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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended: October 28, 2000
Commission File Number: 0-17586
STAPLES, INC.
(Exact name of registrant as specified in its charter)
Delaware | 04-2896127 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
Five Hundred Staples Drive, Framingham, MA 01702
(Address of principal executive office and zip code)
508-253-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes /x/ No / /
The registrant had 452,975,331 shares of Staples Retail and Delivery Common Stock and 13,848,817 shares of Staples.com Common Stock, both par value $.0006, outstanding as of December 7, 2000.
FORM 10-Q
STAPLES, INC.
October 28, 2000
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Part IFinancial Information: | |||
Item 1. Financial Statements (unaudited): |
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Consolidated Balance Sheets | 3 | ||
Consolidated Statements of Income | 4 | ||
Consolidated Statements of Cash Flows | 5 | ||
Notes to Consolidated Financial Statements | 623 | ||
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
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2432 |
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Item 3. Quantitative and Qualitative Disclosures about Market Risks |
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33 |
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Part IIOther Information |
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34 |
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Signature |
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35 |
2
STAPLES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollar Amounts in Thousands, Except Share Data)
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October 28, 2000 (Unaudited) |
January 29, 2000 |
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ASSETS | ||||||||||
Current Assets: | ||||||||||
Cash and cash equivalents | $ | 105,269 | $ | 110,483 | ||||||
Short-term investments | 1,028 | 1,071 | ||||||||
Merchandise inventories | 1,667,932 | 1,607,516 | ||||||||
Receivables, net | 525,387 | 360,901 | ||||||||
Deferred income taxes | 34,526 | 39,730 | ||||||||
Prepaid expenses and other current assets | 91,812 | 73,750 | ||||||||
Total current assets | 2,425,954 | 2,193,451 | ||||||||
Property and Equipment: | ||||||||||
Land and buildings | 363,570 | 328,994 | ||||||||
Leasehold improvements | 515,621 | 442,119 | ||||||||
Equipment | 668,777 | 547,309 | ||||||||
Furniture and fixtures | 335,998 | 286,260 | ||||||||
Total property and equipment | 1,883,966 | 1,604,682 | ||||||||
Less accumulated depreciation and amortization | 637,101 | 509,920 | ||||||||
Net property and equipment | 1,246,865 | 1,094,762 | ||||||||
Other Assets: | ||||||||||
Lease acquisition costs, net of amortization | 62,536 | 68,832 | ||||||||
Investments | 67,344 | 34,755 | ||||||||
Goodwill, net of amortization | 382,260 | 387,595 | ||||||||
Deferred income taxes | 41,775 | 34,912 | ||||||||
Other | 27,215 | 31,769 | ||||||||
Total other assets | 581,130 | 557,863 | ||||||||
$ | 4,253,949 | $ | 3,846,076 | |||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||
Current Liabilities: | ||||||||||
Accounts payable | $ | 1,013,417 | $ | 897,523 | ||||||
Accrued expenses and other current liabilities | 530,019 | 545,162 | ||||||||
Debt maturing within one year | 1,843 | 12,219 | ||||||||
Total current liabilities | 1,545,279 | 1,454,904 | ||||||||
Long-Term Debt |
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779,589 |
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500,903 |
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Other Long-Term Obligations | 69,261 | 61,456 | ||||||||
Stockholders' Equity: | ||||||||||
Preferred stock, $.01 par value 5,000,000 shares authorized; no shares issued | | | ||||||||
Common stock: | ||||||||||
Staples RD Stock, $.0006 par value 1,500,000,000 shares authorized; shares issued: 475,000,681 shares at October 28, 2000 and 470,752,253 shares at January 29, 2000; outstanding: 453,065,938 shares at October 28, 2000 and 457,083,510 shares at January 29, 2000 | 285 | 282 | ||||||||
Staples.com Stock, $.0006 par value 600,000,000 shares authorized; shares issued: 14,084,580 shares at October 28, 2000 and 13,626,093 shares at January 29, 2000; outstanding: 13,836,448 shares at October 28, 2000 and 13,626,093 shares at January 29, 2000 | 8 | 8 | ||||||||
Additional paid-in capital | 1,252,937 | 1,196,512 | ||||||||
Cumulative foreign currency translation adjustments | (10,407 | ) | (4,473 | ) | ||||||
Unrealized gain/(loss) on investments | (7,956 | ) | 6,651 | |||||||
Retained earnings | 1,119,696 | 948,309 | ||||||||
Less: Staples RD treasury stock at cost, 21,934,743 shares at October 28, 2000 and 13,668,743 shares at January 29, 2000 | (493,937 | ) | (318,476 | ) | ||||||
Staples.com treasury stock at cost, 248,132 shares at October 28, 2000 and 0 shares at January 29, 2000 | (806 | ) | | |||||||
Total stockholders' equity | 1,859,820 | 1,828,813 | ||||||||
$ | 4,253,949 | $ | 3,846,076 | |||||||
See notes to consolidated financial statements.
3
STAPLES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Dollar Amounts in Thousands, Except Per Share Data)
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(Unaudited) 13 Weeks Ended |
(Unaudited) 39 Weeks Ended |
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October 28, 2000 |
October 30, 1999 |
October 28, 2000 |
October 30, 1999 |
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Sales | $ | 2,801,769 | $ | 2,393,811 | $ | 7,558,852 | $ | 6,305,987 | ||||||
Cost of goods sold and occupancy costs | 2,125,486 | 1,799,564 | 5,726,258 | 4,762,428 | ||||||||||
Gross profit | 676,283 | 594,247 | 1,832,594 | 1,543,559 | ||||||||||
Operating and other expenses: |
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Operating and selling | 406,655 | 341,026 | 1,187,808 | 928,030 | ||||||||||
Pre-opening | 5,064 | 4,570 | 19,592 | 13,977 | ||||||||||
General and administrative | 103,732 | 88,734 | 299,433 | 262,037 | ||||||||||
Amortization of goodwill | 3,621 | 3,060 | 10,716 | 8,318 | ||||||||||
Store closure credit | | | (7,250 | ) | | |||||||||
Interest and other expense, net | 13,718 | 5,162 | 31,809 | 10,554 | ||||||||||
Total operating and other expenses | 532,790 | 442,552 | 1,542,108 | 1,222,916 | ||||||||||
Income before income taxes |
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143,493 |
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151,695 |
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290,486 |
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320,643 |
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Income tax expense | 58,832 | 59,161 | 119,099 | 125,051 | ||||||||||
Net income | $ | 84,661 | $ | 92,534 | $ | 171,387 | $ | 195,592 | ||||||
Net income/(loss) attributed to: |
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Staples, Inc. Stock | $ | | $ | 92,534 | $ | | $ | 195,592 | ||||||
Staples RD Stock | 86,039 | | 177,619 | | ||||||||||
Staples.com Stock | (1,378 | ) | | (6,232 | ) | | ||||||||
$ | 84,661 | $ | 92,534 | $ | 171,387 | $ | 195,592 | |||||||
Basic earnings per common share |
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Net income per common share Staples, Inc. Stock |
$ | 0.20 | $ | 0.42 | ||||||||||
Net income per common share Staples RD Stock |
$ | 0.19 | $ | 0.39 | ||||||||||
Net loss per common share Staples.com Stock |
$ | (0.10 | ) | $ | (0.45 | ) | ||||||||
Diluted earnings per common share |
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Net income per common share Staples, Inc. Stock |
$ | 0.20 | $ | 0.41 | ||||||||||
Net income per common share Staples RD Stock |
$ | 0.19 | $ | 0.38 | ||||||||||
Net loss per common share Staples.com Stock |
$ | (0.10 | ) | $ | (0.45 | ) | ||||||||
See notes to consolidated financial statements.
4
STAPLES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)
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(Unaudited) 39 Weeks Ended |
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October 28, 2000 |
October 30, 1999 |
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Operating Activities: | |||||||||||
Net income | $ | 171,387 | $ | 195,592 | |||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||||||
Depreciation and amortization | 168,594 | 126,020 | |||||||||
Store closure credit | (7,250 | ) | | ||||||||
Expense from 401K and PARS stock contribution | 7,520 | 13,633 | |||||||||
Deferred income tax expense | 7,629 | 24,630 | |||||||||
Change in assets and liabilities, net of companies acquired using purchase accounting: | |||||||||||
Increase in merchandise inventories | (90,972 | ) | (150,260 | ) | |||||||
Increase in receivables | (171,890 | ) | (184,997 | ) | |||||||
Increase in prepaid expenses and other assets | (20,410 | ) | (30,274 | ) | |||||||
Increase in accounts payable, accrued expenses and other current liabilities | 162,440 | 160,175 | |||||||||
Increase in other long-term obligations | 9,212 | 5,146 | |||||||||
64,873 | (35,927 | ) | |||||||||
Net cash provided by operating activities | 236,260 | 159,665 | |||||||||
Investing Activities: |
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Acquisition of property and equipment | (327,632 | ) | (251,114 | ) | |||||||
Acquisition of businesses, net of cash acquired | | (241,940 | ) | ||||||||
Proceeds from sales and maturities of short-term investments | 108 | 32,836 | |||||||||
Purchase of short-term investments | | (16,651 | ) | ||||||||
Proceeds from sales and maturities of long-term investments | 1,951 | | |||||||||
Purchase of long-term investments | (58,947 | ) | (23,756 | ) | |||||||
Other | (2,861 | ) | 2,040 | ||||||||
Net cash used in investing activities | (387,381 | ) | (498,585 | ) | |||||||
Financing Activities: |
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Proceeds from sale of capital stock | 37,885 | 30,191 | |||||||||
Proceeds from borrowings | 2,819,719 | 745,501 | |||||||||
Payments on borrowings | (2,528,069 | ) | (470,164 | ) | |||||||
Settlement of equity forward purchase agreement | (78,684 | ) | | ||||||||
Purchase of treasury stock | (97,583 | ) | (234,446 | ) | |||||||
Net cash provided by financing activities | 153,268 | 71,082 | |||||||||
Effect of exchange rate changes on cash |
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(7,361 |
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9 |
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Net decrease in cash and cash equivalents |
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(5,214 |
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(267,829 |
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Cash and cash equivalents at beginning of period | 110,483 | 357,993 | |||||||||
Cash and cash equivalents at end of period | $ | 105,269 | $ | 90,164 | |||||||
See notes to consolidated financial statements.
5
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note A Basis of Presentation
The accompanying interim unaudited consolidated financial statements include the accounts of Staples, Inc. and subsidiaries ("Staples" and the "Company"). These financial statements are for the periods covering the thirteen and thirty-nine weeks ending October 28, 2000 (also referred to as the "third quarter of 2000" and "year-to-date 2000", respectively), and the periods covering the thirteen and thirty-nine weeks ending October 30, 1999 (also referred to as the "third quarter of 1999" and "year-to-date 1999", respectively). All intercompany accounts and transactions are eliminated in consolidation.
