<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 18, 2000
REGISTRATION STATEMENT NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
STAPLES, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 04-2896127
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
------------------------------
500 STAPLES DRIVE
FRAMINGHAM, MASSACHUSETTS 01702
(508) 253-5000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
JOHN J. MAHONEY
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND
CHIEF ADMINISTRATIVE OFFICER
STAPLES, INC.
500 STAPLES DRIVE
FRAMINGHAM, MASSACHUSETTS 01702
(508) 253-5000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
Copies to:
<TABLE>
<S> <C>
MARK G. BORDEN, ESQ. ALAN J. SINSHEIMER, ESQ.
VIRGINIA K. KAPNER, ESQ. ROBERT S. RISOLEO, ESQ.
Hale and Dorr LLP Sullivan & Cromwell
60 State Street 125 Broad Street
Boston, Massachusetts 02109 New York, New York 10004
(617) 526-6000 (212) 558-4000
</TABLE>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
------------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE (1) REGISTRATION FEE
<S> <C> <C>
Staples.com common stock, $0.0006 par value per share...... $250,000,000 $66,000
</TABLE>
(1) Estimated solely for the purpose of calculating the registration
fee pursuant to Rule 457(o) under the Securities Act of 1933, as
amended.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION. DATED FEBRUARY 18, 2000.
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
[LOGO]
Shares
STAPLES, INC.-STAPLES.COM
Common Stock
------------------
This is an initial public offering of shares of a new class of common stock
of Staples, Inc. It is intended that these shares reflect the performance of
Staples.com, the e-commerce business of Staples, Inc.
Prior to this offering, there has been no public market for Staples.com
stock. It is currently estimated that the initial public offering price will be
between $ and $ per share. Application has been made for quotation of
Staples.com stock on the Nasdaq National Market under the symbol "SDOT".
SEE "RISK FACTORS" BEGINNING ON PAGE 10 TO READ ABOUT CERTAIN FACTORS YOU
SHOULD CONSIDER BEFORE BUYING SHARES OF STAPLES.COM STOCK.
------------------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Staples, Inc.................. $ $
</TABLE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
To the extent that the underwriters sell more than shares of
Staples.com stock, the underwriters have the option to purchase up to an
additional shares from Staples, Inc. at the initial public offering
price less the underwriting discount.
The underwriters expect to deliver the shares to purchasers on ,
2000.
------------------------
JOINT BOOK-RUNNING MANAGERS
GOLDMAN, SACHS & CO. MORGAN STANLEY DEAN WITTER
---------------------
DEUTSCHE BANC ALEX. BROWN
ROBERTSON STEPHENS
WIT SOUNDVIEW
---------------------
Prospectus dated , 2000.
<PAGE>
[INSIDE FRONT COVER ARTWORK -- SCREEN SHOTS OF STAPLES.COM'S WEB SITES]
Staples has registered the trademarks "Staples" and "Staples--The Office
Superstore" on the Principal Register of the United States Patent and Trademark
Office, the trademark "Staples" in Canada, the United Kingdom and Germany and
the trademark "Quill" in the United States, Canada, Israel, Japan, Mexico and
the United Kingdom. "Staples.com" and "Your Online Office Manager" are service
marks of Staples. All other trademarks or trade names referenced in this
prospectus are the property of their respective owners.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS SOME INFORMATION FROM THIS PROSPECTUS. IT
MAY NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND THIS
OFFERING FULLY, YOU SHOULD READ CAREFULLY THE ENTIRE PROSPECTUS, INCLUDING THE
RISK FACTORS AND THE FINANCIAL STATEMENTS, AS WELL AS THE DOCUMENTS INCORPORATED
BY REFERENCE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES,
REFERENCES IN THIS PROSPECTUS TO "WE", "US", AND "OUR" REFER TO STAPLES.COM AND
REFERENCES TO "STAPLES" REFER TO STAPLES, INC. AND ITS SUBSIDIARIES.
STAPLES, INC.
Staples pioneered the office products superstore concept and is a leading
office products distributor with a total of over 1,100 retail stores located in
the United States, Canada, the United Kingdom, Germany, the Netherlands and
Portugal. In addition, Staples has a catalog business, an e-commerce business
and contract stationer operations.
From an accounting standpoint, Staples has separated Staples.com, its
e-commerce business, from Staples Retail and Delivery, which includes the rest
of its businesses and a retained interest in Staples.com. Staples has allocated
all of its consolidated assets, liabilities, revenue, expenses and cash flow
between Staples.com and Staples Retail and Delivery. Staples Retail and Delivery
is also referred to in this prospectus as "Staples RD".
Staples intends Staples.com stock to track the performance of Staples.com
and intends Staples RD stock to track the performance of Staples RD. Staples is
offering shares of Staples.com stock, but is not offering you any shares of
Staples RD stock.
Staples' principal executive offices are located at 500 Staples Drive,
Framingham, Massachusetts 01702. Staples' telephone number is (508) 253-5000.
STAPLES RETAIL AND DELIVERY
Staples RD includes Staples' retail stores, catalog business, contract
stationer operations and a retained interest in Staples.com. This retained
interest is currently 87.9%, but will decline to reflect the issuance of
Staples.com stock in this offering as well as any future issuances.
STAPLES.COM
Staples.com is creating a leading business-to-business electronic
marketplace offering a comprehensive solution for the office needs of business
customers. We currently provide an electronic marketplace where small, mid-sized
and large businesses can procure office products and business services and
obtain business information and expert content. We plan shortly to expand our
electronic marketplace to enable our customers and suppliers to interact and
engage in e-commerce transactions with each other. By aggregating business
customers, we are creating a sales channel that will provide buyers and sellers
with opportunities to realize operating efficiencies by streamlining complex
purchasing and distribution decisions and to increase revenue by reaching a
broader customer base.
Staples.com is uniquely positioned to leverage the competitive strengths of
Staples, the pioneer of the office products superstore concept with over 1,100
stores worldwide and a significant direct marketing business. We believe that:
- Staples' strong brand, national advertising campaigns and database of more
than 8,000,000 existing business customers enable us to acquire customers
on a cost effective basis;
- Staples' longstanding vendor relationships, purchasing power and
merchandising expertise enable us to price competitively our product and
service offerings; and
3
<PAGE>
- Staples' sophisticated, nationwide fulfillment capabilities enable us to
accurately fill orders and provide reliable next business day delivery.
To help broaden our service offering and gain access to new customers, we
have established strategic alliances with leading Internet service companies. We
currently offer multiple business services, including Internet and virtual
office services, business printing, payroll processing and communications
services. Through our relationship with BizBuyer.com, we plan to further enhance
our service offering by allowing customers to submit requests for quotes from a
network of over 20,000 service providers offering over 40 services. We expect to
increase the total number of available services to approximately 100 by the end
of 2000.
Staples.com has experienced rapid growth in both sales and visitor traffic.
Our sales grew to approximately $24 million during the fiscal quarter ended
October 30, 1999 from approximately $4 million for the same period in 1998,
representing growth of 493%. STAPLES.COM was recently awarded the "Golden Paper
Clip" award by OFFICE SOLUTIONS magazine for the best online shopping experience
for office products. The award recognized the web site for being well-designed,
easy to navigate, fast loading and price competitive.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
STAPLES.COM STOCK OFFERED: shares.
STAPLES.COM STOCK OUTSTANDING AFTER THIS shares, which includes the offered shares and
OFFERING: 27,446,084 shares that were outstanding prior
to this offering. These shares are intended
to represent % of the equity of Staples.com
after this offering.
SHARES OF STAPLES.COM STOCK EFFECTIVELY OWNED 200,000,000 shares. These shares are intended
BY STAPLES RD THROUGH ITS RETAINED INTEREST to represent % of the equity of Staples.com
IN STAPLES.COM AFTER THIS OFFERING: after this offering.
TOTAL NUMBER OF SHARES OF STAPLES.COM STOCK shares, which includes the offered shares,
DEEMED OUTSTANDING AFTER THIS OFFERING: shares outstanding prior to this offering and
shares issuable in respect of Staples RD's
retained interest in Staples.com, but does
not include shares of Staples.com stock that
have been reserved for issuance in respect of
outstanding options under Staples' equity
incentive and stock option plans.
USE OF PROCEEDS: The net proceeds from this offering are
estimated to be approximately $ million,
or approximately $ million if the
underwriters exercise in full their option to
purchase additional shares of Staples.com
stock, all of which will be allocated to
Staples.com. Staples.com will use the net
proceeds for general corporate purposes,
including for promotion and advertising.
PROPOSED NASDAQ NATIONAL MARKET SYMBOL: "SDOT"
</TABLE>
RISK FACTORS
You should carefully consider the risk factors described below, beginning on
page 10 of this prospectus, as well as the other information included or
incorporated by reference in this prospectus before buying shares of Staples.com
stock.
5
<PAGE>
SUMMARY COMBINED FINANCIAL INFORMATION OF STAPLES.COM
The following summary combined financial information of Staples.com should
be read in conjunction with our combined financial statements and the notes
thereto, "Selected Combined Financial Information of Staples.com", and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Staples.com" contained elsewhere in this prospectus, and with
Staples' consolidated financial statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" incorporated by reference in this prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED FISCAL YEAR ENDED
------------------------- ---------------------------------------
OCTOBER 30, OCTOBER 31, JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales.............................. $51,281 $9,104 $16,886 $3,706 $ 35
Gross profit....................... 11,810 2,429 4,165 931 9
Net loss........................... (6,550) (203) (487) (300) (207)
Pro forma net loss (1)............. (6,550) (191) (475) (180) (124)
</TABLE>
<TABLE>
<CAPTION>
AS OF OCTOBER 31, 1999
-------------------------
ACTUAL AS ADJUSTED(2)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $(5,960)
Total assets................................................ 32,457
Group equity................................................ 26,497
</TABLE>
- ------------------------------
(1) Pro forma net loss includes a benefit for income taxes on the previously
untaxed earnings of Quill Corporation, which had been an S corporation prior
to its acquisition by Staples.
(2) Adjusted to give effect to this offering and the application of the net
proceeds, determined at an assumed public offering price of $ per
share, the mid-point of the range of initial public offering prices set
forth on the cover page of this prospectus, as described under "Use of
Proceeds" and "Capitalization".
6
<PAGE>
WHAT IS STAPLES.COM STOCK?
<TABLE>
<S> <C>
STAPLES.COM STOCK: Staples.com stock is sometimes referred to as tracking
stock. Tracking stock is a type of common stock intended to
reflect or track the performance of a particular business.
In this case, Staples.com stock is intended to track the
performance of Staples.com, Staples' e-commerce business.
Staples RD stock is intended to track the performance of
Staples RD, which consists of Staples' other businesses and
a retained interest in Staples.com.
Staples has allocated, for financial reporting purposes, all
of Staples' consolidated assets, liabilities, revenue,
expenses and cash flow between Staples RD and Staples.com.
Staples publishes combined financial statements of Staples
RD, combined financial statements of Staples.com and
consolidated financial statements of Staples.
Staples cannot assure you that the market value of
Staples.com stock will in fact reflect the performance of
Staples.com as it intends. Holders of Staples.com stock are
common stockholders of Staples and, as such, are subject to
all of the risks associated with an investment in Staples
and all of its businesses, assets and liabilities.
DIVIDENDS: Staples currently intends to retain all of its earnings for
use in the operation and expansion of its business. Staples
does not expect to pay any cash dividends on Staples.com
stock in the foreseeable future.
MANDATORY DIVIDEND, REDEMPTION OR If Staples disposes of all or substantially all of the
EXCHANGE ON DISPOSITION OF assets of Staples.com and the disposition is not an exempt
ASSETS: disposition under the terms of Staples' certificate of
incorporation, Staples would be required to choose one of
the following three alternatives:
- pay a dividend to holders of Staples.com stock in an
amount equal to their proportionate interest in the net
proceeds of such disposition;
- redeem from holders of Staples.com stock, for an amount
equal to their proportionate interest in the net proceeds of
such disposition, outstanding shares of Staples.com stock;
or
- issue Staples RD stock in exchange for outstanding
Staples.com stock at a 10% premium.
At any time within one year after completing a special
dividend or partial redemption referred to above, Staples
will have the right to issue Staples RD stock in exchange
for outstanding Staples.com stock at a 10% premium.
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
EXCHANGE OF ONE SERIES OF COMMON Staples has the right, at any time, to issue shares of
STOCK FOR THE OTHER SERIES AT Staples RD stock in exchange for outstanding shares of
STAPLES' OPTION: Staples.com stock at a premium that is currently 24.166667%
and will decline ratably each quarter through November 2002
to 15%.
Notwithstanding the exchange provisions outlined above, in
the event that certain adverse tax law changes were to take
place, Staples has 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,
regardless of when such adverse tax law changes take place.
The exchange ratio that will result in the specified premium
will be calculated based on the average market value of
Staples RD stock during a specified 20 consecutive trading
day period before the exchange.
In addition, Staples has the right at any time Staples.com
stock exceeds 40%, but is below 60%, of the total market
value of both series of Staples common stock 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.
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 during a
specified 20 consecutive trading day period before the
exchange.
EXCHANGE FOR STOCK OF A SUBSIDIARY Staples has the right, at any time, to transfer all of the
AT STAPLES' OPTION: assets and liabilities of Staples.com to a subsidiary and
deliver stock of that subsidiary in exchange for all of the
outstanding Staples.com stock.
VOTING RIGHTS: Holders of Staples RD stock and Staples.com stock vote
together as a single class, except in limited circumstances.
Each share of Staples.com stock will entitle the holder to
one vote per share and each share of Staples RD stock will
entitle the holder to one vote per share.
LIQUIDATION: Upon liquidation of Staples, holders of Staples RD stock and
Staples.com stock will be entitled to receive the net assets
of Staples, if any, available for distribution to
stockholders after payment or provision for all liabilities
of Staples and payment of the liquidation preference payable
to any holders of preferred stock.
CASH MANAGEMENT AND ALLOCATION Staples' board of directors has adopted cash management and
POLICIES: allocation policies with respect to the ongoing relationship
between Staples.com and Staples RD and the allocation of
Staples' businesses, assets and liabilities. In the future,
Staples' board of directors will, in its discretion,
allocate businesses, assets or liabilities between
Staples.com and Staples RD, subject to these cash management
and allocation policies.
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
The cash management and allocation policies also contain
provisions that set general parameters for:
- loans, asset transfers and commercial transactions between
Staples.com and Staples RD; and
- specified extraordinary transactions, including
repurchases of Staples.com stock.
Although Staples has no present intention to do so, it may
modify, suspend, rescind or add to the cash management and
allocation policies in the sole discretion of its board of
directors without the approval of its stockholders. Staples'
board of directors may also adopt additional policies
depending upon the circumstances.
CONFLICT RESOLUTION COMMITTEE: Staples' board of directors has established a committee of
its board of directors known as the conflict resolution
committee. Staples' board of directors has delegated to the
conflict resolution committee the authority to, and the
conflict resolution committee will, interpret, make
determinations under, and oversee the implementation of the
cash management and allocation policies and inter-business
arrangements and otherwise make decisions in areas that may
have disparate impacts on holders of Staples RD stock and
Staples.com stock. Any such decision will be made by the
conflict resolution committee in good faith and in a manner
consistent with its fiduciary duties to Staples and to all
of Staples' common stockholders after giving fair
consideration to the potentially divergent interests and all
other relevant interests of the holders of the separate
classes of Staples common stock, including the holders of
Staples.com stock.
BUSINESS ADVISORY BOARD: Staples.com has a business advisory board that consists of
professionals from the Internet industry. The business
advisory board will consult with our management regarding
Staples.com's business and various strategic initiatives.
</TABLE>
9
<PAGE>
RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY THE RISKS DESCRIBED BELOW, AS WELL AS THE
OTHER INFORMATION INCLUDED IN THIS PROSPECTUS AND THE DOCUMENTS INCORPORATED BY
REFERENCE IN THIS PROSPECTUS, BEFORE BUYING SHARES OF STAPLES.COM STOCK. THE
RISKS DESCRIBED BELOW MAY NOT BE THE ONLY ONES FACING US. ADDITIONAL RISKS NOT
PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR
BUSINESS OPERATIONS. OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS
COULD BE MATERIALLY AND ADVERSELY AFFECTED BY ANY OF THESE RISKS. THE TRADING
PRICE OF STAPLES.COM STOCK COULD DECLINE DUE TO ANY OF THESE RISKS, AND YOU MAY
LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATING TO OUR BUSINESS
WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR SIGNIFICANT FUTURE LOSSES
We incurred net losses of $6.6 million for the nine months ended
October 30, 1999, which represented 12% of our sales in that period. We have
never achieved profitability and we expect to incur significant losses for the
foreseeable future in light of the level of our planned operating and capital
expenditures. If our sales grow more slowly than we anticipate, or if our
operating expenses exceed our expectations and cannot be adjusted in a timely
manner, our business, results of operations, financial condition and prospects
would be materially and adversely affected. Our losses may increase in the
future and we may not be able to achieve or sustain profitability. Even if we
achieve profitability, we may not be able to sustain or increase profitability
on a quarterly or annual basis in the future.
OUR LIMITED OPERATING HISTORY MAKES AN EVALUATION OF OUR BUSINESS AND PROSPECTS
DIFFICULT
We have a limited operating history on which you can evaluate our business,
strategies and performance and an investment in Staples.com stock. Before buying
Staples.com stock, you should consider the risks and difficulties frequently
encountered by early stage companies in new and rapidly growing markets,
particularly those companies whose business depends on the Internet and serves
small businesses.
BECAUSE OUR BUSINESS MODEL IS NEW AND UNPROVEN, WE DO NOT KNOW IF IT WILL
GENERATE SIGNIFICANT REVENUE ON A SUSTAINED BASIS OR ACHIEVE PROFITABILITY
Our business model is new, unproven and continues to evolve. In particular,
our business model is based on several fundamental assumptions, any one of which
may not prove to be true, including the following:
- a significant number of small businesses will purchase office products and
business services online;
- we will be able to take advantage of Staples' and Quill's brand
recognition as distributors of office products to develop our own online
brand recognition and drive traffic to our web sites;
- a significant number of small businesses and small business service
providers will use our STAPLES.COM web site as an electronic marketplace
to buy and sell products and services; and
- at STAPLES.COM, online sales of office products will lead to increased
online sales of business services, and online sales of business services
will lead to increased online sales of office products, and an active
information exchange and electronic marketplace for small businesses will
lead to increased sales of both products and services.
10
<PAGE>
If any of these assumptions does not prove to be true, our business
prospects may be materially diminished.
OUR QUARTERLY OPERATING RESULTS MAY BE SUBJECT TO SIGNIFICANT FLUCTUATION
Our operating results may fluctuate from quarter to quarter as a result of
any of the following:
- the mix of products and services sold;
- pricing actions of our competitors and us;
- the level of advertising and promotional expenses;
- seasonality, primarily because of stronger sales in the fourth quarter of
our fiscal year associated with holiday and beginning of the year office
supply purchases; and
- charges associated with acquisitions and investments.
Most of our operating expenses, such as rent expense, advertising expense
and employee salaries, do not vary directly with the amount of our sales and are
difficult to adjust in the short term. As a result, if our sales in a particular
quarter are below expectations for that quarter, we may not proportionately
reduce operating expenses for that quarter, and therefore any sales shortfall
would have a disproportionate effect on our net income for the quarter.
OUR FUTURE GROWTH MAY BE LIMITED UNLESS SMALL BUSINESSES INCREASE THEIR USE OF
THE INTERNET TO CONDUCT COMMERCE
Our success depends in part on the increasing use of the Internet by small
businesses. If use of the Internet as a medium for business communications and
commerce does not continue to increase, demand for our products and services
will be limited and our financial results will suffer. If we fail to expand our
online brand recognition among small businesses, our future revenue and business
prospects could be materially and adversely affected.
Our success depends in part on our ability to develop STAPLES.COM as a web
site that small businesses regard not only as a place to purchase office
products, but as a general resource center where they can purchase reliable
services and share information with other small businesses. We may fail to
provide the services and information and to foster communications among visitors
to STAPLES.COM necessary to attract regular visits and repeat purchases by small
businesses. Further, our marketing and promotional techniques for generating
traffic from targeted customers to our web sites may fail to be effective. In
the event of any such failure, our sales of products and services would fail to
grow and our business prospects would be materially diminished.
INTENSE COMPETITION IN THE OFFICE PRODUCTS AND BUSINESS SERVICES MARKETS MAY
IMPEDE OUR ABILITY TO GAIN MARKET SHARE AND ACHIEVE PROFITABILITY
The market for selling office products and business services is intensely
competitive. The growing use of the Internet has significantly increased this
competition. Minimal barriers to entry allow new online competitors to easily
launch web sites offering products and services that compete with those that we
currently offer or anticipate offering. Our current and potential competitors
include:
- Internet sites that target the small business market with a full line of
business products or service offerings and offer business content, such as
small business portals;
- Internet sites that sell or resell office products and business services;
and
11
<PAGE>
- traditional retailers that sell or resell office products and business
services, either through storefront locations or through the Internet,
such as mass merchants, warehouse clubs and computer and electronic
superstores.
To compete successfully and to gain market share, we must increase our
online brand recognition and traffic to our web sites. Some of our current and
potential competitors may have more developed technologies and more extensive
marketing and advertising campaigns. Our competitors may develop web sites that
are more sophisticated than our web sites and have better online tools and
service and product offerings. As a result, the web sites of our competitors may
achieve greater market acceptance than our web sites. In this event, our ability
to gain or maintain market share and customer loyalty and to generate sufficient
revenue to achieve profitability would be materially and adversely affected.
IF WE DO NOT DEVELOP ADDITIONAL AND MAINTAIN EXISTING RELATIONSHIPS WITH THIRD
PARTY BUSINESS SERVICE PROVIDERS, WE MAY BE UNABLE TO INCREASE OUR REVENUE FROM
BUSINESS SERVICES
We depend on relationships with third parties to provide business services
offered through STAPLES.COM. Most of these relationships are for terms of one to
three years and many of them are cancelable by either party without cause upon
limited notice. We must maintain our existing relationships and develop new
relationships on terms acceptable to us to continue to provide business services
offered through STAPLES.COM. The termination of any of these existing
agreements, or the failure to secure similar relationships with new third
parties, would limit our ability to provide business services on STAPLES.COM,
and would likely impede our rate of growth. Additionally, we do not know if we
will be able to renew any or all of these agreements on acceptable terms.
THE FAILURE OF THIRD PARTY SERVICE PROVIDERS TO PROVIDE RELIABLE HIGH QUALITY
SERVICE TO OUR CUSTOMERS COULD DAMAGE OUR REPUTATION
We endorse the services of third parties on STAPLES.COM, and sometimes offer
co-branded services. If a third party business service provider fails to provide
reliable high quality service at attractive prices to our customers, it could
damage our reputation and adversely affect our business.
IF WE CANNOT KEEP UP WITH RAPID TECHNOLOGICAL AND INDUSTRY CHANGES, OUR BUSINESS
AND PROSPECTS WILL BE MATERIALLY AND ADVERSELY AFFECTED
The Internet and online commerce markets are characterized by rapid
technological change, frequent introductions of new or enhanced hardware and
software products, evolving industry standards and changes in customer
preferences and requirements. We may not be able to keep up with any of these or
other rapid technological changes, and if we do not, our business will be
harmed. These changes and the emergence of new industry standards and practices
could render our existing web sites and operational infrastructure obsolete. The
widespread adoption of new Internet, networking or telecommunications
technologies or other technological changes could require us to incur
substantial expenditures to modify or adapt our operating practices or
infrastructure. To be successful, we must enhance our web sites' responsiveness,
functionality and features, acquire and license leading technologies, enhance
our existing service and product offerings, and respond to technological
advances and emerging industry standards and practices, none of which may be
possible in a timely and cost effective manner.
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IF WE FAIL TO EXPAND OUR CURRENT TECHNOLOGY INFRASTRUCTURE, WE WILL BE UNABLE TO
ACCOMMODATE OUR ANTICIPATED GROWTH
To be successful, we must continue to increase substantially traffic to our
web sites and convert web site visitors into customers. Accommodating this
potential growth in web site traffic and customer transactions will require us
to continue to develop our technology infrastructure. To maintain the necessary
technological platform in the future, we must continue to expand and stabilize
the performance of our web servers, improve our transaction processing system,
optimize the performance of our network servers and ensure the stable
performance of our entire network. We may not be successful in our ongoing
efforts to upgrade our systems, or if we do successfully upgrade our systems, we
may not do so on time and within budget. If we fail to achieve a stable
technological platform in time to handle increasing web site traffic or customer
order volume, potential customers could be discouraged from using our web sites,
our reputation could be damaged and our business could be harmed.
FREQUENT OR PROLONGED OPERATIONAL INTERRUPTIONS ON OUR WEB SITES COULD LEAD TO
CUSTOMER DISSATISFACTION, CUSTOMER LOSS OR BOTH, WHICH COULD MATERIALLY AND
ADVERSELY AFFECT OUR REPUTATION AND BUSINESS
Any system failure that causes an interruption in the operation of our web
sites or a decrease in their responsiveness could result in reduced user traffic
and reduced revenue. Further, prolonged or ongoing performance problems on our
web sites could damage our reputation and result in the permanent loss of
customers. We have occasionally experienced system interruptions that have made
our web sites totally unavailable, slowed their response time or prevented us
from efficiently fulfilling orders, and these types of problems may occur in the
future.
We have an agreement with Digex to maintain the web servers and database
servers for our STAPLES.COM web site in its Beltsville, Maryland location. We
have an agreement with Millstar to maintain the web servers and database servers
for our QUILLCORP.COM web site in its Philadelphia, Pennsylvania location. We
have an agreement with EMC Corporation to maintain the web servers and database
servers for our STAPLESLINK.COM web site in its Hopkinton, Massachusetts
location. Our operations depend on the ability of each of Digex, Millstar and
EMC to protect its and our systems against damage from fire, power loss, water
damage, telecommunications failures, vandalism and similar unexpected adverse
events. Any disruption in the services provided by Digex, Millstar or EMC could
severely disrupt our operations. Our backup systems may not be sufficient to
prevent major interruptions to our operations, and we do not have a formal
disaster recovery plan. We may not have sufficient business interruption
insurance to cover losses from major interruptions.
Our customers and visitors to our web sites depend on their own Internet
service providers, and other web site operators for access to web sites. Many of
these providers have experienced significant outages in the past, and could
experience outages, delays and other difficulties due to system failures
unrelated to our systems.
