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: November 3, 2001
Commission File Number: 0-17586
STAPLES, INC.
(Exact name of registrant as specified in its charter)
| Delaware (State or other jurisdiction of incorporation or organization) |
04-2896127 (IRS 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 461,616,311 shares of Staples common stock outstanding as of December 10, 2001.
STAPLES, INC. AND SUBSIDIARIES
FORM 10-Q
NOVEMBER 3, 2001
| |
Page |
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|---|---|---|---|
| Part I—Financial 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 | 6-16 | ||
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
17-23 |
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Item 3. Quantitative and Qualitative Disclosures about Market Risk |
24 |
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Part II—Other Information |
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Item 1. Legal Proceedings |
25 |
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Item 2. Changes in Securities and Use of Proceeds |
25 |
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Item 4. Submission of Matters to a Vote of Security Holders |
26 |
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Signature |
27 |
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Page 2
ITEM 1.
STAPLES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollar Amounts in Thousands, Except Share Data)
| |
November 3, 2001 (Unaudited) |
February 3, 2001 |
||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| ASSETS | ||||||||||
| Current Assets: | ||||||||||
| Cash and cash equivalents | $ | 111,315 | $ | 263,560 | ||||||
| Merchandise inventories | 1,580,922 | 1,639,698 | ||||||||
| Receivables, net | 473,451 | 297,916 | ||||||||
| Deferred income taxes | 66,242 | 43,955 | ||||||||
| Other current assets | 120,389 | 110,982 | ||||||||
| Total current assets | 2,352,319 | 2,356,111 | ||||||||
| Property and Equipment: | ||||||||||
| Land and buildings | 425,207 | 400,971 | ||||||||
| Leasehold improvements | 559,989 | 519,681 | ||||||||
| Equipment | 788,823 | 692,783 | ||||||||
| Furniture and fixtures | 393,713 | 352,712 | ||||||||
| Total property and equipment | 2,167,732 | 1,966,147 | ||||||||
| Less accumulated depreciation and amortization | 806,275 | 665,622 | ||||||||
| Net property and equipment | 1,361,457 | 1,300,525 | ||||||||
| Other Assets: | ||||||||||
| Lease acquisition costs, net of amortization | 54,295 | 58,596 | ||||||||
| Goodwill, net of amortization | 233,598 | 238,536 | ||||||||
| Other | 65,967 | 30,155 | ||||||||
| Total other assets | 353,860 | 327,287 | ||||||||
| $ | 4,067,636 | $ | 3,983,923 | |||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||
| Current Liabilities: | ||||||||||
| Accounts payable | $ | 956,736 | $ | 983,851 | ||||||
| Other current liabilities | 557,267 | 542,923 | ||||||||
| Debt maturing within one year | 177,142 | 184,505 | ||||||||
| Total current liabilities | 1,691,145 | 1,711,279 | ||||||||
| Long-Term Debt | 372,425 | 441,257 | ||||||||
| Deferred Tax Liability | 268 | 8,916 | ||||||||
| Other Long-Term Obligations | 77,198 | 73,047 | ||||||||
| Stockholders' Equity: | ||||||||||
| Preferred stock, $.01 par value 5,000,000 shares authorized; no shares issued | — | — | ||||||||
| Common stock: | ||||||||||
| Staples, Inc. Stock, $.0006 par value 2,100,000,000 shares authorized; issued 488,503,111 shares at November 3, 2001 |
293 | — | ||||||||
| Staples RD Stock, $.0006 par value 1,500,000,000 shares authorized; issued 477,111,602 shares at February 3, 2001 |
— | 285 | ||||||||
| Staples.com Stock, $.0006 par value 600,000,000 shares authorized; issued 14,105,821 shares at February 3, 2001 |
— | 8 | ||||||||
| Additional paid-in capital | 1,326,049 | 1,285,719 | ||||||||
| Cumulative foreign currency translation adjustments | (22,609 | ) | (14,353 | ) | ||||||
| Unrealized gain on investments | — | (1 | ) | |||||||
| Retained earnings | 1,179,193 | 1,008,021 | ||||||||
| Less: Staples, Inc. treasury stock at cost, 27,540,507 shares at November 3, 2001, and 24,743,420 shares at February 3, 2001 |
(556,326 | ) | (530,255 | ) | ||||||
| Total stockholders' equity | 1,926,600 | 1,749,424 | ||||||||
| $ | 4,067,636 | $ | 3,983,923 | |||||||
See notes to consolidated financial statements.
Page 3
STAPLES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Dollar Amounts in Thousands, Except Per Share Data)
| |
(Unaudited) 13 Weeks Ended |
(Unaudited) 39 Weeks Ended |
||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
November 3, 2001 |
October 28, 2000 |
November 3, 2001 |
October 28, 2000 |
||||||||||||
| Sales | $ | 2,833,861 | $ | 2,801,769 | $ | 7,815,166 | $ | 7,558,852 | ||||||||
| Cost of goods sold and occupancy costs | 2,146,724 | 2,125,486 | 5,961,692 | 5,726,258 | ||||||||||||
| Gross profit | 687,137 | 676,283 | 1,853,474 | 1,832,594 | ||||||||||||
Operating and other expenses: |
||||||||||||||||
| Operating and selling | 431,337 | 406,655 | 1,238,888 | 1,187,808 | ||||||||||||
| Pre-opening | 3,245 | 5,064 | 12,392 | 19,592 | ||||||||||||
| General and administrative | 95,997 | 103,732 | 295,496 | 299,433 | ||||||||||||
| Amortization of goodwill | 1,646 | 3,621 | 4,938 | 10,716 | ||||||||||||
| Store closure credit | — | — | — | (7,250 | ) | |||||||||||
| Interest and other expense, net | 6,437 | 13,718 | 23,432 | 31,809 | ||||||||||||
| Total operating and other expenses | 538,662 | 532,790 | 1,575,146 | 1,542,108 | ||||||||||||
| Income before income taxes | 148,475 | 143,493 | 278,328 | 290,486 | ||||||||||||
| Income tax expense | 57,163 | 58,832 | 107,156 | 119,099 | ||||||||||||
| Net income | $ | 91,312 | $ | 84,661 | $ | 171,172 | $ | 171,387 | ||||||||
| Net income/(loss) attributed to: | ||||||||||||||||
| Staples, Inc. Stock | $ | 91,312 | $ | — | $ | 91,312 | $ | — | ||||||||
| Staples RD Stock | — | 86,039 | 79,740 | 177,619 | ||||||||||||
| Staples.com Stock | — | (1,378 | ) | 120 | (6,232 | ) | ||||||||||
| $ | 91,312 | $ | 84,661 | $ | 171,172 | $ | 171,387 | |||||||||
| Basic earnings/(loss) per common share: | ||||||||||||||||
| Earnings per common share—Staples, Inc. Stock | $ | 0.20 | $ | — | $ | 0.20 | $ | — | ||||||||
| Earnings per common share—Staples RD Stock | $ | — | $ | 0.19 | $ | 0.18 | $ | 0.39 | ||||||||
| Earnings/(loss) per common share—Staples.com Stock | $ | — | $ | (0.10 | ) | $ | 0.01 | $ | (0.45 | ) | ||||||
| Diluted earnings/(loss) per common share: | ||||||||||||||||
| Earnings per common share—Staples, Inc. Stock | $ | 0.20 | $ | — | $ | 0.20 | $ | — | ||||||||
| Earnings per common share—Staples RD Stock | $ | — | $ | 0.19 | $ | 0.17 | $ | 0.38 | ||||||||
| Earnings/(loss) per common share—Staples.com Stock | $ | — | $ | (0.10 | ) | $ | 0.01 | $ | (0.45 | ) | ||||||
See notes to consolidated financial statements.
