increased 10% for both the second quarter and first

STAPLES, INC. AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)

half of 2000. Comparable sales include stores open for more than one year plus the Commercial business ("Staples Direct") and the Staples.com site. Worldwide comparable store sales increased 6% for the second quarter of 2000 and 7% for first half of 2000. Worldwide non-comparable store sales represented 49% of the increase in total company sales for the second quarter of 2000 and 47% for first half of 2000. Staples had 1,254 open stores as of July 29, 2000 compared to 1,009 stores as of July 31, 1999 and 1,129 stores as of January 29, 2000. This includes 60 stores opened and no stores closed during the second quarter of 2000.

Staples RD: Staples RD had 1,105 North American open stores as of July 29, 2000 compared to 930 North American open stores as of July 31, 1999. The Company increased its North American store base by 54 stores during the second quarter of 2000 and 116 stores during the first half of 2000. The increase in sales for Staples North American Retail division were achieved despite increased personal computer and software sales related to the Microsoft Office 2000® and Microsoft Network promotions that were offered during the second quarter of 1999 for which there was no similar event in the second quarter of 2000. Sales for Contract and Commercial increased 4% for the second quarter of 2000 and increased 7% for the first half of 2000. The increase reflects revenue growth in Staples Direct of 12% for the second quarter of 2000 and 14% growth for the first half of 2000 driven by an increase in targeted customer marketing. Contract division sales, which includes Contract, Quill and Staples Communications, were flat for the second quarter of 2000 and increased 3% for the first half of 2000, reflecting the negative effect of the migration of customers to the Internet sites of StaplesLink.com, and Quill.com. Growth in this division would have been 9% for the second quarter of 2000 and 11% for the first half of 2000 if the revenues from StaplesLink.com, and Quill.com were included. Contract division sales also reflect a decline in the sales performance of Staples Communications.

Staples RD had 149 European open stores as of July 29, 2000 compared to 79 European open stores as of July 31, 1999. The Company increased its European store base by 6 stores during the second quarter of 2000 and by 13 stores during the first half of 2000. The Company's European Operations results for the second quarter of 2000 and first half of 2000 also include the October 1999 acquisition of 42 Office Centre/Sigma stores in the Netherlands, Portugal and Germany.

Staples.com: Sales increased 513% during the second quarter of 2000 and 527% during the first half of 2000 due to the significant increase in the Staples.com customer base and repeat purchases from Staples.com's existing customers. Staples.com had approximately 179,100 repeat customers during the second quarter of 2000 and approximately 322,600 repeat customers during the first half of 2000, and these repeat customers accounted for over 63% of the total sales during the second quarter of 2000.

Gross Profit. Gross profit as a percentage of sales was 24.8% for the second quarter of 2000 and 24.3% for the first half of 2000 as compared to 24.7% and 24.3% for the corresponding periods in 1999. This gross profit rate was maintained through lower product costs from vendors, increased buying efficiencies, continued supply chain enhancements and the leveraging of fixed distribution center and delivery costs over a larger sales base offset by increased price reductions.

Operating and Selling Expenses. Operating and selling expenses, which consist of payroll, advertising and other operating expenses, increased as a percentage of sales to 16.4% in both the second quarter of 2000 and first half of 2000 as compared to 14.7% and 15.0% for the corresponding periods in 1999. The increase was primarily due to increased costs of investing in the operations and marketing of Staples.com. The increase also reflects the continued negative impact of wage inflation at the store level. These increases were partially offset by the continued leveraging of fixed store and delivery operating costs as sales have increased.

STAPLES, INC. AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)

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 $109,000 per store for the second quarter of 2000 and $113,000 per store for the first half of 2000 as compared to $100,000 per store for the first quarter of 1999 and $98,000 per store for the first half of 1999.

General and Administrative Expenses. General and administrative expenses as a percentage of sales were 4.1% for both the second quarter of 2000 and first half of 2000, as compared to 4.7% and 4.5% for the for the corresponding periods in 1999. The decrease was primarily due to Staples' ability to increase sales without proportionately increasing overhead expenses in its core retail and direct business. These decreases were partially offset by the growth of Staples.com which currently has higher general and administrative expenses as a percentage of sales.