OUR NETWORK AND SOFTWARE ARE VULNERABLE TO SECURITY BREACHES AND SIMILAR THREATS
WHICH COULD RESULT IN LIABILITY FOR DAMAGES AND HARM TO OUR REPUTATION
Our web sites and network infrastructure are vulnerable to computer viruses,
break-ins, network attacks and similar disruptive problems. This could result in
liability for damages, and our reputation could suffer, thus deterring potential
customers from transacting with us. Security problems caused by third parties
could lead to interruptions and delays or to the cessation of service to our
customers. Furthermore, inappropriate use of the network by third parties could
also jeopardize the security of confidential information stored in our computer
systems. The costs and resources
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required to alleviate security problems may be significant and could adversely
affect our business and results of operations.
WE DEPEND ON CONTINUED EXPANSION OF THE INTERNET INFRASTRUCTURE
The recent growth in Internet traffic has caused periods of decreased
performance, requiring Internet service providers to upgrade their
infrastructures. If usage continues to grow rapidly, the Internet infrastructure
may not be able to support the demands placed on it by this growth and its
performance and reliability may decline. If these outages or delays on the
Internet occur frequently, overall Internet usage, as well as usage of our web
sites in particular, could grow more slowly or decline. Our ability to increase
the scope of our product and service offerings and the speed and ease of access
to our web sites by our customers is ultimately limited by and dependent upon
the speed and reliability of both the Internet and the capacity of the computer
equipment of our users. Consequently, the emergence and growth of the market for
our products and services is dependent on improvements being made to the entire
Internet and to personal computer equipment in general to alleviate overloading
and congestion.
OUR PRODUCTS AND SERVICES DEPEND UPON THE CONTINUED AVAILABILITY OF LICENSED
TECHNOLOGY FROM THIRD PARTIES
We license and will continue to license technology integral to our products
and services from third parties. If we are unable to acquire or retain key
third-party product licenses or integrate the related third-party products into
our products and services, our product and service development may be delayed or
additional operating costs may be incurred if substitute products or
arrangements are required. We also expect to require new licenses in the future
as our business grows and as technology evolves. We may not be able to obtain
these licenses on commercially reasonable terms, if at all.
WE RELY ON INTELLECTUAL PROPERTY RIGHTS WHICH MAY NOT BE ADEQUATELY PROTECTED
UNDER CURRENT LAWS
To establish and protect our trademark, service mark, copyright and other
proprietary rights in our products and services, we rely on a combination of:
- trademark, service mark, copyright, unfair competition, and trade secret
laws;
- trademark usage policies;
- confidentiality agreements with third parties; and
- confidentiality agreements and policies covering our employees.
We cannot assure you that these measures will be adequate, that we will be
able to secure registrations for all of our marks in the United States or
internationally or that third parties will not infringe upon or misappropriate
our proprietary rights. Any infringement, misappropriation, or litigation
relating to intellectual property rights may divert management's attention and
would require significant funds to litigate such claims. The loss of these
rights could materially and adversely affect our business.
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Legal standards relating to the validity, enforceability and scope of
protection of certain proprietary rights in Internet-related businesses are
uncertain and evolving. In particular, new domain name registration and
ownership priority procedures may be adopted which may make it more difficult
for us to retain or obtain desirable domain names.
In recent years, an increasing number of patents purporting to cover
business methods relating to the Internet have been filed. Patent applications
remain confidential for a period of up to two years after filing. Thus, we can
offer no assurance that applications for patents covering certain aspects of our
business methods have not been, or will not be, filed. To the extent such
patents are granted, we may be forced to alter our practices or incur costs
defending our practices.
IF PRIVACY CONCERNS PREVENT US FROM RECORDING THE BEHAVIOR OF VISITORS ON OUR
WEB SITES, OUR BUSINESS PROSPECTS COULD DECLINE SIGNIFICANTLY
The future success of our web sites will depend, in part, on our ability to
track the behavior of visitors on our web sites so that we can effectively
market our products and services to them. The adoption of new federal, state or
foreign laws or regulations that restrict our ability to assemble and utilize
demographic and other information about our users, such as the European Union
Privacy Directive which took effect in October 1998, could materially and
adversely affect our business and prospects. Currently, we track this
information by the use of "cookies". A cookie is a small file of information
that uniquely identifies a user. It is stored on the hard drive of the user's
computer and passed through the user's browser. Notwithstanding the lack of
legal restrictions, Internet users may avoid web sites where their online
behavior is likely to be tracked. If this occurred on a widespread basis, it
could adversely affect our business.
WE MAY INCUR LIABILITY FOR OUR INTERNET CONTENT AND USER DATA
Since we provide content on our web sites, we may face potential liability
for intellectual property infringement, defamation, invasion of privacy and
other claims. In addition, we may incur liability for unauthorized duplication
or distribution of third-party content or materials or for information collected
from and about our users. We cannot assure you that third parties or users will
not bring claims against us relating to proprietary rights or the use of
personal information. Although we seek to obtain indemnification from strategic
partners for any liability resulting from licensed content or linked sites, such
indemnities may not always be obtainable or adequate. Our general liability
insurance may not cover or be adequate for potential claims of this type.
IF WE FAIL TO MANAGE EFFECTIVELY THE RAPID GROWTH OF OUR OPERATIONS, OUR
BUSINESS AND PROSPECTS WILL BE MATERIALLY AND ADVERSELY AFFECTED
Our business has grown significantly since its inception. This growth has
placed great demands on our management and operational systems. If we are not
successful in expanding our management team and increasing and effectively
managing our employee base, this growth is likely to result in operational
inefficiencies and ineffective management of our business and employees, which
will in turn adversely affect our business and financial performance.
IF WE FAIL TO HIRE AND RETAIN HIGHLY QUALIFIED EMPLOYEES, OUR BUSINESS WILL BE
MATERIALLY AND ADVERSELY AFFECTED
Our future success depends on our ability to identify, hire, train and
retain highly qualified sales and marketing, technical, managerial and
administrative personnel. As we continue to introduce new services, products and
features on our web sites, and as our customer base and revenue continue to
grow, we will need to hire a significant number of qualified personnel.
Competition for qualified personnel, especially those with Internet experience,
is intense, and we may not be able to
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attract, train, assimilate or retain qualified personnel in the future. The
failure to attract, train, assimilate and retain qualified personnel could
seriously disrupt our operations and could increase our costs.
IF WE LOSE ANY OF OUR KEY EMPLOYEES, OUR BUSINESS AND PROSPECTS WILL BE
MATERIALLY AND ADVERSELY AFFECTED
Our business and operations are substantially dependent on the performance
of our key employees, including Jeanne B. Lewis, our President. All of our
employees are employed on an at-will basis. We do not maintain "key person" life
insurance on any of our executives.
IF WE EXPAND OUR INTERNATIONAL SALES AND MARKETING ACTIVITIES, OUR BUSINESS WILL
BE SUSCEPTIBLE TO NUMEROUS RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
We may expand our international operations and hire additional personnel
outside of the United States and Canada. Therefore, we may commit significant
resources to expand our international sales and marketing activities. If
successful, we will be subject to a number of risks associated with
international business activities. These risks generally include:
- currency exchange rate fluctuations;
- seasonal fluctuations in purchasing patterns;
- unexpected changes in regulatory requirements;
- tariffs, export controls and other trade barriers;
- longer accounts receivable payment cycles and difficulties in collecting
accounts receivable;
- difficulties in managing and staffing international operations;
- potentially adverse tax consequences, including restrictions on the
repatriation of earnings;
- burdens of complying with a wide variety of foreign laws;
- risks related to the recent global economic turbulence; and
- political instability.
RISKS RELATING TO THE OWNERSHIP OF STAPLES.COM STOCK
HOLDERS OF STAPLES.COM STOCK WILL BE COMMON STOCKHOLDERS OF STAPLES AND WILL BE
SUBJECT TO RISKS ASSOCIATED WITH AN INVESTMENT IN STAPLES AS A WHOLE
We cannot assure you that the market value of Staples.com stock will reflect
the performance of our business as we intend.
Financial results of Staples RD will affect the consolidated results of
operations, financial position and borrowing costs of Staples. Staples RD's
operations are affected by a variety of factors, including:
- Staples RD's market is highly competitive and Staples RD may not continue
to compete successfully;
- Staples RD may be unable to continue to successfully open new stores;
- Staples RD's quarterly operating results are subject to significant
fluctuations;
- Staples RD's rapid growth may continue to strain its operations, which
could adversely affect its business and financial results;
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- Staples RD's international operations may not become profitable; and
- Staples RD may be unable to obtain adequate future financing.
These, and other factors affecting Staples RD, could adversely affect
Staples' results of operations, financial position or borrowing costs or the
market price of Staples.com stock. In addition, net losses of Staples RD, if any
should occur in the future, and any dividends or distributions on, or
repurchases of, Staples RD stock, will reduce the assets of Staples legally
available for dividends on Staples.com stock. Accordingly, you should read our
financial and other information together with the financial and other
information for Staples RD incorporated by reference in this prospectus.
OUR ARRANGEMENTS WITH STAPLES RD ARE NOT THE RESULT OF THIRD-PARTY NEGOTIATIONS
We have entered into a number of important intercompany arrangements with
Staples RD. None of these arrangements were the result of third-party
negotiations. No assurances can be given therefore that we could not enter into
similar arrangements with a third party on more favorable terms.
DIRECT COMPETITION BETWEEN US AND STAPLES RD MAY INCREASE
We and Staples RD are both engaged in the office products business. Staples
RD is not restricted from competing with us and there can be no assurance that
Staples RD will not expand its operations to compete with us. If the markets for
our products and services continue to converge, opportunities for direct
competition between us and Staples RD will increase.
STRATEGIC DECISIONS MAY BENEFIT STAPLES RD AT OUR EXPENSE
Staples currently intends to pursue its online office products and services
business through us. However, Staples' board of directors, in its sole
discretion, may in the future decide to pursue business opportunities or
operational strategies, even in the online office products and services
business, through Staples RD instead of through us.
We may desire to pursue other strategic initiatives that present conflicts
between us and Staples RD. Our financial results will affect the consolidated
financial results of Staples. Accordingly, strategic decisions by us that
adversely affect our financial results in the near future will also adversely
affect Staples' financial results in the near future. As a result, Staples may
restrict our ability to pursue initiatives that may adversely affect the
financial results of Staples in the near future.
IF STAPLES ENCOUNTERS FINANCIAL DIFFICULTY, THE VALUE OF STAPLES.COM STOCK MAY
SUFFER FOR REASONS UNRELATED TO THE PROSPECTS OF STAPLES.COM
Financial results of either Staples RD or us 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
business or the market price of shares issued with respect to the other
business.
HOLDERS OF STAPLES.COM STOCK WILL NOT HAVE ANY CLAIMS ON OUR ASSETS
Even though from a financial reporting standpoint Staples has allocated all
of its consolidated assets, liabilities, revenue, expenses and cash flow between
us and Staples RD, that allocation has not changed the legal title to any assets
or responsibility for any liabilities and will not affect the rights of any of
Staples' creditors. Further, in any liquidation, holders of Staples.com stock
will not have any rights to any specific assets of Staples.com, but will receive
a share of the net assets of
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Staples based on the relative market value of Staples.com stock and Staples RD
stock rather than on any assessment of the actual value of our business or
Staples RD's business.
HOLDERS OF STAPLES RD STOCK AND STAPLES.COM STOCK WILL VOTE TOGETHER AS A SINGLE
CLASS
Holders of Staples RD 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 RD stock and
Staples.com stock vote together as a single class, holders of the series of
common stock having a majority of the votes, which will initially be the holders
of Staples RD stock, 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 RD
stock and holders of Staples.com stock.
STOCKHOLDERS WILL NOT VOTE ON HOW TO ALLOCATE CONSIDERATION RECEIVED IN
CONNECTION WITH A MERGER AMONG HOLDERS OF STAPLES RD STOCK AND HOLDERS OF
STAPLES.COM STOCK
Staples' certificate of incorporation does 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 RD
stock and holders of Staples.com stock. Neither holders of Staples RD stock nor
holders of Staples.com stock will have a separate class vote in any merger or
consolidation so long as Staples divides the type and amount of consideration
between holders of Staples RD stock and holders of Staples.com stock in a manner
it determines, in its sole discretion, to be fair. In any such merger or
consolidation, the different ways Staples may divide the consideration might
have materially different results. As a result, the consideration to be received
by holders of Staples RD 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.
THERE WILL BE CONFLICTS OF INTEREST INVOLVING STAPLES RD AND STAPLES.COM AND
STAPLES' BOARD OF DIRECTORS MAY MAKE DECISIONS THAT FAVOR STAPLES RD AT OUR
EXPENSE
The extensive relationships between, and the similarity of the business of,
Staples RD and us will create inherent conflicts of interest between the holders
of Staples RD stock and Staples.com stock. Staples' board of directors, in its
sole discretion, will make operational and financial decisions and implement
policies that may affect the business of Staples RD and our business
differently, potentially favoring one business at the expense of the other.
Examples include decisions regarding:
- the allocation of the proceeds of issuances, and the costs of repurchases,
of Staples.com stock to us or to Staples RD in respect of its retained
interest in us;
- the allocation of consideration received in connection with a merger
involving Staples between holders of Staples RD stock and Staples.com
stock;
- whether and when to issue Staples RD stock in exchange for Staples.com
stock;
- the sale of assets of either Staples RD or us;
- the allocation of available cash between Staples RD and us;
- how to account for transfers of funds between Staples RD and us;
- the allocation of assets and resources, such as inventory, distribution
and fulfillment services and management time, between Staples RD and us;
- whether and to what extent we and Staples RD will compete with each other
and how corporate opportunities are allocated between Staples RD and us;
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- the allocation of any issuances of debt or preferred stock of Staples
between Staples RD and us; and
- other transactions between Staples RD and us.
Staples' board of directors has adopted policies that provide that material
matters involving potentially divergent interests will be resolved in a manner
that Staples' board of directors determines to be in the best interests of all
of Staples' common stockholders after giving fair consideration to the
potentially divergent interests and all other relevant interests of the holders
of the separate classes of Staples' common stock, including the holders of
Staples.com stock. Nevertheless, Staples' board of directors could take actions
that benefit or appear to benefit Staples RD at our expense.
The discretion of Staples' board of directors in these areas makes an
investment in Staples.com stock riskier than an investment in ordinary common
stock. All of Staples' directors own disproportionate interests, in both
percentage and value terms, in Staples RD stock and Staples.com stock. This
disparity in ownership interests may create or appear to create potential
conflicts of interest when these directors are faced with decisions that could
have different implications for the different series of common stock.
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.COM
STOCK THAN A HOLDER OF ORDINARY COMMON STOCK
Staples' board of directors has adopted certain policies relating to cash
management and allocations between Staples RD and us. 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 in a manner that is disadvantageous to
holders of Staples.com stock. Staples' board of directors' discretion to change
these policies makes it riskier to be a holder of Staples.com stock than a
holder of ordinary common stock. For a more comprehensive description of these
policies, see "Certain Cash Management and Allocation Policies".
PRINCIPLES OF DELAWARE LAW MAY PROTECT DECISIONS OF STAPLES' BOARD OF DIRECTORS
THAT HAVE A DISPARATE IMPACT UPON HOLDERS OF STAPLES RD STOCK AND STAPLES.COM
STOCK
Principles of Delaware law provide 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. 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 RD stock and Staples.com stock so
long as the board of directors can show that it:
- was disinterested and adequately informed with respect to such decisions;
and
- acted in good faith and in the belief that it was acting in the best
interests of all of the stockholders.
STAPLES MAY DISPOSE OF ASSETS OF STAPLES.COM WITHOUT YOUR APPROVAL AND YOU MAY
RECEIVE LESS VALUE FOR YOUR SHARES THAN THE MARKET VALUE OF YOUR SHARES
Under Delaware law, Staples can sell any amount of assets of Staples.com
without stockholder approval so long as such transaction does not constitute a
sale or other disposition of "all or substantially all" of the assets of Staples
as a whole. As of the date of this prospectus, the assets of Staples.com do not
constitute "all or substantially all" of the assets of Staples.
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Under Staples' certificate of incorporation, if Staples disposes of all or
substantially all the assets of Staples.com, Staples would be required, subject
to certain exceptions, to:
- pay a dividend to holders of Staples.com stock;
- redeem shares of Staples.com stock; or
- exchange all outstanding shares of Staples.com stock for shares of Staples
RD stock at a 10% premium.
The value received by a holder of Staples.com stock may be less than the
market value of the holder's shares prior to the sale. In addition, Staples'
board of directors 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.com stock.
STAPLES IS NOT REQUIRED TO PAY DIVIDENDS EQUALLY ON STAPLES RD STOCK AND
STAPLES.COM STOCK
Although Staples does not intend to pay cash dividends in the foreseeable
future, its board of directors could elect to pay dividends on Staples RD 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 RD or us;
- the amount of assets available for dividends on either series; or
- the amount of prior dividends declared on either series.
In addition, any dividends or distributions on or repurchases of Staples RD
stock will reduce the assets of Staples legally available for dividends on
Staples.com stock. See "Description of Capital Stock--Dividends" for information
about the amount of funds legally available for the payment of dividends. Any
future dividends on Staples.com stock will not necessarily bear a direct
relationship to earnings and retained earnings as expressed on Staples.com's
financial statements as determined in accordance with generally accepted
accounting principles.
STAPLES MAY ISSUE STAPLES RD STOCK IN EXCHANGE FOR STAPLES.COM STOCK WHEN
STAPLES.COM STOCK IS UNDERVALUED OR STAPLES RD STOCK IS OVERVALUED
Staples has the right to issue shares of Staples RD stock in exchange for
outstanding shares of Staples.com stock. Because certain exchanges would be at a
premium to the market value, and since Staples could determine to effect an
exchange at a time when either or both of Staples RD stock and Staples.com stock
may be considered to be overvalued or undervalued, any such exchange may be
disadvantageous to holders of Staples.com stock. In addition, any such exchange
would preclude holders of Staples.com stock from retaining their investment in a
security that is intended to reflect separately the performance of Staples.com.
CLINTON ADMINISTRATION PROPOSALS COULD RESULT IN THE EXCHANGE OF STAPLES RD
STOCK FOR STAPLES.COM STOCK
Legislative proposals made by the Clinton Administration in February 1999
would, if enacted, impose a corporate-level tax on the issuance of stock similar
to Staples.com stock and permit the Treasury Department to treat tracking stock
as an interest other than stock thereby making such tracking stock ineligible
for the tax-free treatment available under the Internal Revenue Code in certain
transactions. The Clinton Administration's Fiscal Year 2001 Budget Proposal
issued in February 2000 would, if enacted, require the recognition of gain by
shareholders upon the receipt of tracking stock in a distribution with respect
to stock or in an exchange, and give the Treasury Department the authority to
treat tracking stock as non-stock or stock of another entity, as
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appropriate. As proposed by the Clinton Administration, these provisions would
be effective for tracking stock issued on or after the date of enactment by
Congress. Tax legislation enacted by Congress subsequent to the Clinton
Administration proposals has not included any provision corresponding to the
proposals. However, we cannot predict whether the Clinton Administration
proposals will be enacted by Congress and, if enacted, whether they will be in
the form proposed. If either of the Clinton Administration proposals or a
similar proposal is enacted, then we could be subject to tax on an issuance of
Staples.com stock on or after the date of enactment.
Staples may issue Staples RD stock in exchange for Staples.com stock at a
premium if, based on the opinion of Staples' tax counsel, as a result of the
enactment of legislative changes or administrative proposals or changes, it is
more likely than not that Staples or its shareholders will be subject to tax
upon issuance of Staples.com stock or Staples RD stock or that any such stock
will not be treated as stock of Staples. The proposals of the Clinton
Administration would be such adverse developments if they are enacted. For
additional information on the events that could cause us to effect a conversion,
see "Description of Capital Stock--Optional Exchange of Staples RD Stock for
Staples.com Stock".
STAPLES MAY EXCHANGE SHARES OF COMMON STOCK OF A SUBSIDIARY FOR SHARES OF
STAPLES.COM STOCK IN CONNECTION WITH A SPIN-OFF OF THE SUBSIDIARY WITHOUT YOUR
APPROVAL
Staples will have the right, at any time, to exchange common stock of a
subsidiary of Staples for Staples.com stock so long as the assets and
liabilities of Staples.com are held directly or indirectly by the subsidiary. In
such event, holders of Staples.com stock will receive shares of a class of
common stock in the subsidiary that possesses voting rights with respect to the
subsidiary that are generally comparable to the voting rights that Staples.com
stock has with respect to Staples. Staples will distribute the remaining shares
of the subsidiary to the holders of Staples RD stock. Depending on the
circumstances at the time, an exchange of stock of a subsidiary of Staples for
Staples.com stock could be taxable to holders of Staples.com stock and Staples
for U.S. federal income tax purposes.
OUR MANAGEMENT HAS BROAD DISCRETION IN ALLOCATING THE USE OF PROCEEDS FROM THIS
OFFERING
We intend to use the net proceeds from this offering, which is equal to
approximately $ million, or approximately $ million if the
underwriters exercise their over-allotment option to purchase additional shares
of Staples.com stock in full, for other general corporate purposes including for
promotion and advertising. We, however, have not allocated our proceeds for
specific purposes and our management will have significant flexibility in
applying the net proceeds. The failure of our management to apply these funds
effectively could have a material adverse effect on our business, results of
operations and financial condition. See "Use of Proceeds".
STAPLES' BOARD OF DIRECTORS HAS SOLE DISCRETION TO ALLOCATE PROCEEDS UPON FUTURE
ISSUANCES OR COSTS OF REPURCHASES OF STAPLES.COM STOCK TO STAPLES.COM OR STAPLES
RD
Proceeds from the future issuance of Staples.com stock may not necessarily
be allocated to the equity of Staples.com. Staples' board of directors will
determine in its sole discretion whether to allocate the proceeds of future
issuances or the costs of repurchases of Staples.com stock to Staples RD in
respect of its retained interest in Staples.com or to the equity of Staples.com.
For a more complete description of how the board of directors will allocate cash
between Staples RD and Staples.com, see "Certain Cash Management and Allocation
Policies".
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WE CANNOT ASSURE YOU THAT A MARKET WILL DEVELOP FOR STAPLES.COM STOCK OR WHAT
ITS MARKET PRICE WILL BE
There is currently no public trading market for Staples.com stock and we
cannot assure you that one will develop or be sustained after this offering. We
cannot predict the prices at which Staples.com stock will trade after this
offering. The initial public offering price for Staples.com stock will be
determined through our negotiations with the underwriters and may not bear any
relationship to the market price at which Staples.com stock will trade after
this offering or to any other established criterion for value. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price.
Certain terms of Staples RD stock and Staples.com stock may adversely affect
the trading price of Staples.com stock. These terms include:
- the right of Staples' board of directors to redeem shares of Staples.com
stock in exchange for shares of Staples RD stock;
- the amount of assets available for dividends on any class of stock; and
- the discretion of Staples' board of directors in making determinations
relating to the inter-group arrangements and to a variety of cash
management and allocation matters.
STAPLES.COM STOCK PRICE MAY BE VOLATILE
The stock market, and specifically the stock prices of Internet-related
companies, have been very volatile. This broad market and industry volatility
may reduce the price of Staples.com stock, without regard to our operating
performance. Due to this volatility, the market price of Staples.com stock could
significantly decrease.
IF STAPLES.COM STOCK IS VOLATILE, STAPLES MAY BE SUBJECT TO SECURITIES CLASS
ACTION LITIGATION
In the past, companies that have experienced market price volatility have
sometimes been the object of securities class action litigation. Staples may in
the future be the target of similar litigation. Securities class action
litigation could result in substantial costs and divert management's attention
and resources.
THE VALUE OF STAPLES.COM STOCK MAY DECLINE IF MORE STAPLES.COM STOCK IS ISSUED
Staples' certificate of incorporation allows its board of directors, in its
sole discretion, to issue authorized but unissued shares of Staples.com stock.
This could dilute the value of shares of Staples.com stock.
THE MARKET PRICE OF STAPLES.COM STOCK MAY BE ADVERSELY AFFECTED BY THE SHARES OF
STAPLES.COM STOCK ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we expect to have shares of
Staples.com stock outstanding, or shares if the underwriters fully
exercise their option to purchase additional shares. The shares being sold in
this offering will be freely tradable without restriction by persons other than
affiliates of Staples. In addition, once a trading market develops for
Staples.com stock, many holders of Staples.com stock will have an opportunity to
sell their stock for the first time.
Upon completion of this offering and expiration of the underwriters'
180 day lock up, and assuming the underwriters do not exercise their option to
purchase additional shares, Staples will be entitled to issue up to
approximately additional shares of Staples.com stock, of which up to
shares could be for the account of Staples RD in respect of Staples RD's
retained interest in Staples.com. Staples' board of directors, in its sole
discretion, may authorize the
22
<PAGE>
issuance of these shares of Staples.com stock to, among other things, raise
capital, provide compensation or benefits to employees, pay stock dividends or
acquire companies or businesses.
We cannot predict the effect, if any, that sales of Staples.com stock, or
the availability of shares for sale, will have on the market price of
Staples.com stock. Nevertheless, sales of significant amounts of Staples.com
stock in the public market, or the perception that such sales may occur, could
adversely affect prevailing market prices. See "Shares Eligible for Future Sale"
for a more detailed description of the possible effects of potential sales of
Staples.com stock.
PROJECTIONS INCLUDED IN THIS PROSPECTUS RELATING TO THE GROWTH OF E-COMMERCE,
THE OFFICE PRODUCTS AND SERVICES MARKET AND THE SMALL BUSINESS MARKET ARE BASED
ON ASSUMPTIONS THAT COULD TURN OUT TO BE INCORRECT AND ACTUAL RESULTS COULD BE
MATERIALLY DIFFERENT FROM THE PROJECTIONS
This prospectus contains various third-party data and projections, including
those relating to revenue generated by electronic commerce, the size of the
office products and services market and the size of the small business market.
See "Business of Staples.com--Industry Background". These data and projections
have been included in studies prepared by independent market research firms, and
the projections are based on surveys, financial reports and models used by these
firms. Actual results or circumstances may be materially different from the
projections. These data and projections are inherently imprecise and investors
are cautioned not to place undue reliance on them.