Page 4
STAPLES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)
| |
(Unaudited) 39 Weeks Ended |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
November 3, 2001 |
October 28, 2000 |
||||||||
| Operating Activities: | ||||||||||
| Net income | $ | 171,172 | $ | 171,387 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||
| Depreciation and amortization | 183,450 | 168,594 | ||||||||
| Deferred tax (benefit)/expense | (40,864 | ) | 7,629 | |||||||
| Store closure credit | — | (7,250 | ) | |||||||
| Other non-cash items affecting income | 15,193 | 7,520 | ||||||||
| Change in assets and liabilities, net of companies acquired/divested using purchase accounting: | ||||||||||
| Decrease/(increase) in merchandise inventories | 31,582 | (90,972 | ) | |||||||
| Increase in receivables | (131,378 | ) | (171,890 | ) | ||||||
| Increase in retained securitized accounts receivable | (86,109 | ) | — | |||||||
| Increase in other assets | (12,060 | ) | (20,410 | ) | ||||||
| Increase in accounts payable and other current liabilities | 53,752 | 162,440 | ||||||||
| Increase in other long-term obligations | 5,954 | 9,212 | ||||||||
| 19,520 | 64,873 | |||||||||
| Net cash provided by operating activities | 190,692 | 236,260 | ||||||||
Investing Activities: |
||||||||||
| Acquisition of property and equipment | (258,232 | ) | (327,632 | ) | ||||||
| Proceeds from the sale of short-term investments | 8,938 | 108 | ||||||||
| Purchase of long-term investments | (250 | ) | (58,947 | ) | ||||||
| Proceeds from the sale and maturity of long-term investments | 1,654 | 1,951 | ||||||||
| Other | (515 | ) | (2,861 | ) | ||||||
| Net cash used in investing activities | (248,405 | ) | (387,381 | ) | ||||||
Financing Activities: |
||||||||||
| Proceeds from sale of capital stock | 26,347 | 37,885 | ||||||||
| Proceeds from borrowings | 597,110 | 2,819,719 | ||||||||
| Payments on borrowings | (683,800 | ) | (2,528,069 | ) | ||||||
| Settlement of equity forward purchase agreement | — | (78,684 | ) | |||||||
| Purchase of treasury stock | (26,071 | ) | (97,583 | ) | ||||||
| Net cash (used in)/provided by financing activities | (86,414 | ) | 153,268 | |||||||
Effect of exchange rate changes on cash |
(8,118 |
) |
(7,361 |
) |
||||||
Net decrease in cash and cash equivalents |
(152,245 |
) |
(5,214 |
) |
||||||
| Cash and cash equivalents at beginning of period | 263,560 | 110,483 | ||||||||
| Cash and cash equivalents at end of period | $ | 111,315 | $ | 105,269 | ||||||
See notes to consolidated financial statements.
Page 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 period covering the thirteen and thirty-nine weeks ending November 3, 2001 (also referred to as the "third quarter of 2001" and "year-to-date 2001", respectively), and the period 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). 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) considered necessary to present fairly the financial position and the results of operations and cash flows for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended February 3, 2001.
Certain previously reported amounts have been reclassified to conform with the current period presentation.
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. During the third quarter of 2001 and year-to-date 2001, total comprehensive income amounted to $88 million and $163 million, respectively, compared to approximately $33 million and $151 million for the corresponding periods in 2000. This change in comprehensive income was primarily due to a fluctuation in the unrealized gain/(loss) on investments.
Note C—Acquisitions and Divestitures
During fiscal years 1998 and 1999, Staples made three acquisitions: Quill Corporation on May 21, 1998; Claricom Holdings, Inc. and certain related entities, 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. These accruals were fully utilized prior to fiscal year 2001 except for accruals relating to contract and lease terminations. Year-to-date 2001, Staples charged expenses of $151,000 related to the Quill acquisition and $430,000 related to the European Office Supply purchase to these accruals. At November 3, 2001, the remaining accruals were $3.6 million for the Quill acquisition and $6.7 million for the European Office Supply purchase. The Company believes that the remaining accruals, which relate to contract and lease terminations, will be entirely utilized by fiscal year 2004, although some payments may be made over the remaining lease terms.
Page 6
During the fourth quarter of 2000, Staples recognized impairment losses of $156 million related to the write-down of goodwill and fixed assets of its telecommunications subsidiary, Staples Communications. On April 3, 2001, Staples sold Staples Communications to Platinum Equity L.L.C. The sale of Staples Communications includes the subsidiary's three primary businesses which provide hardware sales and services, long distance services and local network services to small and medium sized business customers.