These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, such interim statements reflect all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position and the results of operations and cash flows for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K/A2 for the year ended January 29, 2000.
On November 9, 1999, the stockholders of Staples approved a proposal ("the Tracking Stock Proposal") which amended the Company's certificate of incorporation to (i) authorize the issuance of a new series of common stock, designated as Staples.com common stock ("Staples.com Stock"), intended to track the performance of Staples.com, the Company's e-commerce business, (ii) increase the aggregate number of shares of common stock that the Company may issue from 1,500,000,000 to 2,100,000,000, initially comprised of 1,500,000,000 shares of Staples Retail and Delivery common stock ("Staples RD Stock") and 600,000,000 shares of Staples.com Stock, and (iii) re-classify Staples' existing common stock as Staples RD Stock, intended to track the performance of Staples RD, which consists of all of the Company's non e-commerce businesses and a retained interest in Staples.com. Despite the Company's intentions, the market value of Staples RD Stock may not track the performance of Staples RD and the market value of Staples.com Stock may not track the performance of Staples.com. The Company filed a registration statement with the Securities and Exchange Commission on February 18, 2000 for a public offering of Staples.com Stock.
The Company consolidates for financial reporting purposes Staples RD and Staples.com. Staples RD is comprised of Staples' retail stores, catalog businesses, contract stationer business and a retained interest in Staples.com. For the third quarter of 2000 Staples RD had an 89% retained interest in the losses of Staples.com and a 100% retained interest in the losses of Staples.com for the corresponding period in 1999. Year-to-date 2000 Staples RD had an 88% retained interest in the losses of Staples.com and a 100% retained interest in the losses of Staples.com for the corresponding period in 1999. Staples.com includes the operations of Staples' e-commerce sites, Staples.com, Quill.com, StaplesLink.com, and its Canadian e-commerce business. Staples RD's and Staples.com's separate operating results as presented in Note I of the Consolidated Financial Statements reflect the effect of the application of certain cash management and allocation polices adopted by the Board of Directors of Staples (the "Board").
Certain previously reported amounts have been reclassified to conform with the current period presentation.
6
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note B Comprehensive Income
Staples calculates comprehensive income in accordance with SFAS No. 130 "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires Staples to report comprehensive income which includes net income, foreign currency translation adjustments and unrealized gains and losses on investments, which are reported separately in stockholders' equity, in the notes to the financial statements for interim periods. During the third quarter of 2000 and year-to-date 2000, total comprehensive income amounted to approximately $32,588,000 and $150,846,000, respectively, compared to approximately $96,684,000 and $198,604,000, for the corresponding periods in 1999.
Note C Investments
Staples' investments are classified as available for sale and consist of securities purchased in Internet-related companies. Investments that qualify as marketable equity securities are carried at fair value using quoted market prices and all other investments have been accounted for on a cost basis as each investment represents an interest of no greater than fifteen percent of the outstanding stock of that company. Unrealized gains and losses are reported as a separate component of stockholders' equity.
In February 2000, Staples completed an investment in Paperexhange.com of approximately $5,000,000. Due to a reduced realizable value of Paperexchange.com Stock during the third quarter of 2000, Staples received 2,000,000 shares of Internet Capital Group, the majority shareholder of Paperexchange.com. Staples then sold these shares of Internet Capital Group Stock resulting in a $45,000 realized gain. Staples had an ownership percentage in Paperexchange.com at October 28, 2000 of approximately 1%. Paperexchange.com operates a global e-commerce marketplace for the pulp and paper industry.
Also, in February 2000, Staples completed an investment in BizBuyer.com of approximately $19,000,000, representing an ownership percentage at October 28, 2000 of approximately 12%. BizBuyer.com is a business-to-business marketplace where buyers and sellers connect to buy and sell products and services.
In March 2000, Register.com, an investment initially recorded at cost by Staples of approximately $33,000,000, completed an initial public offering of its common stock. At October 28, 2000, Staples owned approximately 2,312,000 shares of common stock, and warrants to purchase approximately 1,640,000 additional shares, resulting in an unrealized loss of approximately $9,500,000. As of October 28, 2000, Staples had an ownership percentage in Register.com of approximately 7.5%. Register.com is a service provider for domain name registrations.
In June 2000, Staples completed an investment in ICG Commerce of approximately $2,600,000 representing an ownership percentage at October 28, 2000 of approximately 1%. ICG Commerce is a comprehensive online procurement service provider for businesses.
In July 2000, Staples completed an investment in NowDocs, Inc. of approximately $6,000,000, representing an ownership percentage at October 28, 2000 of approximately 10%. NowDocs, Inc. provides businesses with the ability to upload files for virtual storage and obtain digital printing and binding of documents that can be delivered in a variety of ways.
7
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The following is a summary of equity investments as of October 28, 2000 and January 29, 2000 (in thousands):
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Cost |
Gross Unrealized Gain/(Loss) |
Estimated Fair Value |
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October 28, 2000 | $ | 80,821 | $ | (13,477 | ) | $ | 67,344 | |||
January 29, 2000 | $ | 23,780 | $ | 10,975 | $ | 34,755 | ||||
Note D Long-Term Debt and Credit Agreements
Long-Term Debt:
On May 3, 2000, Staples entered into a currency swap on its $200,000,000 of 7.125% senior notes issued on August 12, 1997. The Company has swapped the dollar-denominated principal and interest into Canadian dollar denominated obligations. This swap has been designated as a foreign currency hedge on Staples' net investment in Canadian dollar denominated subsidiaries, and gains or losses will be recorded in the cumulative translation adjustment line in stockholders' equity. As of October 28, 2000, the principal owed was $295,290,000 in Canadian dollars at an interest rate of 6.445%.
On May 24, 2000, Staples issued notes in the aggregate principal amount of $175,000,000. The notes bear interest at a rate equal to the three month LIBOR plus 85 basis points, or 7.54% at October 28, 2000, and are due on November 26, 2001.
Credit Agreement:
On June 26, 2000, Staples entered into a 364 day revolving credit facility, with a syndicate of banks, which provides up to $200,000,000 of borrowings. Borrowings made pursuant to the facility will bear interest at either (a) the higher of the lead bank's prime rate or the federal funds rate plus 0.50%, with such rate in both cases to be increased by 0.125% when the outstanding balance under the facility exceeds $100,000,000, or (b) the LIBOR rate plus a percentage spread based upon certain defined ratios, and this rate was approximately 7.035% at October 28, 2000. The agreement, among other conditions, contains certain restrictive covenants, including net worth maintenance, minimum fixed charge coverage and limitations on indebtedness and sale of assets. As of October 28, 2000, no borrowings were outstanding under this revolving credit facility.
Accounts Receivable Securitization:
On October 27, 2000, Lincolnshire Funding, LLC ("Lincolnshire"), an indirect subsidiary of Staples, entered into an accounts receivable sale agreement with Corporate Receivables Corporation and Citicorp North America, Inc. under which Lincolnshire agreed to sell accounts receivable which are purchased by Lincolnshire from Hackensack Funding, LLC ("Hackensack"), Lincolnshire's corporate parent and also an indirect subsidiary of Staples, which receivables are, in turn, purchased by Hackensack from Staples Contract & Commercial, Inc. and Quill Corporation, direct subsidiaries of the Company. The purchase limit under the Lincolnshire receivables sale agreement is $175,000,000. Under the Lincolnshire receivables sale agreement, the purchasers are entitled to receive a yield on their purchase price at a rate, depending on the identity of the purchaser, equal to either (a) the LIBOR rate plus 1.25% or (b) the rate paid by the purchaser on commercial paper notes issued to fund its receivables purchases from Lincolnshire. Staples has entered into a performance undertaking with respect to the performance obligations of its subsidiaries in connection with the receivables sale arrangement. As of October 28, 2000, Staples had not sold any of these receivables under the accounts receivable securitization agreement.
8
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note E Business Acquisitions
During fiscal years 1999 and 1998, Staples made three acquisitions: Quill Corporation on May 21, 1998, Claricom Holdings, Inc. and certain related entities, now referred to as Staples Communications, on February 26, 1999 and the European Office Supply Companies, which includes Sigma Burowelt in Germany, Office Centre in the Netherlands and Office Centre in Portugal on October 6, 1999. At the time of each acquisition the Company recorded a liability for restructuring, merger-related and integration costs. The activity impacting these liabilities for year-to-date 2000 is summarized in the table below (in thousands):
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Balance at January 29, 2000 |
Purchase Price Adjustments |
Charges Utilized/ Reclassified |
Balance at October 28, 2000 |
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Quill Merger Related and Integration Costs | |||||||||||||
Transaction Costs | $ | 208 | $ | | $ | (208 | ) | $ | | ||||
Contract and Lease Termination | 12,985 | | (6,392 | ) | 6,593 | ||||||||
Other | 469 | | (469 | ) | | ||||||||
$ | 13,662 | $ | | $ | (7,069 | ) | $ | 6,593 | |||||
European Office Supply Purchase Price Adjustment | |||||||||||||
Transaction Costs | $ | 514 | $ | | $ | (514 | ) | $ | | ||||
Incremental Employee | 7,165 | | (5,411 | ) | 1,754 | ||||||||
Contract and Lease Termination | 6,948 | 1,972 | (1,808 | ) | 7,112 | ||||||||
Other | 5,295 | 1,076 | (4,366 | ) | 2,005 | ||||||||
$ | 19,922 | $ | 3,048 | $ | (12,099 | ) | $ | 10,871 | |||||
Claricom Purchase Price Adjustment | |||||||||||||
Incremental Employee | $ | 3,770 | $ | | $ | (2,881 | ) | $ | 889 | ||||
Other | 16 | | | 16 | |||||||||
$ | 3,786 | $ | | $ | (2,881 | ) | $ | 905 | |||||
Staples recorded additional costs of $3,048,000 as part of the purchase price of the European Office Supply Companies during the third quarter 2000, representing revised estimates to recorded liabilities. All of the above costs will be utilized by the end of fiscal year 2000, except for costs related to contract and lease terminations. The Company believes that the accruals relating to contract and lease terminations will be entirely utilized by fiscal year 2004, although some payments may be made over the remaining lease terms.