23
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and the information incorporated by reference includes
"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 some of these forward-looking statements by the use of the words
"believes", "anticipates", "plans", "expects", "may", "will", "would", "should",
"intends", "estimates" and similar expressions, whether in the negative or
affirmative. We cannot guarantee that Staples 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 in this prospectus and the documents incorporated by reference in
this prospectus, particularly under the heading "Risk Factors", that we believe
could cause Staples' 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. Staples does not assume any obligation to update any
forward-looking statement we make.
WHERE YOU CAN FIND MORE INFORMATION
Staples files reports, proxy statements and other information with the SEC.
Such reports, proxy statements and other information concerning Staples can be
read and copied at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the Public Reference Room. The SEC maintains an Internet site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding issuers that file electronically with the SEC,
including Staples. Staples RD stock is listed on the Nasdaq National Market
under the symbol "SPLS".
The SEC allows Staples to "incorporate by reference" the information it
files with the SEC. This permits Staples to disclose important information to
you by referring to these filed documents. Any information referred to in this
way is considered part of this prospectus, and any information filed with the
SEC by Staples after the date of this prospectus will automatically be deemed to
update and supersede this information. Staples incorporates by reference the
following documents that have been filed with the SEC:
1. Staples' Annual Report on Form 10-K for the fiscal year ended
January 30, 1999;
2. Staples' Quarterly Reports on Form 10-Q for the fiscal quarters ended
October 30, 1999, July 31, 1999 and May 1, 1999;
3. Staples' Current Report on Form 8-K filed on February 9, 1999;
4. All of Staples' filings pursuant to the Exchange Act after the date of
filing the initial registration statement and prior to effectiveness of
the registration statement; and
5. The description of Staples RD stock contained in Staples' Registration
Statement on Form 8-A dated April 7, 1989.
We also incorporate by reference any future filings made with the SEC
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act.
We will provide without charge upon written or oral request, a copy of any
or all of the documents that are incorporated by reference into this prospectus,
other than exhibits which are specifically incorporated by reference into such
documents. Requests should be directed to Staples, Inc., 500 Staples Drive,
Framingham, MA 01702, Attention: Investor Relations (Telephone: 508-253-0879).
The information on our web sites is not part of this prospectus.
24
<PAGE>
USE OF PROCEEDS
Based on an initial public offering price of $ per share of Staples.com
stock, the mid-point of the range of public offering prices set forth on the
cover page of this prospectus, it is anticipated that, after deducting estimated
underwriting discounts and expenses, Staples will receive net proceeds from the
initial public offering of Staples.com stock of $ , or $ if the
underwriters fully exercise their option to purchase additional shares. Staples
will allocate all net proceeds to Staples.com, as if this were a primary
offering of common stock by Staples.com.
Staples.com plans to use the net proceeds for general corporate purposes,
including for promotion and advertising.
Pending specific application of the proceeds, we intend to advance them to
Staples RD. The advance of cash by us to Staples RD will be treated as an
intergroup cash advance. See "Certain Cash Management and Allocation Policies"
for information about cash transfers between Staples RD and Staples.com.
DIVIDEND POLICY
Staples does not expect to pay any dividends in the foreseeable future on
Staples.com stock. Although Staples' revolving credit agreement currently
restricts the payment of cash dividends, Staples will otherwise be permitted to
pay dividends on:
- Staples RD stock out of the assets of Staples legally available for the
payment of dividends under Delaware law, but the total amounts paid as
dividends on Staples RD stock cannot exceed the Available Dividend Amount
for Staples RD; 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 RD in respect of its retained interest in Staples.com.
However, the total amounts paid as dividends on Staples.com stock and the
corresponding amounts transferred to Staples RD in respect of its retained
interest in Staples.com cannot exceed the Available Dividend Amount for
Staples.com.
The "Available Dividend Amount" for Staples RD and Staples.com, as the case
may be, is based on the amount that would be legally available for the payment
of dividends under Delaware law if Staples RD and Staples.com were separate
Delaware corporations. For more information on the Available Dividend Amount for
Staples RD and Staples.com, see "Description of Capital Stock--Dividends".
Staples expects that determinations to pay dividends on Staples.com stock would
be based primarily upon the financial condition, results of operations,
regulatory and business capital requirements, any restrictions contained in
financing or other agreements binding upon Staples and other factors that the
Staples board of directors deems relevant.
25
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Staples.com and Staples
as of October 30, 1999 and as adjusted to give effect to:
- the offering at an initial public offering price of $ per share, the
mid-point of the range of public offering prices set forth on the cover
page of this prospectus, after deducting estimated underwriting discounts
and expenses and assuming the underwriters do not exercise their option to
acquire additional shares;
- the application of net proceeds as described under "Use of Proceeds"; and
- the amendment of Staples' certificate of incorporation in November 1999 to
provide for the reclassification of its existing common stock into Staples
RD stock and Staples.com stock.
These tables should be read in conjunction with the financial statements and
the related notes appearing elsewhere or incorporated by reference in this
prospectus.
STAPLES.COM
<TABLE>
<CAPTION>
AS OF OCTOBER 30, 1999
-----------------------------
ACTUAL AS ADJUSTED
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
Group equity............................................... $26,497
------- -------
Total capitalization....................................... $26,497 $
======= =======
</TABLE>
STAPLES, INC.
<TABLE>
<CAPTION>
AS OF OCTOBER 30, 1999
-------------------------
ACTUAL AS ADJUSTED
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt.............................................. $ 492,910 $
Other long-term obligations................................. 58,515
---------- ----------
Preferred stock, $.01 par value--authorized 5,000,000
shares; no shares issued.................................. -- --
Staples RD stock, $0.0006 par value--1,500,000,000 shares
authorized; no shares issued and outstanding, actual;
467,201,085 shares issued and outstanding, as adjusted.... --
Staples.com stock, $0.0006 par value--600,000,000 shares
authorized; no shares issued and outstanding, actual;
shares issued and outstanding as adjusted............ --
Staples' existing common stock, $0.0006 par value--
1,500,000,000 shares authorized; 467,201,085 shares issued
and outstanding, actual; no shares issued and outstanding,
as adjusted............................................... 280 --
Additional paid-in capital.................................. 1,109,883
Cumulative foreign currency translation adjustments......... (9,791)
Unrealized gain on investments.............................. 1,138
Retained earnings........................................... 828,914
Less: treasury stock at cost, 10,269,153 shares at October
30, 1999.................................................. (242,684)
---------- ----------
Total stockholders' equity................................ 1,687,740
---------- ----------
Total capitalization.................................... $2,239,165 $
========== ==========
</TABLE>
26
<PAGE>
DILUTION
At October 30, 1999, Staples.com had a net tangible book value of
approximately $26,497,000 or $ per share equivalent. Net tangible book value
per share equivalent at any date represents the amount of Staples.com's tangible
assets minus total liabilities divided by the total number of notional
Staples.com shares deemed outstanding. After giving effect to the sale of
shares of Staples.com stock offered by this prospectus at the initial public
offering price of $ per share, the mid-point of the range of public offering
prices set forth on the cover page of the prospectus, and the application of the
estimated net proceeds allocated to Staples.com, the pro forma net tangible book
value of Staples.com would have been approximately $ or $ per share
equivalent. Thus, under these assumptions, purchasers of Staples.com stock
offered by this prospectus will pay $ per share and will receive shares with
a net tangible book value per share equivalent of $ , which represents an
immediate dilution of $ per share.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share............ $
----------
Net tangible book value per share equivalent at
October 30, 1999............................... $
Increase in pro forma net tangible book value per
share equivalent attributable to new
investors......................................
----------
Pro forma net tangible book value per share
equivalent after the offering....................
----------
Dilution per share to new investors................ $
==========
</TABLE>
The foregoing computation of dilution excludes an aggregate of approximately
10,981,558 shares of Staples.com stock purchasable for approximately $1.625 per
share upon the exercise of outstanding employee stock options.
27
<PAGE>
SELECTED COMBINED FINANCIAL INFORMATION OF STAPLES.COM
In the table below, we provide you with selected combined financial
information of Staples.com. We have prepared this information using the combined
financial statements of Staples.com for the three years ended January 30, 1999
and the nine-month periods ended October 30, 1999 and October 31, 1998. The
financial statements for the three fiscal years ended January 30, 1999 have been
audited by Ernst & Young LLP, independent auditors. The financial statements for
the nine-month periods ended October 30, 1999 and October 31, 1998 have not been
audited. The unaudited financial statements include all adjustments, consisting
of normal recurring accruals, which Staples considers necessary for a fair
presentation of the financial position and the results of operations for these
periods. Operating results for the nine months ended October 30, 1999 are not
necessarily indicative of the results that may be expected for the entire year
ending January 29, 2000.
The following summary combined financial information should be read in
conjunction with Staples.com's combined financial statements and the notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Staples.com" contained elsewhere in this prospectus and
Staples' consolidated financial statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" incorporated by reference in this prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED FISCAL YEAR ENDED
--------------------------- -----------------------------------------
OCTOBER 30, OCTOBER 31, JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1999 1998 1997
------------ ------------ ------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales......................... $51,281 $9,104 $16,886 $3,706 $ 35
Gross profit.................. 11,810 2,429 4,165 931 9
Net loss...................... (6,550) (203) (487) (300) (207)
Pro forma net loss (1)........ (6,550) (191) (475) (180) (124)
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
OCTOBER 30, JANUARY 30,
1999 1999
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $(5,960) $ 948
Total assets................................................ 32,457 2,047
Group equity................................................ 26,497 1,962
</TABLE>
- ------------------------
(1) Pro forma net loss includes a benefit for income taxes on the previously
untaxed earnings of Quill Corporation, which had been an S corporation prior
to its acquisition by Staples.
28
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF STAPLES, INC.
In the table below, we provide you with selected consolidated financial
information of Staples, Inc. We have prepared this information using the
consolidated financial statements of Staples for the five years ended
January 30, 1999 and the nine-month periods ended October 30, 1999 and
October 31, 1998. The financial statements for the five fiscal years ended
January 30, 1999 have been audited by Ernst & Young LLP, independent auditors.
As to years 1996 and 1997, Ernst & Young LLP's report is based in part on the
report of Kupferburg, Goldberg & Neimark, LLC, independent auditors. The
financial statements for the nine-month periods ended October 30, 1999 and
October 31, 1998 have not been audited. The unaudited financial statements
include all adjustments, consisting of normal recurring accruals, which Staples
considers necessary for a fair presentation of the financial position and the
results of operations for these periods. Operating results for the nine months
ended October 30, 1999 are not necessarily indicative of the results that may be
expected for the entire year ending January 29, 2000.
The following selected consolidated financial information should be read in
conjunction with Staples' consolidated financial statements and related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in its annual and quarterly reports filed with
the SEC and incorporated by reference in this prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED FISCAL YEAR
--------------------------------- ---------------------------------------------------------------
OCT. 30, 1999 OCT. 31, 1998 (1) 1998 (1)(2) 1997 (3) 1996 1995 (4) 1994
------------- ----------------- ----------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SELECTED OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Sales................ $6,305,987 $5,046,086 $7,123,189 $5,732,145 $4,493,589 $3,565,235 $2,418,793
Gross profit......... 1,543,559 1,196,879 1,726,266 1,354,455 1,060,245 809,451 554,534
Net income........... 195,592 114,110 185,370 167,914 144,742 108,428 72,071
Pro forma net income
(5)................ 195,592 112,296 183,556 153,128 129,413 94,539 59,219
SELECTED OPERATING
DATA:
Stores open (at
period end)........ 1,009 830 913 742 557 443 350
</TABLE>
<TABLE>
<CAPTION>
AS OF
--------------------------------------------------------------------------------------------
OCT. 30, 1999 JAN. 30, 1999 JAN. 31, 1998 FEB. 1, 1997 JAN. 27, 1996 JAN. 28, 1995
------------- ------------- ------------- ------------ ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......... $ 677,023 $ 798,768 $ 803,660 $ 623,835 $ 580,244 $ 355,639
Total assets............ 3,735,645 3,179,266 2,638,862 1,955,636 1,552,199 1,141,496
Total long-term debt,
less current
portion............... 492,910 205,015 518,959 402,985 351,508 257,122
Stockholders' equity.... 1,687,740 1,656,886 1,094,485 875,823 712,141 472,215
</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 Corporation.
(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
$29,665,000 resulting from the costs incurred in connection with the
proposed merger with Office Depot, Inc.
(4) Fiscal year 1995 was a 53 week year.
(5) Pro forma net income includes a provision for income taxes on the previously
untaxed earnings of Quill Corporation, which had been taxed as an S
corporation prior to its acquisition by Staples.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF STAPLES.COM
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF STAPLES.COM SHOULD BE READ IN CONJUNCTION WITH THE COMBINED
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS.
THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. STAPLES.COM'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH UNDER "RISK FACTORS" AND
ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
From an accounting standpoint, Staples has separated Staples.com, its
e-commerce business, from Staples RD, which includes the rest of its businesses
and a retained interest in Staples.com. Staples has allocated all of its
consolidated assets, liabilities, revenue, expenses and cash flow between
Staples.com and Staples RD. Staples intends Staples.com stock to track the
performance of Staples.com, and we intend the Staples RD stock to track the
performance of Staples RD.
The combined financial statements of Staples.com include the balance sheets,
statements of operations, cash flows and group equity of Staples' e-commerce
businesses, including principally the STAPLES.COM, QUILLCORP.COM and
STAPLESLINK.COM web sites. The financial statements of Staples.com give effect
to all allocation and related party transaction policies adopted by the board of
directors of Staples. For a description of these policies, see "Certain Cash
Management and Allocation Policies".
Holders of Staples.com stock are common stockholders of Staples. The assets
Staples attributes to one business will be subject to the liabilities of the
other business, even if such liabilities arise from lawsuits, contracts or
indebtedness that are attributed to the other business. If Staples is unable to
satisfy one business's liabilities out of the assets attributed to it, Staples
may be required to satisfy those liabilities with assets it has attributed to
the other business. Further, holders of Staples.com stock and Staples RD stock
do 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 Staples which
may not reflect the actual trading prices, if any, of the respective businesses
at such time.
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's
historical operating results for the fiscal years ended January 31, 1998 and
February 1, 1997 with corresponding Quillcorp.com operating results for the
years ended December 31, 1997 and 1996.
30
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain of Staples.com's financial results
for the nine months ended October 30, 1999 and October 31, 1998, and for the
fiscal years ended January 30, 1999, January 31, 1998 and February 1, 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED FISCAL YEAR ENDED
------------------------- ---------------------------------------
OCTOBER 30, OCTOBER 31, JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales.............................. $ 51,281 $ 9,104 $ 16,886 $3,706 $ 35
Cost of goods sold and occupancy
costs............................ 39,471 6,675 12,721 2,775 26
-------- ------- -------- ------ -----
Gross profit....................... 11,810 2,429 4,165 931 9
OPERATING AND OTHER EXPENSES:
Operating and selling.............. 13,470 1,057 2,488 637 130
General and administrative......... 8,963 1,682 2,440 586 83
Interest and other expense, net.... 115 10 28 8 3
-------- ------- -------- ------ -----
Total operating and other
expenses......................... 22,548 2,749 4,956 1,231 216
Loss before income taxes........... (10,738) (320) (791) (300) (207)
Income tax benefit................. (4,188) (117) (304) -- --
-------- ------- -------- ------ -----
Net loss........................... $ (6,550) $ (203) $ (487) $ (300) $(207)
======== ======= ======== ====== =====
OTHER DATA:
Net cash used in operating
activities....................... $ (3,536) $(1,052) $ (1,377) $ (300) $(207)
Net cash used in investing
activities....................... (29,921) (712) (1,072) -- --
Net cash provided by financing
activities....................... 33,457 1,764 2,449 300 207
</TABLE>
COMPARISON OF FISCAL YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND
FEBRUARY 1, 1997
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 Staples'
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.
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 the
continued rollout of e-commerce activities. This decrease was partially offset
by the benefit provided by the inter-business allocation arrangement 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
31
<PAGE>
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 RD 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-business 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 RD fund the
operating needs of Staples.com as most finance activities are managed on a
centralized basis and attributed to Staples RD. These advances were funded as a
capital contribution by Staples RD at the end of each fiscal year.
INCOME TAX BENEFIT. 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'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 NINE MONTHS ENDED OCTOBER 30, 1999 AND OCTOBER 31, 1998
SALES. Our sales increased 492.7% to $23,979,000 in the quarter ended
October 30, 1999 from $4,046,000 in the quarter ended October 31, 1998 and
increased 463.3% to $51,281,000 for the nine months ended October 30, 1999
compared to $9,104,000 for the nine months ended October 31, 1998. This growth
was attributable to the continued rollout of the e-commerce business. The
results for the nine months ended October 30, 1999 include all three of
Staples.com's web sites, 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 and StaplesLink.com. Staples.com was launched in the quarter ended
January 31, 1999.
GROSS PROFIT. Our gross profit as a percentage of sales was 23.0% for the
three and nine months ended October 30, 1999 as compared to 26.6% and 26.7%,
respectively, for the same periods in the prior year. The decrease is
attributable to changes in product and customer mix during the continued rollout
of e-commerce activities. This decrease was partially offset by the benefit
provided by the inter-business allocation arrangements, which passed on the
benefit of lower product costs from vendors.
OPERATING AND SELLING EXPENSES. Our operating and selling expenses, which
consist of payroll, advertising and other operating expenses, increased as a
percentage of sales in the three and nine months ended October 30, 1999 to 26.6%
and 26.3%, respectively, as compared to 11.0% and 11.6% for the same periods in
the prior year. The increase was primarily due to increased marketing expenses
which represented 18.7% and 18.9% of sales for the three months and nine months
ended October 30, 1999, respectively, as compared to 6.5% and 7.1% for the same
periods in the prior year.
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GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative
expenses as a percentage of sales were 15.5% and 17.5% for the three and nine
months ended October 30, 1999, respectively, as compared to 19.4% and 18.5% for
the same periods in the prior year. The decrease in general and administrative
costs as a percentage of sales reflects the leveraging of infrastructure as
sales increase.
INTEREST AND OTHER EXPENSE, NET. Net interest and other expense for the
three and nine months ended October 30, 1999 was $64,000 and $115,000,
respectively, as compared to $9,000 and $10,000 for the same periods in the
prior year. The interest expense relates to the inter-business revolving credit
advances from Staples RD to fund the operating needs of Staples.com as most
treasury activities are managed on a centralized basis and are attributed to
Staples RD unless Staples' board of directors determines otherwise. These
advances were funded as a capital contribution by Staples RD at the end of each
fiscal year.
INCOME TAX BENEFIT. Our provision for income taxes as a percentage of
pre-tax income was 39% for both the three and nine months ended October 30, 1999
as compared to 39.3% and 36.6%, respectively, for the same periods in the prior
year. 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 40.3% for the nine months ended October 31, 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 RD and will
continue to do so in the future unless Staples' board of directors determines
otherwise. Whenever Staples.com holds cash, Staples.com will normally, but will
not be obligated to, transfer that cash to Staples RD. Conversely, whenever
Staples.com has a cash need, Staples RD will normally, but will not be obligated
to, fund that cash need. Staples' board of directors will determine, in its sole
discretion, whether either business will provide any particular funds on any
particular occasion to the other business, but will not be obligated to cause
such cash transfers.
During the nine months ended October 30, 1999, cash used in operations was
$3,536,000, primarily due to the net loss from operations of $6,550,000,
partially offset by the decrease in prepaid expenses and other current assets of
$1,033,000 and an increase in accounts payable, accrued expenses and other
liabilities of $1,594,000. Cash used in investing activities of $29,921,000
represents investments made in internet related companies of $23,756,000 and
acquisitions of property and equipment of $6,165,000. Cash provided by financing
activities of $33,457,000 represents capital contributions from Staples RD of
$29,921,000 and proceeds from borrowings under the inter-business revolver of
$3,536,000.
Upon completion of this offering, Staples.com will advance the net proceeds
to Staples RD, resulting in a positive inter-group account and interest income
to Staples.com from Staples. Staples.com's access to cash will be subject to the
policies described under "Certain Cash Management and Allocation Policies".
INFLATION AND SEASONALITY
While neither inflation nor deflation has had, and Staples.com does not
expect either to have, a material impact upon operating results, there can be no
assurance that Staples.com's business will not be affected by inflation or
deflation in the future. Staples.com believes that its business is somewhat
seasonal, with sales and profitability slightly lower during the first and
second quarters of its fiscal year.
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YEAR 2000
Staples.com has completed implementation of its year 2000 remediation plan
on a timely basis, and such remediation plan as implemented addresses all
mission critical systems. We are not aware of any adverse effects of year 2000
issues on Staples.com, including its systems and operations.
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BUSINESS OF STAPLES.COM
Staples.com is creating a leading business-to-business electronic
marketplace offering a comprehensive solution for the office needs of business
customers. We currently provide an electronic marketplace where small, mid-sized
and large businesses can procure office products and business services and
obtain business information and expert content. We plan shortly to expand our
electronic marketplace to enable our customers and suppliers to interact and
engage in e-commerce transactions with each other. By aggregating business
customers, we are creating a sales channel that will provide buyers and sellers
with opportunities to realize operating efficiencies by streamlining complex
purchasing and distribution decisions and to increase revenue by reaching a
broader customer base.
Staples.com is uniquely positioned to leverage the competitive strengths of
Staples, the pioneer of the office products superstore concept with over 1,100
stores worldwide and a significant direct marketing business. We believe that:
- Staples' strong brand, national advertising campaigns and database of more
than 8,000,000 existing business customers enable us to acquire customers
on a cost effective basis;
- Staples' longstanding vendor relationships, purchasing power and
merchandising expertise enable us to price competitively our product and
service offerings; and
- Staples' sophisticated, nationwide fulfillment capabilities enable us to
accurately fill orders and provide reliable next business day delivery.
To help broaden our service offering and gain access to new customers, we
have established strategic alliances with leading Internet service companies. We
currently offer multiple business services, including Internet and virtual
office services, business printing, payroll processing and communications
services. Through our relationship with BizBuyer.com, we plan to further enhance
our service offering by allowing customers to submit requests for quotes from a
network of over 20,000 service providers offering over 40 services. We expect to
increase the total number of available services to approximately 100 by the end
of 2000.
Staples.com has experienced rapid growth in both sales and visitor traffic.
Our sales grew to approximately $24 million during the fiscal quarter ended
October 30, 1999 from approximately $4 million for the same period in 1998,
representing growth of 493%. STAPLES.COM was recently awarded the "Golden Paper
Clip" award by OFFICE SOLUTIONS magazine for the best online shopping experience
for office products. The award recognized the web site for being well-designed,
easy to navigate, fast loading and price competitive.
INDUSTRY BACKGROUND
THE GROWTH OF COMMERCE ON THE INTERNET
The Internet is fundamentally changing the way businesses and consumers
communicate, find information and purchase products and services. Forrester
Research estimates that U.S. business-to-business sales over the Internet will
increase from approximately $109 billion in 1999 to $2.7 trillion in 2004.
The growth in business-to-business e-commerce is being driven in large part
by the recurring nature of business transactions, which offers businesses the
opportunity to create loyal and valuable long-term relationships with other
businesses. Business-to-business e-commerce solutions provide buyers and
suppliers with opportunities to increase revenue by reaching a broader customer
base and to realize operating efficiencies by streamlining complex purchasing
and distribution processes. These benefits have spurred the creation of
electronic marketplaces that aggregate buyers and sellers in a centralized
setting.
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Small businesses, in particular, are increasingly relying on the Internet to
communicate with current and potential customers and suppliers, leverage their
resources and reduce their procurement costs. International Data Corporation
estimates that total e-commerce revenue generated by small businesses will
increase from $3.4 billion in 1998 to $72.8 billion in 2003, representing a
compound annual growth rate of 85%.
THE OFFICE PRODUCTS AND SERVICES INDUSTRY
The market for office products and services is large and growing. Office
products range from supplies, such as writing instruments and paper, to
computers, copiers and other business machines. Staples estimates that the
overall sales for paper and office products totaled $250 billion in 1999.
Forrester Research estimates that online sales of paper and office products
totaled approximately $2.9 billion in 1999 and will grow to $235.3 billion by
2004, representing a compound annual growth rate of 141%. The market opportunity
for office services is also significant. For instance, according to Forrester
Research, the online sales of key business services such as financial services,
including 401(k) and insurance services, totaled approximately $7.3 billion in
1999 and are expected to grow to $80 billion by 2003; professional services,
including legal and accounting services, totaled approximately $4.4 billion in
1999 and are expected to grow to $48 billion by 2003; and administrative support
services, including temporary help, totaled approximately $3.9 billion in 1999
and are expected to grow to $39 billion by 2003.
The office products and services market consists of four segments: small
businesses and home offices, which generally have less than 100 employees;
mid-sized businesses, which generally have between 100 and 499 employees; large
businesses, which generally have over 500 employees; and consumers. The small
business and home office market is both the largest and fastest growing segment
of the office products market.
THE INTERNET OPPORTUNITY IN THE OFFICE PRODUCTS AND SERVICES INDUSTRY
Office products and business services are well suited for sale through an
electronic marketplace. Businesses purchase office products on a repeat basis,
utilize customized products and need access to a wide range of services ranging
from financial services, such as payroll administration and insurance, to
communication services, such as long distance and Internet access.
For small and mid-sized businesses, in particular, the process of obtaining
office products and services can be both time consuming and costly. Small
businesses are often located outside of markets served by office products
superstores which offer the most attractive prices and often lack sufficient
size to attract the attention of the direct sales forces of office products and
services providers. Moreover, the market for office services is highly
fragmented, and no single vendor currently offers the full complement of
products and services necessary to meet the office needs of small and mid-sized
businesses. As a result, these businesses confront a bewildering array of
choices with little available guidance as to the office products and services
best suited for their particular needs.
The rapid growth of the small business market and the growing reliance of
small businesses on the Internet creates a significant opportunity for an
electronic marketplace where businesses can easily procure office products and
services, obtain business-specific content, exchange information and conduct
e-commerce transactions with each other.
THE STAPLES.COM SOLUTION
We provide an electronic marketplace where small, mid-sized and large
businesses can buy office products and business services and obtain information
and expert content. Our principal web
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sites, STAPLES.COM, QUILLCORP.COM and STAPLESLINK.COM, leverage the brand
recognition and fulfillment infrastructure of Staples, the pioneer of the office
products superstore concept and a leading distributor of office products. In
addition to a broad selection of office products, we offer an array of business
services from vendors selected by Staples.com. We plan shortly to expand,
through strategic relationships, our electronic marketplace to give our
customers access to over 20,000 service providers offering over 40 services. We
also plan to introduce message boards and other features that will foster an
online community where businesses can exchange ideas and information with each
other.