Note D—Store Closure Charge/Credit
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 $49.7 million of which $7.3 million was reversed in the first quarter of 2000. All of the remaining accruals directly relate to long-term lease obligations for the closed stores which the Company is either in the process of obtaining subtenants for or is attempting to cancel. Accordingly, the Company believes that the remaining accruals should be entirely utilized by fiscal year 2004; however, some payments may be made over the remaining lease terms. The following table is a roll-forward of the store closure accruals for year-to-date 2001 (in thousands):
| |
Balance at February 3, 2001 |
Charges utilized |
Balance at November 3, 2001 |
||||||
|---|---|---|---|---|---|---|---|---|---|
| Lease Terminations | $ | 17,054 | $ | (3,532 | ) | $ | 13,522 | ||
| Legal and Settlement Costs | 3,602 | (612 | ) | 2,990 | |||||
| $ | 20,656 | $ | (4,144 | ) | $ | 16,512 | |||
Note E—Segment Reporting
Staples has three reportable segments: North American Retail, North American Delivery, and European Operations. Staples' North American Retail segment consists of the U.S. and Canadian business units that operate office supply stores. The North American Delivery segment consists of the U.S. and Canadian business units that sell and deliver office products, supplies and services directly to businesses; and is comprised of Direct.com (North American catalog and e-commerce operations), Staples Contract and Quill. The European Operations segment consists of six operating units that operate office supply stores in the United Kingdom, Germany, the Netherlands and Portugal and that sell and deliver office products and supplies directly to businesses throughout the United Kingdom and Germany.
Staples' North American Retail and North American Delivery segments are managed separately because the way they market products is different, the classes of customers they service may be different, and the distribution methods used to deliver products to customers is different. The European Operations are considered a separate reportable segment because of the significant difference in the operating environment from the North American operations.
As a result of the Recapitalization (see Note G), Staples has restated the presentation of its results of operations into the three reportable segments, combining the previously reported Staples.com and Contract and Commercial reportable segments into the North American Delivery reportable segment.
Page 7
The following is a summary of Sales and Business Unit Income/(Loss) by reportable segment for the third quarter of 2001 and year-to-date 2001 and for the corresponding periods in 2000 (in thousands):
Sales by Segment
| |
Thirteen Weeks Ended |
Thirty-nine Weeks Ended |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
November 3, 2001 |
October 28, 2000 |
November 3, 2001 |
October 28, 2000 |
|||||||||
| N. American Retail | $ | 1,851,660 | $ | 1,877,586 | $ | 4,985,389 | $ | 4,935,100 | |||||
| N. American Delivery | 777,598 | 715,072 | 2,243,955 | 1,997,643 | |||||||||
| European Operations | 204,603 | 165,820 | 560,642 | 492,721 | |||||||||
| Total Reportable Segments | $ | 2,833,861 | $ | 2,758,478 | $ | 7,789,986 | $ | 7,425,464 | |||||
| Divested Business(1) | — | 43,291 | 25,180 | 133,388 | |||||||||
| Consolidated Staples | $ | 2,833,861 | $ | 2,801,769 | $ | 7,815,166 | $ | 7,558,852 | |||||
Business Unit Income/(Loss)
| |
Thirteen Weeks Ended |
Thirty-nine Weeks Ended |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
November 3, 2001 |
October 28, 2000 |
November 3, 2001 |
October 28, 2000 |
|||||||||
| N. American Retail | $ | 100,464 | $ | 129,781 | $ | 179,318 | $ | 289,481 | |||||
| N. American Delivery | 54,710 | 41,860 | 138,959 | 74,816 | |||||||||
| European Operations | (262 | ) | (6,521 | ) | (14,980 | ) | (26,498 | ) | |||||
| Total Reportable Segments | $ | 154,912 | $ | 165,120 | $ | 303,297 | $ | 337,799 | |||||
| Divested Business(1) | — | (7,909 | ) | (1,537 | ) | (22,754 | ) | ||||||
| Store closure credit | — | — | — | 7,250 | |||||||||
| Interest and other expense, net | (6,437 | ) | (13,718 | ) | (23,432 | ) | (31,809 | ) | |||||
| Income before income taxes | $ | 148,475 | $ | 143,493 | $ | 278,328 | $ | 290,486 | |||||
Page 8
Staples' $200 million of 7.125% senior notes (the "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 November 3, 2001 and October 28, 2000. The non-guarantor subsidiaries represent more than an inconsequential portion of the consolidated assets and revenues of the Company; however, separate complete financial statements of the respective Guarantor Subsidiaries would not provide additional information which would be useful in assessing the financial condition of the Guarantor Subsidiaries and thus are not presented.
Investments in subsidiaries are accounted for by the Company on the equity method for purposes of the supplemental consolidating presentation. Earnings of subsidiaries are, therefore, reflected in the Company's investment accounts and earnings. The principal elimination entries eliminate the Company's investment in subsidiaries and intercompany balances and transactions.
Condensed Consolidating Balance Sheet
As of November 3, 2001
(in thousands)
| |
Staples, Inc. (Parent Co.) |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations |
Consolidated |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash and cash equivalents | $ | 1,252 | $ | 50,294 | $ | 59,769 | $ | — | $ | 111,315 | |||||
| Merchandise inventories | (6,620 | ) | 1,220,030 | 367,512 | — | 1,580,922 | |||||||||
| Other current assets and intercompany | 273,679 | 400,832 | 976,165 | (990,594 | ) | 660,082 | |||||||||
| Total current assets | 268,311 | 1,671,156 | 1,403,446 | (990,594 | ) | 2,352,319 | |||||||||
| Net property, equipment and other assets | 726,960 | 1,012,405 | 576,273 | (600,321 | ) | 1,715,317 | |||||||||
| Total assets | $ | 995,271 | $ | 2,683,561 | $ | 1,979,719 | $ | (1,590,915 | ) | $ | 4,067,636 | ||||