Merger-Related and Integration Costs. As discussed in Note E to the Financial Statements, during the second half of 2000, the Company utilized reserves of $6,524,000 related to the Quill merger, $5,026,000 related to the European Office Supply purchase and $1,502,000 related to the Claricom purchase. At July 29, 2000, the remaining accruals were $7,138,000 for the Quill merger, $14,896,000 for the European Office Supply purchase and $2,284,000 for the Claricom purchase. All of the remaining accruals will be utilized by the end of fiscal year 2000, except for accruals related to contract and lease terminations. The Company believes that the accruals relating to contract and lease terminations will be entirely utilized by fiscal year 2004, although some payments may be made over the remaining lease terms.

Store Closure Credit. During the first half of 2000, management decided not to close several stores that were included in the original store closure plan. Accordingly, the Company has reversed a portion of the charge in the amount of $7,250,000, representing eighteen stores that the Company is no longer committed to closing due to changes in market conditions.

Amortization of Goodwill. Amortization of goodwill was $3,523,000 for the second quarter of 2000 and $7,095,000 for the first half of 2000 as compared to $2,971,000 for the second quarter 1999 and $5,258,000 for the first half 1999. The increase in amortization is due to the additional goodwill created from the acquisitions of Sigma Burowelt in Germany, Office Centre in the Netherlands and Office Centre in Portugal on October 6, 1999 and Claricom Holdings, Inc., now referred to as Staples Communications, on February 26, 1999.

Interest and Other Expense, Net. Net interest and other expense was $11,952,000 for the second quarter of 2000 and $18,092,000 for the first half of 2000 as compared to $3,976,000 for the second quarter 1999 and $5,392,000 for the first half of 1999. The interest expense relates primarily to existing borrowings. The increase in the net interest expense during the second quarter of 2000 and first half of 2000 was primarily due to increased borrowings from Staples' revolving credit facility and the issuance of $175,000,000 floating rate notes on May 24, 2000.

Income Taxes. The provision for income taxes as a percentage of pre-tax income was 41% for the second quarter of 2000 and first half of 2000 and 39% for the for the corresponding periods in 1999. The increase in Staples' effective tax rate is due primarily to a one time charge associated with the legal restructuring of the European Operations.

STAPLES, INC. AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)

Liquidity and Capital Resources

Staples has traditionally used a combination of cash generated from operations and debt or equity offerings to fund its expansion and acquisition activities. During the twenty-six weeks ended July 29, 2000 and July 31, 1999, Staples also utilized its revolving credit facility to support its various growth initiatives.

Staples opened 129 stores during the first half of 2000 and 96 stores during first half of 1999. 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 carry its own receivables from these sales. As Staples expands its contract and direct mail businesses worldwide, Staples anticipates that its accounts receivable portfolio will grow. Receivables from its vendors under rebate, cooperative advertising and marketing programs are a significant percentage of its total receivables and tend to fluctuate somewhat seasonally. Staples expects to open approximately 40 stores during the second half of fiscal year 2000. Staples estimates that its cash requirements, including pre-opening expenses, inventory, leasehold improvements and fixtures, will be approximately $1,500,000 for each new store (excluding the cost of any acquisitions of lease rights). Accordingly, Staples expects to use approximately $60,000,000 for store openings during this period.

During the first half 2000, cash and cash equivalents decreased by $33,000,000. This decrease was primarily attributable to cash used in investing activities of $258,000,000, including the acquisition of property and equipment of $199,000,000, primarily for the 129 new stores opened, and long-term investments in Internet related companies of $59,000,000. This decrease was partially offset by cash provided by financing activities of $238,000,000, comprised of net borrowings of $359,000,000 and proceeds from the sale of capital stock through the exercise of stock options of $24,000,000, which were offset by the settlement of the equity forward purchase agreement of $79,000,000 and the purchase of treasury stock of $67,000,000. Cash used in operating activities of $10,000,000 was comprised primarily of an increase in receivables of $88,000,000, increase in merchandise inventories of $86,000,000, increase in prepaid expenses and other assets of $21,000,000 and a decrease in accounts payable and other current liabilities of $21,000,000, which was offset by net income of $87,000,000 and depreciation and amortization of $109,000,000.