Each of our web sites is targeted to the needs of a particular segment of
our customer base:
- STAPLES.COM is our core electronic marketplace for small businesses, home
offices and consumers. The web site provides complete, on-site transaction
processing for the purchase of over 130,000 office products and services.
STAPLES.COM also hosts our Business Solutions Center, which will be the
site of our business-to-business trading hub, messaging boards and other
interactive features.
- QUILLCORP.COM leverages the strength of the Quill brand name in the
catalog-order office products market to sell to small and mid-sized
businesses. Quill, which was acquired by Staples in 1998, has been a
direct retailer of office products through catalogs for over 40 years.
QUILLCORP.COM offers over 20,000 office products from Quill's direct mail
catalogs, including Quills' private label products.
- STAPLESLINK.COM leverages the strength of the Staples brand name in the
contract stationers market to provide online procurement of office
products for large businesses. STAPLESLINK.COM offers the highest level of
procurement functionality of our web sites, including customized pricing,
payment terms, usage reporting and full service account management
designed to appeal to businesses which require high levels of procurement
control.
We believe that our web sites offer the following benefits to our customers:
TRUSTED STAPLES BRAND
As a leading distributor of office products, Staples has earned a reputation
for high quality merchandise at attractive prices, wide product selection and
reliable service. According to YOUR COMPANY magazine, Staples is ranked by small
businesses as the best supplier of office products. Because we utilize Staples'
infrastructure and experience in selling office products, we are able to offer
our customers compelling value through the combination of the following
benefits:
- HIGH QUALITY MERCHANDISE AT ATTRACTIVE PRICES. Staples' experienced
purchasing personnel and established vendor relationships provide our
customers with a broad selection of high quality merchandise. In fiscal
1999, Staples purchased more than $6.4 billion of office products. We
combine Staples' purchasing power with the economies of online selling to
provide our customers with attractive prices.
- FAST, RELIABLE DELIVERY. Our customers receive reliable next business day
delivery through 29 national distribution centers, which shipped over
13.3 million Staples orders in fiscal 1999. Our customers have direct
online access to these distribution centers for inventory and shipping
information as to ordered products.
- EXTENSIVE CUSTOMER SUPPORT. Our customers benefit from Staples' national
call and e-mail customer service centers and from Staples' over 1,100
retail stores worldwide where they can view and sample products prior to
purchasing them online and can make returns and exchanges.
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SINGLE SOURCE FOR THE NEEDS OF BUSINESSES
We provide our customers with a single source for office products and
business services, business information and expert content to help them make
more efficient and informed purchases and more effectively manage their offices.
Our message boards and other planned interactive features will enable our
customers to benefit from exchanges of ideas and information with other
businesses with similar needs.
EXTENSIVE PRODUCT OFFERING
Our web sites collectively offer over 130,000 products. These products are
purchased by Staples' purchasing personnel, who have established strong
relationships with many vendors and have significant expertise in identifying
and purchasing products that meet the evolving needs of business customers. Our
web sites also feature content to inform customers about the benefits of various
types of products, as well as to assist them in choosing among specific product
offerings on our web sites.
WIDE RANGE OF BUSINESS SERVICES
We offer a wide array of services ranging from office services from
providers selected by us to more complex services that we plan to offer on a
request for quote basis. Currently, we offer multiple business services,
including payroll processing, high speed Internet access and domain name
registration. In addition, we plan to expand our electronic marketplace at
STAPLES.COM through our relationship with BizBuyer.com. This marketplace will
enable our customers to request quotes from a network of over 20,000 service
providers offering over 40 services, thus significantly expanding the number of
services made available by us. STAPLES.COM and QUILLCORP.COM both feature
content to inform customers about the benefits of various types of services, as
well as to assist them in choosing among specific service offerings. We expect
that the number of our available business services will increase to
approximately 100 services by the end of 2000.
CONVENIENCE AND EASE OF USE
Our web sites are available 24 hours a day, 7 days a week, from anywhere
with Internet access, enabling our business customers to shop after their
business hours. Our web sites categorize products into easy-to-use categories,
or aisles, and offer advanced search technologies that make it easy for
customers to locate products quickly. Businesses can take advantage of our
convenient account management tools, such as order tracking and purchasing
history reports. In addition, at our STAPLES.COM web site we offer real-time
inventory status and e-mail confirmation of orders placed. We make purchasing
easier for small businesses by providing access to credit.
CUSTOMIZED USER EXPERIENCE
Our web sites have numerous tools that help our customers tailor their
experience and make purchases more efficiently, including:
- PERSONALIZATION FEATURES. STAPLES.COM'S customers can create personalized
order forms, access an individualized "favorite aisle" menu, receive
e-mail reminders to help manage office supply flow and access past
purchasing history. Our ability to collect information about our
customers' purchasing patterns on our web sites enables us to offer
products and services which are personalized and responsive to the
particular preferences and needs of our customers.
- GROUP PURCHASING ACCOUNTS. Our customers can establish group purchasing
accounts that allow a number of employees of the same company to submit
individual orders to our web
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sites, subject to final approval of the person who established the
account. This feature avoids the administrative inconvenience of
circulating office product request forms and helps consolidate the review
and order placement of multiple requests.
- READY-MADE PURCHASE LISTS. Our web sites offer ready-made purchase lists
to help our customers in circumstances such as the arrival of a new
employee or the purchase of a new computer. STAPLESLINK.COM offers
customized lists of frequent purchases to reduce the time that customers
spend in reordering office supplies.
STRATEGY
Our objective is to create the leading business-to-business electronic
marketplace offering a comprehensive solution for the office needs of our
business customers. We seek to provide a single online destination where
businesses can procure a broad array of office products and business services,
access and exchange business information and expert content and conduct
e-commerce transactions with each other. Key elements of our strategy include:
CAPITALIZE ON STAPLES RELATIONSHIP
Our relationship with Staples, the pioneer of the office product superstore
concept and a leading distributor of office products, provides us with
significant competitive advantages. We plan to continue to leverage these
advantages, such as Staples' top brand name among small businesses, large
product selection, purchasing power and national distribution capabilities, to
generate sales and traffic on our web sites.
GROW CUSTOMER BASE
We plan to aggressively acquire new business customers and drive repeat
purchases by leveraging our strong brand franchise, providing easy access to a
wide selection of products, services and information and utilizing Staples' and
Quill's extensive direct marketing experience, sophisticated marketing
techniques and high-quality customer service.
Additionally, we intend to generate incremental sales from Staples' existing
customers by offering them an additional distribution channel for their
purchases and by offering them a variety of business services. We conduct
various cross-marketing, co-promotion and customer acquisition programs with
Staples to leverage Staples' database of approximately 8,000,000 business
customers. We utilize information about our customers to help us identify market
needs, enhance our web sites and effectively tailor our market strategy. We also
expect to generate sales from our electronic kiosks in Staples' retail stores
where customers can purchase products online that are not available in the
store.
LEVERAGE HIGH-QUALITY CUSTOMER TRAFFIC
Staples.com's product and service offerings drive high quality and high
frequency traffic to our web sites. We plan to further grow our sales by
offering a complement of business services, both through our partners and our
RFQ marketplace, which are intended to cause buyers and sellers to visit our web
sites to access this network of small and mid-sized businesses and vendors. As
the number of visitors to our electronic marketplace grows, we believe that a
greater diversity of buyers and service providers will be attracted, which, in
turn, should create a viral network effect increasing the amount of customer
traffic to our web sites.
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APPLY SOPHISTICATED DIRECT MARKETING TECHNIQUES
Staples and Quill have over 50 combined years of experience in the direct
marketing of office products. We plan to take advantage of their significant
direct marketing expertise, as well as the customer profile information that we
gather through our web sites, to tailor our products and service offerings to
the individual needs of our customers.
BUILD ONLINE BRAND AWARENESS
We will continue to invest in building our online brands and in
communicating the benefits and convenience of shopping at our web sites. We
believe that we are well positioned to establish STAPLES.COM, QUILLCORP.COM and
STAPLESLINK.COM as premier online brands for office products and services,
related business information and community. We benefit from our relationship
with Staples through multiple cross-marketing initiatives. For example, Staples'
print advertising and circulars typically contain the STAPLES.COM web site
address. We plan to continue to use local and national media, including online,
television, radio, print and outdoor advertising, to further enhance our online
brand. In addition, we will continue to enter into online marketing
arrangements. For example, we are featured as the premier office supply and
services merchant on Yahoo!-Registered Trademark- Small Business.
CONTINUALLY ENHANCE THE CUSTOMER EXPERIENCE
We seek to continually enhance our web sites based on our targeted
customers' preferences and needs. Our web sites allow us to gather significant
data on customer browsing and shopping preferences. We use this information to
dynamically change our product offerings to meet the changing preferences and
needs of our targeted customers. We also use this information, as well as online
questionnaires, to refine the layout and performance of our web sites. In early
2000, we plan to launch newly designed versions of our web sites with enhanced
functionality. We expect that continued enhancements of our web sites will make
shopping with us more efficient and generate increased customer satisfaction.
EXPAND STRATEGIC ALLIANCES
We will continue to use strategic alliances and equity investments, such as
those we have with BizBuyer.com, DSL.net, HotOffice Technologies and
Register.com, to expand our business service offerings, gain entry into new
markets and drive traffic to our web sites. Our relationship with Staples
enables us to establish strategic alliances with partners seeking to establish
cross-marketing relationships with Staples and Staples.com.
EXPAND INTERNATIONALLY
We plan to expand our offerings in Canada through STAPLES.COM OF CANADA,
BUSINESSDEPOT.COM and BUREAU EN GROS, the online outlets of Staples' Canadian
retail stores. These sites are available in French and English. We believe that
the experience we gain in Canada will enable us to expand efficiently into
Europe and other international markets in the future. Staples currently operates
over 1,100 retail stores worldwide, including in Germany, the Netherlands, the
United Kingdom and Portugal.
OFFICE PRODUCTS, BUSINESS SERVICES AND CONTENT AND COMMUNITY
Through our web sites, we offer our customers a wide selection of office
products and business services. We are enhancing our web sites to provide our
customers with relevant business content and access to a community of other
small businesses.
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OFFICE PRODUCTS
We offer a wide range of competitively priced products selected to meet the
needs of our customers. Our merchandisers work closely with the Staples and
Quill merchandise departments to select quality brands and products to feature
on our web sites. We select our products based on the needs and feedback of our
customers, and supplement our selections on an ongoing basis based on seasonal
demand, such as holiday or tax season related offerings. Our products are
organized into the following categories:
<TABLE>
<CAPTION>
PRODUCT CATEGORY DESCRIPTION
- ---------------- -----------
<S> <C> <C>
Paper and Office Supplies - More than 20,000 office supply products from leading
manufacturers, such as 3M, Acco, Avery, Bic, Daytimer,
Hammermill, Sanford and Xerox
- Product offerings include copy paper and other paper
products, toner cartridges, writing instruments, file
folders, staplers and paper fasteners and a broad array of
office supplies, including calendars, personal organizers,
business forms and janitorial supplies
Business Machines - More than 3,000 business machines from leading
manufacturers, such as Canon, Casio and Xerox
- Product offerings include copiers, fax machines,
calculators, telephones and handheld electronics, as well as
a full line of consumable accessories, including batteries,
and printer and copier cartridges
Computers and Accessories - More than 5,000 computers, printers and related accessories
from leading manufacturers, such as Compaq, Hewlett-Packard
and Toshiba, and accessories from quality suppliers like
Belkin, Fellowes and Microsoft
- Over 100,000 software titles categorized by function from
leading software developers, such as Intuit, Microsoft and
Symantec
- Product offerings include notebook computers, business
software, printers, monitors, memory upgrades and a wide
variety of accessories such as cables, modems, storage and
system components
Furniture - More than 1,000 pieces of office furniture from leading
manufacturers, such as Bush, Global and Hon
- Product offerings for the small and mid-size offices include
chairs, desks, tables, wall units, computer furniture and
file cabinets, as well as a full line of accessories,
including chair mats and lamps
Private Label Items - More than 500 private label items under the Staples and
Quill brand names
- Product offerings include copy paper, staplers, computer
accessories, calculators, desk accessories and writing
instruments
</TABLE>
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BUSINESS SERVICES
Staples.com is creating a leading business-to-business electronic
marketplace offering a comprehensive solution for the business service needs of
small, mid-sized and large businesses. We currently offer multiple business
services in conjunction with our strategic partners who are selected by us for
their quality and reliability. Our business service offerings are designed to
reduce the time that small businesses expend researching, finding and engaging
quality service providers. We seek to provide a full suite of services which
assist our customers in every aspect of establishing and managing their office.
The following is a summary of the services we currently offer:
<TABLE>
<CAPTION>
BUSINESS CATEGORY DESCRIPTION SERVICE PROVIDER
- ----------------- ----------- ----------------
<S> <C> <C>
Internet Services -Web site hosting and e-commerce -Concentric Network
-Web site domain registration -Register.com
-Internet access -DSL.net
Office Services -Online business printing -Staples private label
-Intranet services -HotOffice Technologies
Financial Services -Payroll processing, including related -Interpay
tax filings, and employee benefit plans
-Credit -Staples private label
Communication Services -Business communications systems and -Staples Communications
software, voice, data and network
solutions
-Cellular products and services -Point.com
</TABLE>
INTERNET SERVICES. We provide a number of services designed to help our
customers establish and maintain a business presence on the Internet. These
services are primarily targeted to small business customers who seek to
integrate the Internet into their business operations. Through our relationship
with DSL.net, we provide affordable, high speed, high bandwidth Internet access
on a nationwide basis. In addition, we provide an easy-to-use solution to
register a customer's domain name through our alliance with Register.com.
Through our relationship with Concentric Network, we provide a suite of services
to enable a small business to operate its own web site. These services include
high performance, reliable web site hosting; easy-to-use, template-driven
creation of e-commerce web sites; and a secure transaction processing system.
OFFICE SERVICES. To help manage the day-to-day operations of our customers'
businesses, we provide a range of convenient and affordable office services.
Through our relationship with a private label supplier, we provide customers
with the ability to order from their desktops and receive at their doorstep a
wide variety of printed office supplies, such as business cards, letterhead and
carbonless forms. In addition, we provide a virtual office to our customers
through our alliance with HotOffice Technologies. This virtual office is an
Internet-based solution that provides employees of small businesses with e-mail,
document management, online conferencing, group calendars, file sharing and
backup, as well as a secure firewall.
FINANCIAL SERVICES. Many small business customers lack the expertise, time
and desire to handle the complicated administrative tasks involved with
financial services, such as payroll processing. Through our alliance with
Interpay, we offer our customers payroll processing expertise through a
complete, affordable, outsourced solution. This service includes printing and
distribution of employee payroll, as well as processing of employee tax filings
and withholdings on a basis
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guaranteed by Interpay to meet government requirements. In addition, we offer
other financial services through Interpay such as employee pre-tax spending
accounts and 401(k) accounts. To facilitate our customers' purchases of
Staples.com products, we provide access to Staples' private label credit card
and the ability to establish an open business account available to multiple
users that incorporates purchase orders and features net payment terms. We
believe that these services satisfy a strong need of our small business
customers and are cost effective to implement.
COMMUNICATIONS SERVICES. We believe that voice and data communications
systems are increasingly important to our small and mid-size business customers.
The selection of an appropriate vendor for communications services represents a
complex and time consuming business decision. To assist our customers, Staples
Communications provides a broad range of communications services, including
voice and data phone systems, network design and implementation, Internet
access, voicemail systems and large scale communications systems. Through our
alliance with Point.com, we also offer a valuable service to help customers
obtain the background and comparative information needed to make the complex
purchase decision relating to wireless communications products and service
plans.
In addition, we plan to expand our electronic marketplace, through our
relationship with BizBuyer.com, to enable our customers to request quotes from a
network of over 20,000 service providers offering over 40 services. Our
electronic business-to-business marketplace will, for example, make available on
an RFQ basis the services listed below:
<TABLE>
<CAPTION>
BUSINESS CATEGORY DESCRIPTION
<S> <C>
Communication and Technology - Paging, telephone systems and voice over Internet
- Internet services, such as web hosting, high-speed
Internet access and web design
- Technology support services, such as networking and
technical training
- Consulting on such matters as data security, information
technology strategy, software development and system
integration
Money Management - Payroll services
- Consulting on such matters as starting a new business,
obtaining financing and general business management
- Financing services, such as lease financing, credit lines
and loans
Human Resources and Staffing - Recruiting, temporary staffing and technical training
Sales and Marketing - Promotional products and services, telemarketing, banner
ad design, prospect lists and printing of marketing
materials such as brochures
Legal and Insurance - Legal services relating to such matters as business
incorporation, intellectual property registration and
general business law
- Insurance products covering business auto insurance,
commercial umbrella, employment practices, legal malpractice
insurance, medical malpractice insurance, professional
liability and workers' compensation
Office Services - Shipping, transporting and storage
- Procurement and space management services to assist with
moving, maximizing office space and obtaining office
equipment
</TABLE>
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This expanded electronic marketplace will provide our customers with the
following benefits:
- the ability to reach efficiently and cost-effectively multiple service
providers, particularly for time-sensitive requests and for services that
might not otherwise be available in the customer's geographic area;
- the ability to compare competitive quotes and pricing; and
- the ability to make more informed purchases with immediate information
about the marketplace.
By enhancing our business-to-business marketplace, we expect to increase our
customer traffic and loyalty to our web sites.
By the end of 2000, we expect to offer approximately 100 business services,
including human resources, sales and marketing and insurance services.
CONTENT AND COMMUNITY
We will provide our customers with additional content to enable them to make
informed product and service purchases and to improve their business operations.
We will offer solutions and support for small businesses by providing them a
single online destination for information they need to more effectively manage
their businesses, including relevant periodicals; business and productivity
tools, such as loan calculators, business plan templates and information on
sources of venture capital funding; and access to expert advice from professors
at a leading business school. These features, together with message boards and
other planned interactive elements, are designed to foster an online business
community at our web sites.
MARKETING AND MERCHANDISING
MARKETING
We have designed our marketing strategy to build awareness of the
Staples.com brands, increase traffic to our web sites, encourage repeat business
and expand our customer base. We use both online and offline marketing to carry
out our marketing strategy. Our online marketing includes e-mail promotions and
special programs, such as special pricing on key items. We have established
online marketing relationships with several leading web sites that feature
integrated links to our web sites. For example, we are featured as the premier
office supply and services merchant on Yahoo!-Registered Trademark- Small
Business. Our offline marketing includes traditional advertising on television
and in other media, which is often combined with advertising for Staples'
superstores. Advertising for Staples.com is often included in direct marketing
for Staples' retail stores and catalogs. As part of Staples' multi-channel
promotions, Staples includes the STAPLES.COM web site address in its print
advertisements and catalogs and promotes STAPLES.COM as one of its "three ways
to save", in addition to its well established retail stores and catalog
operations.
In marketing to small and mid-sized businesses, we utilize sales
representatives in Staples' catalog operations, which consisted of 250 employees
as of February 16, 2000. In marketing to STAPLESLINK.COM'S large business
customers, we utilize Staples contract stationers' sales force, which consisted
of 505 employees as of February 16, 2000. We also take advantage of the
telemarketing resources of both Staples and Quill to market our web sites. We
seek to further benefit from our relationship with Staples by placing kiosks
linked to our web sites in Staples retail stores.
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MERCHANDISING
Our online stores provide us with significant flexibility in organizing and
showcasing our products and service selection to customers. Our easy-to-use web
sites provide showrooms for customers to browse our product and service
selections by brand, product category, price and other attributes. We regularly
adjust our product mix to respond to changing customer demand and behavior. In
addition, we personalize our merchandising by displaying to customers products
that complement items they have ordered, such as batteries for hand-held
electronics or power cords for computers. In addition, when a customer orders a
product, we will frequently inform the customer of other items in the same
category with additional features that might better suit the customer's needs.
We also conduct promotions for products that we have been able to obtain at an
attractive price or that are in high demand by our customers.
STRATEGIC ALLIANCES AND INVESTMENTS
We pursue strategic alliances and equity investments to help broaden our
products and services offering and gain access to new customers. As of
February 15, 2000, we have invested a total of approximately $43 million in the
capital stock of our strategic partners. The marketing arrangements that we
enter into in connection with these alliances generally provide for exclusive
relationships, and generally are for a term of one to three years. Our principal
strategic alliances that include equity investments to date are as follows:
BIZBUYER.COM
BizBuyer.com offers an RFQ marketplace for small and mid-sized businesses.
Our alliance with BizBuyer.com extends our RFQ sales capabilities and will
provide our customers with an opportunity to sell their products and services to
each other and allow us to offer our products and services to the BizBuyer
customer base.
DSL.NET
DSL.net offers high-speed Internet access through digital subscriber line
technology. Our alliance with DSL.net provides for the sale of DSL.net services
to our customers and our products and services to DSL.net customers.
HOTOFFICE TECHNOLOGIES
HotOffice Technologies is an application services provider of intranet
services for small businesses. Our alliance with HotOffice enables us to offer
HotOffice virtual office services to our customers and to offer our products and
services to HotOffice customers.
POINT.COM
Point.com provides information on wireless communications products and
services. Our alliance with Point.com enables us to offer our customers
assistance in making purchasing decisions relating to wireless communications
products and services.
REGISTER.COM
Register.com provides domain name registration services. Through our
alliance with Register.com, we are able to offer easy to use domain registration
services to our customers and our products and services to Register.com
customers.
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OPERATIONS
FULFILLMENT
We maintain no inventory, but rather sell products maintained as inventory
in Staples' nationwide network of 29 distribution centers. Staples employs
modern warehouse management systems and radio frequency technology, just-in-time
replenishment procedures and material handling equipment that help to minimize
overall inventory levels while maintaining optimal in-stock positions.
STAPLES.COM and STAPLESLINK.COM are directly tied to Staples' fulfillment
centers enabling customers to promptly determine whether ordered products are
available. We typically can fill 80% of our U.S. orders from Staples' in-stock
inventory. Our products are delivered through third-party couriers and Staples'
truck fleet.
CUSTOMER SERVICE
We have a dedicated customer service staff and also utilize Staples'
customer service representatives. They handle questions about orders and assist
customers in finding desired products and services. Our customer service
representatives share the call center infrastructure of Staples. Our
sophisticated e-mail management system and Staples' telephone Automatic Call
Distributor allow us to prioritize incoming contacts, route them to the
appropriate customer service representatives and respond in a timely fashion.
Our customer service representatives, customer phone calls and customer e-mails
are valuable sources of feedback regarding customer satisfaction. In addition,
by providing our customer service function in-house, we maintain a direct
relationship with our customers. We also use an online market research company
to obtain monthly customer feedback. This information is used to determine
opportunities for improvement and to evaluate areas of success. Our web sites
also provide several service options, including FAQs, e-mail, live help through
toll free 800 numbers, as well as a list of nearby store locations.
TECHNOLOGY
We have implemented a broad array of scalable electronic commerce, site
management, search, and customer interaction services and systems that we use to
process customers' orders and interact with customers. These services and
systems use a combination of our own technologies, Staples' technologies and
commercially available, licensed technologies. The systems that we use to accept
and process customers' orders are integrated with the order management, payment
processing, distribution, accounting and financial systems of Staples. We focus
our internal development efforts on creating and enhancing specialized software
that is unique to our online business. We use a set of applications for:
- accepting and validating customer orders for products;
- transmitting orders to Staples for processing and fulfillment;
- interacting with customers for customer service and other purposes; and
- connecting to third parties for sale and delivery of certain products and
services to customers.
Our systems have been designed based on industry standard architectures and
have been designed to reduce downtime in the event of outages or catastrophic
occurrences. Our web systems hardware is hosted at third-party facilities in
Beltsville, Maryland, Hopkinton, Massachusetts and Philadelphia, Pennsylvania.
The associated Staples systems hardware resides at Staples facilities in
Framingham, Massachusetts and Quill facilities in Lincolnshire, Illinois. We
have implemented load balancing systems and our own redundant servers to provide
for fault tolerance of our web systems.
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COMPETITION
The online commerce market and Internet content sites are rapidly evolving
and, like the office products and services market, are intensely competitive.
Primary competitive factors in our markets include:
- brand recognition;
- selection;
- convenience;
- price;
- speed and accessibility;
- depth, breadth and presentation of site content;
- customer service; and
- reliability and speed of order shipment.
We currently compete with a variety of other companies offering office
products and services, including:
- traditional store-based retailers that sell office products;
- online office product retailers;
- traditional providers of services for small business, such as telephone,
credit card and insurance companies; and
- online service providers, such as small business portals, that target the
small business market or sell to small business customers.
We believe that we currently compete favorably with respect to each of the
above factors. However, as the market is still rapidly evolving, we may not be
able to compete successfully against current and new competitors in the future.
EMPLOYEES
As of February 2, 2000, we employed approximately 140 full- and part-time
employees. We also use independent contractors and temporary employees. None of
our employees are represented by a labor union.
We use Staples personnel for certain functions, including 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. As a
result, we pay an allocated portion of Staples' expenses. For a discussion of
policies regarding cost allocation, see "Certain Cash Management and Allocation
Policies".
FACILITIES
Our headquarters is located in Framingham, Massachusetts. Staples owns all
of the property and offices occupied by us and as a result we pay an allocated
portion of Staples' expenses. For a discussion of policies regarding cost
allocation, see "Certain Cash Management and Allocation Policies".
We believe existing facilities are adequate for our current operations, and
that suitable additional or alternative space would be available on reasonable
commercial terms for future expansion.
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MANAGEMENT OF STAPLES.COM
SENIOR OFFICERS OF STAPLES.COM
The following table sets forth information regarding the senior officers of
Staples.com.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
Jeanne B. Lewis............... 36 President
Kevin Dempsey................. 42 Vice President--Merchandising
Anne-Marie Keane.............. 34 Vice President--Business-to-Business Electronic
Commerce
Christine T. Komola........... 32 Chief Financial Officer
Jeffrey L. Levitan............ 45 Executive Vice President--Strategy and Development
J.B. Lyon..................... 36 Vice President--Business Services
Kelly Mahoney................. 42 Chief Marketing Officer
Michael J. Ragunas............ 36 Chief Technology Officer
Jackie Shoback................ 33 Vice President--Operations
Sarah Alter................... 34 Vice President--Quillcorp.com
</TABLE>
JEANNE B. LEWIS has served as President of Staples.com since
September 1999. Prior to that, she served in various capacities since joining
Staples in April 1993, including Executive Vice President--Marketing from
January 1998 to September 1999, Senior Vice President--Marketing and Small
Business from April 1997 to January 1998, Vice President/Divisional Merchandise
Manager from 1996 to April 1997 and Director of Operations and Director of Sales
and Marketing from 1994 to 1996. Ms. Lewis received an M.B.A. degree from
Harvard Business School and a B.A. degree from Wellesley College.