| Total current liabilities | $ | 152,589 | $ | 546,220 | $ | 661,179 | $ | 331,157 | $ | 1,691,145 | |||||
| Total long-term liabilities | 165,813 | 267,917 | 16,161 | — | 449,891 | ||||||||||
| Total stockholders' equity | 676,869 | 1,869,424 | 1,302,379 | (1,922,072 | ) | 1,926,600 | |||||||||
| Total liabilities and stockholders' equity | $ | 995,271 | $ | 2,683,561 | $ | 1,979,719 | $ | (1,590,915 | ) | $ | 4,067,636 | ||||
Page 9
Condensed Consolidating Balance Sheet
As of February 3, 2001
(in thousands)
| |
Staples, Inc. (Parent Co.) |
Guarantor Subsidiaries |
Non- Guarantor Subsidiaries |
Eliminations |
Consolidated |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash and cash equivalents | $ | 142,825 | $ | 52,055 | $ | 68,680 | $ | — | $ | 263,560 | |||||
| Merchandise inventories | 1,721 | 1,255,041 | 382,936 | — | 1,639,698 | ||||||||||
| Other current assets and intercompany | 399,328 | 763,320 | 718,795 | (1,428,590 | ) | 452,853 | |||||||||
| Total current assets | 543,874 | 2,070,416 | 1,170,411 | (1,428,590 | ) | 2,356,111 | |||||||||
| Net property, equipment and other assets | 593,669 | 979,477 | 1,097,649 | (1,042,983 | ) | 1,627,812 | |||||||||
| Total assets | $ | 1,137,543 | $ | 3,049,893 | $ | 2,268,060 | $ | (2,471,573 | ) | $ | 3,983,923 | ||||
| Total current liabilities | $ | 294,452 | $ | 1,043,874 | $ | 537,627 | $ | (164,674 | ) | $ | 1,711,279 | ||||
| Total long-term liabilities | 251,750 | 243,314 | 28,156 | — | 523,220 | ||||||||||
| Total stockholders' equity | 591,341 | 1,762,705 | 1,702,277 | (2,306,899 | ) | 1,749,424 | |||||||||
| Total liabilities and stockholders' equity | $ | 1,137,543 | $ | 3,049,893 | $ | 2,268,060 | $ | (2,471,573 | ) | $ | 3,983,923 | ||||
Condensed Consolidated Statement of Income
For the thirteen weeks ended November 3, 2001
(in thousands)
| |
Staples, Inc. (Parent Co.) |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Consolidated |
||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Sales | $ | — | $ | 2,076,840 | $ | 757,021 | $ | 2,833,861 | ||||
| Cost of goods sold and occupancy costs | 167 | 1,579,278 | 567,279 | 2,146,724 | ||||||||
| Gross profit | (167 | ) | 497,562 | 189,742 | 687,137 | |||||||
| Operating and other expenses | 14,212 | 400,473 | 123,977 | 538,662 | ||||||||
| Income/(loss) before income taxes | (14,379 | ) | 97,089 | 65,765 | 148,475 | |||||||
| Income tax expense | — | 35,106 | 22,057 | 57,163 | ||||||||
| Net income/(loss) | $ | (14,379 | ) | $ | 61,983 | $ | 43,708 | $ | 91,312 | |||
Page 10
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 thirty-nine weeks ended November 3, 2001
(in thousands)
| |
Staples, Inc. (Parent Co.) |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Consolidated |
||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Sales | $ | — | $ | 5,734,630 | $ | 2,080,536 | $ | 7,815,166 | ||||
| Cost of goods sold and occupancy costs | 537 | 4,395,571 | 1,565,584 | 5,961,692 | ||||||||
| Gross profit | (537 | ) | 1,339,059 | 514,952 | 1,853,474 | |||||||
| Operating and other expenses | 41,185 | 1,156,624 | 377,337 | 1,575,146 | ||||||||
| Income/(loss) before income taxes | (41,722 | ) | 182,435 | 137,615 | 278,328 | |||||||
| Income tax expense/(benefit) | (498 | ) | 65,664 | 41,990 | 107,156 | |||||||
| Net income/(loss) | $ | (41,224 | ) | $ | 116,771 | $ | 95,625 | $ | 171,172 | |||
Page 11
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 | |||
Condensed Consolidated Statement of Cash Flows
For the thirty-nine weeks ended November 3, 2001
(in thousands)
| |
Staples, Inc. (Parent Co.) |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Consolidated |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net cash (used in)/provided by operating activities | $ | (54,310 | ) | $ | 166,890 | $ | 78,112 | $ | 190,692 | ||||
| Investing Activities: | |||||||||||||
| Acquisition of property and equipment | (27,326 | ) | (160,266 | ) | (70,640 | ) | (258,232 | ) | |||||
| Other | 10,342 | — | (515 | ) | 9,827 | ||||||||
| Cash used in investing activities | (16,984 | ) | (160,266 | ) | (71,155 | ) | (248,405 | ) | |||||
| Financing Activities: | |||||||||||||
| Payments on borrowings | (668,077 | ) | — | (15,723 | ) | (683,800 | ) | ||||||
| Other | 597,798 | (8,372 | ) | 7,960 | 597,386 | ||||||||
| Cash used in financing activities | (70,279 | ) | (8,372 | ) | (7,763 | ) | (86,414 | ) | |||||
| Effect of exchange rate changes on cash | — | — | (8,118 | ) | (8,118 | ) | |||||||
| Net decrease in cash | (141,573 | ) | (1,748 | ) | (8,924 | ) | (152,245 | ) | |||||
| Cash and cash equivalents at beginning of period | 142,825 | 52,042 | 68,693 | 263,560 | |||||||||
| Cash and cash equivalents at end of period | $ | 1,252 | $ | 50,294 | $ | 59,769 | $ | 111,315 | |||||
Page 12
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 (used in)/provided by operating activities | $ | (154,223 | ) | $ | 280,920 | $ | 109,563 | $ | 236,260 | |||||
| Investing Activities: | ||||||||||||||
| Acquisition of property and equipment | (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 | |||||
Note G—Computation of Earnings Per Common Share
From November 1999 through August 27, 2001, the Company's Certificate of Incorporation included two series of common stock, one designated as Staples.com common stock ("Staples.com Stock"), intended to track the performance of Staples.com, the Company's e-commerce business, and the other designated as Staples Retail and Delivery common stock ("Staples RD Stock"), intended to track the performance of Staples Retail and Delivery ("Staples RD"), which consisted of all of the Company's non e-commerce businesses and a retained interest in Staples.com. On August 27, 2001, the Company's stockholders approved a proposal to amend the Company's Certificate of Incorporation to effect a recapitalization by reclassifying each share of Staples.com Stock into 0.4396 shares of Staples common stock and by reclassifying each share of Staples RD Stock into one share of Staples common stock (the "Recapitalization").