Note F Store Closure Charge
In the fourth quarter of 1998, Staples committed to a plan to close certain stores which could not be expanded and upgraded to Staples' current store model and reported a pre-tax store closure charge of $49,706,000. At October 28, 2000, 31 stores were closed, and at January 29, 2000, 10 stores were closed. For year-to-date 2000, the Company reversed the portion of the store closure charge related to 18 locations that the Company had neither reached an agreement to close or was no longer committed to closing due to changes in market conditions, unexpected landlord concessions and the Company's European acquisition. With respect to the remaining 9 stores, the Company has executed lease agreements for new stores and all
9
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
the corresponding old stores will be closed by July 2001. The following table is a rollforward of the store closure charges utilized and reversed for year-to-date 2000 (in thousands):
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Balance at January 29, 2000 |
Charges utilized |
Charges reversed |
Balance at October 28, 2000 |
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Lease Terminations | $ | 29,322 | $ | (4,268 | ) | $ | (6,284 | ) | $ | 18,770 | |||
Legal and Settlement Costs | 4,788 | (200 | ) | (966 | ) | 3,622 | |||||||
$ | 34,110 | $ | (4,468 | ) | $ | (7,250 | ) | $ | 22,392 | ||||
All of the above costs directly relate to long-term lease obligations that the Company is either in the process of obtaining subtenants for or attempting to cancel the lease. Accordingly, the Company believes that the remaining balance will be entirely utilized by fiscal year 2004, although some payments may be made over the remaining lease terms.
Note G Segment Reporting
Staples has four reportable segments: North American Retail, Contract and Commercial, European Operations and Staples.com. Staples' North American Retail segment consists of the U.S. and Canadian operating units that operate office supply stores. The Contract and Commercial segment consists of Staples Direct, Contract, Quill Corporation and Staples Communications, each of which sells office products, supplies and services directly to businesses throughout the U.S. and Canada. The European Operations segment consists of six operating units that operate office supply stores in the United Kingdom, Germany, the Netherlands and Portugal and sell office products and supplies directly to businesses throughout the United Kingdom and Germany. Staples.com includes the operations of Staples' e-commerce sites: Staples.com, Quill.com, StaplesLink.com, and its Canadian e-commerce business.
Staples evaluates performance and allocates resources based on profit or loss from operations before income taxes. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Intersegment sales and transfers are recorded at Staples' cost, therefore, there is no intercompany profit or loss recognized on these transactions.
Staples' reportable segments are each managed separately because the way they market products may be different, the classes of customers they service may be different, or they may use different distribution methods to deliver products to customers. The European Operations are considered a separate operating segment because of the significant difference in the operating environment from the North American operations.
10
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The following is a summary of significant accounts and balances by reportable segment for the third quarter of 2000 and year-to-date 2000 and for the corresponding periods in 1999 (in thousands):
Thirteen weeks ended October 28, 2000:
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N. American Retail |
Contract & Commercial |
Staples.com |
European Operations |
Totals |
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Sales | $ | 1,877,586 | $ | 616,676 | $ | 141,687 | $ | 165,820 | $ | 2,801,769 | |||||
Depreciation and amortization | $ | 39,903 | $ | 12,137 | $ | 2,358 | $ | 4,836 | $ | 59,234 | |||||
Segment income/(loss) | $ | 129,781 | $ | 53,996 | $ | (20,045 | ) | $ | (6,521 | ) | $ | 157,211 | |||
Interest and other expense, net | $ | 10,452 | $ | 889 | $ | 846 | $ | 1,531 | $ | 13,718 | |||||
Income/(loss) before income taxes | $ | 119,329 | $ | 53,107 | $ | (20,891 | ) | $ | (8,052 | ) | $ | 143,493 |
Thirteen weeks ended October 30, 1999:
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N. American Retail |
Contract & Commercial |
Staples.com |
European Operations |
Totals |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sales | $ | 1,627,065 | $ | 617,389 | $ | 23,979 | $ | 125,378 | $ | 2,393,811 | |||||
Depreciation and amortization | $ | 30,003 | $ | 10,596 | $ | 207 | $ | 3,637 | $ | 44,443 | |||||
Segment income/(loss) | $ | 122,216 | $ | 52,873 | $ | (4,442 | ) | $ | (13,790 | ) | $ | 156,857 | |||
Interest and other expense, net | $ | 3,264 | $ | 1,063 | $ | 221 | $ | 614 | $ | 5,162 | |||||
Income/(loss) before income taxes | $ | 118,952 | $ | 51,810 | $ | (4,663 | ) | $ | (14,404 | ) | $ | 151,695 |
Thirty-nine weeks ended October 28, 2000:
|
N. American Retail |
Contract & Commercial |
Staples.com |
European Operations |
Totals |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sales | $ | 4,935,100 | $ | 1,818,289 | $ | 312,742 | $ | 492,721 | $ | 7,558,852 | |||||
Depreciation and amortization | $ | 113,058 | $ | 35,774 | $ | 5,384 | $ | 14,379 | $ | 168,595 | |||||
Segment income/(loss)(1) | $ | 296,731 | $ | 140,438 | $ | (88,376 | ) | $ | (26,498 | ) | $ | 322,295 | |||
Interest and other expense, net | $ | 23,877 | $ | 2,098 | $ | 2,017 | $ | 3,817 | $ | 31,809 | |||||
Income/(loss) before income taxes(1) | $ | 272,854 | $ | 138,340 | $ | (90,393 | ) | $ | (30,315 | ) | $ | 290,486 | |||
Capital expenditures | $ | 207,888 | $ | 61,642 | $ | 69,199 | $ | 47,850 | $ | 386,579 |
Thirty-nine weeks ended October 30, 1999:
|
N. American Retail |
Contract & Commercial |
Staples.com |
European Operations |
Totals |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sales | $ | 4,218,054 | $ | 1,744,385 | $ | 51,281 | $ | 292,267 | $ | 6,305,987 | |||||
Depreciation and amortization | $ | 87,099 | $ | 29,185 | $ | 387 | $ | 9,349 | $ | 126,020 | |||||
Segment income/(loss) | $ | 258,981 | $ | 118,452 | $ | (10,224 | ) | $ | (36,012 | ) | $ | 331,197 | |||
Interest and other expense, net | $ | 6,078 | $ | 1,996 | $ | 514 | $ | 1,966 | $ | 10,554 | |||||
Income/(loss) before income taxes | $ | 252,903 | $ | 116,456 | $ | (10,738 | ) | $ | (37,978 | ) | $ | 320,643 | |||
Capital expenditures(2) | $ | 191,934 | $ | 172,870 | $ | 29,921 | $ | 122,085 | $ | 516,810 |
11
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Assets:
|
October 28, 2000 |
January 29, 2000 |
||||||
---|---|---|---|---|---|---|---|---|
N. American Retail | $ | 3,715,726 | $ | 3,515,341 | ||||
Contract & Commercial | 1,139,674 | 1,011,662 | ||||||
Staples.com | 92,416 | 72,421 | ||||||
European Operations | 1,187,065 | 1,193,675 | ||||||
Totals | 6,134,881 | 5,793,099 | ||||||
Elimination of Intercompany Liabilities | 146,910 | 79,862 | ||||||
Elimination of Intercompany Investments | (2,027,842 | ) | (2,026,885 | ) | ||||
Totals | $ | 4,253,949 | $ | 3,846,076 | ||||
Geographic Information:
Sales:
|
13 Weeks Ended |
39 Weeks Ended |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
October 28, 2000 |
October 30, 1999 |
October 28, 2000 |
October 30, 1999 |
|||||||||
North America | $ | 2,635,949 | $ | 2,268,433 | $ | 7,066,131 | $ | 6,013,720 | |||||
Europe | 165,820 | 125,378 | 492,721 | 292,267 | |||||||||
Totals | $ | 2,801,769 | $ | 2,393,811 | $ | 7,558,852 | $ | 6,305,987 | |||||
Long-Lived Assets:
|
October 28, 2000 |
January 29, 2000 |
|||||
---|---|---|---|---|---|---|---|
North America | $ | 1,551,989 | $ | 1,404,944 | |||
Europe | 207,016 | 181,000 | |||||
Totals | $ | 1,759,005 | $ | 1,585,944 | |||
Note H Guarantor Subsidiaries
The 7.125% senior notes due August 15, 2007 are fully and unconditionally guaranteed on an unsecured, joint and several basis by certain wholly owned subsidiaries of the Company (the "Guarantor Subsidiaries"). The following condensed consolidating financial data illustrates the composition of Staples, Inc. (the "Parent Company"), Guarantor Subsidiaries, and non-guarantor subsidiaries as of and for the thirteen and thirty-nine weeks ended October 28, 2000 and October 30, 1999. The non-guarantor subsidiaries represent more than an inconsequential portion of the consolidated assets and revenues of the Company. Separate complete financial statements of the respective Guarantor Subsidiaries would not provide additional information which would be useful in assessing the financial condition of the Guarantor Subsidiaries and thus are not presented.
Investments in subsidiaries are accounted for by the Company on the equity method for purposes of the supplemental consolidating presentation. Earnings of subsidiaries are, therefore, reflected in the Company's investment accounts and earnings. The principal elimination entries eliminate the Company's investment in subsidiaries and intercompany balances and transactions.