KEVIN DEMPSEY has served as Vice President--Merchandising of Staples.com
since November 1999. Prior to that, Mr. Dempsey was Vice
President--International Merchandising for Staples in Brussels. From
November 1994 to April 1997, he was Vice President--Import Buying and Product
Development of Staples. From May 1991 to November 1994, he was Vice President
Merchandising and a founding member of the management team for Staples' Canadian
operation, Business Depot. Mr. Dempsey received a B.A. degree from The
University of Western Ontario, Canada.
ANNE-MARIE KEANE has served as Vice President--Business-to-Business
Electronic Commerce of Staples.com since September 1999. Ms. Keane joined
Staples in 1992 and has held a variety of positions within the Staples'
marketing, merchandising and strategy organizations. She received an M.B.A.
degree from Harvard Business School and a B.A. degree from Dartmouth College.
CHRISTINE T. KOMOLA has served as Chief Financial Officer of Staples.com
since November 1999. She joined Staples in April 1997 and most recently was Vice
President--Planning, Margin and Control for Staples, where she was responsible
for financial analysis and long-range planning, budgeting, forecasting and
financial accounting. Prior to joining Staples, Ms. Komola was employed for
eight years at Ernst & Young, LLP. Ms. Komola received a B.S. degree from Miami
University in Oxford, Ohio and is a Certified Public Accountant.
JEFFREY L. LEVITAN has served as Executive Vice President--Strategy and New
Business Development of Staples.com since November 1999. He managed the launch
of Staples.com as Senior Vice President from November 1998 to November 1999.
Prior to that, he served as Senior Vice President--Strategic Planning and New
Business Development from August 1996 to November 1998, during which time he was
responsible for the development and launch of Staples.com. From 1989 to 1996, he
was with The Boston Consulting Group, where he served as a
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<PAGE>
strategic management consultant. Mr. Levitan received an M.B.A. degree from the
Wharton School at the University of Pennsylvania and a B.A. degree from Cornell
University.
J.B. LYON has served as Vice President--Business Solutions of Staples.com
since November 1999. From November 1998 to November 1999, Mr. Lyon served as
Vice President--Marketing of Staples.com. From October 1997 to November 1998,
Mr. Lyon wrote the business plan and led the launch of Staples.com. He joined
Staples as a senior associate of strategic planning in 1996. Mr. Lyon founded
and managed Uncle Dave's Kitchen, a nationally distributed all natural pasta
sauce and condiment packaged foods company. He received an M.B.A degree from
Harvard Business School and a B.A. degree from Tufts University.
KELLY MAHONEY has served as Chief Marketing Officer of Staples.com since
November 1999. Prior to joining Staples.com in 1999, she was Chief Marketing
Officer at Arnold Direct, the integrated marketing division of Arnold
Communications, where she developed customer acquisition, retention and
optimization programs for leading brands, as well as pre-IPO start-up companies.
From 1993 to 1996, Ms. Mahoney was Senior Vice President at Bronner Slosberg
Humphrey (now Digitas), a leading direct marketing firm, where she developed
customer base management and e-commerce strategies for Fortune 1000 clients.
Ms. Mahoney received a B.A. degree from the University of Michigan.
MICHAEL J. RAGUNAS has served as Chief Technology Officer since
January 2000. He served as Vice President--Information Systems for Staples.com
from July 1999 to January 2000 and Director--Information Systems for Staples.com
from January 1999 to July 1999. From September 1997 to January 1999,
Mr. Ragunas served as Director of Strategic Technology and Systems Architecture
for Staples, where he managed the development of electronic commerce
applications. He joined Staples in 1986 and has held various roles in the
Information Systems and Retail Operations functions. Mr. Ragunas received an
A.B. degree from Harvard College.
JACKIE SHOBACK has served as Vice President--Operations of Staples.com since
February 1999. Prior to that, Ms. Shoback served as Vice President--Call Center
Operations for Staples Direct, Staples' catalog division. She joined Staples in
1993 and has held various positions in its marketing, store operations and
strategy organizations. Ms. Shoback received an M.B.A. degree from Harvard
Business School and a B.A. degree from Wellesley College.
SARAH ALTER has served as Vice President of Quillcorp.com since
November 1999. Prior to that, Ms. Alter served as the Director of Advertising
for Quill, where she managed all catalog creative and print production
operations. From March 1997 to July 1998, Ms. Alter headed all retail and direct
marketing operations for Staples UK as its Marketing Comptroller. Ms. Alter
received an M.B.A. degree from Harvard Business School and a B.A. degree from
Northwestern University.
BUSINESS ADVISORY BOARD
Staples.com has a business advisory board that consists of professionals
from the Internet industry. The advisory board will consult with our management
and provide advice and guidance to our management and Staples' board of
directors regarding our business and various strategic initiatives.
The following sets forth information regarding the members of Staples.com's
business advisory board:
WILLIAM O. GRABE has served as a General Partner of General Atlantic
Partners, LLC since he joined the firm in 1992. Prior to joining General
Atlantic, Mr. Grabe retired from the IBM Corporation as a Vice President and
Corporate Officer. Mr. Grabe is a Member of the UCLA Foundation Board of
Trustees and a Trustee of Outward Bound USA. Mr. Grabe is also a director on the
boards of directors of Baan Company, N.V., Compuware Corporation, Firepond Inc.,
Gartner Group, Inc.,
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Exact Holding N.V., LHS Group, Inc., Meta4 N.V., TDS GmbH and several other
privately held software and service companies.
WILLIAM W. HELMAN has served as a General Partner of Greylock Equity Limited
Partnership since 1991. Mr. Helman joined Greylock Management Corporation in
1984 and is currently also a General Partner of Greylock Limited Partnership,
Greylock Capital Limited Partnership, Greylock Investments Limited Partnership
and Greylock IX Limited Partnership, each of which is a private limited
partnership for equity capital investments. Mr. Helman is also a director of
Media Metrix, Inc. and several private companies.
ROBERT F. HIGGINS has served as Managing General Partner of Highland Capital
Partners since its inception in 1987. Prior to forming Highland Capital
Partners, Mr. Higgins was a General Partner at Charles River Ventures.
Immediately prior to entering venture capital, he spent four years as the
Executive Director of the John A. Hartford Foundation. He was also the Chief
Executive of the Clark Foundation and the Burden Foundation, an Assistant to the
U.S. Secretary of Commerce and an Assistant to the head of the international
division of the U.S. Department of the Treasury. Mr. Higgins currently serves as
a director of LegaLink Corporation, Mitotix and U.S. Pathology Labs.
MARC F. MCMORRIS has served as a Principal of General Atlantic Partners, LLC
since July 1999. From June 1996 to July 1999, Mr. McMorris was Vice President of
Goldman, Sachs & Co., High Technology Group, Investment Banking Division. From
August 1994 to June 1996, Mr. McMorris was an associate with Morgan Stanley
& Co., Mergers, Acquisitions and Restructurings Department.
WILLIAM A. SAHLMAN is the Dimitri V. d'Arbeloff--Class of 1955 Professor of
Business Administration at Harvard Business School. From 1991 to 1999,
Mr. Sahlman was Senior Associate Dean, Director of Publishing Activities and
Chairman of the Board for Harvard Business School Publishing Corporation. From
1990 to 1991, he was Chairman of the Harvard University Advisory Committee on
Shareholder Responsibility. He is a member of the board of directors of several
private companies.
MARGARET C. WHITMAN has served as President and Chief Executive Officer of
eBay, Inc., an on-line auction company, since February 1998 and has been a
director of Staples since March 1998. From January 1997 to February 1998,
Ms. Whitman was General Manager of the Preschool Division of Hasbro, Inc. From
February 1995 to December 1996, Ms. Whitman was employed by FTD, Inc., most
recently as President, Chief Executive Officer and a director. From
October 1992 to February 1995, Ms. Whitman was employed by The Stride Rite
Corporation, in various capacities, including President, Stride Rite Children's
Group and Executive Vice President, Product Development, Marketing &
Merchandising, Keds Division.
We have agreed that two persons designated by General Atlantic Partners,
currently William O. Grabe and Marc McMorris, will be members of our business
advisory board for so long as General Atlantic Partners and its affiliates own
at least 2,307,692 shares of Staples.com stock. We have also agreed that two
persons designated by Highland Capital Partners, currently William Helman and
Robert Higgins, will be members of our business advisory board for so long as
Highland Capital Partners and its affiliates own at least 2,307,692 shares of
Staples.com stock.
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<PAGE>
CERTAIN RELATIONSHIPS
COMMON STOCK ISSUANCES
Between November 1999 and January 2000, Staples sold an aggregate of
11,792,308 shares of Staples.com stock to a group of investors including General
Atlantic Partners 59, L.P., Highland Capital Partners IV and Greylock IX Limited
Partnership at a purchase price of $1.625 per share. In connection with this
transaction, Staples entered into a Staples.com common stock purchase agreement
with the investors pursuant to which the investors are entitled to registration
rights under the Securities Act with respect to the shares of Staples.com stock
that they purchased. In connection with this transaction, certain directors of
Staples purchased an aggregate of 1,100,000 shares of Staples.com stock at a
purchase price of $1.625 per share.
GUARANTEE OF LOANS TO OFFICERS
The members of our management team and certain officers of Staples have
acquired shares of Staples.com stock upon exercise of stock options. We have the
right to repurchase a portion of the shares at their purchase price in the event
the person ceases to provide services to us. Ten members of our management team
and 21 officers of Staples borrowed an aggregate of $16.2 million from Boston
Safe Deposit and Trust Company in order to pay for their shares. In addition,
eight individuals of our management team and one officer of Staples deferred the
interest payments on their loans for two years. The loans are 50% non-recourse
to the individuals and the interest payable on the loans is with full recourse
to the individuals. Each of these persons entered into a pledge agreement with
Boston Safe Deposit and Bank Company pursuant to which they pledged their shares
of Staples.com stock as collateral for the loan they received. Staples entered
into a Line of Credit and Guaranty Agreement with Boston Safe Deposit and Trust
Company pursuant to which Staples agreed to guarantee these loans.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership of
Staples RD stock and Staples.com stock as of January 29, 2000 by:
- each person we know who beneficially owns more than 5% of the outstanding
shares of Staples RD stock or Staples.com stock;
- each of Staples' directors;
- each of Staples' five most highly compensated executive officers in the
fiscal year ended January 29, 2000; and
- Staples' directors and executive officers as of January 29, 2000 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 February 11, 2000, which we refer to as
Presently Exercisable Options, 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. Percentage of shares of Staples
RD stock beneficially owned is based on 457,188,187 shares of Staples RD stock
outstanding as of February 11, 2000. Percentage of shares of Staples.com stock
beneficially owned excluding shares of Staples.com stock issuable in respect of
Staples RD's retained interest in Staples.com is based on 27,446,084 shares of
Staples.com stock outstanding as of February 11, 2000. Percentage of shares of
Staples.com stock beneficially owned including shares of Staples.com stock
issuable in respect of Staples RD's retained interest in Staples.com is based on
227,446,084 shares of Staples.com stock deemed outstanding as of February 11,
2000, which includes 27,446,084 shares of Staples.com stock outstanding as of
such date and the 200,000,000 shares of Staples.com stock issuable in respect of
Staples RD's retained interest in Staples.com.
52
<PAGE>
<TABLE>
<CAPTION>
STAPLES.COM STOCK
----------------------------------------------------------
STAPLES RD STOCK PERCENTAGE OF SHARES BENEFICIALLY OWNED
----------------------------- -------------------------------------------
NUMBER OF PERCENTAGE OF NUMBER OF EXCLUDING SHARES INCLUDING SHARES
SHARES SHARES SHARES ISSUABLE IN RESPECT ISSUABLE IN RESPECT
BENEFICIALLY BENEFICIALLY BENEFICIALLY OF STAPLES RD'S OF STAPLES RD'S
NAME OF BENEFICIAL OWNER OWNED OWNED OWNED RETAINED INTEREST RETAINED INTEREST
- ------------------------ ------------ -------------- ------------ -------------------- --------------------
<S> <C> <C> <C> <C> <C>
5% STOCKHOLDERS
Janus Capital Corporation
(1).......................... 40,414,818 8.84 -- -- *
100 Fillmore Street
Denver, CO 80206
FMR Corp. (2).................. 36,629,910 8.01 -- -- *
82 Devonshire Street
Boston, MA 02109
General Atlantic Partners
(3).......................... -- -- 4,615,385 16.82 2.03
3 Pickwick Plaza, Suite 200
Greenwich, CT 06830
Highland Capital Partners
(4).......................... -- -- 3,076,923 11.21 1.35
2 International Place
Boston, MA 02110
Greylock IX Limited
Partnership.................. -- -- 1,846,154 6.73 *
One Federal Street
Boston, MA 02110.............
Jeanne B. Lewis (5)............ 16,981 * 2,025,824 7.38 *
Staples.com
500 Staples Drive
Framingham MA 01702
DIRECTORS AND NAMED EXECUTIVE
OFFICERS
Thomas G. Stemberg (6)......... 5,259,486 1.15 2,129,120 7.76 *
Martin Trust (7)............... 3,168,244 * 100,000 *
Ronald L. Sargent (8).......... 899,204 * 1,096,840 4.00 *
Robert C. Nakasone (9)......... 500,061 * 100,000 * *
Rowland T. Moriarty (10)....... 393,539 * 100,000 * *
Mary Elizabeth Burton (11)..... 195,719 * 100,000 * *
Paul F. Walsh (12)............. 119,057 * 100,000 * *
James L. Moody, Jr. (13)....... 82,218 * 100,000 * *
W. Lawrence Heisey (14)........ 71,219 * 100,000 * *
W. Mitt Romney (15)............ 66,439 * 100,000 * *
Basil L. Anderson (16)......... 32,950 * 100,000 * *
Margaret C. Whitman (17)....... 17,691 * 100,000 * *
George J. Mitchell (18)........ 7,457 * 100,000 * *
John C. Bingleman (19)......... 1,322,805 * 0 * *
John J. Mahoney (20)........... 576,478 * 638,736 2.33 *
Joseph S. Vassalluzzo (21)..... 1,535,512 * 638,736 2.33 *
All directors and executive
officers as of January 29,
2000 as a group (29 persons)
(22)......................... 15,330,895 3.30 10,717,339 31.31 4.58
</TABLE>
- ------------------------------
* Less than 1%
(1) Based on Janus Capital Corporation's Schedule 13G filed with the SEC on
February 15, 2000.
(2) Based on FMR Corp.'s Schedule 13G filed with the SEC on February 14, 2000.
(3) Includes 3,894,418 shares beneficially owned by General Atlantic Partners
59, L.P. and 720,967 shares beneficially owned by GAP Coinvestment Partners
II, L.P.
(4) Includes 2,953,846 shares beneficially owned by Highland Capital Partners IV
Limited Partnership and 123,077 shares beneficially owned by Highland
Entrepreneurs' IV Limited Partnership.
(5) Includes 1,410,440 shares of Staples.com stock subject to Presently
Exercisable Options.
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<PAGE>
(6) Includes 1,940,544 shares of Staples RD stock subject to Presently
Exercisable Options. Also includes 254,046 shares of Staples RD stock owned
by Thomas G. Stemberg 1998 Trust; 5,692 shares of Staples RD stock owned by
Mr. Stemberg's wife; 100,000 shares of Staples RD stock owned by Thomas G.
Stemberg 1999 Trust; and 150,000 shares of Staples RD stock owned by Thomas
G. Stemberg LP.
(7) Includes 58,124 shares of Staples RD stock subject to Presently Exercisable
Options. Also includes 17,083 shares of Staples RD stock owned by
Mr. Trust's wife; 2,808,105 shares of Staples RD stock owned by Trust
Investments; and 100,000 shares of Staples.com stock owned by 1999 MTDT
Descendants' Trust of which Mr. Trust is a Trustee.
(8) Includes 685,313 shares of Staples RD stock subject to Presently Exercisable
Options.
(9) Includes 96,565 shares of Staples RD stock subject to Presently Exercisable
Options.
(10) Includes 153,044 shares of Staples RD stock subject to Presently
Exercisable Options. Also includes 39,480 shares of Staples RD stock
beneficially owned by Mr. Moriarty's children and 100,000 shares of Staples
RD stock beneficially owned by the Rowland T. Moriarty Qualified Annuity
Trust.
(11) Includes 133,719 shares of Staples RD stock subject to Presently
Exercisable Options. Also includes 100,000 shares of Staples.com stock owned
by Jennifer Ann Burton Irrevocable Trust.
(12) Includes 96,092 shares of Staples RD stock subject to Presently Exercisable
Options.
(13) Includes 53,063 shares of Staples RD stock subject to Presently Exercisable
Options.
(14) Includes 53,230 shares of Staples RD stock subject to Presently Exercisable
Options. Also includes 25,000 shares of Staples.com stock beneficially owned
by Two Cents Worth, Inc., of which Mr. Heisey is a controlling shareholder.
(15) Includes 23,182 shares of Staples RD stock subject to Presently Exercisable
Options.
(16) Includes 17,250 shares of Staples RD stock subject to Presently Exercisable
Options. Also includes 100,000 shares of Staples.com stock beneficially
owned by the Basil Anderson Revocable Trust.
(17) Includes 3,750 shares of Staples RD stock subject to Presently Exercisable
Options.
(18) Includes 4,500 shares of Staples RD stock subject to Presently Exercisable
Options. Also includes 100,000 shares of Staples.com stock owned by Senator
Mitchell's son.
(19) Includes 1,035,842 shares of Staples RD stock subject to Presently
Exercisable Options.
(20) Includes 416,250 shares of Staples RD stock subject to Presently
Exercisable Options.
(21) Includes 1,322,872 shares of Staples RD stock subject to Presently
Exercisable Options.
(22) Includes 6,781,462 shares of Staples RD stock and 1,677,616 shares of
Staples.com stock subject to Presently Exercisable Options.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
THE FOLLOWING DESCRIPTION IS NOT COMPLETE AND SHOULD BE READ WITH STAPLES'
CERTIFICATE OF INCORPORATION, AS AMENDED, WHICH IS FILED AS AN EXHIBIT TO THE
REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART.
GENERAL
Staples' certificate of incorporation authorizes it to issue 2,105,000,000
shares, consisting of 2,100,000,000 shares of common stock, par value $0.0006
per share, and 5,000,000 shares of preferred stock, par value $0.01 per share.
Staples may issue its common stock in two series:
- Staples Retail and Delivery Common Stock, which is referred to in this
prospectus as Staples RD stock; and
- Staples.com Common Stock, which is referred to in this prospectus as
Staples.com stock
Staples has initially designated 1,500,000,000 shares of its common stock as
Staples RD stock and 600,000,000 shares of its common stock as Staples.com
stock. Staples may also issue its preferred stock in series. As of February 11,
2000, Staples had 457,188,187 shares of Staples RD stock, 27,446,084 shares of
Staples.com stock and no shares of preferred stock issued and outstanding.
Staples RD's retained interest in Staples.com is currently represented by
200,000,000 shares of Staples.com stock.
Staples intends Staples.com stock to reflect the performance of Staples.com,
Staples' e-commerce business. Staples intends Staples RD stock to reflect the
performance of Staples RD, which consists of Staples' other businesses and a
retained interest in Staples.com. Staples has allocated, for financial reporting
purposes, all of its consolidated assets, liabilities, revenue, expenses and
cash flow between Staples RD and Staples.com. Staples publishes combined
financial statements of Staples RD, combined financial statements of Staples.com
and consolidated financial statements of Staples.
The full definitions of the terms "Staples RD" and "Staples.com" are set
forth under "--Certain Terms" below.
The Staples board of directors has the authority to increase or decrease
from time to time the total number of authorized shares comprising either series
of common stock. However, the Staples 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 Staples 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 Staples board of directors has 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 Staples board of directors has 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
Staples currently intends to retain all of its earnings for use in the
operation and expansion of its business. Staples therefore does not expect to
pay any cash dividends on Staples.com stock in the foreseeable future. Although
Staples' revolving credit agreement currently restricts the payment of cash
dividends, and in any event, Staples does not expect to pay any dividends in the
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foreseeable future on any series of common stock, Staples will otherwise be
permitted to pay dividends on:
- Staples RD 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 RD stock cannot exceed the Available Dividend Amount
for Staples RD; 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 RD in respect of its Retained Interest in Staples.com.
However, the total amounts paid as dividends on Staples.com stock and the
corresponding amounts transferred to Staples RD in respect of its Retained
Interest in Staples.com cannot exceed the Available Dividend Amount for
Staples.com.
THE "AVAILABLE DIVIDEND AMOUNT" for Staples RD at any time is the amount
that would then be legally available for the payment of dividends on Staples RD
stock under Delaware law if:
- Staples RD and Staples.com were each a separate Delaware corporation;
- Staples RD had outstanding (a) a number of shares of common stock, par
value $0.0006 per share, equal to the number of shares of Staples RD 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 RD and are then
outstanding;
- The assumptions about Staples.com set forth in the next sentence were
true; and
- Staples RD owned a number of shares of Staples.com stock equal to the
Number of Shares Issuable with Respect to Staples RD's Retained Interest
in Staples.com.
Similarly, the "AVAILABLE DIVIDEND AMOUNT" for Staples.com at any time is
the amount that would then be legally available for the payment of dividends on
Staples.com stock under Delaware law if:
- Staples RD and Staples.com were each a separate Delaware corporation; and
- Staples.com had 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 RD's Retained Interest in Staples.com 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.com 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:
- the total assets of the corporation less its total liabilities; less
- 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 RD and Staples.com. 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 the Staples RD or the Staples.com business, 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.
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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, Staples has the right to pay dividends on both, one or
neither series of common stock in equal or unequal amounts, notwithstanding the
performance of either the Staples RD or the Staples.com business, 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, but excluding any dividend
payable in shares of Staples.com stock, Staples will credit to Staples RD, and
charge against Staples.com, a corresponding amount in respect of Staples RD's
Retained Interest in Staples.com. Specifically, the corresponding amount will
equal:
- the aggregate amount of such dividend; multiplied by
- a fraction, the numerator of which is the Number of Shares Issuable with
Respect to Staples RD's Retained Interest in Staples.com and the
denominator of which is the number of shares of Staples.com stock then
outstanding.
Upon any dividend payable in shares of Staples.com stock, appropriate
adjustment will be made in the Number of Shares Issuable with Respect to Staples
RD's Retained Interest in Staples.com.
MANDATORY DIVIDEND, REDEMPTION OR EXCHANGE ON DISPOSITION OF ALL OR
SUBSTANTIALLY ALL OF THE ASSETS OF STAPLES.COM
If Staples disposes of All or Substantially All of the Assets of
Staples.com, in one transaction or a series of related transactions, and this
disposition is not an Exempt Disposition as defined below, Staples would be
required, by the 85th trading day after the consummation of this Disposition, to
choose one of the following three alternatives:
- declare and pay a dividend to holders of Staples.com stock, 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 the Disposition;
- redeem from holders of Staples.com stock, 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 the Disposition, all of the outstanding shares of the
Staples.com stock, or, if Staples.com continues after the Disposition to
own any material assets other than the proceeds of the Disposition, a
number of shares of Staples.com 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 Staples RD stock in exchange for all of the outstanding
shares of Staples.com stock at a 10% premium, based on the average Market
Value of the Staples.com stock as compared to the average Market Value of
the Staples RD 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, Staples will credit to Staples RD, and charge against
Staples.com, a corresponding amount in respect of Staples RD's Retained Interest
in Staples.com. Specifically, the corresponding amount will equal:
- the aggregate Fair Value of such dividend or redemption; multiplied by
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- a fraction, the numerator of which is the Number of Shares Issuable with
Respect to Staples RD's Retained Interest in Staples.com 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, Staples will decrease the Number of Shares Issuable with
Respect to Staples RD's Retained Interest in Staples.com by the same proportion
as the proportionate decrease in outstanding shares of Staples.com caused by
such redemption.
At any time within one year after completing any dividend or partial
redemption of the sort referred to above, Staples will have the right to issue
shares of Staples RD stock in exchange for outstanding shares of Staples.com
stock at a 10% premium. The exchange ratio that will result in a 10% premium
will be calculated based on the average Market Value of the Staples.com stock as
compared to the average Market Value of the Staples RD 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
Staples.com stock. In determining whether to effect any such exchange following
such a dividend or partial redemption, Staples would, in addition to other
matters, consider:
- whether the remaining assets of Staples.com continue to constitute a
viable business;
- the number of shares of Staples.com stock remaining issued and
outstanding;
- the per share market price of Staples.com stock; and
- the ongoing cost of continuing to have a separate series of Staples.com
stock outstanding.
CERTAIN TERMS
The following terms used in this document have the meanings specified in
Staples' Restated Certificate of Incorporation, as amended, and are set forth
below:
"ALL OR SUBSTANTIALLY ALL OF THE ASSETS" of Staples.com means a portion of
such assets that represents at least 80% of the then-current Fair Value of the
assets of Staples.com.
"BUSINESS" means either Staples RD or Staples.com.
"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 Business to one or more persons or entities, in one
transaction or a series of related transactions.
"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 Staples board of directors in its sole discretion;
- a Disposition 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 above
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in each case without regard to the voting power or other management or
governance rights associated therewith, of an entity that is primarily
engaged or proposes to engage primarily in one or more businesses
similar or complementary to businesses conducted by Staples.com prior to
the Disposition, as determined by the Staples board of directors in its
sole discretion;
- a dividend out of Staples.com's assets to holders of Staples.com stock and
a transfer of a corresponding amount to Staples RD in respect of its
Retained Interest in Staples.com;
- a dividend out of Staples RD's assets to holders of Staples RD stock; and
- any other Disposition, if:
-- at the time of the Disposition there are no shares of Staples RD
stock outstanding;
-- at the time of the Disposition there are no shares of Staples.com
stock outstanding; or
-- before the 30th Trading Day following the Disposition, Staples has
mailed a notice stating that Staples is exercising its right to
exchange outstanding shares of Staples.com stock for newly issued
shares of Staples RD stock as contemplated under "--Optional Exchange
of Staples RD Stock for Staples.com Stock" below.