During the first half of 2000, Staples extended its stock repurchase program intended to provide shares for employee stock programs. The Board has authorized up to $400,000,000 to be used in fiscal 2000 for these repurchases. During the first half of 2000, Staples repurchased 6,247,500 shares for approximately $145,000,000 under this program. In addition, on July 3, 2000, Staples elected to settle its 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, the Company purchased 2,600,000 shares at an average price of $30.263.

Staples also plans to continue to make investments in information systems, distribution centers and store remodels to improve operational efficiencies and customer service, and may expend additional funds to acquire businesses or lease rights from tenants occupying retail space that is suitable for a Staples store.

Staples 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

STAPLES, INC. AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)

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 29, 2000, $302,000,000 of borrowings were outstanding under the $350,000,000 revolving credit agreement and no borrowings were outstanding under the $200,000,000 revolving credit facility. Staples also had available $35,000,000 in other uncommitted, short-term bank credit lines, of which $20,000,000 was outstanding as of July 29, 2000. Staples UK had a $45,000,000 line of credit of which $4,900,000 was outstanding at July 29, 2000, Staples Germany has a $18,900,000 line of credit of which $11,800,000 was outstanding at July 29, 2000 and Office Centre Portugal had a $460,000 line of credit of which $407,000 was outstanding at July 29, 2000. Office Centre Netherlands has a $6,300,000 line of credit and Business Depot has a $6,800,000 line of credit, both with no outstanding balances at July 29, 2000. Total cash, short-term investments and available revolving credit amounts totaled $401,700,000 as of July 29, 2000.

Staples expects that income from operations, together with its current short-term investments, funds available under its revolving credit facility and proceeds from notes issued will be sufficient to fund its planned store openings and other recurring operating cash needs for at least the next twelve to eighteen months. Staples 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 upon market conditions, or through an additional commercial bank debt arrangement.

Inflation and Seasonality

While neither inflation nor deflation has had, and Staples does not expect either to have, a material impact upon operating results, there can be no assurance that inflation or deflation will not affect Staples' business in the future. Staples 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 quarterly report on Form 10-Q includes or incorporates forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify these forward-looking statements by 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 cannot guarantee that they actually will achieve these plans, intentions or expectations disclosed in the forward looking statements made. Staples has included important factors in the cautionary statements below that Staples believes could cause actual results to

STAPLES, INC. AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)

differ materially from the forward-looking statements contained herein. The forward-looking statements do not reflect the potential impact of any future acquisitions, mergers or dispositions. Staples does not assume any obligation to update any forward-looking statement contained herein.

Staples' market is highly competitive and Staples may not continue to compete successfully. Staples competes in a highly competitive marketplace with a variety of retailers, dealers and distributors. In most of its geographic markets, Staples 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 also competes with mass merchants, such as Wal-Mart, warehouse clubs, computer and electronic superstores, and other discount retailers. In addition, Staples' retail stores, delivery and contract businesses, and Staples.com compete with numerous mail order firms, on-line office supply service providers, contract stationer businesses and direct manufacturers. Many of Staples' competitors, including Office Depot, OfficeMax and Wal-Mart, have in recent years significantly increased the number of stores they operate within Staples' markets. Some of Staples' 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' competitors may reduce Staples' market share, may reduce Staples' profit margin, and may adversely affect Staples' business and financial performance in other ways.

Staples may be unable to continue to successfully open new stores. An important part of Staples' business plan is to aggressively increase its number of stores. Staples opened 175 stores in the United States, Canada and Europe in fiscal 1999 and plans to open approximately 170 new stores in fiscal 2000. For Staples' growth strategy to be successful, Staples must identify and lease favorable store sites, hire and train employees and adapt management and operational systems to meet the needs of Staples' expanded operations. These tasks may be difficult to accomplish successfully. If Staples is unable to open new stores as quickly as planned, Staples' future sales and profits could be materially adversely affected. Even if Staples succeeds in opening new stores, these new stores may not achieve the same sales or profit levels as its existing stores. Also, Staples' expansion strategy includes opening new stores in markets where Staples 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' quarterly operating results are subject to significant fluctuation. Staples' 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' 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 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 Staples' stores are typically slightly lower in the first and second quarter of the fiscal year than in other quarters; and
•: charges associated with acquisitions.

STAPLES, INC. AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)

Most of Staples' 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 may not proportionately reduce operating expenses for that quarter, and therefore this sales shortfall would have a disproportionate effect on its net income for the quarter.