Subsequent to the Recapitalization, the Company calculates earnings per share for a single class of stock, Staples common stock ("Staples, Inc. Stock"). Accordingly, earnings per share has been presented for Staples, Inc. Stock for the three months ended November 3, 2001. Prior to the Recapitalization, the Company had calculated earnings per share under the two class method for Staples RD Stock and Staples.com Stock. Therefore, earnings per share has been presented for Staples
Page 13
RD Stock and Staples.com Stock for the six months ended August 4, 2001, and the three months and nine months ended October 28, 2000. (Amounts in thousands, except per share data):
| |
13 Weeks Ended November 3, 2001 |
13 Weeks Ended October 28, 2000 |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Staples, Inc. |
Staples RD |
Staples.com |
|||||||||
| Numerator: | ||||||||||||
| Net income | $ | 91,312 | $ | 86,039 | $ | (1,378 | ) | |||||
| Denominator: | ||||||||||||
| Denominator for basic earnings per common share—weighted-average shares | 459,864 | 453,307 | 13,893 | |||||||||
| Effect of dilutive securities: | ||||||||||||
| Incremental and windfall shares | 5,644 | 4,306 | — | |||||||||
| Denominator for diluted earnings per common share | 465,508 | 457,613 | 13,893 | |||||||||
| Basic earnings per common share | $ | 0.20 | $ | 0.19 | $ | (0.10 | ) | |||||
| Diluted earnings per common share | $ | 0.20 | $ | 0.19 | $ | (0.10 | ) | |||||
| |
13 Weeks Ended November 3, 2001 |
26 Weeks Ended August 4, 2001 |
39 Weeks Ended October 28, 2000 |
|||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Staples, Inc. |
Staples RD |
Staples.com |
Staples RD |
Staples.com |
|||||||||||||
| Numerator: | ||||||||||||||||||
| Net income | $ | 91,312 | $ | 79,740 | $ | 120 | $ | 177,619 | $ | (6,232 | ) | |||||||
| Denominator: | ||||||||||||||||||
| Denominator for basic earnings per common share—weighted-average shares | 459,864 | 455,399 | 7,980 | 454,972 | 13,923 | |||||||||||||
| Effect of dilutive securities: | ||||||||||||||||||
| Incremental and windfall shares | 5,644 | 5,980 | 1,839 | 6,902 | — | |||||||||||||
| Denominator for diluted earnings per common share | 465,508 | 461,379 | 9,819 | 461,874 | 13,923 | |||||||||||||
| Basic earnings per common share | $ | 0.20 | $ | 0.18 | $ | 0.01 | $ | 0.39 | $ | (0.45 | ) | |||||||
| Diluted earnings per common share | $ | 0.20 | $ | 0.17 | $ | 0.01 | $ | 0.38 | $ | (0.45 | ) | |||||||
Note H—New Accounting Pronouncements
In October 2001, the FASB issued Statement No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". This statement supercedes Statement No. 121. Although this statement retains many of the fundamental provisions of Statement No. 121, it expands the scope of discontinued operations to include more disposal transactions and significantly changes the criteria for classifying an asset as held-for-sale. The provisions of this Statement are effective for fiscal years beginning after December 15, 2001. Management does not believe that the adoption of this Statement will have a material impact on Staples' overall financial position or results of operations.
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In July 2001, the FASB issued Statement No. 143 "Accounting for Asset Retirement Obligations". This Statement requires that the fair value of a liability for an asset retirement obligation be recorded in the period in which it is incurred and to capitalize the associated asset retirement costs as part of the carrying amount of the long-lived asset. Adoption of this Statement is required for fiscal years beginning after June 15, 2002. Management does not believe that the adoption of this Statement will have a material impact on Staples' overall financial position or results of operations.
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards No. 141 "Business Combinations" and No. 142 "Goodwill and Other Intangible Assets" (the "Statements"), effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements.
Staples will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the non-amortization provisions of the Statements is expected to result in an increase in net income of $6.6 million per year. During 2002, the Company will perform the first of the required impairment tests of goodwill as of February 2, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company.
Effective February 4, 2001, Staples adopted Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities," as amended ("SFAS 133"), which requires that all derivative instruments be reported on the balance sheet at fair value and establishes criteria for designation and effectiveness of hedging relationships. The cumulative effect of adopting SFAS 133 as of February 4, 2001 was not material to the Company's financial statements. Staples is exposed to market risk from changes in interest rates and foreign exchange rates. Staples uses interest rate swap agreements and has entered into a currency swap agreement to manage the volatility relating to these exposures. The changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the fair value or cash flows of the underlying exposures being hedged. Staples does not hold or issue derivative financial instruments for trading or speculative purposes.
Staples has both fair value and net investment hedges. 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 hedging against changes in the fair value of its debt instruments. On October 23, 2001, Staples terminated its $200 million of interest rate swaps that scheduled to terminate on August 15, 2007. Under these swap agreements, Staples was entitled to receive semi-annual interest payments at a fixed rate of 7.125% and was obligated to make semi-annual interest payments at a floating rate based on the 30-day Non-Financial US Commercial Paper Rate plus an average of 69 basis points. Upon termination of the swaps, Staples realized a gain of $18 million, which will be amortized over the remaining term of the original agreement, as an adjustment to interest expense. Simultaneous to the termination of these interest rate swaps, Staples entered into another $200 million of interest rate swaps whereby Staples is entitled to receive semi-annual interest payments at a fixed rate of 7.125% and is obligated to make semi-annual interest payments at a floating rate based on the U.S. Dollar LIBOR. These swap agreements are scheduled to terminate on August 15, 2007. At November 3, 2001, Staples had interest rate swap agreements with a fair value asset of $13 million designated as fair value hedges of fixed rate debt obligations.
Page 15
Staples uses a currency swap on its $200 million of 7.125% Senior Notes due August 27, 2007 to swap the dollar denominated principal and interest into Canadian dollar denominated obligations at a fixed interest rate. This swap has been designated as a net investment hedge on Staples' Canadian dollar denominated investments in subsidiaries. At November 3, 2001, Staples had recorded a benefit of $13.9 million, net of $8.7 million in taxes, to accumulated other comprehensive income related to this net investment hedge. Staples' fair value and net investment hedges are highly effective, and therefore, there was an immaterial net impact to earnings due to hedge ineffectiveness during year-to-date 2001.
Note I—Subsequent Event
Staples' $175 million of variable rate notes, issued on May 24, 2000 (the "Variable Rate Notes") and outstanding as of November 3, 2001, came due on November 26, 2001. Staples repaid the Variable Rate Notes through a combination of cash on hand and borrowings on existing credit lines.
Page 16
ITEM 2.
STAPLES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
On August 27, 2001, the Company's stockholders approved a proposal to amend the Company's Certificate of Incorporation to effect a recapitalization by reclassifying each share of Staples.com Stock into 0.4396 shares of Staples common stock and by reclassifying each share of Staples RD Stock into one share of Staples common stock (the "Recapitalization"). The Recapitalization had no effect on Staples' overall financial position or results of operations. As a result of the Recapitalization, Staples has restated the presentation of its results of operations into three reportable segments, combining the previously reported Staples.com and Contract and Commercial reportable segments into one segment, North American Delivery.