"FAIR VALUE" means:
- in the case of cash, the amount thereof;
- in the case of capital stock that has been Publicly Traded for a period of
at least 15 months, the Market Value thereof; and
- in the case of other assets or securities, the fair market value thereof
as the Staples board of directors shall determine in good faith.
Any good faith determination by the Staples board of directors of Fair Value
shall be conclusive and binding on all stockholders.
"MARKET CAPITALIZATION" of Staples RD stock or Staples.com 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 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 to the Staples
certificate of incorporation.
"NET PROCEEDS" of a Disposition of any of the assets of a Business 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 Staples board of directors, which determination will be conclusive and
binding on all stockholders, for:
- any taxes payable by Staples in respect of such Disposition;
- any taxes payable by Staples in respect of any resulting dividend or
redemption;
- any transaction costs, including, without limitation, any legal,
investment banking and accounting fees and expenses; and
- any liabilities, contingent or otherwise, of, attributed to or related to,
such Business, 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,
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any liabilities for future purchase price adjustments and any obligations
with respect to outstanding securities, other than common stock,
attributed to such Business.
"NUMBER OF SHARES ISSUABLE WITH RESPECT TO STAPLES RD'S RETAINED INTEREST IN
STAPLES.COM" on any date means the number of shares of Staples.com stock that
could be issued by Staples for the account of Staples RD on such date.
"PROPORTIONATE INTEREST" of holders of Staples.com stock in the Net Proceeds
of a Staples.com Disposition, or in the outstanding shares of common stock of
any subsidiaries holding Staples.com'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 Shares Deemed Outstanding.
"PUBLICLY TRADED" with respect to any security means a security that is:
- registered under Section 12 of the Securities Exchange Act of 1934, as
amended (the "EXCHANGE ACT"), or any successor provision of law; and
- listed for trading on the New York Stock Exchange, or any other national
securities exchange registered under Section 6 of the Exchange Act, or any
successor provision of law; or
- listed for trading on the Nasdaq National Market, or any successor market
system.
"STAPLES RD" means:
- 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;
- the rights and obligations of Staples RD under any inter-Business debt
deemed to be owed to or by Staples RD, as such rights and obligations are
defined in accordance with policies established from time to time by the
board of directors; and
- a proportionate interest in Staples.com, after giving effect to any
options, preferred stock, other securities or debt issued or incurred by
Staples and attributed to Staples.com, equal to the Retained Interest
Percentage; provided that:
- Staples may reallocate assets from one Business to the other Business
in return for other assets or services rendered by that other business
in the ordinary course of business or in accordance with policies
established by the Staples board of directors from time to time; and
- 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
Disposition, then the Staples board of directors shall reallocate from
Staples.com to Staples RD 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
RD's Retained Interest in Staples.com 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.
"RETAINED INTEREST" means Staples RD's interest in Staples.com, excluding
the interest represented by outstanding shares of Staples.com stock.
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"RETAINED INTEREST PERCENTAGE" means the Number of Shares Issuable with
Respect to Staples RD's Retained Interest in Staples.com divided by the Total
Number of Notional Staples.com Shares Deemed Outstanding.
"STAPLES.COM" means:
- the e-commerce business division of Staples, including all of the
businesses, assets and liabilities of Staples and its subsidiaries that
the Staples board of directors has, as of November 9, 1999, the date on
which the Certificate of Amendment became effective under Delaware law
(the "EFFECTIVE DATE"), allocated to Staples.com;
- 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;
- any businesses, assets or liabilities acquired or incurred by Staples or
any of its subsidiaries after the Effective Date that the Staples board of
directors has specifically allocated to Staples.com or that Staples
otherwise allocates to Staples.com in accordance with policies established
from time to time by the Staples board of directors; and
- the rights and obligations of Staples.com under any inter-Business debt
deemed to be owed to or by Staples.com, as such rights and obligations are
defined in accordance with policies established from time to time by the
Staples board of directors; provided that:
- Staples may reallocate assets from one Business to the other Business
in return for other assets or services rendered by that other Business
in the ordinary course of business or in accordance with policies
established by the Staples board of directors from time to time; and
- 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
Disposition, then the Staples board of directors shall reallocate from
Staples.com to Staples RD 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
RD's Retained Interest in Staples.com 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 SHARES DEEMED OUTSTANDING" means the
number of shares of Staples.com stock outstanding plus the Number of Shares
Issuable with Respect to Staples RD's Retained Interest in Staples.com.
"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 quoted on the Nasdaq National Market or, if such security is not
listed or admitted to trading on a national securities exchange or quoted on the
Nasdaq National Market, traded in the principal over-the-counter market in which
it trades.
OPTIONAL EXCHANGE OF STAPLES RD STOCK FOR STAPLES.COM STOCK
Staples has the right, at any time, to issue shares of Staples RD stock in
exchange for outstanding shares of Staples.com stock at a premium. The premium
is currently 24.166667% and will decline ratably each quarter through November
2002 to 15%.
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Notwithstanding the preceding paragraph, upon the occurrence of a Tax Event,
as defined below, Staples has the right to issue shares of Staples RD stock in
exchange for outstanding shares of Staples.com stock at a 10% premium,
regardless of when such a Tax Event takes place.
The exchange ratio that will result in the specified premium will be
calculated based on the average Market Value of Staples RD 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 Staples mails the notice of exchange to holders of the
outstanding shares being exchanged.
In addition, Staples has 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 Staples RD stock in exchange for outstanding shares of Staples.com
stock on a value for value basis.
The exchange ratio that will result in a value for value exchange will be
based on the average Market Value of Staples.com stock as compared to the
average Market Value of Staples RD stock during the 20 consecutive Trading Day
period ending on, and including, the 5th Trading Day immediately preceding the
date on which Staples mails the notice of exchange to holders of Staples.com
stock.
"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:
- 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 RD stock or Staples.com stock; or
- either Staples RD 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 Staples
mails 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 Staples mails the notice of exchange. If Staples has the right, on the
date on which it mails a notice of exchange as contemplated above, to issue
shares of Staples RD stock in exchange for outstanding shares of Staples.com
stock on a value for value basis as described above, it 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.
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EXCHANGE FOR STOCK OF A SUBSIDIARY AT STAPLES' OPTION
At any time at which all of the assets and liabilities of the business of
Staples.com are held directly or indirectly by one or more wholly owned
subsidiaries of Staples (the "BUSINESS SUBSIDIARIES"), Staples has the right to
deliver to holders of Staples.com stock their Proportionate Interest in all of
the outstanding shares of the common stock of the Business Subsidiaries in
exchange for all of the outstanding shares of Staples.com stock.
- If the Number of Shares Issuable with Respect to Staples RD's Retained
Interest in Staples.com is greater than zero so that less than all of the
shares of common stock of the Business Subsidiaries are being delivered to
the holders of Staples.com stock, Staples may retain the remaining shares
of common stock of the Business Subsidiaries or distribute those shares as
a dividend on Staples RD stock, at its option.
GENERAL DIVIDEND, REDEMPTION AND EXCHANGE PROVISIONS
If Staples completes a disposition of All or Substantially All of the Assets
of a Business, other than an Exempt Disposition, it would be required, not more
than 10 Trading Days after the consummation of such Disposition, to issue a
press release specifying:
- the Net Proceeds of such Disposition;
- the number of shares of Staples.com stock then outstanding;
- the number of shares of Staples.com 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
- the Number of Shares Issuable with Respect to Staples RD's Retained
Interest in Staples.com.
Not more than 40 Trading Days after such consummation, Staples 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 Staples.com" it has
determined to take, and upon making that announcement, that determination would
become irrevocable. In addition, Staples 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 Staples' transfer books.
If Staples determines to pay a special dividend, it would be required to
specify in the notice:
- the record date for such dividend;
- the payment date of such dividend which cannot be more than 85 Trading
Days after such consummation; and
- the aggregate amount and type of property to be paid in such dividend and
the approximate per share amount thereof.
If Staples determines to undertake a redemption, it would be required to
specify in the notice:
- the date of redemption, which cannot be more than 85 Trading Days after
such consummation;
- the aggregate amount and type of property to be paid as a redemption price
and the approximate per share amount thereof;
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- if less than all shares of Staples.com stock are to be redeemed, the
number of shares to be redeemed; and
- the place or places where certificates for shares of Staples.com stock,
properly endorsed or assigned for transfer, unless Staples waives 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 Staples determines to undertake an exchange, it would be required to
specify in the notice:
- the date of exchange, which cannot be more than 85 Trading Days after such
consummation;
- the number of shares of Staples RD stock to be issued in exchange for each
outstanding share of Staples.com stock; and
- the place or places where certificates for shares of Staples.com stock,
properly endorsed or assigned for transfer, unless Staples waives such
requirement, should be surrendered in return for delivery of stock to be
issued by Staples in such exchange.
If Staples determines to complete any exchange described under "--Optional
Exchange of Staples RD Stock for Staples.com Stock" or "--Exchange for Stock of
a Subsidiary at Staples' Option," it 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 Staples.com stock at their addresses as they appear on
its transfer books, specifying:
- the exchange date and the other terms of the exchange; and
- the place or places where certificates for shares of Staples.com stock,
properly endorsed or assigned for transfer, unless Staples waives such
requirement, should be surrendered for delivery of the Staples RD 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 Staples is redeeming less than all of the outstanding shares of
Staples.com stock as described above, it would redeem such shares pro rata or by
lot or by such other method as the Staples board of directors determines to be
equitable.
No holder of shares of Staples.com 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 Staples
specifies, unless it waives such requirement. As soon as practicable after its
receipt of certificates for such shares, Staples 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 Staples.com stock
represented by any one certificate were to be exchanged or redeemed, Staples
would also issue and deliver a new certificate for the shares of Staples.com
stock not exchanged or redeemed.
Staples would not be required to issue or deliver fractional shares of any
capital stock or any other fractional securities to any holder of Staples.com
stock upon any exchange, redemption, dividend or other distribution described
above. If more than one share of Staples.com stock were held at the same time by
the same holder, Staples 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
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any holder, Staples 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 Staples.com 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 Staples.com stock being
exchanged would not be entitled to receive any dividend or other distribution
with respect to shares of Staples RD stock until after the shares being
exchanged are surrendered as contemplated above. Upon such surrender, Staples
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 Staples RD stock
represented by the certificate or certificates issued upon such surrender. From
and after the date set for any exchange, Staples would, however, be entitled to
treat the certificates for shares of Staples.com stock being exchanged that were
not yet surrendered for exchange as evidencing the ownership of the number of
whole shares of Staples RD stock for which the shares of such Staples.com stock
should have been exchanged, notwithstanding the failure to surrender such
certificates.
Staples 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. Staples 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.
Staples 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
Holders of Staples RD stock and Staples.com stock vote together as one class
on all matters as to which common stockholders generally are entitled 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 RD
stock entitles the holder to one vote and each outstanding share of Staples.com
stock entitles the holder to one vote.
When holders of Staples RD 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, which is currently the holders of Staples RD stock, 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 RD 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 would increase or decrease the aggregate number of authorized
shares of such series, 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.
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Staples will set forth the number of outstanding shares of Staples RD stock
and Staples.com stock in its annual and quarterly reports filed pursuant to the
Securities Exchange Act, and will disclose in any proxy statement for a
stockholder meeting the number of outstanding shares and per share voting rights
of Staples RD stock and Staples.com stock.
LIQUIDATION
In the event of Staples' dissolution, liquidation or winding up, whether
voluntary or involuntary, the holders of Staples RD stock and Staples.com stock
will be entitled to receive Staples' 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
Staples' 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
the purpose of these liquidation provisions.
Each share of Staples.com stock will have one liquidation unit. Each share
of Staples RD stock will have a number of liquidation units equal to the
quotient of the average Market Value of a share of Staples RD 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.
After the number of liquidation units to which each share of Staples RD
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
Staples RD stock is entitled, the liquidation rights of the holders of
Staples.com 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. Staples considers that liquidation is a remote contingency.
No holder of Staples.com stock will have any special right to receive
specific assets of the Staples.com business and no holder of Staples RD stock
will have any special right to receive specific assets of the Staples RD
business upon Staples' dissolution, liquidation or winding up.
If Staples subdivides or combines the outstanding shares of either series of
common stock or declares 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 the Staples board of directors, to avoid any
dilution in the relative liquidation rights of any series of common stock.
STAPLES RD'S RETAINED INTEREST IN STAPLES.COM
The number of shares of Staples.com stock that Staples may issue for the
account of Staples RD in respect of its Retained Interest is referred to as the
"NUMBER OF SHARES ISSUABLE WITH RESPECT TO STAPLES RD'S RETAINED INTEREST IN
STAPLES.COM." The Staples board of directors has designated the initial Number
of Shares Issuable with Respect to Staples RD's Retained Interest in Staples.com
to be 200,000,000 shares.
In this prospectus, we call the percentage interest in Staples.com 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 intended to be represented at any time by Staples RD's Retained
Interest in Staples.com the "RETAINED INTEREST
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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 Shares Deemed Outstanding, expressed as a percentage, and
the Retained Interest Percentage equals the Number of Shares Issuable with
Respect to Staples RD's Retained Interest in Staples.com divided by the Total
Number of Notional Staples.com Shares Deemed Outstanding, expressed as a
percentage. The sum of the Outstanding Interest Percentage and the Retained
Interest Percentage always equals 100%.
NUMBER OF SHARES ISSUABLE WITH RESPECT TO STAPLES RD'S RETAINED INTEREST IN
STAPLES.COM
Staples has designated 200,000,000 as the initial Number of Shares Issuable
with Respect to Staples RD's Retained Interest in Staples.com. Staples has
issued a total of 27,446,084 shares of Staples.com stock, including 14,553,776
shares issued upon the exercise of stock options granted to its employees. As of
February 11, 2000, there were options for 10,981,558 shares of Staples.com that
were granted under Staples' 1992 Equity Incentive Plan that had not been
exercised. Staples has attributed the net proceeds of the sale of Staples.com
stock and the exercise of such options to the equity of Staples.com. The
issuance of shares of Staples.com stock upon the exercise of outstanding options
will have no effect on the Number of Shares Issuable with Respect to Staples
RD's Retained Interest in Staples.com.
In this offering, Staples will attribute the net proceeds to the equity of
Staples.com. The issuance of the shares in this offering will have no effect on
the Number of Shares Issuable with Respect to Staples RD's Retained Interest in
Staples.com. Thus, after giving effect to the exercise of all outstanding
options and to this offering:
- there will be shares of Staples.com stock outstanding, or
shares if the underwriters fully exercise their option to purchase
additional shares;
- the Number of Notional Shares of Staples.com stock Issuable with Respect
to Staples RD's Retained Interest in Staples.com will remain at
200,000,000;
- the Number of Notional Shares of Staples.com stock Deemed Outstanding will
be ;
- the Outstanding Interest Percentage will be approximately %, or
approximately % if the underwriters fully exercise their option to
purchase additional shares; and
- the Retained Interest Percentage will be approximately %, or
approximately % if the underwriters fully exercise their option to
purchase additional shares.
Staples may issue additional shares of Staples.com stock in one or more
private or public financings and may grant additional options to purchase shares
of Staples.com stock. The specific terms of the financings, including whether
they are private or public, and of the option grants, the amount of Staples.com
stock issued, and the timing of the financings or option grants, will depend
upon factors such as stock market conditions and the performance of Staples.com.
The effect of those financings and stock option grants on the Retained Interest
Percentage and the Outstanding Interest Percentage would depend upon the number
of shares of Staples.com stock sold and whether Staples elects to attribute the
net proceeds of such financings or option grants to the equity of Staples.com or
to Staples RD in respect of its Retained Interest.
ATTRIBUTION OF ISSUANCES OF STAPLES.COM STOCK. Whenever Staples decides to
issue shares of Staples.com stock, or options therefor, it would determine, in
its sole discretion, whether to attribute that issuance, and the proceeds
thereof, to Staples RD in respect of its Retained Interest in Staples.com in a
manner analogous to a secondary offering of common stock of a subsidiary owned
by a corporate parent or to Staples.com in a manner analogous to a primary
offering of common stock. If Staples issues any shares of Staples.com stock and
attributes that issuance, and the proceeds thereof, to Staples RD in respect of
its Retained Interest in Staples.com, the Number
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of Shares Issuable with Respect to Staples RD's Retained Interest in Staples.com
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 Shares Deemed Outstanding would remain unchanged,
the Retained Interest Percentage would be reduced and the Outstanding Interest
Percentage would be correspondingly increased. If Staples instead attributes
that issuance, and the proceeds thereof, to Staples.com, the Number of Shares
Issuable with Respect to Staples RD's Retained Interest in Staples.com would
remain unchanged, the number of outstanding shares of Staples.com stock and the
Total Number of Notional Staples.com 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 RD
STOCK. Staples reserves the right to issue shares of Staples.com stock as a
distribution on Staples RD stock, although it does not currently intend to do
so. If it did so, Staples would attribute that distribution to Staples RD in
respect of its Retained Interest in Staples.com. As a result, the Number of
Shares Issuable with Respect to Staples RD's Retained Interest in Staples.com
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 Shares Deemed Outstanding would remain
unchanged, the Retained Interest Percentage would be reduced and the Outstanding
Interest Percentage would be correspondingly increased. If instead Staples
issued shares of Staples.com stock as a distribution on Staples.com stock, it
would attribute that distribution to Staples.com, in which case it would
proportionately increase the Number of Shares Issuable with Respect to Staples
RD's Retained Interest in Staples.com. As a result, the Number of Shares
Issuable with Respect to Staples RD's Retained Interest in Staples.com and the
Total Number of Notional Staples.com 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, but excluding any dividend payable in Staples.com stock, Staples
will credit to Staples RD, and charge against Staples.com, a corresponding
amount in respect of Staples RD's Retained Interest in Staples.com.
Specifically, the corresponding amount will equal:
- the aggregate amount of such dividend; multiplied by
- a fraction, the numerator of which is the Number of Shares Issuable with
Respect to Staples RD's Retained Interest in Staples.com and the
denominator of which is the number of shares of Staples.com stock then
outstanding.
REPURCHASES OF STAPLES.COM STOCK. If Staples decides to repurchase shares
of Staples.com stock, it would determine, in its sole discretion, whether to
attribute that repurchase, and the cost thereof, to Staples RD in a manner
analogous to a purchase of common stock of a subsidiary by a corporate parent or
to Staples.com in a manner analogous to an issuer repurchase. If Staples
repurchases shares of Staples.com stock and attributes that repurchase, and the
cost thereof, to Staples RD, the Number of Shares Issuable with Respect to
Staples RD's Retained Interest in Staples.com 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
Shares Deemed Outstanding would remain unchanged, the Retained Interest
Percentage would be increased and the Outstanding Interest Percentage would be
correspondingly decreased. If Staples instead attributes that repurchase, and
the cost thereof, to
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Staples.com, the Number of Shares Issuable with Respect to Staples RD's Retained
Interest in Staples.com would remain unchanged, the number of outstanding shares
of Staples.com stock and the Total Number of Notional Staples.com 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 RD AND
STAPLES.COM. Staples may, in its sole discretion, determine to transfer cash or
other property of Staples.com to Staples RD in return for a decrease in Staples
RD's Retained Interest in Staples.com in a manner analogous to a return of
capital or to transfer cash or other property of Staples RD to Staples.com in
return for an increase in Staples RD's Retained Interest in Staples.com in a
manner analogous to a capital contribution. If Staples determines to transfer
cash or other property of Staples.com to Staples RD in return for a decrease in
Staples RD's Retained Interest in Staples.com, the Number of Shares Issuable
with Respect to Staples RD's Retained Interest in Staples.com and the Total
Number of Notional Staples.com 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 Staples instead determines to
transfer cash or other property of Staples RD to Staples.com in return for an
increase in Staples RD's Retained Interest in Staples.com, the Number of Shares
Issuable with Respect to Staples RD's Retained Interest in Staples.com and the
Total Number of Notional Staples.com 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.
Staples may not attribute issuances of Staples.com stock to Staples RD,
transfer cash or other property of Staples.com to Staples RD in return for a
decrease in its Retained Interest in Staples.com or take any other action to the
extent that doing so would cause the Number of Shares Issuable with Respect to
Staples RD's Retained Interest in Staples.com 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 RD's Retained Interest in Staples.com and the Total Number of
Notional Staples.com Shares Deemed Outstanding after giving effect to certain
hypothetical dividends, issuances, repurchases and transfers, see Annex I--
"Illustration 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
Staples.com," "--Optional Exchange of Staples RD Stock for Staples.com Stock,"
"--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 Staples RD stock and Staples.com stock
outstanding.
DETERMINATIONS BY THE STAPLES BOARD OF DIRECTORS
Staples' certificate of incorporation provides that, subject to applicable
law, any determinations made by the Staples board of directors in good faith
under Staples' certificate of incorporation or in
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any certificate of designation filed pursuant thereto would be final and binding
on all stockholders of Staples.
The Staples board of directors has established a business advisory board,
comprised of individuals who are not directors, officers or employees of
Staples. The business advisory board's members were appointed by the Staples
board of directors or its chairman and serve as consultants to Staples.com with
respect to its business and not as a governing body.
The Staples board of directors has established a subcommittee of the board
of directors known as the conflict resolution committee to address and resolve,
at the request of the Staples board of directors, any business issues concerning
the relationship between Staples RD and Staples.com. The current members of the
conflict resolution committee are Basil L. Anderson, George J. Mitchell and
James L. Moody, Jr.
PREEMPTIVE RIGHTS
Holders of Staples.com stock do not have any preemptive rights to subscribe
for any additional shares of capital stock or securities that Staples may issue
in the future.
CERTAIN OTHER PROVISIONS OF STAPLES' CERTIFICATE OF INCORPORATION, BY-LAWS AND
DELAWARE LAW
PREFERRED STOCK
Staples may issue preferred stock from time to time in one or more series
and its board of directors, without further approval of the Staples
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 Staples 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 Staples' 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, Staples 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 Staples' 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 Staples' 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 Staples' common stock.
Such percentages may, in the Staples 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 Staples' 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 Staples 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 Staples'
outstanding common stock held by a 20% or more stockholder, each right not owned
by a 20% or
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more stockholder will enable its holder to purchase that number of shares of
Staples' common stock which equals the exercise price of the right divided by
one-half of the current market price of our common stock at the date of the
occurrence of the event. In addition, if Staples is involved in a merger or
other business combination transaction with another person or group in which it
is not the surviving corporation or in connection with which its common stock is
changed or converted, or it sells or transfers 50% or more of its 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. Staples will generally be entitled to redeem the rights
at $0.02 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 Staples on
terms not approved by the Staples 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 Staples board of directors since the rights may be redeemed by
Staples at $0.02 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 Staples' common stock.
The rights attach to Staples RD stock, and all terms of the rights relating
to Staples' existing common stock relate to Staples RD stock. Staples may in the
future decide to adopt a Rights Plan covering Staples.com stock.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
Staples is 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.
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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.
Staples' certificate of incorporation requires that holders of two-thirds of
its issued and outstanding stock entitled to vote approve any merger,
consolidation, dissolution or sale of all or substantially all of its assets.
The Staples board of directors is divided into three classes of
approximately equal size, one of which is elected each year. Staples'
certificate of incorporation requires all stockholder action to occur at a
meeting and prohibits stockholder action by written consent. Staples' by-laws
provide that special meetings of stockholders may be called only by the Chairman
of the Staples board of directors or the President.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Staples' certificate of incorporation and by-laws 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.
Staples believes that these provisions are necessary to attract and retain
qualified persons as directors and officers.
STOCK TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services, L.L.C. is the registrar and transfer agent
for Staples RD stock and Staples.com stock.
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CERTAIN CASH MANAGEMENT AND ALLOCATION POLICIES
CASH MANAGEMENT AND ALLOCATION POLICIES
In order to prepare separate financial statements for Staples RD and
Staples.com, Staples has allocated, for financial reporting purposes, all of its
consolidated assets, liabilities, revenue, expenses and cash flow between
Staples RD and Staples.com. Thus, the financial statements of Staples RD and
Staples.com, taken together, comprise all of the accounts included in the
corresponding financial statements of Staples.
The financial statements of Staples RD and Staples.com reflect the
application of cash management and allocation policies adopted by the Staples
board of directors. These policies are summarized below. The Staples 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
Staples board of directors to modify, rescind or add to any of these policies
would, however, be subject to the Staples board of directors' general fiduciary
duties.
Even though Staples has allocated all of its consolidated assets,
liabilities, revenue, expenses and cash flow between Staples RD and Staples.com,
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.com stock will be common stockholders of Staples and will be subject to
risks associated with an investment in Staples as a whole".
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 generally remits its cash receipts to
Staples RD, but is not obligated to do so, and Staples RD generally funds
Staples.com's cash disbursements on a regular basis, but is not obligated to do
so.
In the combined financial statements of Staples RD and combined financial
statements of Staples.com:
- all equity transactions, and the proceeds thereof, were attributed to
Staples RD;
- whenever Staples.com held cash, that cash was transferred to Staples RD
and accounted for as an inter-business revolving credit advance; and
- whenever Staples.com had a cash need, that cash need was funded by Staples
RD and accounted for as an inter-business revolving credit advance. The
inter-business revolving credit arrangement bears interest at a rate at
which Staples' 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. The Staples board of directors,
at its sole discretion, may elect an alternative financing mechanism
between Staples RD and Staples.com based upon the facts and circumstances.
Staples' board of directors has adopted the following additional policies
related to the Staples.com stock:
- Staples will attribute each future incurrence or issuance of external debt
or preferred stock, and the proceeds thereof, to Staples RD, unless the
Staples board of directors determines otherwise. The Staples 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 to
the extent that Staples incurs or issues the debt or preferred stock for
the benefit of Staples.com.
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- Staples will attribute each future issuance of Staples RD stock, and the
proceeds thereof, to Staples RD. Staples may attribute any future issuance
of Staples.com stock, and the proceeds thereof, to Staples RD in respect
of its Retained Interest in Staples.com, in a manner analogous to a
secondary offering of common stock of a subsidiary owned by a corporate
parent, or to Staples.com, in a manner analogous to a primary offering of
common stock. Dividends on and repurchases of Staples RD stock will be
charged against Staples RD, and dividends on and repurchases of
Staples.com stock will be charged against Staples.com. In addition, at the
time of any dividend on Staples.com stock, Staples will credit to Staples
RD, and charge against Staples.com, a corresponding amount in respect of
Staples RD's Retained Interest in Staples.com. See "Description of Capital
Stock".