12
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Condensed Consolidated Balance Sheet
October 28, 2000
(in thousands)
|
Staples, Inc. (Parent Co.) |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations |
Consolidated |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cash, cash equivalents and short-term investments | $ | (8,185 | ) | $ | 39,357 | $ | 75,125 | $ | | $ | 106,297 | |||||
Merchandise inventories | 7,961 | 1,297,055 | 362,916 | | 1,667,932 | |||||||||||
Other current assets and Intercompany | 622,442 | 475,988 | 677,222 | (1,123,927 | ) | 651,725 | ||||||||||
Total current assets | 622,218 | 1,812,400 | 1,115,263 | (1,123,927 | ) | 2,425,954 | ||||||||||
Net property, equipment and other assets | 517,699 | 1,012,417 | 1,066,126 | (768,247 | ) | 1,827,995 | ||||||||||
Total assets | $ | 1,139,917 | $ | 2,824,817 | $ | 2,181,389 | $ | (1,892,174 | ) | $ | 4,253,949 | |||||
Total current liabilities | $ | (56,178 | ) | $ | 835,593 | $ | 355,842 | $ | 410,022 | $ | 1,545,279 | |||||
Total long-term liabilities | 578,776 | 243,848 | 26,226 | | 848,850 | |||||||||||
Total stockholders' equity | 617,319 | 1,745,376 | 1,799,321 | (2,302,196 | ) | 1,859,820 | ||||||||||
Total liabilities and stockholders' equity | $ | 1,139,917 | $ | 2,824,817 | $ | 2,181,389 | $ | (1,892,174 | ) | $ | 4,253,949 | |||||
Condensed Consolidated Balance Sheet
January 29, 2000
(in thousands)
|
Staples, Inc. (Parent Co.) |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations |
Consolidated |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cash, cash equivalents and short-term investments | $ | 23,577 | $ | 24,677 | $ | 63,300 | $ | | $ | 111,554 | ||||||
Merchandise inventories | (925 | ) | 1,239,768 | 368,673 | | 1,607,516 | ||||||||||
Other current assets and Intercompany | 661,084 | 453,630 | 553,570 | (1,193,903 | ) | 474,381 | ||||||||||
Total current assets | 683,736 | 1,718,075 | 985,543 | (1,193,903 | ) | 2,193,451 | ||||||||||
Net property, equipment and other assets | 482,668 | 866,446 | 1,056,632 | (753,121 | ) | 1,652,625 | ||||||||||
Total assets | $ | 1,166,404 | $ | 2,584,521 | $ | 2,042,175 | $ | (1,947,024 | ) | $ | 3,846,076 | |||||
Total current liabilities | $ | 84,699 | $ | 743,733 | $ | 347,062 | $ | 279,410 | $ | 1,454,904 | ||||||
Total long-term liabilities | 300,908 | 238,961 | 22,490 | | 562,359 | |||||||||||
Total stockholders' equity | 780,797 | 1,601,827 | 1,672,623 | (2,226,434 | ) | 1,828,813 | ||||||||||
Total liabilities and stockholders' equity | $ | 1,166,404 | $ | 2,584,521 | $ | 2,042,175 | $ | (1,947,024 | ) | $ | 3,846,076 | |||||
13
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Condensed Consolidated Statement of Income
For the thirteen weeks ended October 28, 2000
(in thousands)
|
Staples, Inc. (Parent Co.) |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Consolidated |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sales | $ | | $ | 2,060,925 | $ | 740,844 | $ | 2,801,769 | |||||
Cost of goods sold and occupancy costs | 153 | 1,571,379 | 553,954 | 2,125,486 | |||||||||
Gross profit | (153 | ) | 489,546 | 186,890 | 676,283 | ||||||||
Operating and other expenses | 21,624 | 375,914 | 135,252 | 532,790 | |||||||||
Income/(loss) before income taxes | (21,777 | ) | 113,632 | 51,638 | 143,493 | ||||||||
Income tax expense/(benefit) | (3,162 | ) | 42,380 | 19,614 | 58,832 | ||||||||
Net income/(loss) | $ | (18,615 | ) | $ | 71,252 | $ | 32,024 | $ | 84,661 | ||||
Condensed Consolidated Statement of Income
For the thirteen weeks ended October 30, 1999
(in thousands)
|
Staples, Inc. (Parent Co.) |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Consolidated |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sales | $ | | $ | 1,763,310 | $ | 630,501 | $ | 2,393,811 | |||||
Cost of goods sold and occupancy costs | 224 | 1,328,565 | 470,775 | 1,799,564 | |||||||||
Gross profit | (224 | ) | 434,745 | 159,726 | 594,247 | ||||||||
Operating and other expenses | (563 | ) | 320,342 | 122,773 | 442,552 | ||||||||
Income/(loss) before income taxes | 339 | 114,403 | 36,953 | 151,695 | |||||||||
Income tax expense/(benefit) | 30,837 | 12,975 | 15,349 | 59,161 | |||||||||
Net income/(loss) | $ | (30,498 | ) | $ | 101,428 | $ | 21,604 | $ | 92,534 | ||||
Condensed Consolidated Statement of Income
For the thirty-nine weeks ended October 28, 2000
(in thousands)
|
Staples, Inc. (Parent Co.) |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Consolidated |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sales | $ | | $ | 5,536,598 | $ | 2,022,254 | $ | 7,558,852 | |||||
Cost of goods sold and occupancy costs | 575 | 4,207,047 | 1,518,636 | 5,726,258 | |||||||||
Gross profit | (575 | ) | 1,329,551 | 503,618 | 1,832,594 | ||||||||
Operating and other expenses | 64,309 | 1,092,375 | 385,424 | 1,542,108 | |||||||||
Income/(loss) before income taxes | (64,884 | ) | 237,176 | 118,194 | 290,486 | ||||||||
Income tax expense/(benefit) | (3,162 | ) | 81,437 | 40,824 | 119,099 | ||||||||
Net income/(loss) | $ | (61,722 | ) | $ | 155,739 | $ | 77,370 | $ | 171,387 | ||||
14
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Condensed Consolidated Statement of Income
For the thirty-nine weeks ended October 30, 1999
(in thousands)
|
Staples, Inc. (Parent Co.) |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Consolidated |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sales | $ | | $ | 4,705,348 | $ | 1,600,639 | $ | 6,305,987 | |||||
Cost of goods sold and occupancy costs | 566 | 3,567,153 | 1,194,709 | 4,762,428 | |||||||||
Gross profit | (566 | ) | 1,138,195 | 405,930 | 1,543,559 | ||||||||
Operating and other expenses | 15,803 | 896,983 | 310,130 | 1,222,916 | |||||||||
Income/(loss) before income taxes | (16,369 | ) | 241,212 | 95,800 | 320,643 | ||||||||
Income tax expense/(benefit) | 24,655 | 64,985 | 35,411 | 125,051 | |||||||||
Net income/(loss) | $ | (41,024 | ) | $ | 176,227 | $ | 60,389 | $ | 195,592 | ||||
Condensed Consolidated Statement of Cash Flows
For the thirty-nine weeks ended October 28, 2000
(in thousands)
|
Staples, Inc. (Parent Co.) |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Consolidated |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net cash provided by/(used in) operating activities | $ | (154,223 | ) | $ | 280,920 | $ | 109,563 | $ | 236,260 | |||||
Investing Activities: | ||||||||||||||
Acquisition of property, equipment and lease rights | (37,890 | ) | (211,210 | ) | (78,532 | ) | (327,632 | ) | ||||||
Other | | (57,041 | ) | (2,708 | ) | (59,749 | ) | |||||||
Cash used in investing activities | (37,890 | ) | (268,251 | ) | (81,240 | ) | (387,381 | ) | ||||||
Financing Activities: | ||||||||||||||
Payments on borrowings | (2,518,955 | ) | | (9,114 | ) | (2,528,069 | ) | |||||||
Other | 2,679,306 | 2,011 | 20 | 2,681,337 | ||||||||||
Cash provided by/(used in) financing activities | 160,351 | 2,011 | (9,094 | ) | 153,268 | |||||||||
Effect of exchange rate changes on cash | | | (7,361 | ) | (7,361 | ) | ||||||||
Net (decrease)/increase in cash | (31,762 | ) | 14,680 | 11,868 | (5,214 | ) | ||||||||
Cash and cash equivalents at beginning of period | 23,577 | 24,677 | 62,229 | 110,483 | ||||||||||
Cash and cash equivalents at end of period | $ | (8,185 | ) | $ | 39,357 | $ | 74,097 | $ | 105,269 | |||||
15
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Condensed Consolidated Statement of Cash Flows
For the thirty-nine weeks ended October 30, 1999
(in thousands)
|
Staples, Inc. (Parent Co.) |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Consolidated |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net cash (used in)/provided by operating activities | $ | (238,461 | ) | $ | 151,531 | $ | 246,595 | $ | 159,665 | |||||
Investing Activities: | ||||||||||||||
Acquisition of property, equipment and lease rights | (21,154 | ) | (144,401 | ) | (85,559 | ) | (251,114 | ) | ||||||
Other | (23,010 | ) | 935 | (225,396 | ) | (247,471 | ) | |||||||
Cash (used in)/provided by investing activities | (44,164 | ) | (143,466 | ) | (310,955 | ) | (498,585 | ) | ||||||
Financing Activities: | ||||||||||||||
Payments on borrowings | (434,184 | ) | | (35,980 | ) | (470,164 | ) | |||||||
Other | 515,736 | | 25,510 | 541,246 | ||||||||||
Cash provided by/(used) in financing activities | 81,552 | | (10,470 | ) | 71,082 | |||||||||
Effect of exchange rate changes on cash | | | 9 | 9 | ||||||||||
Net decrease in cash | (201,073 | ) | 8,065 | (74,821 | ) | (267,829 | ) | |||||||
Cash and cash equivalents at beginning of period | 219,426 | 16,348 | 122,219 | 357,993 | ||||||||||
Cash and cash equivalents at end of period | $ | 18,353 | $ | 24,413 | $ | 47,398 | $ | 90,164 | ||||||
Note I Consolidating Information
Below is the consolidating financial information of Staples RD and Staples.com. The financial information reflects the businesses of Staples RD and Staples.com, including the allocation of all the Company's assets, liabilities, revenues, expenses and cash flows between the two businesses in accordance with the Company's cash management and allocation policies adopted by the Board. Allocation policies adopted by the Board can be rescinded or amended at the sole discretion of the Board, although no such changes are currently contemplated. Any such changes adopted by the Board would be made in its good faith business judgement of the Company's best interests, taking into consideration the interests of all stockholders.
Staples RD is comprised of Staples' retail stores, catalog businesses and contract stationer business and a retained interest in Staples.com. Staples.com includes the operations of Staples' e-commerce sites, Staples.com, Quill.com, StaplesLink.com, and its Canadian e-commerce business.