Results of Operations
Sales
| (Amounts in thousands) |
13 Weeks Ended November 3, 2001 |
13 Weeks Ended October 28, 2000 |
Increase/ (Decrease) % |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
| North American Retail | $ | 1,851,660 | $ | 1,877,586 | (1 | %) | ||||
| North American Delivery | 777,598 | 715,072 | 9 | % | ||||||
| European Operations | 204,603 | 165,820 | 23 | % | ||||||
| Total Reportable Segments | 2,833,861 | 2,758,478 | 3 | % | ||||||
| Divested Business | — | 43,291 | N/A | |||||||
| Consolidated Staples | $ | 2,833,861 | $ | 2,801,769 | 1 | % | ||||
| (Amounts in thousands) |
39 Weeks Ended November 3, 2001 |
39 Weeks Ended October 28, 2000 |
Increase/ (Decrease) % |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
| North American Retail | $ | 4,985,389 | $ | 4,935,100 | 1 | % | ||||
| North American Delivery | 2,243,955 | 1,997,643 | 12 | % | ||||||
| European Operations | 560,642 | 492,721 | 14 | % | ||||||
| Total Reportable Segments | 7,789,986 | 7,425,464 | 5 | % | ||||||
| Divested Business | 25,180 | 133,388 | (81 | %) | ||||||
| Consolidated Staples | $ | 7,815,166 | $ | 7,558,852 | 3 | % | ||||
Worldwide comparable sales decreased 3% for the third quarter of 2001, bringing year-to-date 2001 comparable sales to negative 1%. Comparable sales include stores open for more than one year plus the Direct.com businesses in North America and Europe. Worldwide comparable sales for our retail locations decreased 5% for the third quarter and 4% for year-to-date 2001. Worldwide non-comparable sales represented 192% of the increase in total company sales for the third quarter of 2001 and 111% for year-to-date 2001. Sales were negatively impacted by the weak economy, including sharp declines in spending on computers, as well as the impact of terrorist attacks in the United States on September 11th. The sales impact for the eleven days following the terrorist attacks on September 11th was approximately $50 million. Staples had 1,424 open stores as of November 3, 2001 compared to 1,293 stores as of October 28, 2000 and 1,307 stores as of February 3, 2001. This includes 33 stores opened and one store closed during the third quarter of 2001.
Page 17
Sales for North American Retail decreased 1% for the third quarter of 2001 and increased 1% for year-to-date 2001. The year-to-date growth was primarily due to the increase in the North American store base to 1,250 open stores as of November 3, 2001 from 1,138 open stores as of October 28, 2000. This growth was offset by a decrease in sales at existing stores and a decrease in the Canadian exchange rate to the US dollar from the third quarter of 2000 and year-to-date 2000, as well as the impact of the events of September 11th which was approximately $35 million for North American Retail.
Sales for North American Delivery increased 9% for the third quarter of 2001 and 12% for year-to-date 2001. These increases, achieved despite a weak economy and the events of September 11th, reflect the positive results of Staples' cross-channel marketing between our catalog, web-sites and retail stores and increases in both customer acquisition and customer retention rates in our Contract business. The impact on sales for North American Delivery due to the terrorist attacks on September 11th was approximately $15 million.
Sales for European Operations increased 23% for the third quarter of 2001 and 14% for year-to-date 2001. This growth was due to the increase in the European store base to 174 open stores as of November 3, 2001 from 155 open stores as of October 28, 2000, an increase in sales at existing stores and an increase in sales in the delivery business. The year-to-date growth was partially offset by a decrease in European exchange rates to the US dollar from year-to-date 2000.
Sales for the Divested Businesses represent the sales for Staples Communications which was sold on April 3, 2001.
Gross Profit. Gross profit as a percentage of sales was 24.2% for the third quarter of 2001 and 23.7% for year-to-date 2001 compared to 24.1% and 24.2% for corresponding periods in 2000. Strong margins from an improved product mix and continued success in controlling shrink costs lead to the improved rate during the third quarter of 2001. These improvements were offset by the de-leveraging of fixed distribution, delivery and rent and occupancy costs. For year-to-date 2001, the decrease in the gross profit rate was due to the de-leveraging of fixed distribution, delivery and rent and occupancy costs, clearance activity related to the elimination of several hundred SKUs during our 300 store re-flow initiative and mark-downs attributed to keeping PC and furniture inventories current.
Operating and Selling Expenses. Operating and selling expenses, which consist of payroll, advertising and other operating expenses, as a percentage of sales were 15.2% in the third quarter of 2001 and 15.9% for year-to-date 2001 compared to 14.5% and 15.7% for the corresponding periods in 2000. This performance reflects a shift of marketing and advertising initiatives from the fourth quarter to the third quarter in 2001, as Staples increases its focus on its small business message, as well as the additional labor expense associated with our 300 store re-flow initiative for year-to-date 2001. These increases were partially offset by the benefit of expense leveraging at Staples' e-commerce businesses as well as Staples' ability to effectively manage operating expenses despite softer sales.
Pre-opening Expenses. Pre-opening expenses related 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 decreased to $3.2 million in the third quarter of 2001 from $5.1 million in the third quarter of 2000 and to $12.4 million for year-to-date 2001 from $19.6 million for year-to-date 2000. This decrease is due to a decrease in the number of stores opened in 2001. Staples opened 33 new stores in the third
Page 18
quarter of 2001 compared to 41 in the third quarter of 2000 and 122 new stores for year-to-date 2001 compared to 170 for year-to-date 2000.
General and Administrative Expenses. General and administrative expenses decreased as a percentage of sales to 3.4% for the third quarter of 2001 and 3.8% for year-to-date 2001 compared to 3.7% and 4.0% for corresponding periods of 2000. This reflects the divestiture of Staples Communications on April 3, 2001 which had high general and administrative expenses as a percent of sales, the benefits of expense leveraging in Staples' e-commerce businesses and the results of cost control initiatives throughout the Company.
Merger-Related and Integration Costs. As discussed in Note C to the Financial Statements, for year-to-date 2001, the Company charged expenses of $151,000 related to the Quill merger and $430,000 related to the European Office Supply purchase to accruals established at the time of each acquisition. At November 3, 2001, the remaining accruals were $3.6 million for the Quill merger and $6.7 million for the European Office Supply purchase. The remaining accruals relate 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.
Amortization of Goodwill. Amortization of goodwill was $1.6 million for the third quarter of 2001 and $4.9 million for year-to-date 2001 compared to $3.6 million for the third quarter of 2000 and $10.7 million for year-to-date 2000. The decrease in amortization is due to the write-off of Staples Communications goodwill, due to impairment, during the fourth quarter of 2000.