- Whenever Staples.com holds cash, Staples.com will normally transfer that
cash to Staples RD. Conversely, whenever Staples.com has a cash need,
Staples RD will normally fund that cash need. However, the Staples board
of directors will determine, in its sole discretion, whether to provide
any particular funds to either business and will not be obligated to do
so.
- Staples will account for all cash transfers from one business to or for
the account of the other business (other than transfers in return for
assets or services rendered or transfers in respect of Staples RD's
Retained Interest that correspond to dividends paid on Staples.com stock),
as inter-business revolving credit advances unless:
-- the Staples board of directors determines that a given transfer, or
type of transfer, should be accounted for as a long-term loan;
-- the Staples board of directors determines that a given transfer, or
type of transfer, should be accounted for as a capital contribution
increasing Staples RD's Retained Interest in Staples.com; or
-- the Staples board of directors determines that a given transfer, or
type of transfer, should be accounted for as a return of capital
reducing Staples RD's Retained Interest in Staples.com.
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-business revolving credit advance. The
Staples 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
Staples board of directors would consider include:
-- the current and projected capital structure of each business;
-- the relative levels of internally generated funds of each business;
-- the financing needs and objectives of the recipient business;
-- the investment objectives of the transferring business;
-- the availability, cost and time associated with alternative financing
sources; and
-- prevailing interest rates and general economic conditions.
- Any cash transfer accounted for as an inter-business revolving credit
advance will bear interest at the rate at which the Staples 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 Staples board of directors, in its sole discretion, determines Staples
could borrow such funds.
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- Any cash transfer from Staples RD to Staples.com, or for Staples.com's
account, accounted for as a capital contribution will correspondingly
increase Staples.com's division equity and Staples RD's Retained Interest
in Staples.com. As a result, the Number of Shares Issuable with Respect to
Staples RD's Retained Interest in Staples.com 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 to Staples RD, or for Staples RD's
account, accounted for as a return of capital will correspondingly reduce
Staples.com's division equity and Staples RD's Retained Interest in
Staples.com. As a result, the Number of Shares Issuable with Respect to
Staples RD's Retained Interest in Staples.com will decrease by the amount
of such return of capital divided by the Market Value of Staples.com stock
on the date of transfer.
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 and the good faith judgment of
the Staples board of directors or Staples' 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 RD or Staples.com. 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. For
example, for printed advertisements and commercials that include both Staples RD
and Staples.com, we currently reimburse 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.
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 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 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 company basis.
CARRYING CHARGE
Staples RD sells inventory to Staples.com for resale. The cost per inventory
unit purchased by Staples.com equals Staples RD's product cost. Staples RD
maintains inventory to support Staples.com's inventory needs and the processing
of receivables for Staples.com. Staples RD charges Staples.com a carrying charge
for use of their capital for these purposes as determined by the Staples board
of directors. The carrying charge is reflected in Staples.com's financial
statements as part of operating and selling expenses and in Staples RD's
financial statements as a
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credit to operating and selling expenses. This charge is calculated based on the
amount of receivables and inventory that Staples RD is required to carry for
Staples.com. In addition, inventory, shrink, obsolescence and other inventory
costs are allocated to Staples.com based on Staples.com's share of such costs.
The Staples board of directors may, in its sole discretion, change the carrying
charge charged to Staples.com as it deems appropriate in light of the
circumstances from time to time.
EMPLOYEE BENEFITS
Staples RD and Staples.com 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 RD and Staples.com or such
other basis as Staples' management believes to be an equitable and reasonable
estimate of such costs.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of certain United States federal
income tax considerations relevant to an investment in Staples.com stock. This
discussion is based on the provisions of the Internal Revenue Code of 1986,
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.com stock or the Treasury Department
could issue regulations or other guidance that change current law, including,
without limitation, regulations issued under the broad grant of authority under
Section 337(d) of the Internal Revenue Code, that affect the treatment of
tracking stock, including Staples.com stock. Any future legislation, regulations
or other guidance could apply retroactively. See "Clinton Administration
Proposals" below.
This discussion addresses only those of you who would hold Staples.com stock
as a capital asset and did not acquire your shares in a compensatory
transaction, including the exercise of warrants and 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.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.
Because United States tax consequences may differ from one holder to the
next, the discussion set out below does not purport to describe all of the tax
considerations that may be relevant to you in light of your particular
situation. In addition, the discussion below does not address matters of state,
local or foreign tax law. Accordingly, you are advised to consult your own tax
advisor as to the United States federal, state, local and other tax consequences
of investing in Staples.com stock.
TREATMENT OF STAPLES.COM STOCK
We believe that Staples.com stock will be treated as common stock of Staples
for United States federal income tax purposes. Accordingly, we believe that
neither we nor you will recognize any income, gain or loss for United States
federal income tax purposes as a result of the issuance of Staples.com stock.
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.com stock. Therefore, the tax treatment of the tracking stock is subject
to some uncertainty under current law.
It is possible that the Internal Revenue Service could assert successfully
that the issuance of Staples.com stock as well as a subsequent conversion or
exchange of Staples.com stock could be taxable to you and to us. Once again, you
should consult your own tax advisor.
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CLINTON ADMINISTRATION PROPOSALS
A proposal by the Clinton Administration in February 1999 would impose a
corporate level tax on the issuance of stock similar to Staples.com stock. It
would also permit the Treasury Department 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 Internal Revenue Code in certain
transactions. The Clinton Administration's Fiscal Year 2001 Budget Proposal,
issued in February 2000, contains similar provisions. As proposed by the Clinton
Administration, these provisions would be effective for tracking stock issued on
or after the date of enactment by Congress. Tax legislation enacted by Congress
subsequent to the Clinton Administration proposals has not included any
provisions corresponding to the proposals. However, we cannot predict whether
either of the Clinton Administration proposals will be enacted by Congress and,
if enacted, whether they will be in the form proposed. If either of the Clinton
Administration proposals or a similar proposal is enacted, then we could be
subject to tax on an issuance of Staples.com stock on or after the date of
enactment.
EXCHANGE OF STOCK
We may issue shares of Staples RD stock in exchange for outstanding shares
of another series under certain circumstances and, in certain cases, at a
premium. See "Description of Capital Stock--Optional Exchange of Staples RD
Stock for Staples.com Stock". Under current law, such an exchange should qualify
as a tax-free recapitalization, such that no gain or loss will be recognized by
us or by holders of the stock to be exchanged. However, as noted above, if
either of the Clinton Administration proposals or a similar proposal is enacted,
then you could be subject to tax on such an exchange.
We have the right, at any time, to exchange stock of one or more wholly
owned subsidiaries of Staples for Staples.com stock so long as all of the assets
and liabilities of Staples.com are held directly or indirectly by such
subsidiaries. See "Description of Capital Stock--Exchange for Stock of a
Subsidiary at Staples' Option". Depending on the circumstances at the time, such
an exchange could be taxable to holders of Staples.com stock and to Staples.
BACKUP WITHHOLDING
Certain non-corporate holders of Staples.com 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:
- fails to furnish its taxpayer identification number, or TIN, which, for
an individual, would be his or her social security number;
- furnishes an incorrect TIN;
- is notified by the Internal Revenue Service that it has failed to
properly report payments of interest or dividends; or
- under certain circumstances, fails to certify under penalties of
perjury that it has furnished a correct TIN and that it has not 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.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for Staples.com
stock. Sales of significant amounts of Staples.com stock in the public market,
or the perception that such sales may occur, could adversely affect the market
prices of Staples.com stock.
Upon completion of this offering, we expect to have shares of
Staples.com stock outstanding, or shares if the underwriters fully
exercise their option to purchase additional shares. Of these shares, the
shares to be sold in this offering will be freely tradable without restriction,
except that any shares purchased by "affiliates" of Staples, as that term is
defined in Rule 144 of the Securities Act, may generally only be sold in
compliance with the limitations of Rule 144 described below.
Upon completion of this offering and assuming the underwriters do not
exercise their option to purchase additional shares, Staples will be entitled to
issue up to approximately additional shares of Staples.com stock, of which
up to 200,000,000 shares could be for the account of Staples RD in respect of
Staples RD's retained interest in Staples.com.
Of the 27,446,084 shares of Staples.com stock that are currently
outstanding, 12,892,308 shares were issued and sold by Staples on or after
November 9, 1999 in reliance on exemptions from the registration requirements of
the Securities Act and are deemed to be "restricted securities" within the
meaning of the Securities Act. The remaining 14,553,776 shares were issued upon
the exercise of employee stock options and are registered under the Securities
Act. Those shares will be freely saleable in the public market following this
offering, subject to vesting requirements and the lock up restrictions described
below.
Restricted securities may be sold in the public market only if they are
registered or if they qualify for an exemption from registration under Rule 144
under the Securities Act. In general, under Rule 144 as currently in effect, a
person (or persons whose shares are aggregated), including an affiliate of
Staples, who beneficially owns restricted securities may not sell those
securities until they have been beneficially owned for at least one year.
Thereafter, the person would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of:
- 1% of the number of shares of Staples.com stock then outstanding (which
will equal approximately shares immediately after this offering); or
- the average weekly trading volume of Staples.com stock on the Nasdaq
National Market during the four calendar weeks preceding the filing with
the SEC of a notice on the SEC's Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain other requirements
regarding the manner of sale, notice and availability of current public
information about Staples.
Under Rule 144(k), a person who is not, and has not been at any time during
the 90 days preceding a sale, an affiliate of Staples and who has beneficially
owned the shares proposed to be sold for at least two years (including the
holding period of any prior owner, except and affiliate) is entitled to sell
such shares without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144.
Staples' employees have the right to purchase 10,981,558 shares of
Staples.com stock under currently outstanding employee stock options, subject to
vesting requirements. Staples has filed a registration statement under the
Securities Act to register all shares issuable on exercise of stock options
granted or to be granted under the Staples.com stock option plan. Subject to the
vesting requirements, these shares will be freely saleable in the public market
immediately following exercise of these options.
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After this offering, the holders of approximately 11,792,308 shares of
Staples.com will be entitled to rights with respect to the registration of these
shares under the Securities Act. If Staples proposes to register any shares of
Staples.com stock under the Securities Act, either for its own account or for
the account of other security holders exercising registration rights, these
holders are entitled to notice of such registration and are entitled to include
shares of Staples.com stock in such registration. Additionally, they are
entitled to demand registration rights pursuant to which they may require
Staples on up to three occasions to file a registration statement under the
Securities Act at its expense. Staples is required to use its reasonable best
efforts to effect any such registration. These registration rights are subject
to the right of the underwriters of an offering to limit the number of shares
including in such registration and Staples' right not to effect a requested
registration within 180 days following this offering. Further, these holders may
require Staples to file registration statements on Form S-3 at its expense.
Under "lock-up" agreements with the underwriters, all executive officers and
directors of Staples, all senior officers of Staples.com and certain holders of
Staples.com stock who collectively hold (or have options to acquire, subject to
vesting requirements) an aggregate of shares of Staples.com stock, have
agreed not to offer, sell, contract to sell, pledge, grant any option to
purchase, make any short sale or otherwise dispose of any shares of Staples.com
stock, or any securities convertible into, exchangeable for or that represent
the right to receive shares of Staples.com stock, for a period of 180 days from
the date of this prospectus without the prior consent of the representatives of
the underwriters. Staples also will agree with the underwriters that, without
the prior consent of the representatives of the underwriters, Staples will not
offer, sell, contract to sell or otherwise dispose of Staples.com stock or any
securities of Staples that are substantially similar to Staples.com stock,
including any securities of Staples that are convertible into or exchangeable
for, or represent the right to receive, Staples.com stock for a period of
180 days from the date of this prospectus, other than pursuant to employee stock
option plans existing on or upon the conversion or exchange or convertible or
exchangeable securities outstanding as of, the date of this prospectus.
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UNDERWRITING
Staples and the underwriters for the offering named below have entered into
an underwriting agreement with respect to the shares being offered. Subject to
certain conditions, each underwriter has severally agreed to purchase the number
of shares indicated in the following table. Goldman, Sachs & Co., Morgan Stanley
& Co. Incorporated, FleetBoston Robertson Stephens Inc., Deutsche Bank
Securities, Inc. and SoundView Technology Group, Inc. are the representatives of
the underwriters.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ------
<S> <C>
Goldman, Sachs & Co.........................................
Morgan Stanley & Co. Incorporated...........................
FleetBoston Robertson Stephens Inc..........................
Deutsche Bank Securities, Inc...............................
SoundView Technology Group, Inc.............................
-----------
Total.....................................................
===========
</TABLE>
------------------
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
shares from Staples to cover such sales. They may exercise that option for
30 days. If any shares are purchased pursuant to this option, the underwriters
will severally purchase shares in approximately the same proportion as set forth
in the table above.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by Staples. Such amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
Paid by Staples
---------------
No Exercise Full Exercise
------------ -------------
<S> <C> <C>
Per Share...................................... $ $
Total.......................................... $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per share from
the initial public offering price. If all the shares are not sold at the initial
public offering price, the representatives may change the offering price and the
other selling terms.
Staples and the executive officers and directors of Staples, the senior
officers of Staples.com and certain holders of Staples.com stock have agreed
with the underwriters not to dispose of or hedge any of their Staples.com stock
or securities convertible into or exchangeable for shares of Staples.com stock
during the period from the date of this prospectus continuing through the date
180 days after the date of this prospectus, except with the prior written
consent of the
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representatives. This agreement does not apply to any existing employee benefit
plans. See "Shares Eligible for Future Sale" for a discussion of transfer
restrictions.
Prior to this offering, there has been no public market for the shares. The
initial public offering price will be negotiated among Staples and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares in addition to prevailing market conditions,
will be the historical performance of both Staples and Staples.com, estimates of
the business potential and earnings prospects of Staples and Staples.com, as
assessment of the management of Staples and Staples.com, and the consideration
of the above factors in relation to market valuation of companies in related
businesses.
Staples.com stock will be quoted on the Nasdaq National Market under the
symbol "SDOT".
In connection with the offering, the underwriters may purchase and sell
shares of Staples.com stock in the open market. These transactions may include
short sales, stabilizing transactions and purchases to cover positions created
by short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of Staples.com stock while
the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of Staples.com stock. As a result, the price of
Staples.com stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
Staples estimates that its share of the total expenses of this offering,
excluding underwriting discounts and commissions, will be approximately
$ million. These expenses will be allocated to Staples.com.
Staples has agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act.
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VALIDITY OF STAPLES.COM STOCK
The validity of Staples.com stock offered by this prospectus will be passed
upon for Staples by Hale and Dorr LLP, Boston, Massachusetts, and for the
underwriters by Sullivan & Cromwell, New York, New York.
EXPERTS
Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements of Staples, Inc. at January 30, 1999 and January 31, 1998,
and for each of the three years in the period ended January 30, 1999, as set
forth in their report. As to the years 1996 and 1997, Ernst & Young LLP's report
is based in part on the report of Kupferberg, Goldberg, & Neimark, LLC,
independent auditors. Ernst & Young LLP have also audited the combined financial
statements of Staples.com at January 30, 1999 and January 31, 1998 and for each
of the three years in the period ended January 30, 1999, as set forth in their
report. We have incorporated by reference the consolidated financial statements
of Staples, Inc. and included the combined financial statements of Staples.com
in the prospectus and elsewhere in the registration statement in reliance on
such firms' reports, given on the authority of such firms as experts in
accounting and auditing.
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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 RD's Retained Interest in Staples.com 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 RD's Retained Interest in Staples.com 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 prospectus. 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
this prospectus. Actual calculations may be slightly different due to rounding.
"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 RD's Retained Interest in Staples.com.
At any given time, the percentage interest in Staples.com 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 intended to be represented
by Staples RD's Retained Interest in Staples.com (I.E., the RETAINED INTEREST
PERCENTAGE) is equal to:
NUMBER OF SHARES ISSUABLE WITH RESPECT TO STAPLES RD'S
________________RETAINED INTEREST IN STAPLES.COM________________
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 RD's Retained Interest in Staples.com 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%.
THE OFFERING
The following illustrations reflect an assumed issuance by Staples of 15
shares of Staples.com stock in this offering.
Assume the issuance is attributed to Staples.com as an increase in its
equity, with the net proceeds credited solely to Staples.com.
<TABLE>
<S> <C>
Shares of Staples.com stock previously issued and
outstanding............................................... 0
Newly issued shares for account of Staples.com.............. 15
--
Total shares of Staples.com stock issued and outstanding
after the issuance..................................... 15
==
</TABLE>
I-1
<PAGE>
- The Number of Shares Issuable with Respect to Staples RD's Retained
Interest in Staples.com (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 RD
would be credited, and Staples.com would be charged, with an amount equal
to approximately 667% (representing the ratio of the Number of Shares
Issuable with Respect to Staples RD's Retained Interest in Staples.com
(100) to the total number of shares of Staples.com stock issued and
outstanding following the offering (15)) of the aggregate amount of such
dividend or distribution.
ADDITIONAL OFFERINGS OF STAPLES.COM
The following illustrations reflect an assumed issuance of an additional 15
shares of Staples.com stock after the assumed initial issuance of 15 shares for
the account of Staples RD.
ADDITIONAL OFFERING FOR ACCOUNT OF STAPLES RD
Assume the issuance is attributed to Staples RD in respect of its Retained
Interest, with the net proceeds credited solely to Staples RD.
<TABLE>
<S> <C>
Shares of Staples.com previously issued and outstanding..... 15
Newly issued shares of Staples.com stock for account of
Staples RD................................................ 15
--
Total shares of Staples.com stock issued and outstanding
after additional offering.............................. 30
==
</TABLE>
- The Number of Shares Issuable with Respect to Staples RD's Retained
Interest in Staples.com would decrease by the number of shares of
Staples.com stock issued for the account of Staples RD.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to Staples RD's
Retained Interest in Staples.com prior to the additional
offering.................................................. 85
Newly issued shares of Staples.com stock for account of
Staples RD................................................ 15
--
Number of Shares Issuable with Respect to Staples RD's
Retained interest in Staples after the additional
offering............................................... 70
==
</TABLE>
- As a result, the total issued and outstanding shares of Staples.com stock
(30) would in the aggregate represent an Outstanding Interest Percentage
of 30% calculated as follows:
30
--------------
30 + 70
The Retained Interest Percentage would accordingly be reduced to 70%.
- In this case, in the event of any dividend or other distribution paid on
Staples.com stock (other than a dividend or other distribution payable in
shares of Staples.com stock), Staples RD would be credited, and
Staples.com would be charged, with an amount equal to 233%
I-2
<PAGE>
(representing the ratio of the Number of Shares Issuable with Respect to
Staple RD's Retained Interest in Staples.com (70) to the number of shares
of Staples.com stock issued and outstanding following the additional
offering (30)) of the aggregate amount of such dividend or distribution.
ADDITIONAL OFFERING FOR ACCOUNT OF STAPLES.COM
Assume the issuance is attributed to Staples.com as an increase in its
equity, with the net proceeds credited solely to Staples.com.
<TABLE>
<S> <C>
Shares of Staples.com stock previously issued and
outstanding............................................... 15
Newly issued shares of Staples.com stock for account of
Staples.com............................................... 15
--
Total shares of Staples.com stock issued and outstanding
after additional offering.............................. 30
==
</TABLE>
- The Number of Shares Issuable with Respect to Staples RD's Retained
Interest in Staples.com (85) would remain unchanged.
- As a result, the total issued and outstanding shares (30) would in the
aggregate represent an Outstanding Interest Percentage of approximately
26%, calculated as follows:
30
--------------
30 + 85
The Retained Interest Percentage would accordingly be reduced to
approximately 74%.
- In this case, in the event of any dividend or other distribution paid on
Staples.com stock (other than a dividend or other distribution payable in
shares of Staples.com stock), Staples RD would be credited, and
Staples.com would be charged, with an amount equal to 283% (representing
the ratio of the Number of Shares Issuable with Respect to Staples RD's
Retained Interest in Staples.com (85) to the total number of shares of
Staples.com stock issued and outstanding following the additional offering
(30)) of the aggregate amount of such dividend or distribution.
OFFERINGS OF OPTIONS AND CONVERTIBLE SECURITIES
If Staples 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 "Additional Offering for Account of Staples RD",
if such options or securities were attributed to Staples RD, or under
"Additional Offering for Account of Staples.com", if such options or securities
were attributed to Staples.com.
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 RD.
I-3
<PAGE>
REPURCHASE FOR THE ACCOUNT OF STAPLES RD
Assume the repurchase is attributed to Staples RD as an increase in its
Retained Interest in Staples.com, with the cost charged solely against Staples
RD.
<TABLE>
<S> <C>
Shares of Staples.com stock previously issued and
outstanding............................................... 15
Shares of Staples.com stock repurchased for account of
Staples RD................................................ 5
--
Total shares of Staples.com stock issued and outstanding
after repurchase....................................... 10
==
</TABLE>
- The Number of Shares Issuable with Respect to Staples RD's Retained
Interest in Staples.com would be increased by the number of any shares of
Staples.com stock repurchased for the account of Staples RD.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to Staples RD's
Retained Interest in Staples.com prior to repurchase...... 85
Number of shares of Staples.com stock repurchased for the
account of Staples RD..................................... 5
--
Number of Shares Issuable with Respect to Staples RD's
Retained Interest in Staples.com after repurchase...... 90
==
</TABLE>
- As a result, the total issued and outstanding shares of Staples.com stock
(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 WITHOUT PARTICIPATION BY STAPLES RD
Assume the repurchase is attributed to Staples.com, with the cost being
charged solely against Staples.com. Further assume that the Staples board of
directors does not elect to transfer assets from Staples.com to Staples RD to
hold constant the Outstanding Interest Percentage and Retained Interest
Percentage.
<TABLE>
<S> <C>
Shares of Staples.com stock previously issued and
outstanding............................................... 15
Shares of Staples.com stock repurchased for account of
Staples.com............................................... 5
--
Total shares of Staples.com stock issued and outstanding
after repurchase....................................... 10
==
</TABLE>
- The Number of Shares Issuable with Respect to Staples RD's Retained
Interest in Staples.com (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 WITH PARTICIPATION BY STAPLES RD
Assume the repurchase is attributed to Staples.com, with the cost being
charged solely against Staples.com. Further assume that the repurchase is made
in connection with a tender offer for 5, or
I-4
<PAGE>
33%, of the then outstanding shares of Staples.com stock at a price of $20 per
share, and that the Staples board of directors elects to transfer cash or other
assets from Staples.com to Staples RD to hold constant the Outstanding Interest
Percentage and the Retained Interest Percentage.
<TABLE>
<S> <C>
Shares of Staples.com stock previously issued and
outstanding............................................... 15
Shares of Staples.com stock repurchased for account of
Staples.com............................................... 5
--
Total shares of Staples.com stock issued and outstanding
after repurchase....................................... 10
==
</TABLE>
- In order to hold constant the Outstanding Interest Percentage and Retained
Interest Percentage, the Staples 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 to Staples RD an amount of cash or other assets
equal to approximately 567% (representing the ratio of the Number of
Shares Issuable with Respect to Staples RD's Retained Interest in
Staples.com (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 RD's
Retained Interest in Staples.com (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 RD's
Retained Interest in Staples.com prior to transfer........ 85
Adjustment in respect of Staples RD's Retained Interest in
Staples.com to reflect transfer to Staples RD of funds
previously allocated to Staples.com....................... 28
--
Number of Shares Issuable with Respect to Staples RD's
Retained Interest in Staples.com 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%.
- Assuming that the Staples board of directors transferred only half of the
$567 amount, or $283.50, from Staples.com to Staples RD, the Number of
Shares of Staples.com stock Issuable with Respect to Staples RD's Retained
Interest in Staples.com (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 RD's
Retained Interest in Staples.com prior to transfer........ 85
Adjustment in respect of Staples RD's Retained Interest in
Staples.com to reflect transfer to Staples RD of funds
previously allocated to Staples.com....................... 14
--
Number of Shares Issuable with Respect to Staples RD's
Retained Interest in Staples.com after transfer........ 71
==
</TABLE>
I-5
<PAGE>
- As a result, the total issued and outstanding shares of Staples.com stock
(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 RD 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 RD.
STAPLES.COM STOCK DIVIDEND ON STAPLES RD STOCK
Assume 500 shares of Staples RD stock are outstanding and Staples declares a
dividend of 1/10 of a share of Staples.com stock on each outstanding share of
Staples RD stock.
<TABLE>
<S> <C>
Shares of Staples.com stock previously issued and
outstanding............................................... 15
Newly issued shares of Staples.com stock for account of
Staples RD................................................ 50
--
Total of Staples.com stock issued and outstanding after
dividend............................................... 65
==
</TABLE>
- Any dividend of shares of Staples.com stock to the holders of shares of
Staples RD stock would be treated as a reduction in the Number of Shares
Issuable with Respect to Staples RD's Retained Interest in Staples.com.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to Staples RD's
Retained Interest in Staples.com prior to dividend........ 85
Number of shares of Staples.com stock distributed on
outstanding shares of Staples RD stock for account of
Staples.com............................................... 50
--
Number of Shares Issuable with Respect to Staples RD's
Retained Interest in Staples.com after dividend........ 35
==
</TABLE>
- As a result, the total issued and outstanding shares of Staples.com stock
(65) would in the aggregate represent an Outstanding Interest Percentage
of 65%, calculated as follows:
65
--------------
65 + 35
The Retained Interest Percentage would accordingly be reduced to 35%. Note,
however, that after the dividend, the holders of Staples RD 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.