16
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The allocation policies reflected in the following consolidating financial information are as follows:
17
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
CONDENSED CONSOLIDATING BALANCE SHEETS
October 28, 2000
(in thousands)
|
Staples RD |
Staples.com |
Adjustments/ Eliminations |
Staples, Inc. |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Current assets | $ | 2,425,872 | $ | 82 | $ | | $ | 2,425,954 | ||||||
Net funds allocated from Staples RDtemporary | | 5,525 | (5,525 | ) | | |||||||||
Property and equipment, net | 1,224,250 | 22,615 | | 1,246,865 | ||||||||||
Investments | 3,150 | 64,194 | | 67,344 | ||||||||||
Funds allocated to Staples.compermanent | 102,809 | | (102,809 | ) | | |||||||||
Other assets | 513,786 | | | 513,786 | ||||||||||
Total assets | $ | 4,269,867 | $ | 92,416 | $ | (108,334 | ) | $ | 4,253,949 | |||||
Current liabilities | $ | 1,521,209 | $ | 24,070 | $ | | $ | 1,545,279 | ||||||
Net funds allocated to Staples.comtemporary | 5,525 | | (5,525 | ) | | |||||||||
Long-term debt | 779,589 | | | 779,589 | ||||||||||
Other long-term liabilities | 69,261 | | | 69,261 | ||||||||||
Staples RD Stock | 285 | | | 285 | ||||||||||
Staples.com Stock | | 8 | | 8 | ||||||||||
Additional paid-in capital | 1,208,001 | 44,936 | | 1,252,937 | ||||||||||
Funds allocated from Staples RDpermanent | | 102,809 | (102,809 | ) | | |||||||||
Cumulative foreign currency translation adjustments | (10,441 | ) | 34 | | (10,407 | ) | ||||||||
Unrealized gain/(loss) on investments | (5 | ) | (7,951 | ) | | (7,956 | ) | |||||||
Retained earnings/(Accumulated deficit) | 1,190,380 | (70,684 | ) | | 1,119,696 | |||||||||
Treasury stock at cost | (493,937 | ) | (806 | ) | | (494,743 | ) | |||||||
Total liabilities and stockholders' equity | $ | 4,269,867 | $ | 92,416 | $ | (108,334 | ) | $ | 4,253,949 | |||||
18
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
CONDENSED CONSOLIDATING BALANCE SHEETS
January 29, 2000
(in thousands)
|
Staples RD |
Staples.com |
Adjustments/ Eliminations |
Staples, Inc. |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Current assets | $ | 2,191,873 | $ | 1,578 | $ | | $ | 2,193,451 | ||||||
Net Funds allocated to Staples RD, temporary | | 23,660 | (23,660 | ) | | |||||||||
Property and equipment, net | 1,082,334 | 12,428 | | 1,094,762 | ||||||||||
Investments | | 34,755 | | 34,755 | ||||||||||
Funds allocated to Staples.compermanent | 32,878 | | (32,878 | ) | | |||||||||
Other assets | 523,108 | | | 523,108 | ||||||||||
Total assets | $ | 3,830,193 | $ | 72,421 | $ | (56,538 | ) | $ | 3,846,076 | |||||
Current liabilities | $ | 1,447,438 | $ | 7,466 | $ | | $ | 1,454,904 | ||||||
Net funds allocated from Staples.comtemporary | 23,660 | | (23,660 | ) | | |||||||||
Long-term debt | 500,903 | | | 500,903 | ||||||||||
Other long-term liabilities | 61,456 | | | 61,456 | ||||||||||
Staples RD Stock | 282 | | | 282 | ||||||||||
Staples.com Stock | | 8 | | 8 | ||||||||||
Additional paid-in capital | 1,153,784 | 42,728 | | 1,196,512 | ||||||||||
Funds allocated from Staples RDpermanent | | 32,878 | (32,878 | ) | | |||||||||
Cumulative foreign currency translation adjustments | (4,473 | ) | | | (4,473 | ) | ||||||||
Unrealized gain/(loss) on investments | (44 | ) | 6,695 | | 6,651 | |||||||||
Retained earnings/(Accumulated deficit) | 965,663 | (17,354 | ) | | 948,309 | |||||||||
Treasury stock at cost | (318,476 | ) | | | (318,476 | ) | ||||||||
Total liabilities and stockholders' equity | $ | 3,830,193 | $ | 72,421 | $ | (56,538 | ) | $ | 3,846,076 | |||||
19
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
CONSOLIDATING STATEMENTS OF INCOME
For the thirteen weeks ended October 28, 2000
(in thousands)
|
Staples RD |
Staples.com |
Reclassifications/ Eliminations |
Staples, Inc. |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sales | $ | 2,660,082 | $ | 141,687 | $ | | $ | 2,801,769 | ||||||
Cost of goods sold and occupancy costs | 2,014,243 | 111,243 | | 2,125,486 | ||||||||||
Gross profit | 645,839 | 30,444 | | 676,283 | ||||||||||
Operating and other expenses: | ||||||||||||||
Operating and selling | 368,944 | 30,712 | 6,999 | 406,655 | ||||||||||
Pre-opening | 5,064 | | | 5,064 | ||||||||||
Site development | | 6,999 | (6,999 | ) | | |||||||||
General and administrative | 90,954 | 12,778 | | 103,732 | ||||||||||
Amortization of goodwill | 3,621 | | | 3,621 | ||||||||||
Interest and other expense, net | 12,872 | 846 | | 13,718 | ||||||||||
Total operating and other expenses | 481,455 | 51,335 | | 532,790 | ||||||||||
Income/(Loss) before income taxes | 164,384 | (20,891 | ) | | 143,493 | |||||||||
Income tax expense/(benefit) | 67,397 | (8,565 | ) | | 58,832 | |||||||||
Net income/(loss) | $ | 96,987 | $ | (12,326 | ) | $ | | $ | 84,661 | |||||
CONDSOLIDATING STATEMENTS OF INCOME
For the thirteen weeks ended October 30, 1999
(in thousands)
|
Staples RD |
Staples.com |
Reclassifications/ Eliminations |
Staples, Inc. |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sales | $ | 2,369,832 | $ | 23,979 | $ | | $ | 2,393,811 | ||||||
Cost of goods sold and occupancy costs | 1,781,090 | 18,474 | | 1,799,564 | ||||||||||
Gross profit | 588,742 | 5,505 | | 594,247 | ||||||||||
Operating and other expenses: | ||||||||||||||
Operating and selling | 334,036 | 5,984 | 1,006 | 341,026 | ||||||||||
Pre-opening | 4,570 | | | 4,570 | ||||||||||
Site development | | 1,006 | (1,006 | ) | | |||||||||
General and administrative | 85,777 | 2,957 | | 88,734 | ||||||||||
Amortization of goodwill | 3,060 | | | 3,060 | ||||||||||
Interest and other expense, net | 4,941 | 221 | | 5,162 | ||||||||||
Total operating and other expenses | 432,384 | 10,168 | | 442,552 | ||||||||||
Income/(Loss) before income taxes | 156,358 | (4,663 | ) | | 151,695 | |||||||||
Income tax expense/(benefit) | 60,980 | (1,819 | ) | | 59,161 | |||||||||
Net income/(loss) | $ | 95,378 | $ | (2,844 | ) | $ | | $ | 92,534 | |||||
20
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
CONSOLIDATING STATEMENTS OF INCOME
For the thirty-nine weeks ended October 28, 2000
(in thousands)
|
Staples RD |
Staples.com |
Reclassifications/ Eliminations |
Staples, Inc. |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sales | $ | 7,246,110 | $ | 312,742 | $ | | $ | 7,558,852 | |||||||
Cost of goods sold and occupancy costs | 5,479,229 | 247,029 | | 5,726,258 | |||||||||||
Gross profit | 1,766,881 | 65,713 | | 1,832,594 | |||||||||||
Operating and other expenses: | |||||||||||||||
Operating and selling | 1,068,302 | 96,527 | 22,979 | 1,187,808 | |||||||||||
Pre-opening | 19,592 | | | 19,592 | |||||||||||
Site development | | 22,979 | (22,979 | ) | | ||||||||||
General and administrative | 264,851 | 34,582 | | 299,433 | |||||||||||
Amortization of goodwill | 10,716 | | | 10,716 | |||||||||||
Store closure credit | (7,250 | ) | | | (7,250 | ) | |||||||||
Interest and other expense, net | 29,790 | 2,019 | | 31,809 | |||||||||||
Total operating and other expenses | 1,386,001 | 156,107 | | 1,542,108 | |||||||||||
Income/(Loss) before income taxes | 380,880 | (90,394 | ) | | 290,486 | ||||||||||
Income tax expense/(benefit) | 156,161 | (37,062 | ) | | 119,099 | ||||||||||
Net income/(loss) | $ | 224,719 | $ | (53,332 | ) | $ | | $ | 171,387 | ||||||
CONDSOLIDATING STATEMENTS OF INCOME
For the thirty-nine weeks ended October 30, 1999
(in thousands)
|
Staples RD |
Staples.com |
Reclassifications/ Eliminations |
Staples, Inc. |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sales | $ | 6,254,706 | $ | 51,281 | $ | | $ | 6,305,987 | ||||||
Cost of goods sold and occupancy costs | 4,722,957 | 39,471 | | 4,762,428 | ||||||||||
Gross profit | 1,531,749 | 11,810 | | 1,543,559 | ||||||||||
Operating and other expenses: | ||||||||||||||
Operating and selling | 913,249 | 12,656 | 2,125 | 928,030 | ||||||||||
Pre-opening | 13,977 | | | 13,977 | ||||||||||
Site development | | 2,125 | (2,125 | ) | | |||||||||
General and administrative | 254,784 | 7,253 | | 262,037 | ||||||||||
Amortization of goodwill | 8,318 | | | 8,318 | ||||||||||
Interest and other expense, net | 10,040 | 514 | | 10,554 | ||||||||||
Total operating and other expenses | 1,200,368 | 22,548 | | 1,222,916 | ||||||||||
Income/(Loss) before income taxes | 331,381 | (10,738 | ) | | 320,643 | |||||||||
Income tax expense/(benefit) | 129,239 | (4,188 | ) | | 125,051 | |||||||||
Net income/(loss) | $ | 202,142 | $ | (6,550 | ) | $ | | $ | 195,592 | |||||
21
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note J Computation of Earnings Per Common Share
Staples calculates earnings per share in accordance with Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("FAS 128") which requires disclosure of basic and diluted earnings per share. Basic earnings per share exclude any dilutive effects of options, warrants, and convertible securities, while diluted earnings per share include such effects. Subsequent to the approval of the Tracking Stock Proposal on November 9, 1999, the Company has calculated earnings per share under the two class method. Accordingly, earnings per share has been presented for Staples, Inc. common stock for the third quarter of 1999 and year-to-date 1999 and Staples RD Stock and Staples.com Stock for the third quarter of 2000 and year-to-date 2000. Also, net loss per share for Staples.com Stock has been retroactively restated to reflect the effect of a recapitalization effected through a one-for-two reverse stock split approved by the Board on March 7, 2000 and effective April 5, 2000. The computation of earnings/(loss) per common share for the third quarter of 2000 and year-to-date 2000 and for the corresponding periods in 1999 is as follows (in thousands, except per share data):
|
|
|
13 Weeks Ended October 30, 1999 Staples, Inc. |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
13 Weeks Ended October 28, 2000 |
||||||||||
|
Staples RD |
Staples.com |
|||||||||
Numerator: | |||||||||||
Net income/(loss) before adjustment for equity loss | $ | 96,987 | $ | (12,326 | ) | $ | 92,534 | ||||
Adjustment for Staples.com losses attributed to Staples RD Stock | (10,948 | ) | 10,948 | | |||||||
Net income/(loss) attributed to each class of stock | 86,039 | (1,378 | ) | 92,534 | |||||||
Denominator: | |||||||||||
Weighted-average sharesBasic | 453,307 | 13,893 | 460,548 | ||||||||
Weighted-average sharesDiluted | 457,613 | 13,893 | 472,344 | ||||||||
Basic earnings/(loss) per common share | $ | 0.19 | $ | (0.10 | ) | $ | 0.20 | ||||
Diluted earnings/(loss) per common share | $ | 0.19 | $ | (0.10 | ) | $ | 0.20 | ||||
|
|
|
39 Weeks Ended October 30, 1999 Staples, Inc. |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
39 Weeks Ended October 28, 2000 |
||||||||||
|
Staples RD |
Staples.com |
|||||||||
Numerator: | |||||||||||
Net income/(loss) before adjustment for equity loss | $ | 224,719 | $ | (53,332 | ) | $ | 195,592 | ||||
Adjustment for Staples.com losses attributed to Staples RD Stock | (47,100 | ) | 47,100 | | |||||||
Net income/(loss) attributed to each class of stock | 177,619 | (6,232 | ) | 195,592 | |||||||
Denominator: | |||||||||||
Weighted-average sharesBasic | 454,972 | 13,923 | 461,934 | ||||||||
Weighted-average sharesDiluted | 461,874 | 13,923 | 475,059 | ||||||||
Basic earnings/(loss) per common share | $ | 0.39 | $ | (0.45 | ) | $ | 0.42 | ||||
Diluted earnings/(loss) per common share | $ | 0.38 | $ | (0.45 | ) | $ | 0.41 | ||||
22
STAPLES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note K Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The new standard requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives will be reported in the statement of operations or as a deferred item, depending on the use of the derivatives and whether they qualify for hedge accounting. The key criterion for hedge accounting is that the derivative must be highly effective in achieving offsetting changes in fair value or cash flows of the hedged items during the term of the hedge. The effective date of SFAS No. 133 was delayed to fiscal 2001 by the issuance of SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date to FASB Statement No. 133-an amendment of FASB Statement 133". The Company does not expect the adoption of this standard to have a material impact on its results of operations or its financial position.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements", which the Company will be required to adopt in the fourth quarter of 2000. The Company is in the process of determining the effect of adoption of SAB No. 101 on its consolidated financial statements and related disclosures.