Interest and Other Expense, Net. Net interest and other expense was $6.4 million for the third quarter of 2001 and $23.4 million for year-to-date 2001 compared to $13.7 million for the third quarter of 2000 and $31.8 million for year-to-date 2000. The decrease in net interest expense was due to a net decrease in borrowings on lines of credit and lower interest rates.
Income Taxes. The provision for income taxes as a percentage of pre-tax income was 38.5% for the third quarter and year-to-date 2001 and 41% for the third quarter and year-to-date 2000. The decrease in Staples' effective tax rate is due primarily to a one-time charge associated with the legal restructuring of European Operations during 2000.
New Accounting Pronouncements. In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141 "Business Combinations" and No. 142 "Goodwill and Other Intangible Assets" (the "Statements"), effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements.
Staples will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the non-amortization provisions of the Statements is expected to result in an increase in net income of $6.6 million per year. During 2002, the Company will perform the first of the required impairment tests of goodwill as of February 2, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company.
Page 19
Liquidity and Capital Resources
Staples has traditionally used a combination of cash generated from operations, debt or equity offerings and credit lines to fund its expansion and acquisition activities.
Cash provided by operations was $191 million for year-to-date 2001, driven primarily by cash earnings (net income plus depreciation/amortization and other non-cash items affecting income) of $329 million, an increase in accounts payable and other current liabilities of $54 million and a decrease in merchandise inventories of $32 million. These increases were partially offset by an increase in accounts receivable of $131 million, reflecting vendor rebate receivables which are generally settled at the end of an annual term, as well as an increase in retained securitized accounts receivable of $86 million.
Cash used in investing activities of $248 million for year-to-date 2001 consisted primarily of the acquisition of property and equipment of $258 million. The acquisition of property and equipment during this period was related to the opening of 122 new stores, the continued expansion and improvement of our distribution network and investments in information systems.
Cash used in financing activities of $86 million consisted primarily of net repayments of borrowings of $87 million. Year-to-date 2001, Staples borrowed $20 million on short-term bank credit lines while paying down the $100 million outstanding on its $350 million revolving credit facility and paying down the $9 million outstanding on its European lines of credit. Staples also received $26 million of proceeds from the sale of capital stock, primarily through the exercise of employee stock options, and used $26 million for the purchase of treasury shares.
At November 3, 2001, Staples had $111 million of cash and cash equivalents, the full $350 million available on its revolving credit facility that is effective through November 2002, the full $200 million available on its 364 day revolving credit facility that was renewed on June 25, 2001, $101 million available under Staples' accounts receivable securitization agreement, the full $80 million available in other uncommitted, short-term bank credit lines and the full $87 million available on its Canadian and European lines of credit. Accordingly, Staples had $929 million of total cash and available funds through credit agreements at November 3, 2001.
Staples also had $175 million of variable rate notes, issued on May 24, 2000 (the "Variable Rate Notes"), outstanding as of November 3, 2001 which came due on November 26, 2001. Staples repaid the Variable Rate Notes through a combination of cash on hand and available credit lines.
Staples expects to open less than 20 stores during the fourth quarter of 2001 and less than 120 stores during fiscal year 2002. Staples estimates that its cash requirements, including pre-opening expenses, inventory, leasehold improvements and fixtures, will be approximately $1.5 million for each new store (excluding the cost of any acquisitions of lease rights). Staples plans to continue to make investments in information systems and distribution centers to improve operational efficiencies and customer service, and may expend additional funds to acquire businesses or purchase lease rights from tenants occupying retail space that is suitable for a Staples store. Staples expects that its cash generated from operations, together with its current cash and funds available under credit agreements 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.
Page 20
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 it 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. It is possible that increased competition or improved performance by Staples' competitors may reduce Staples' market share, may reduce Staples' profit margin, and may adversely affect Staples' business and financial performance in other ways.
Staples may be unable to continue to successfully open new stores. An important part of Staples' business plan is to aggressively increase its number of stores. Staples opened 189 new stores in the United States, Canada and Europe in fiscal 2000. Despite original plans to open 160 new stores during fiscal 2001, Staples currently expects to have opened fewer than 140 new stores by the end of fiscal 2001 and currently plans to open less than 120 new stores in fiscal 2002. 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
Page 21
supervision costs. However, these new stores may result in the loss of sales in existing stores in nearby areas.
Staples' quarterly operating results are subject to significant fluctuation. Staples' operating results have fluctuated from quarter to quarter in the past, and it expects that they will continue to do so in the future. Staples' earnings may not continue to grow at rates similar to the growth rates achieved in recent years and may fall short of either a prior fiscal period or investors' expectations. Factors that could cause these quarterly fluctuations include the following:
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' operating results may be impacted by changes in the economy. The operating results of Staples are directly impacted by the health of the North American and European economies. The North American and European economies have recently experienced a significant slowdown when compared to the growth rates that had been recently achieved. The current economic slowdown or future declines in the health of these economies may adversely affect Staples' business and its results of operations.
Staples' stock price may fluctuate based on the expectations of professional security analysts. The public trading of Staples 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. If the securities analysts that regularly follow Staples' stock lower their rating or lower their projections for future growth and financial performance, the market price of Staples' 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
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in the future. This growth has placed significant demands on management and operational systems. If Staples is not successful in upgrading the operational and financial systems, expanding the management team and increasing and effectively managing the employee base, this growth is likely to result in operational inefficiencies and ineffective management of the business and employees, which will in turn adversely affect Staples' business and financial performance.
Staples' European operations may not become profitable. Staples currently operates in European markets through Staples UK in the United Kingdom, Staples Deutschland in Germany, Product Sourcing Group Europe in Belgium and Office Centre in the Netherlands and Portugal. Staples' consolidated European operations are currently unprofitable, and Staples cannot guarantee that they will become profitable.
Staples' International operations expose Staples to the unique risks inherent in foreign operations. In addition to its operations in Europe, Staples has a significant presence in Canada through The Business Depot Ltd. Staples may also 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 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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ITEM 3.