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 of Staples.com stock previously issued and
outstanding............................................... 15
Newly issued shares of Staples.com stock for account of
Staples.com............................................... 3
--
Total shares of Staples.com stock issued and outstanding
after dividend......................................... 18
==
</TABLE>
I-6
<PAGE>
- The Number of Shares Issuable with Respect to Staples RD's Retained
Interest in Staples.com 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 RD's Retained Interest in Staples.com would be increased by a
number equal to approximately 567% (representing the ratio of the Number
of Shares Issuable with Respect to Staples RD's Retained Interest in
Staples.com (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 RD's
Retained Interest in Staples.com prior to dividend........ 85
Adjustment in respect of Staples RD's Retained Interest to
reflect shares distributed on outstanding shares of
Staples.com stock......................................... 17
---
Number of Shares Issuable with Respect to Staples RD's
Retained Interest in Staples.com 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 RD AND STAPLES.COM
CAPITAL CONTRIBUTION OF CASH OR OTHER ASSETS FROM STAPLES RD TO STAPLES.COM
The following illustration reflects the assumed contribution by Staples RD
to Staples.com, after an assumed initial issuance of 15 shares of Staples.com
stock for the account of Staples RD, of $100 of assets allocated to Staples RD
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>
- The Number of Shares Issuable with Respect to Staples RD's Retained
Interest in Staples.com would be increased to reflect the contribution to
Staples.com of assets previously allocated to Staples RD 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 RD's
Retained Interest in Staples.com prior to contribution.... 85
Increase to reflect contribution to Staples.com of assets
allocated to Staples RD................................... 5
--
Number of Shares Issuable with Respect to Staples RD's
Retained Interest in Staples.com after contribution.... 90
==
</TABLE>
I-7
<PAGE>
- 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 TO
STAPLES RD
The following illustration reflects the assumed transfer by Staples.com to
Staples RD, after an assumed initial issuance of 15 shares of Staples.com stock
for the account of Staples RD, of $100 of assets allocated to Staples.com on a
date on which the Market Value of Staples.com stock is $20 per share.
<TABLE>
<S> <C>
Shares of Staples.com stock 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 RD's Retained
Interest in Staples.com would be decreased to reflect the transfer to
Staples RD of assets previously allocated to Staples.com 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 RD's
Retained Interest in Staples.com prior to contribution.... 85
Decrease to reflect contribution to Staples RD of assets
allocated to Staples.com.................................. 5
--
Number of Shares Issuable with Respect to Staples RD's
Retained Interest in Staples.com after contribution.... 80
==
</TABLE>
- As a result, the total issued and outstanding shares of Staples.com stock
(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-8
<PAGE>
STAPLES.COM
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998, AND
FEBRUARY 1, 1997
Report of Independent Auditors.............................. F-2
Combined Statements of Operations........................... F-3
Combined Balance Sheets..................................... F-4
Combined Statements of Group Equity......................... F-5
Combined Statements of Cash Flows........................... F-6
Notes to the Combined Financial Statements.................. F-7
NINE MONTHS ENDED OCTOBER 30, 1999 AND OCTOBER 31, 1998
Combined Statements of Operations (unaudited)............... F-14
Combined Balance Sheets (unaudited)......................... F-15
Combined Statements of Cash Flows (unaudited)............... F-16
Notes to the Combined Financial Statements (unaudited)...... F-17
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Staples, Inc.
We have audited the accompanying combined balance sheets of Staples.com (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 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 is a business group of Staples, Inc., accordingly, the combined
financial statements of Staples.com 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
F-2
<PAGE>
STAPLES.COM
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 combined financial statements.
F-3
<PAGE>
STAPLES.COM
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 combined financial statements.
F-4
<PAGE>
STAPLES.COM
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 RD.......................... $ 207
Net loss for the year....................................... (207)
------
BALANCES AT FEBRUARY 1, 1997................................ $ --
Capital contribution by Staples RD.......................... $ 300
Net loss for the year....................................... (300)
------
BALANCES AT JANUARY 31, 1998................................ $ --
Capital contribution by Staples RD.......................... 2,449
Net loss for the year....................................... (487)
------
BALANCES AT JANUARY 30, 1999................................ $1,962
======
</TABLE>
See notes to combined financial statements.
F-5
<PAGE>
STAPLES.COM
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 RD............ 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 combined financial statements.
F-6
<PAGE>
STAPLES.COM
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE A BASIS OF PRESENTATION
These combined financial statements and notes to combined financial
statements of Staples.com 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.
Staples.com is comprised of the e-commerce operations of Staples. 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 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
common stock ("Staples.com Stock"), intended to reflect the performance of
Staples.com, (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
Stock") and 600,000,000 shares of Staples.com Stock, and (iii) reclassify
Staples existing common stock as Staples Stock, intended to reflect the
performance of Staples RD, which consists of all of the Company's other
businesses and a retained interest in Staples.com.
Staples RD currently has a 100% retained interest in Staples.com. 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. The effect of that financing on
the Staples.com financial statements will depend upon the number of shares of
Staples.com sold and whether the Company elects to attribute the net proceeds of
such financing to the equity of Staples.com or to Staples RD in respect of its
retained interest.
In order to prepare separate financial statements for Staples.com and
Staples RD, the Company has allocated, for financial reporting purposes, all of
its consolidated assets, liabilities, revenue, expenses and cash flow between
Staples.com and Staples RD. Thus, the combined financial statements of
Staples.com and Staples RD, taken together, comprise all of the accounts
included in the corresponding consolidated financial statements of Staples.
Staples.com'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."
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.
Even though Staples has allocated all of its consolidated assets,
liabilities, revenue, expenses and cash flow between Staples RD and Staples.com,
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 business
are subject to the liabilities of the other businesses, whether such liabilities
arise from lawsuits, contracts or
F-7
<PAGE>
STAPLES.COM
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
indebtedness attributed to the other business. 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 businesses 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.com. 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 should be read in conjunction with the financial information for
Staples RD and financial information for Staples.
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS: Staples RD operates a chain of office supply stores
and contract stationer/delivery warehouses throughout North America and in the
United Kingdom and Germany. Staples.com represents the e-commerce business of
Staples and is comprised of three principal business units, Staples.com,
Quillcorp.com and StaplesLink.com, each of which has its own web site. Staples
RD represents the other business of Staples, including its retail stores,
catalog businesses and contract stationer businesses.
FISCAL YEAR: Staples.com'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. Accordingly, to conform fiscal years for
1998, an adjustment for Quill's operating results for January 1998 was made to
retained earnings.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management of Staples.com
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 does not carry any inventory or
receivables and is solely reliant upon Staples RD and its ability to fullfill
Staples.com's sales. Staples.com is also dependent on Staples RD 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.
F-8
<PAGE>
STAPLES.COM
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
STOCK OPTION PLANS: Staples.com has adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("FAS 123"). As permitted by FAS 123, Staples.com continues to account for
Staples' 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 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 will be computed by dividing (i) the product of the earnings of
Staples.com 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.
LONG-LIVED ASSETS: Staples.com 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: Staples.com 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 holds assets and reports revenues.
Staples.com holds assets and reports revenues in one operating segment.
NOTE C CORPORATE ACTIVITIES
Staples.com'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 generally
remits its cash receipts to Staples RD, and Staples RD generally funds
Staples.com's disbursements on a regular basis.
In the combined financial statements of Staples.com and Staples RD, (1) all
equity transactions, and the proceeds thereof, were attributed to Staples RD,
(2) whenever Staples.com held cash, that cash was transferred to Staples RD and
accounted for as an inter-business revolving credit advance and (3) whenever
Staples.com had a cash need, that cash need was funded by Staples RD and
accounted for as an inter-business revolving credit advance. Staples intends to
continue these practices until shares of Staples.com Stock, or options thereof,
are issued or the Board determines an alternative method appropriate. The
inter-business revolving credit arrangement bears interest at a rate at which
the Board, in its sole discretion, determines Staples could borrow such funds on
a
F-9
<PAGE>
STAPLES.COM
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
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 businesses through an
inter-business revolving credit arrangement. As and when determined by the
Board, this revolving credit arrangement will be settled between the businesses
through a capital contribution or a return of capital, increasing or decreasing
Staples RD's retained interest in Staples.com.
The Board, at its sole discretion, may elect an alternative financing
mechanism between the businesses based upon the facts and circumstances.
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.com and Staples RD 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 business. 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 RD maintains inventory and receivables to support
Staples.com inventory needs and the processing of receivables for Staples.com.
As such, Staples RD charges Staples.com a carrying charge for use of its capital
as determined by the Board. The current charge is reflected in Staples.com'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. The Board may, in its sole discretion, change this
charge 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 based on Staples.com's share of such costs.
TAXES: Federal income taxes, which are determined on a consolidated basis,
are allocated between the businesses, 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 businesses based principally
upon the financial income, taxable income, credits and other amounts directly
related to the respective businesses. Tax benefits that cannot be used by the
group generating such attributes, but can be utilized on a consolidated basis,
are allocated to the businesses that generated such benefits. As a result, the
allocated 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 business basis.
EMPLOYEE BENEFITS: Staples.com 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 of Staples.com or on another
basis as management believes to be an equitable and reasonable estimate of such
costs.
F-10
<PAGE>
STAPLES.COM
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE D RELATED PARTY TRANSACTIONS
Staples RD sells inventory to Staples.com for resale. Under this
arrangement, Staples.com purchases inventory from Staples RD for resale. The
cost per inventory unit purchased by Staples.com is based on Staples RD's
product cost. Inventory purchased by Staples.com 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 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 RD 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, at a current incremental borrowing rate of 6%, to the
extent that Staples incurs or issues the debt for the benefit of Staples.com.
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
F-11
<PAGE>
STAPLES.COM
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
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 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 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
businesses based principally upon the financial income, taxable income, credits
and other amounts directly related to the 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 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.
Deferrred 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
F-12
<PAGE>
STAPLES.COM
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
tax purposes. Staples.com's temporary differences primarily consist of a net
operating loss of $761,000 and basis differences related to equipment. Because
Staples.com has been fully reimbursed for the benefit of the net operating loss
under Staples' tax allocation policy, no valuation allowance has been provided
on the net operating loss and the balance is included in the inter-business
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.
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)
</TABLE>
<TABLE>
<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 Corporation 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'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'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.
F-13
<PAGE>
STAPLES.COM
COMBINED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
13 WEEKS ENDED 39 WEEKS ENDED
--------------------------- ---------------------------
OCTOBER 30, OCTOBER 31, OCTOBER 30, OCTOBER 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Sales................................ $23,979 $4,046 $51,281 $9,104
Cost of goods sold and occupancy
costs.............................. 18,474 2,969 39,471 6,675
------- ------ ------- ------
GROSS PROFIT..................... 5,505 1,077 11,810 2,429
OPERATING AND OTHER EXPENSES:
Operating and selling.............. 6,384 446 13,470 1,057
General and administrative......... 3,720 785 8,963 1,682
Interest and other expense, net.... 64 9 115 10
------- ------ ------- ------
TOTAL OPERATING AND OTHER
EXPENSES....................... 10,168 1,240 22,548 2,749
------- ------ ------- ------
LOSS BEFORE INCOME TAXES........... (4,663) (163) (10,738) (320)
Income tax benefit................... (1,819) (64) (4,188) (117)
------- ------ ------- ------
NET LOSS......................... $(2,844) $ (99) $(6,550) $ (203)
======= ====== ======= ======
PRO FORMA:
Historical net loss................ $ (203)
Provision for income taxes on
previously untaxed earnings of
pooled S-Corporation income...... (12)
------
PRO FORMA NET LOSS................... $ (191)
======
</TABLE>
See notes to combined interim financial statements.
F-14
<PAGE>
STAPLES.COM
COMBINED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 30, JANUARY 30,
1999 1999
------------ ------------
(UNAUDITED)
<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................................................. 7,237 1,072
Less accumulated depreciation............................. 445 58
------- ------
NET EQUIPMENT........................................... 6,792 1,014
OTHER ASSETS:
Investments............................................... 25,665 --
------- ------
TOTAL OTHER ASSETS...................................... 25,665 --
------- ------
$32,457 $2,047
======= ======
LIABILITIES AND GROUP EQUITY
CURRENT LIABILITIES:
Inter-group payable to Staples Group...................... $ 4,281 $ --
Accrued expenses and other current liabilities............ 1,679 85
------- ------
TOTAL CURRENT LIABILITIES............................... 5,960 85
GROUP EQUITY................................................ 26,497 1,962
------- ------
$32,457 $2,047
======= ======
</TABLE>
See notes to combined interim financial statements.
F-15
<PAGE>
STAPLES.COM
COMBINED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
39 WEEKS ENDED
---------------------------
OCTOBER 30, OCTOBER 31,
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................... $(6,550) $ (203)
Adjustments to reconcile net income to net cash used in
operating activities:.....................................
Depreciation and amortization............................. 387 --
Change in assets and liabilities:
(Increase)/Decrease in prepaid expenses and other
assets................................................ 1,033 (850)
Increase in inter-group payable......................... -- --
Increase in accounts payable, accrued expenses and other
current liabilities................................... 1,594 1
------- -------
3,014 (849)
------- -------
NET CASH USED IN OPERATING ACTIVITIES....................... (3,536) (1,052)
INVESTING ACTIVITIES:
Acquisition of property and equipment..................... (6,165) (712)
Purchase of long-term investments......................... (23,756) --
------- -------
NET CASH USED IN INVESTING ACTIVITIES..................... (29,921) (712)
FINANCING ACTIVITIES:
Proceeds from borrowings.................................. 3,536 1,052
Capital contributions from Staples RD..................... 29,921 712
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES................. 33,457 1,764
NET INCREASE/(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 combined interim financial statements.
F-16
<PAGE>
STAPLES.COM
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
The stockholders of Staples, Inc. ("Staples" or "the Company") approved the
Tracking Stock Proposal which amended the Company's certificate of incorporation
to (i) authorize the issuance of a new series of common stock, to be designated
as Staples.com Common Stock ("Staples.com Stock"), intended to reflect the
performance of Staples.com, the Company's e-commerce business, (ii) increase the
aggregate number of authorized 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 Stock") and 600,000,000
shares of Staples.com Stock, and (iii) re-classify Staples existing common stock
as Staples Stock, intended to reflect the performance of Staples RD, which
consists of all of the Company's other businesses and a retained interest in
Staples.com.
The accompanying interim unaudited combined financial statements include the
accounts of Staples' three e-commerce businesses, Staples.com, Quillcorp.com and
StaplesLink.com ("Staples.com"). All intercompany accounts and transactions are
eliminated in consolidation. In order to prepare separate financial statements
for Staples RD and Staples.com, the Company has allocated, for financial
reporting purposes, all of its consolidated assets, liabilities, revenue,
expenses and cash flow between Staples RD and Staples.com. These financial
statements of Staples RD and Staples.com, taken together, comprise all of the
accounts included in the corresponding consolidated financial statements of
Staples. Staples.com's financial statements reflect the application of certain
cash management and allocation policies adopted by the Board of Directors of
Staples (the "Board").
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.
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. In addition, the net losses of Staples.com,
and any dividends or distributions on, or repurchases of Staples.com Stock will
reduce the assets of Staples legally available for dividends on shares of
Staples.com Common Stock. Accordingly, these financial statements should be read
in conjunction with Staples.com's audited combined financial statements as of
January 30, 1999 included elsewhere in the registration statement and the
Staples, Inc. audited consolidated financial statements and Annual Report on
Form 10-K as of January 30, 1999 and unaudited interim results included in
Staples, Inc.'s Quarterly Report on Form 10-Q for the three and nine month
periods ended October 30, 1999 which are incorporated by reference in the
registration statement.
NOTE 2--COMPREHENSIVE INCOME
Staples.com 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.
SFAS 130 requires Staples.com to report
F-17
<PAGE>
STAPLES.COM
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--COMPREHENSIVE INCOME (CONTINUED)
comprehensive income which includes net income, foreign currency translation
adjustments and unrealized gains and losses on short-term investments, which are
reported separately in stockholders' equity, in the notes to the financial
statements for interim periods. During the three and nine months ended
October 30, 1999, total comprehensive loss amounted to approximately $935,000
and $4,641,000, respectively, compared to $99,000 and $203,000, for the
corresponding periods ended October 31, 1998.
NOTE 3--INVESTMENTS
Investments consist of stock purchased in internet related companies. These
investments have been accounted for on a cost basis as each investment
represents an interest of no greater than fifteen percent of the outstanding
capital stock of that company.
NOTE 4--SUBSEQUENT EVENTS
On November 9, 1999, at a special stockholders meeting, the stockholders of
Staples, Inc. approved the Tracking Stock Proposal and the Stock Plan Proposals
as described in the Proxy Statement dated October 12, 1999.
On November 12, 1999, approximately 5% of Staples.com Stock (including
shares allocable to Staples RD's retained interest) was sold to several
investors through a private placement.
F-18
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Prospectus Summary.......................... 3
Risk Factors................................ 10
Special Note Regarding Forward-Looking
Statements................................ 24
Where You Can Find More Information......... 24
Use of Proceeds............................. 25
Dividend Policy............................. 25
Capitalization.............................. 26
Dilution.................................... 27
Selected Combined Financial Information of
Staples.com............................... 28
Selected Consolidated Financial Information
of Staples, Inc........................... 29
Management's Discussion and Analysis of
Financial Condition and Results of
Operations of Staples.com................. 30
Business of Staples.com..................... 35
Management of Staples.com................... 48
Certain Relationships....................... 51
Principal Stockholders...................... 52
Description of Capital Stock................ 55
Certain Cash Management and Allocation
Policies.................................. 73
Certain United States Federal Income Tax
Considerations............................ 77
Shares Eligible for Future Sale............. 79
Underwriting................................ 81
Validity of Staples.com Stock............... 83
Experts..................................... 83
Annex I--Illustration of Certain Terms...... I-1
Index to Combined Financial Statements...... F-1
</TABLE>
Shares
STAPLES, INC.-STAPLES.COM
Common Stock
------------------
[LOGO]
------------------
JOINT BOOK-RUNNING MANAGERS
GOLDMAN, SACHS & CO.
MORGAN STANLEY DEAN WITTER
---------------------
DEUTSCHE BANC ALEX. BROWN
ROBERTSON STEPHENS
WIT SOUNDVIEW
Representatives of the Underwriters
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses, other than underwriting
discounts, to be incurred in connection with the sale and distribution of the
securities being registered hereby. All amounts shown are estimates except the
Securities and Exchange Commission registration fee.
<TABLE>
<S> <C>
Filing Fee--Securities and Exchange Commission.............. $66,000
Blue Sky fees............................................... $ *
Legal fees and expenses of Staples.......................... $ *
Accounting fees and expenses................................ $ *
Printing.................................................... $ *
Miscellaneous expenses...................................... $ *
-------
Total expenses.......................................... $ *
=======
</TABLE>
- ------------------------
* To be included by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Except as hereinafter set forth, there is no provision of Staples'
Certificate of Incorporation, or any contract, arrangement or statute under
which any director or officer of Staples is insured or indemnified in any manner
against any liability that he may incur in his capacity as such.
Section 145 of the General Corporation Law of the State of Delaware provides
that a corporation has the power to indemnify a director, officer, employee or
agent of the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred in
connection with an action or proceeding to which he is or is threatened to be
made a party by reason of such position, if such person shall have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, in any criminal proceeding, if such person
had no reasonable cause to believe his conduct was unlawful, provided that, in
the case of actions brought by or in the right of the corporation, no
indemnification shall be made with respect to any matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent that the adjudicating court determines that such indemnification is
proper under the circumstances. Staples' Certificate of Incorporation provides
that Staples shall indemnify its directors and officers to the fullest extent
permitted by the Delaware General Corporation Law.
Staples' Certificate of Incorporation also provides that no director shall
be liable to Staples or its stockholders for monetary damages for breach of his
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to Staples or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General corporation
Law or (iv) for any transaction in which the director derived an improper
personal benefit.
The By-laws of Staples contain provisions to the effect that each director
and officer of Staples, and in certain instances, employees of Staples shall be
indemnified by Staples against liabilities and expenses in connection with any
legal proceedings to which he may be made a party or with which he may become
involved or threatened by reason of having been an officer, director or employee
of Staples or of any other organization at the request of Staples. The
provisions include
II-1
<PAGE>
indemnification with respect to matters covered by a settlement. Any such
indemnification shall be made only if the Staples board of directors determines
by a majority vote of a quorum consisting of disinterested directors (or, if
such quorum is not obtainable, or if the Board of Directors directs, by
independent legal counsel) or by stockholders, that indemnification is proper in
the circumstances because the person seeking indemnification has met the
applicable standards of conduct. It must be determined that the director,
officer or employee acted in good faith with the reasonable belief that his
action was in or not opposed to the best interests of Staples, and, with respect
to any criminal action or proceeding, that he had no reasonable cause to believe
his conduct was unlawful.
Staples maintains directors and officers liability insurance for the benefit
of its directors and certain of its officers.
The underwriting agreement provides that the underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of Staples against certain liabilities, including liabilities under the
Securities Act of 1933. Reference is made to the form of Underwriting Agreement
filed as Exhibit 1.1 hereto.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
1.1* Underwriting Agreement
3.1 Restated Certificate of Incorporation, dated June 12, 1996
(Incorporated by reference to Staples' Annual Report on
Form 10-K filed with the SEC on April 5, 1999)
3.2 Amendment to Restated Certificate of Incorporation, dated
November 9, 1999 (Incorporated by reference to Staples'
Schedule 14A filed with the SEC on October 12, 1999)
5.1* Opinion of Hale and Dorr LLP
23.1 Consent of Ernst & Young LLP
23.2 Consent of Kupferberg, Goldberg & Neimark, LLC
23.3 Consent of Hale and Dorr LLP (Included in Exhibit 5.1 filed
herewith)
24.1 Power of Attorney (See page II-4 of this Registration
Statement)
</TABLE>
- ------------------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS.
Item 512(b) of Regulation S-K. The Registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act, each filing of
the Registrant's annual report pursuant to Section 13(a) or 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in this Registration Statement shall be deemed to be a
new registration statement relating to the securities offered therein and the
offering of such securities at the time shall be deemed to be the initial bona
fide offering thereof.
Item 512(h) of Regulation S-K. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the indemnification provisions
described herein, or otherwise, the Registrant has been
II-2
<PAGE>
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
Item 512(i) of Regulation S-K. The undersigned registrant hereby undertakes
that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Framingham, Commonwealth of Massachusetts, on this
18th day of February, 2000.
<TABLE>
<S> <C> <C>
STAPLES, INC.
By: /s/ THOMAS G. STEMBERG
-----------------------------------------
Thomas G. Stemberg
CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD OF DIRECTORS
</TABLE>
SIGNATURES AND POWER OF ATTORNEY
We, the undersigned officers and directors of Staples, Inc., hereby
severally constitute and appoint Thomas G. Stemberg, John J. Mahoney, Jack A.
VanWoerkom and Mark G. Borden and each of them singly, our true and lawful
attorneys with full power to any of them, and to each of them singly, to sign
for us and in our names in the capacities indicated below (i) the Registration
Statement on Form S-3 filed herewith and any and all pre-effective and
post-effective amendments to said Registration Statement and (ii) registration
statements (including any amendments thereto) relating to the offering covered
hereby which may be filed with the Securities and Exchange Commission pursuant
to Rule 462(b) under the Securities Act of 1933, and generally to do all such
things in our name and behalf in our capacities as officers and directors to
enable Staples, Inc. to comply with the provisions of the Securities Act and all
requirements of the Securities and Exchange Commission, hereby ratifying and
confirming our signatures as they may be signed by our said attorneys, or any of
them, to said Registration Statements and any and all amendments thereto.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ THOMAS G. STEMBERG Chief Executive Officer and Chairman of
---------------------------- the Board of Directors (Principal February 18, 2000
Thomas G. Stemberg Executive Officer)
/s/ JOHN J. MAHONEY Executive Vice President, Chief Financial
---------------------------- Officer and Chief Administrative Officer February 18, 2000
John J. Mahoney (Principal Financial Officer)
/s/ PATRICK HICKEY Senior Vice President and Corporate
---------------------------- Controller (Principal Accounting February 18, 2000
Patrick Hickey Officer)
/s/ BASIL L. ANDERSON Director
---------------------------- February 18, 2000
Basil L. Anderson
/s/ MARY ELIZABETH BURTON Director
---------------------------- February 18, 2000
Mary Elizabeth Burton
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ W. LAWRENCE HEISEY Director
---------------------------- February 18, 2000
W. Lawrence Heisey
/s/ GEORGE J. MITCHELL Director
---------------------------- February 18, 2000
George J. Mitchell
Director
----------------------------
James L. Moody, Jr.
/s/ ROWLAND T. MORIARTY Director
---------------------------- February 18, 2000
Rowland T. Moriarty
/s/ ROBERT C. NAKASONE Director
---------------------------- February 18, 2000
Robert C. Nakasone
/s/ W. MITT ROMNEY Director
---------------------------- February 18, 2000
W. Mitt Romney
/s/ RONALD L. SARGENT Director
---------------------------- February 18, 2000
Ronald L. Sargent
/s/ MARTIN TRUST Director
---------------------------- February 18, 2000
Martin Trust
/s/ PAUL F. WALSH Director
---------------------------- February 18, 2000
Paul F. Walsh
Director
----------------------------
Margaret C. Whitman
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1* Underwriting Agreement
3.1 Restated Certificate of Incorporation, dated June 12, 1996
(Incorporated by reference to Staples' Annual Report on
Form 10-K filed with the SEC on April 5, 1999)
3.2 Amendment to Restated Certificate of Incorporation, dated
November 9, 1999 (Incorporated by reference to Staples'
Schedule 14A filed with the SEC on October 12, 1999)
5.1* Opinion of Hale and Dorr LLP
23.1 Consent of Ernst & Young LLP
23.2 Consent of Kupferberg, Goldberg & Neimark, LLC
23.3 Consent of Hale and Dorr LLP (Included in Exhibit 5.1 filed
herewith)
24.1 Power of Attorney (See page II-4 of this Registration
Statement)
</TABLE>
- ------------------------------
* To be filed by amendment.
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Combined Financial Information of Staples.com," "Selected Consolidated Financial
Information of Staples, Inc.," and "Experts" and to the use of our report dated
September 21, 1999, in the Registration Statement (Form S-3) and related
Prospectus of Staples, Inc. dated February 18, 2000 for the registration of
shares of Staples.com common stock and to the incorporation by reference therein
of our report dated March 4, 1999, with respect to the consolidated financial
statements of Staples, Inc. included in its Annual Report (Form 10-K) for the
year ended January 30, 1999, filed with the Securities and Exchange Commission.
Boston, Massachusetts
February 17, 2000
<PAGE>
Exhibit 23.2
CONSENT OF KUPFERBERG, GOLDBERG & NEIMARK, LLC, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Information of Staples, Inc." and "Experts" in the
Registration Statement (Form S-3) and related Prospectus of Staples, Inc., dated
February 18, 2000, for the registration of shares of Staples.com common stock
and to the incorporation by reference therein of our report dated February 24,
1998, with respect to the consolidated financial statements of Quill Corporation
and Subsidiary as of December 31, 1997 and for the years ended December 31, 1997
and 1996 included in Staples, Inc.'s Annual Report (Form 10-K) for the year
ended January 30, 1999, filed with the Securities and Exchange Commission.
Chicago, Illinois
February 17, 2000