Note L Subsequent Event
From November 13, 2000 through November 30, 2000, Lincolnshire, an indirect subsidiary of Staples, received $125,000,000 in aggregate sales proceeds from the purchasers under the accounts receivable securitization sale agreement.
23
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
On November 9, 1999, the stockholders of Staples approved a proposal ("the Tracking Stock Proposal") which amended the Company's certificate of incorporation to (i) authorize the issuance of a new series of common stock, designated as Staples.com common stock ("Staples.com Stock"), intended to track the performance of Staples.com, the Company's e-commerce business, (ii) increase the aggregate number of shares of common stock that the Company may issue from 1,500,000,000 to 2,100,000,000, initially comprised of 1,500,000,000 shares of Staples Retail and Delivery common stock ("Staples RD Stock") and 600,000,000 shares of Staples.com Stock, and (iii) re-classify Staples' existing common stock as Staples RD Stock, intended to track the performance of Staples RD, which consists of all of the Company's non e-commerce businesses and a retained interest in Staples.com. Despite the Company's intentions, the market value of Staples RD Stock may not track the performance of Staples RD and the market value of Staples.com Stock may not track the performance of Staples.com. The Company has a registration statement on file with the Securities and Exchange Commission for a public offering of Staples.com Stock.
The change in the capital structure of the Company as a result of the approval of the Tracking Stock Proposal did not result in the distribution or spin-off to stockholders of any of the Company's assets and liabilities and will not affect ownership of its assets or responsibility for its liabilities or those of its subsidiaries. Holders of Staples RD Stock and Staples.com Stock are common stockholders of the Company and as such will be subject to the risks associated with an investment in Staples and all of its businesses, assets and liabilities. The assets the Company attributes to one business are subject to the liabilities of the other business, even if such liabilities arise from lawsuits, contracts or indebtedness attributed to the other business. If the Company is unable to satisfy one business' liabilities out of the assets attributed to it, the Company may be required to satisfy those liabilities with the assets the Company has attributed to the other business. Further, holders of Staples RD Stock and Staples.com Stock will not have any legal rights related to specific assets of either business and in any liquidation will receive a fixed share of the net assets of the Company, which may not reflect the actual trading prices, if any, of the respective businesses at such time.
Financial effects from one business that affect the Company's consolidated results of operations or financial condition could, if significant, affect the results of operations or financial condition of the other business and the market price of the stock relating to the other business. In addition, net losses of either business and dividends and distributions on, or repurchases of, either class of common stock or repurchases of common stock at a price per share greater than par value will reduce the funds the Company can pay on each class of common stock under Delaware Law.
The Company consolidates for financial reporting purposes Staples RD and Staples.com. Staples RD is comprised of Staples' retail stores, catalog businesses, contract stationer business and a retained interest in Staples.com. For the third quarter of 2000 Staples RD had an 89% retained interest in the losses of Staples.com and a 100% retained interest in the losses of Staples.com for the corresponding period in 1999. Year-to-date 2000 Staples RD had an 88% retained interest in the losses of Staples.com and a 100% retained interest in the losses of Staples.com for the corresponding period in 1999. Staples.com includes the operations of Staples' e-commerce sites, Staples.com, Quill.com, StaplesLink.com, and its Canadian e-commerce business.
Staples RD's and Staples.com's separate operating results, as presented in Note I of the Consolidated Financial Statements, reflect the effect of the application of certain cash management and allocation polices adopted by the Board. While the Company believes such allocations to be reasonable they are not
24
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
necessarily indicative of, and it is not practical for the Company to estimate, the levels of expenses that would have resulted had Staples RD and Staples.com been operating as independent companies. Staples.com has relied upon Staples RD to provide financing for its operations. Therefore, Staples.com's financial position is not necessarily indicative of the financial position that would have resulted had Staples.com been operating as an independent company. However, management believes that the level of expenses would not have been materially different if these services had been provided by third parties. Allocation and related party transaction policies adopted by the Board can be rescinded or amended at the sole discretion of the Board without approval by the stockholders, although no such changes are currently contemplated. Any such changes adopted by the Board would be made in its good faith business judgement of the Company's best interests, taking into consideration the interests of all stockholders.
Results of Operations
Sales
|
13 Weeks Ended October 28, 2000 |
13 Weeks Ended October 30, 1999 |
Increase % |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(Amounts in thousands) |
|
||||||||
North American Retail | $ | 1,877,586 | $ | 1,627,065 | 15 | % | ||||
Contract and Commercial | 616,676 | 617,389 | 0 | % | ||||||
European Operations | 165,820 | 125,378 | 32 | % | ||||||
Total Staples RD | 2,660,082 | 2,369,832 | 12 | % | ||||||
Total Staples.com | 141,687 | 23,979 | 491 | % | ||||||
Total Staples, Inc. | $ | 2,801,769 | $ | 2,393,811 | 17 | % | ||||
|
39 Weeks Ended October 28, 2000 |
39 Weeks Ended October 30, 1999 |
Increase % |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(Amounts in thousands) |
|
||||||||
North American Retail | $ | 4,935,100 | $ | 4,218,054 | 17 | % | ||||
Contract and Commercial | 1,818,289 | 1,744,385 | 4 | % | ||||||
European Operations | 492,721 | 292,267 | 69 | % | ||||||
Total Staples RD | 7,246,110 | 6,254,706 | 16 | % | ||||||
Total Staples.com | 312,742 | 51,281 | 510 | % | ||||||
Total Staples, Inc. | $ | 7,558,852 | $ | 6,305,987 | 20 | % | ||||
Worldwide comparable sales increased 7% for the third quarter of 2000 and 9% for year-to-date 2000. Comparable sales include stores open for more than one year plus the Commercial business ("Staples Direct") and the Staples.com site. Worldwide comparable store sales increased 4% for the third quarter of 2000 and 6% for year-to-date 2000. Worldwide non-comparable store sales represented 57% of the increase in total company sales for the third quarter of 2000 and 51% for year-to-date 2000. Staples had 1,293 open stores as of October 28, 2000 compared to 1,107 stores as of October 30, 1999 and 1,129 stores as of January 29, 2000. This includes 41 stores opened and 2 stores closed during the third quarter of 2000.
Staples RD: Sales for North American retail increased 15% for the third quarter of 2000 and increased 17% for year-to-date 2000. This growth was primarily due to the increase in the North American store base by 33 stores during the third quarter of 2000 and 147 stores for year-to-date 2000. Staples RD
25
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
had 1,138 North American open stores as of October 28, 2000 compared to 972 North American open stores as of October 30, 1999. Sales for Contract and Commercial were flat for the third quarter of 2000 and have increased 4% for year-to-date 2000. This sales activity reflects revenue growth in Staples Direct of 4% for the third quarter of 2000 and 10% growth for year-to-date 2000 driven by an increase in targeted customer marketing, offset by the migration of customers to the Internet site Staples.com. Combined revenue growth for Staples Direct and Staples.com was 32% for year-to-date 2000. Contract division sales, which includes Contract, Quill and Staples Communications, decreased 2% for the third quarter of 2000 and have increased 1% for year-to-date 2000. This slowdown in sales growth reflects the effect of the migration of customers to the Internet sites of StaplesLink.com and Quill.com. Growth in this division would have been 11% for both the third quarter of 2000 and year-to date 2000 if the revenues from StaplesLink.com and Quill.com were included. Contract division sales also reflect a decline in the sales performance of Staples Communications.
Sales for European Operations increased 32% for the third quarter of 2000 and increased 69% for year-to-date 2000. This growth was primarily due to the increase in its European store base by 6 stores during the third quarter of 2000 and by 17 stores for year-to-date 2000, as well as the addition of 42 Office Centre/Sigma stores in the Netherlands, Portugal and Germany in October 1999. Staples RD had 155 European open stores as of October 28, 2000, compared to 135 European stores as of October 30, 1999.
Staples.com: Sales increased 491% during the third quarter of 2000 and 510% for year-to-date 2000 due to the significant increase in the Staples.com customer base and repeat purchases from Staples.com's existing customers. Staples.com had approximately 301,000 repeat customer visits and approximately 194,000 unique repeat customers during the third quarter of 2000. Repeat customers accounted for almost 67% of the total sales during the third quarter of 2000.
Gross Profit. Gross profit as a percentage of sales was 24.1% for the third quarter of 2000 and 24.2% for year-to-date 2000 as compared to 24.8% and 24.5% for the corresponding periods in 1999. The decrease in the gross profit rate for the third quarter of 2000 was largely a reflection of increased shrink costs in Staples' North American retail operations and pricing pressures from Staples competitors offset through lower product costs from vendors, increased buying efficiencies, continued supply chain enhancements and the leveraging of fixed distribution center and delivery costs over a larger sales base.
Operating and Selling Expenses. Operating and selling expenses, which consist of payroll, advertising and other operating expenses, increased as a percentage of sales to 14.5% in the third quarter of 2000 and 15.7% for year-to-date 2000 as compared to 14.2% and 14.7% for the corresponding periods in 1999. The increase was primarily due to increased costs of investing in the operations and marketing of Staples.com. Excluding the costs associated with Staples.com, these expenses as a percentage of sales would have been 13.9% in the third quarter of 2000 and 14.7% for year-to-date 2000 as compared to 14.1% and 14.6% for the corresponding periods in 1999. The slight increase for year-to-date 2000 also reflects the negative impact of wage inflation at the store level during the first half of fiscal year 2000. This increase was partially offset by reduced marketing spending by Staples Retail and Delivery and the continued leveraging of fixed store and delivery operating costs as sales have increased.
Pre-opening Expenses. Pre-opening expenses relating to new store openings, consisting primarily of salaries, supplies, marketing and occupancy costs, are expensed as incurred and therefore fluctuate from period to period depending on the timing and number of new store openings. Pre-opening expenses averaged $123,000 per store for the third quarter of 2000 and $115,000 per store for year-to-date 2000 as compared to $82,000 and $92,000 per store for the corresponding periods in 1999. This increase in pre-opening expense for the third quarter of 2000 and year-to-date 2000 reflects the increased costs associated with opening stores in remote locations.