Staples stock price may fluctuate based on the expectations of professional security analysts. The public trading of Staples RD Stock is based in large part on professional securities analysts' expectations that its business will continue to grow and that the Company will achieve certain levels of net income. If Staples' 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 the growth potential and future financial performance of Staples. In particular, in light of the Company's substantial recent investment in Staples.com and the Company's pending public offering of Staples.com Stock, the Company believes that Staples RD Stock has become increasingly subject to the recent market volatility associated with Internet stocks. If the securities analysts that regularly follow Staples RD Stock lower their rating or lower their projections for future growth and financial performance, the market price of Staples RD Stock is likely to drop significantly. In addition, in those circumstances the decrease in the stock price may be disproportionate to the shortfall in the Company's financial performance.

Staples' rapid growth may continue to strain operations, which could adversely affect the business and financial results. Staples' business, including sales, number of stores, investment in Staples.com and number of employees, has grown dramatically over the past several years. In addition, Staples 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 management and operational systems. If Staples is not successful in upgrading the operational and financial systems, expanding the management team and increasing and effectively managing the employee base, this growth is likely to result in operational inefficiencies and ineffective management of the business and employees, which will in turn adversely affect Staples' business and financial performance.

Staples' international operations may not become profitable. Staples currently operates in international markets through The Business Depot Ltd. in Canada, Staples UK in the United Kingdom, Staples Deutschland in Germany, and Office Centre in the Netherlands and Portugal. Consolidated European operations are currently unprofitable, and Staples cannot guarantee that they will become profitable. Staples may seek to expand further into other international markets in the future. Staples' foreign operations encounter risks similar to those faced by its US stores, as well as risks inherent in foreign operations, such as local customs and competitive conditions and foreign currency fluctuations.

Staples e-commerce operations may not become profitable. Staples.com includes the operations of Staples' e-commerce sites, Staples.com, Quill.com, StaplesLink.com, and its Canadian e-commerce business. Staples.com is currently unprofitable. Staples cannot guarantee that Staples.com will become profitable.

Staples may be unable to obtain adequate future financing. It is possible that Staples will require additional sources of financing earlier than anticipated, as a result of unexpected cash needs or opportunities, an 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.

STAPLES, INC. AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)

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 has evaluated the potential impact of the conversion to the euro on its business, including the ability of the information systems to handle euro-denominated transactions, the impact on exchange costs and currency exchange rate risks. Based on the results of this evaluation, Staples does not expect the conversion to the euro to have a material impact on its operations or financial position.

ITEM 3.

STAPLES, INC. AND SUBSIDIARIES

Quantitative and Qualitative Disclosure about Market Risks

Staples is exposed to market risk from changes in interest rates and foreign exchange rates. Staples initiated a risk management control process to monitor the interest rate and foreign exchange risks. The risk management process uses analytical techniques including market value, sensitivity analysis, and value at risk estimates. Staples does not believe that the potential exposure is significant in light of its size and its business. Staples uses interest rate and currency swap agreements for purposes other than trading and they are treated as off-balance sheet items. Staples uses interest rate swap agreements to modify fixed rate obligations to variable rate obligations, thereby adjusting the interest rates to current market rates and ensuring that the debt instruments are always reflected at fair value. Staples is exposed to foreign exchange risks through subsidiaries in Canada, the United Kingdom, Germany, the Netherlands, Portugal and Belgium. Staples has entered into derivative financial instruments, as noted below, to partially hedge its foreign exchange exposure, and Staples believes the remaining potential exposure is not material to its overall financial position or its results of operations.

On May 11, 1999 and August 3, 1999, Staples entered into interest rate swaps, each for an aggregate notional amount of $100,000,000, in order to minimize financing costs associated with its $200,000,000 of 7.125% senior notes due August 15, 2007. The swap agreements are both scheduled to terminate on August 15, 2007. Under the interest rate swap agreements, Staples is entitled to receive semi-annual interest payments at a fixed rate of 7.125% and is obligated to pay interest based on a 30 day Non-Financial US Commercial Paper Rate plus 107 basis points and 31.875 basis points, respectively, currently approximately 7.58% and 6.83%. The interest rate swaps are being accounted for as a hedge and the differential to be paid or received on the interest rate swap agreements is accrued and recognized as an adjustment to interest expense over the life of the agreements. If Staples and the counterparty to the agreements terminate the swaps prior to their original maturity, any gain or loss upon termination will be amortized to interest expense over the remaining original life of the agreements.