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 to manage its risk in these areas. 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 hedging against changes in the fair value of its debt instruments. 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 October 23, 2001, Staples terminated its $200 million of interest rate swaps originally scheduled to terminate on August 15, 2007. Under the interest rate swap agreements, Staples was entitled to receive semi-annual interest payments at a fixed rate of 7.125% and was obligated to make semi-annual interest payments at a floating rate based on the 30-day Non-Financial U.S. Commercial Paper Rate plus an average of 69 basis points. Upon termination, Staples realized a gain of $18 million, which will be amortized over the remaining term of the original agreement, as an adjustment to interest expense. Simultaneous to the termination of these interest rate swaps, Staples entered into another $200 million of interest rate swaps whereby Staples is entitled to receive semi-annual interest payments at a fixed rate of 7.125% and is obligated to make semi-annual interest payments at a floating rate based on the U.S. Dollar LIBOR plus an average of 2.04%, currently approximately 4.31%. The new swap agreements are scheduled to terminate on August 15, 2007. Staples has designated its $200 million of 7.125% senior notes due August 15, 2007 (the "Senior Notes") and its interest rate swap agreements to be an integrated transaction. Accordingly, 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.
During fiscal year 2000, Staples entered into a currency swap on its Senior Notes. Staples has swapped the dollar-denominated principal and interest into Canadian dollar denominated obligations of 295 million in Canadian dollars at a fixed 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 are recorded in the cumulative translation adjustment line in stockholders' equity.
Staples issued notes in the aggregate principal amount of 150 million euro on November 15, 1999. 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 million euro. 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 4.86%. Staples has designated its 150 million 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 agreement is accrued and recognized as an adjustment to interest expense over the life of the agreement.
This risk management discussion and discussion of the effects of changes in interest rates and foreign exchange rates contains 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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STAPLES, INC. AND SUBSIDIARIES
Item 1--Legal Proceedings
As discussed in Part II, Item 1 of the Company's Form 10-Q for the first quarter and second quarter of 2001, beginning on March 23, 2001, 12 lawsuits were filed in Delaware Chancery Court by Staples RD stockholders against Staples and each of its directors. The lawsuits were subsequently consolidated into a purported class action entitled In re Staples, Inc. Shareholders Litigation, Cons. C.A. No. 18784. The plaintiffs opposed Staples' proposal to reclassify the Staples.com and Staples RD series of common stock into a single class of Staples common stock. Plaintiffs alleged that the proposed reclassification violated Delaware General Corporation Law, Staples' contractual obligations, and the fiduciary duties of Staples' directors and moved for a preliminary injunction to prevent a stockholder vote, previously scheduled for June 11, 2001, on the reclassification proposal. After holding a hearing on the motion, the court decided on June 5, 2001, that the vote may proceed after the Company set a new record date for the vote and made additional disclosures regarding the methodology used by the Board and the outside investment bankers retained by the Board in recommending the valuation of the Staples.com Stock for the purposes of the reclassification.
On June 29, 2001, Staples and the plaintiffs settled the lawsuit. According to the settlement, which was subject to final approval of the Delaware Court of Chancery, Staples agreed to set a new record date, to amend the proxy statement in accordance with the court's opinion, and to pay the fees and expenses for the attorneys representing the stockholder group. After setting a new record date of July 6, 2001 and adding information to the proxy statement related to the value of Staples.com Stock, the Company mailed the proxy statement and called a stockholders meeting for August 27, 2001 to vote on the reclassification.
On August 16, 2001, the Delaware Court of Chancery ordered final approval of the above described settlement. On August 27, 2001, Staples' stockholders approved the reclassification, which will have no effect on Staples' overall financial position or results of operations.
Item 2--Changes in Securities and Use of Proceeds
On August 27, 2001, the Company's stockholders approved an amendment (the "Amendment") to the Company's Certificate of Incorporation to effect a recapitalization by reclassifying each share of Staples.com Stock into 0.4396 shares of Staples common stock and by reclassifying each share of Staples RD Stock (collective, with Staples.com Stock, "Common Stock") into one share of Staples common stock. The Amendment eliminated the existing two separate series of the class of Staples common stock and reclassified the two series into Staples common stock. The Amendment also provided that Staples could no longer issue common stock in series.
A detailed comparison of the rights, powers, characteristics and limitations of Staples' common stock before and after the Amendment can be found on pages 24 through 27 of the Company's Proxy Statement for the Company's August 27, 2001 Annual Meeting of Stockholders that was filed by the Company on July 23, 2001 with the Securities and Exchange Commission.
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Item 3--Not Applicable
Item 4--Submission of Matters to a Vote of Security Holders
The Company held the 2001 Annual Meeting of Stockholders (the "Annual Meeting") on August 27, 2001. At the Annual Meeting, the following actions were taken:
1. The stockholders elected Arthur M. Blank, James L. Moody, Jr., Martin Trust, and Paul F. Walsh as Class 1 Directors, to serve for a three-year term expiring at the 2004 Annual Meeting. Holders of 399,234,579 shares of Common Stock voted for Mr. Blank, and holders of 7,874,903 shares of Common Stock withheld their votes for Mr. Blank. Holders of 400,704,082 shares of Common Stock voted for Mr. Moody, and holders of 6,405,400 shares of Common stock withheld their votes for Mr. Moody. Holders of 400,701,180 shares of Common Stock voted for Mr. Trust, and holders of 6,408,302 shares of Common Stock withheld their votes for Mr. Trust. Holders of 400,742,704 shares of Common Stock voted for Mr. Walsh, and holders of 6,366,778 shares of Common Stock withheld their votes for Mr. Walsh.
2. The stockholders approved an amendment to the Company's Certificate of Incorporation by a vote of 6,273,340 shares of Staples.com for, 1,353 shares of Staples.com against, and 0 shares of Staples.com abstaining; 282,751,550 shares of Staples RD for, 51,329,119 shares of Staples RD against, 3,589,353 shares of Staples RD abstaining and 63,164,767 shares of Staples RD not voting; and 289,024,890 shares of Common Stock for, 51,330,472 shares of Common Stock against, 3,589,353 shares of Common Stock abstaining and 63,164,767 shares of Common Stock not voting.
3. The stockholders approved an amendment to the Company's Amended and Restated 1992 Equity Incentive Plan by a vote of 305,361,075 shares of Common Stock for, 98,783,614 shares of Common Stock against, and 2,964,793 shares of Common Stock abstaining.
4. The stockholders ratified the selection of Ernst & Young as the Company's independent auditors for the current fiscal year by a vote of 393,585,085 shares of Common Stock for, 11,401,338 shares of Common Stock against, and 2,113,059 shares of Common Stock abstaining.
Items 5 and 6--Not Applicable
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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 11, 2001 |
By: |
/s/ JOHN J. MAHONEY John J. Mahoney Executive Vice President, Chief Administrative Officer and Chief Financial Officer (Principal Financial Officer) |
||
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