26
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
General and Administrative Expenses. General and administrative expenses as a percentage of sales were 3.7% for the third quarter of 2000 and 4.0% for year-to-date 2000, as compared to 3.7% and 4.2% for the corresponding periods in 1999. Excluding the impact of Staples.com, which currently has higher general and administrative expenses as a percentage of sales than Staples RD, general and administrative expenses would have dropped to 3.4% for the third quarter of 2000 compared to 3.6% for the third quarter of 1999.
Merger-Related and Integration Costs. As discussed in Note E to the Financial Statements, for year-to-date 2000, the Company utilized reserves of $7,069,000 related to the Quill merger, $12,099,000 related to the European Office Supply purchase and $2,881,000 related to the Claricom purchase. At October 28, 2000, the remaining accruals were $6,593,000 for the Quill merger, $10,871,000 for the European Office Supply purchase and $905,000 for the Claricom purchase. All of the costs anticipated in establishing these reserves will be paid by the end of fiscal year 2000, except for accruals related to contract and lease terminations. The Company believes that the accruals relating to contract and lease terminations will be entirely utilized by fiscal year 2004, although some payments may be made over the remaining lease terms.
Store Closure Credit. For year-to-date 2000, management decided not to close several stores that were included in the original store closure plan. Accordingly, the Company has reversed a portion of the charge in the amount of $7,250,000, representing eighteen stores that the Company is no longer committed to closing due to changes in market conditions.
Amortization of Goodwill. Amortization of goodwill was $3,621,000 for the third quarter of 2000 and $10,716,000 for year-to-date 2000 as compared to $3,060,000 for the third quarter 1999 and $8,318,000 for year-to-date 1999. The increase in amortization is due to the additional goodwill created from the acquisitions of Sigma Burowelt in Germany, Office Centre in the Netherlands and Office Centre in Portugal on October 6, 1999 and Claricom Holdings, Inc., now referred to as Staples Communications, on February 26, 1999. If Staples Communications continues to incur significant operating losses, a write-down of Staples Communications related goodwill and long-lived assets may become necessary, if management determines that the assets have become permanently impaired.
Interest and Other Expense, Net. Net interest and other expense was $13,718,000 for the third quarter of 2000 and $31,809,000 for year-to-date 2000 as compared to $5,162,000 for the third quarter 1999 and $10,554,000 for year-to-date 1999. The interest expense relates primarily to existing borrowings. The increase in the net interest expense during the third quarter of 2000 and year-to-date 2000 was primarily due to increased borrowings from Staples' revolving credit facility and the issuance of $175,000,000 floating rate notes on May 24, 2000.
Income Taxes. The provision for income taxes as a percentage of pre-tax income was 41% for the third quarter of 2000 and for year-to-date 2000 and 39% for the for the corresponding periods in 1999. The increase in Staples' effective tax rate is due primarily to a one time charge associated with the legal restructuring of the European Operations.
Liquidity and Capital Resources
Staples has traditionally used a combination of cash generated from operations and debt or equity offerings to fund its expansion and acquisition activities. During year-to-date 2000 and year-to-date 1999 Staples has also utilized its revolving credit facility to support its various growth initiatives.
27
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Cash flow from operations was $236,000,000 for year-to-date 2000, driven primarily by cash earnings (net income plus depreciation/amortization and other non-cash expenses) of $348,000,000. These earnings were partially offset by increases in receivables of $172,000,000. Receivables from Staples' vendors under rebate and cooperative advertising and marketing programs account for the majority of the increase in receivables since January 29, 2000 as many of the programs are settled at the end of an annual term. The increase in receivables is also attributable to the continued growth of Staples' contract stationer business, Quill, StaplesLink.com and Quill.com. Sales generated by the contract stationer business segment and certain direct mail customers are made under regular credit terms, which requires that Staples carry its own receivables from these sales. On October 27, 2000, Staples entered into an agreement to sell substantially all accounts receivable generated by its contract stationer business segment, on a revolving basis, to a third party. As of October 28, 2000, Staples had not yet sold any of these receivables under the accounts receivables securitization agreement.
Merchandise inventories increased $91,000,000 during the first three quarters of 2000. This increase was primarily attributable to an increase in the number of stores by 164 for year-to-date 2000, offset by lower inventory levels per store. The lower inventory level per store was primarily achieved due to Staples' continued focus on increasing inventory turnover. Total inventory turnover has improved to 4.34 turns per year through October 28, 2000 compared to 4.14 turns for the corresponding period in 1999. The net increase in inventory was funded by corresponding increases in accounts payable. Accounts payable, accrued expenses and other current liabilities increased $162,000,000 during the first three quarters of 2000 due to increased inventory levels, timing of payments and leveraging of accounts payable. To the extent that Staples' store base matures and becomes more profitable, cash generated from store operations is expected to continue to provide a greater portion of funds required for new store inventories and other working capital requirements.
Cash used in investing activities of $387,000,000 for year-to-date 2000 consisted primarily of the acquisition of property and equipment of $328,000,000 and long-term investments in Internet related companies of $59,000,000. The majority of the property and equipment purchased during this period was related to the opening of 170 new stores as well as continued expansion of multi-channel distribution capabilities, the growth of Staples.com and investments in information systems.
Staples maintains a revolving credit facility, effective through November 2002, with a syndicate of banks, which provides up to $350,000,000 of available borrowings. Borrowings made pursuant to this facility will bear interest at either the lead bank's prime rate, the federal funds rate plus 0.50%, the LIBOR rate plus a percentage spread based upon certain defined ratios, a competitive bid rate or a swing line loan rate. This agreement, among other conditions, contains certain restrictive covemants, including net worth maintenance, minimum fixed charge interest coverage, and limitations on indebtedness and sales of assets.
On May 24, 2000, Staples issued notes in the aggregate principal amount of $175,000,000. The notes bear interest at a rate equal to the three month LIBOR plus 85 basis points, or 7.54% at October 28, 2000, and are due on November 26, 2001.
On June 26, 2000, Staples entered into a 364 day revolving credit facility, with a syndicate of banks, which provides up to $200,000,000 of borrowings. Borrowings made pursuant to the facility will bear interest at either (a) the higher of the lead bank's prime rate or the federal funds rate plus 0.50%, with such rate in both cases to be increased by 0.125% when the outstanding balance under the facility exceeds $100,000,000, or (b) the LIBOR rate plus a percentage spread based upon certain defined ratios. The agreement, among other conditions, contains certain restrictive covenants, including net worth maintenance, minimum fixed charge coverage and limitations on indebtedness and sale of assets.
28
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
On October 27, 2000, Lincolnshire Funding, LLC ("Lincolnshire"), an indirect subsidiary of Staples, entered into an accounts receivable sale agreement with Corporate Receivables Corporation and Citicorp North America, Inc. under which Lincolnshire agreed to sell accounts receivable which are purchased by Lincolnshire from Hackensack Funding, LLC ("Hackensack"), Lincolnshire's corporate parent and also an indirect subsidiary of Staples, which receivables are, in turn, purchased by Hackensack from Staples Contract & Commercial, Inc. and Quill Corporation, direct subsidiaries of the Company. The purchase limit under the Lincolnshire receivables sale agreement is $175,000,000. Under the Lincolnshire receivables sale agreement, the purchasers are entitled to receive a yield on their purchase price at a rate, depending on the identity of the purchaser, equal to either (a) the LIBOR rate plus 1.25% of (b) the rate paid by the purchaser on commercial paper notes issued to fund its receivables purchases from Lincolnshire. Staples has entered into a performance undertaking with respect to the performance obligations of its subsidiaries in connection with the receivables sale arrangement. As of October 28, 2000, Staples had not yet sold any of these receivables under the accounts receivable securitization agreement.
Cash provided by financing activities of $153,000,000 includes net proceeds from borrowings of $292,000,000 and proceeds from the sale of capital stock, primarily through the exercise of stock options, of $38,000,000 offset by the purchase of treasury stock of $176,000,000. During the first three quarters of 2000, Staples increased its borrowings under its $350,000,000 revolving credit agreement by $125,000,000 to $275,000,000 at October 28, 2000. Staples also has available $200,000,000 on its 364 day revolving credit facility, $35,000,000 on other uncommitted, short-term bank credit lines, $66,900,000 on European lines of credit and $6,500,000 on a Canadian line of credit all with no outstanding balances as of October 28, 2000, resulting in $489,800,000 of total cash, short-term investments and available revolving credit agreements.
For fiscal 2000, Staples extended its stock repurchase program intended to provide shares for employee stock programs. Management plans to use $250,000,000 for these repurchases. During the first three quarters of 2000, Staples repurchased 8,047,500 shares for approximately $172,000,000 under this program. This amount includes the purchase of 2,600,000 shares for approximately $78,700,000 on July 3, 2000, to settle an equity forward purchase agreement. The agreement was used to hedge against stock price fluctuations for the repurchase of Staples' common stock in connection with the annual stock option grant to employees and directors.
Staples expects to open approximately 176 stores during the next five quarters. Staples estimates that its cash requirements, including pre-opening expenses, inventory, leasehold improvements and fixtures, will be approximately $1,500,000 for each new store (excluding the cost of any acquisitions of lease rights). Accordingly, Staples expects to use approximately $264,000,000 for store openings during this period. Staples also plans to continue to make investments in information systems, distribution centers and store remodels to improve operational efficiencies and customer service, and may expend additional funds to acquire businesses or lease rights from tenants occupying retail space that is suitable for a Staples store. Staples expects that income from operations, together with its current cash and short-term investments, funds available under its revolving credit facility and proceeds from the planned sales of receivables will be sufficient to fund its planned store openings and other recurring operating cash needs for at least the next twelve to eighteen months. Staples continually evaluates financing possibilities, and it may seek to raise additional funds through any one or a combination of public or private debt or equity-related offerings, depending upon market conditions, or through an additional commercial bank debt arrangement.
29
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Inflation and Seasonality
While neither inflation nor deflation has had, and Staples does not expect either to have, a material impact upon operating results, there can be no assurance that inflation or deflation will not affect Staples' business in the future. Staples believes that its business is somewhat seasonal, with sales and profitability slightly lower during the first and second quarters of its fiscal year.
Future Operating Results
This quarterly report on Form 10-Q includes or incorporates forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify these forward-looking statements by the use of the words "believes", "anticipates", "plans", "expects", "may", "will", "would", "intends", "estimates" and other similar expressions, whether in the negative or affirmative. Staples cannot guarantee that they actually will achieve these plans, intentions or expectations disclosed in the forward looking statements made. Staples has included important factors in the cautionary statements below that Staples believes could cause actual results to
differ materially from the forward-looking statements contained herein. The forward-looking statements do not reflect the potential impact of any future acquisitions, mergers or dispositions. Staples does not assume any obligation to update any forward-looking statement contained herein.