Staples issued notes in the aggregate principal amount of 150,000,000 euro on November 15, 1999. Net proceeds of approximately $148,000,000 were used to fund international expansion. These notes bear interest at a rate of 5.875% per annum and are due on November 15, 2004. These notes have been designated as a foreign currency hedge on Staples' net foreign investments in Europe and gains or losses are recorded in the cumulative translation adjustment line in Stockholders' Equity.

On November 15, 1999, Staples entered into an interest rate swap for an aggregate notional amount of 150,000,000 euro in order to minimize financing costs on the notes issued the same date. The swap agreement is scheduled to terminate on November 15, 2004. Under the interest rate swap agreement, Staples is entitled to receive annual interest payments at a fixed rate of approximately 5.875% and is required to make quarterly interest payments at a floating rate of the one month EURIBOR plus 1.1175%, currently approximately 5.5085%. Staples has designated its 150,000,000 euro notes and its interest rate swap agreement to be an integrated transaction. Accordingly, the interest rate swap agreement is being accounted for as a hedge and the differential to be paid or received on the interest rate swap agreements is accrued and recognized as an adjustment to interest expense over the life of the agreement.

On May 3, 2000, Staples entered into a currency swap on its $200,000,000 of 7.125% senior notes issued on August 12, 1997. The Company has swapped the dollar-denominated principal and interest into Canadian dollar denominated obligations. This swap has been designated as a foreign currency hedge on Staples' net investment in Canadian dollar denominated subsidiaries and gains or losses will be recorded in the cumulative translation adjustment line in stockholders' equity. As of July 29, 2000 the principal was $295,290,000 in Canadian dollars at an interest rate of 6.445%.

STAPLES, INC. AND SUBSIDIARIES

Quantitative and Qualitative Disclosure about Market Risks (Continued)

This risk management discussion and discussion of the effects of changes in interest rates and foreign exchange rates, are forward-looking statements. Actual future results may differ materially from these projected results due to developments in the global financial markets. The analytical methods used by Staples to assess and mitigate risk discussed above should not be considered projections of future events or losses

PART II—OTHER INFORMATION

Items 1, 2, 3 and 5—Not applicable

Item 4—Submission of Matters to a Vote of Security Holders

The Company held the 2000 Annual Meeting of Stockholders (the "Annual Meeting") on July 10, 2000. At the Annual Meeting, the following actions were taken:

1. The stockholders elected Basil L. Anderson, George J. Mitchell, Robert C. Nakasone, Ronald L. Sargent and Thomas G. Stemberg as Class III Directors, to serve for a three-year term expiring at the 2003 Annual Meeting. Holders of 406,702,104 shares of Common Stock voted for Mr. Anderson. Holders of 404,525,718 shares of Common Stock voted for Mr. Mitchell. Holders of 406,610,007 shares of Common Stock voted for Mr. Nakasone. Holders of 406,609,273 shares of Common Stock voted for Mr. Sargent. Holders of 406,680,906 shares of Common Stock voted for Mr. Stemberg.

2. The stockholders approved amendments to the Company's Amended and Restated 1990 Director Stock Option Plan by a vote of 331,101,872 shares of Common Stock for, 76,376,026 shares of Common Stock against and 2,442,067 shares of Common Stock not voting.

3. The stockholders ratified the appointment of Ernst & Young LLP as the Company's independent auditors for the current fiscal year by a vote of 408,003,568 shares of Common Stock for, 615,258 shares Common Stock against and 1,301,139, shares of common Stock not voting.

Item 6—Exhibits and Reports on Form 8-K.

(a) Exhibits

		10.1		Revolving Credit Agreement, dated as of June 26, 2000, by and among the Company, Fleet National Bank and the banks named therein.
		27.1		Financial Data Schedule.

(b) Reports on Form 8-K

Not Applicable

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		STAPLES, INC.
Date: September 11, 2000		By:	/s/ JOHN J. MAHONEY John J. Mahoney Executive Vice President—Finance and Chief Financial Officer (Principal Financial Officer)

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FORM 10-Q STAPLES, INC. July 29, 2000
TABLE OF CONTENTS
PART II—OTHER INFORMATION
SIGNATURE