Staples' market is highly competitive and Staples may not continue to compete successfully. Staples competes in a highly competitive marketplace with a variety of retailers, dealers and distributors. In most of its geographic markets, Staples competes with other high-volume office supply chains, such as Office Depot, OfficeMax and Office World, that have store formats, pricing strategies and product selections that are similar to Staples. Staples also competes with mass merchants, such as Wal-Mart, warehouse clubs, computer and electronic superstores, and other discount retailers. In addition, Staples' retail stores, delivery and contract businesses, and Staples.com compete with numerous mail order firms, on-line office supply service providers, contract stationer businesses and direct manufacturers. Many of Staples' competitors, including Office Depot, OfficeMax and Wal-Mart, have in recent years significantly increased the number of stores they operate within Staples' markets. Some of Staples' current and potential competitors are larger than Staples and have substantially greater financial resources. The recent poor performance by Staples most direct retail competitors, specifically Office Depot and Office Max, may continue to cause price pressure and thus reduce Staples profit margin. It is also possible that increased competition or improved performance by Staples' competitors may reduce Staples' market share, may reduce Staples' profit margin, and may adversely affect Staples' business and financial performance in other ways.
Staples may be unable to continue to successfully open new stores. An important part of Staples' business plan is to aggressively increase its number of stores. Staples opened 175 stores in the United States, Canada and Europe in fiscal 1999 and has already opened 170 new stores in fiscal 2000. For Staples' growth strategy to be successful, Staples must identify and lease favorable store sites, hire and train employees and adapt management and operational systems to meet the needs of Staples' expanded operations. These tasks may be difficult to accomplish successfully. If Staples is unable to open new stores as quickly as planned, Staples' future sales and profits could be materially adversely affected. Even if Staples succeeds in opening new stores, these new stores may not achieve the same sales or profit levels as its existing stores. Also, Staples' expansion strategy includes opening new stores in markets where Staples already has a presence so it can take advantage of economies of scale in marketing, distribution and supervision costs. However, these new stores may result in the loss of sales in existing stores in nearby areas.
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STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Staples' quarterly operating results are subject to significant fluctuation. Staples' operating results have fluctuated from quarter to quarter in the past, and it expects that they will continue to do so in the future. Staples' earnings may not continue to grow at rates similar to the growth rates achieved in recent years and may fall short of either a prior fiscal period or investors' expectations. Factors that could cause these quarterly fluctuations include the following:
Most of Staples' operating expenses, such as rent expense, advertising expense and employee salaries, do not vary directly with the amount of sales and are difficult to adjust in the short term. As a result, if sales in a particular quarter are below expectations for that quarter, Staples may not proportionately reduce operating expenses for that quarter, and therefore this sales shortfall would have a disproportionate effect on its net income for the quarter.
Staples' stock price may fluctuate based on the expectations of professional security analysts. The public trading of Staples RD Stock is based in large part on professional securities analysts' expectations that its business will continue to grow and that the Company will achieve certain levels of net income. If Staples' financial performance in a particular quarter does not meet the expectations of securities analysts, this may adversely affect the views of those securities analysts concerning the growth potential and future financial performance of Staples. In particular, in light of the Company's substantial recent investment in Staples.com and the Company's pending public offering of Staples.com Stock, the Company believes that Staples RD Stock has become increasingly subject to the recent market volatility associated with Internet stocks. If the securities analysts that regularly follow Staples RD Stock lower their rating or lower their projections for future growth and financial performance, the market price of Staples RD Stock is likely to drop significantly. In addition, in those circumstances the decrease in the stock price may be disproportionate to the shortfall in the Company's financial performance.
Staples' rapid growth may continue to strain operations, which could adversely affect the business and financial results. Staples' business, including sales, number of stores, investment in Staples.com and number of employees, has grown dramatically over the past several years. In addition, Staples has acquired a number of significant companies in the last few years and may make additional acquisitions in the future. This growth has placed significant demands on management and operational systems. If Staples is not successful in upgrading the operational and financial systems, expanding the management team and increasing and effectively managing the employee base, this growth is likely to result in operational inefficiencies and ineffective management of the business and employees, which will in turn adversely affect Staples' business and financial performance.
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STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Staples' international operations may not become profitable. Staples currently operates in international markets through The Business Depot Ltd. in Canada, Staples UK in the United Kingdom, Staples Deutschland in Germany, and Office Centre in the Netherlands and Portugal. Consolidated European operations are currently unprofitable, and Staples cannot guarantee that they will become profitable. Staples may seek to expand further into other international markets in the future. Staples' foreign operations encounter risks similar to those faced by its US stores, as well as risks inherent in foreign operations, such as local customs and competitive conditions and foreign currency fluctuations.
Staples' e-commerce business is currently experiencing operating losses. Staples.com includes the operations of Staples' e-commerce sites, Staples.com, Quill.com, StaplesLink.com, and its Canadian e-commerce business. Staples.com is currently unprofitable. Staples cannot guarantee that Staples.com will become profitable.
Staples e-commerce business has equity investments in various e-commerce companies, whose operations may not become profitable or generate cash flows to sustain operations. In light of the recent market volatility associated in Internet Stocks, some of these companies may experience significant devaluation due to cash restraints and failed business models. If these companies are unable to implement a profitable business model or obtain additional funding Staples may incur investment losses which would increase the net losses of Staples.com in the future. Staples currently has a cost basis of approximately $81,000,000 in e-commerce companies.
Staples Communications' operations may not become profitable. Staples Communications, formerly Claricom Holdings Inc., a business acquired in February 1999 is currently unprofitable. Staples does not expect Staples Communications will become profitable in the near term. Should the performance of Staples Communications continue to incur significant operating losses, a write-down of Staples Communications goodwill and long-lived assets may become necessary if management determines that the assets have become permanently impaired.
Staples may be unable to obtain adequate future financing. It is possible that Staples will require additional sources of financing earlier than anticipated, as a result of unexpected cash needs or opportunities, an expanded growth strategy or disappointing operating results. Additional funds may not be available on satisfactory terms when needed, or at all, whether in the next twelve to eighteen months or thereafter.
Euro Currency
On January 1, 1999, participating member countries of the European Union established fixed conversion rates between their existing currencies and the European Union's common currency ("the euro"). The former currencies of the participating countries are scheduled to remain legal tender as denominations of the euro until January 1, 2002 when the euro will be adopted as the sole legal currency.
Staples has evaluated the potential impact of the conversion to the euro on its business, including the ability of the information systems to handle euro-denominated transactions, the impact on exchange costs and currency exchange rate risks. Based on the results of this evaluation, Staples does not expect the conversion to the euro to have a material impact on its operations or financial position.
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STAPLES, INC. AND SUBSIDIARIES
Quantitative and Qualitative Disclosures about Market Risks
Staples is exposed to market risk from changes in interest rates and foreign exchange rates. Staples initiated a risk management control process to monitor the interest rate and foreign exchange risks. The risk management process uses analytical techniques including market value, sensitivity analysis, and value at risk estimates. Staples does not believe that the potential exposure is significant in light of its size and its business. Staples uses interest rate and currency swap agreements for purposes other than trading and they are treated as off-balance sheet items. Staples uses interest rate swap agreements to modify fixed rate obligations to variable rate obligations, thereby adjusting the interest rates to current market rates and ensuring that the debt instruments are always reflected at fair value. Staples is exposed to foreign exchange risks through subsidiaries in Canada, the United Kingdom, Germany, the Netherlands, Portugal and Belgium. Staples has entered into derivative financial instruments, as noted below, to partially hedge its foreign exchange exposure, and Staples believes the remaining potential exposure is not material to its overall financial position or its results of operations.
On May 11, 1999 and August 3, 1999, Staples entered into interest rate swaps, each for an aggregate notional amount of $100,000,000, in order to minimize financing costs associated with its $200,000,000 of 7.125% senior notes due August 15, 2007. The swap agreements are both scheduled to terminate on August 15, 2007. Under the interest rate swap agreements, Staples is entitled to receive semi-annual interest payments at a fixed rate of 7.125% and is obligated to pay interest based on a 30 day Non-Financial US Commercial Paper Rate plus 107 basis points and 31.875 basis points, respectively, currently approximately 7.58% and 6.83%. The interest rate swaps are being accounted for as a hedge and the differential to be paid or received on the interest rate swap agreements is accrued and recognized as an adjustment to interest expense over the life of the agreements. If Staples and the counterparty to the agreements terminate the swaps prior to their original maturity, any gain or loss upon termination will be amortized to interest expense over the remaining original life of the agreements.
Staples issued notes in the aggregate principal amount of 150,000,000 euro on November 15, 1999. Net proceeds of approximately $148,000,000 were used to fund international expansion. These notes bear interest at a rate of 5.875% per annum and are due on November 15, 2004. These notes have been designated as a foreign currency hedge on Staples' net foreign investments in Europe and gains or losses are recorded in the cumulative translation adjustment line in stockholders' equity.
On November 15, 1999, Staples entered into an interest rate swap for an aggregate notional amount of 150,000,000 euro in order to minimize financing costs on the notes issued the same date. The swap agreement is scheduled to terminate on November 15, 2004. Under the interest rate swap agreement, Staples is entitled to receive annual interest payments at a fixed rate of approximately 5.875% and is required to make quarterly interest payments at a floating rate of the one month EURIBOR plus 1.1175%, currently approximately 5.9385%. Staples has designated its 150,000,000 euro notes and its interest rate swap agreement to be an integrated transaction. Accordingly, the interest rate swap agreement is being accounted for as a hedge and the differential to be paid or received on the interest rate swap agreements is accrued and recognized as an adjustment to interest expense over the life of the agreement.
On May 3, 2000, Staples entered into a currency swap on its $200,000,000 of 7.125% senior notes issued on August 12, 1997. The Company has swapped the dollar-denominated principal and interest into Canadian dollar denominated obligations of 295,290,000 in Canadian dollars at an interest rate of 6.445%. This swap has been designated as a foreign currency hedge on Staples' net investment in Canadian dollar denominated subsidiaries and gains or losses will be recorded in the cumulative translation adjustment line in stockholders' equity.
This risk management discussion and discussion of the effects of changes in interest rates and foreign exchange rates, are forward-looking statements. Actual future results may differ materially from these projected results due to developments in the global financial markets. The analytical methods used by Staples to assess and mitigate risk discussed above should not be considered projections of future events or losses.
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Items 1, 2, 3, 4 and 5Not applicable
Item 6Exhibits and Reports on Form 8-K.
Not Applicable
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
STAPLES, INC. | |||
Date: December 12, 2000 |
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By: |
/s/ JOHN J. MAHONEY John J. Mahoney Executive Vice President-Finance and Chief Financial Officer (Principal Financial Officer) |
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