Staples 2003 Annual Report Download - page 55

STAPLES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
decrease in management’s variable compensation, and our ability to increase sales without proportionately increasing
overhead expenses.
Amortization of Intangibles: Amortization of intangibles was $2.1 million in fiscal 2002, reflecting the amortization
of customer-related intangible assets and noncompetition agreements associated with our European mail order and
MAP acquisitions in fiscal 2002. Prior to fiscal 2002, we had no amortizable intangible assets.
Amortization of Goodwill: Amortization of goodwill was zero in fiscal 2002, $6.6 million in fiscal 2001 and
$13.6 million in fiscal 2000. The elimination of amortization of goodwill in fiscal 2002 is due to our adoption of Statement
of Financial Accounting Standards No. 142 ‘‘Goodwill and Other Intangible Assets’’ (‘‘SFAS No. 142’’), which requires
that goodwill and intangible assets that have indefinite lives be tested at least annually for impairment, rather than
amortized. Accordingly, we ceased amortizing all goodwill on February 3, 2002. The decrease in the amortization of
goodwill in fiscal 2001 from fiscal 2000 reflects the write-off of Staples Communications goodwill due to the impairment
recorded during the fourth quarter of 2000.
Asset Impairment and Other Charges: During the fourth quarter of 2001, we recognized charges totaling $10.7 mil-
lion, comprised of $6.8 million of severance related to the elimination of positions in our corporate office, certain call
centers and distribution centers and $3.9 million for net lease obligations and asset write-offs related to the closure of a
distribution center, two call centers and a delivery office in our North American Delivery segment. At February 1, 2003,
we had $1.9 million remaining in accrued expenses and other current liabilities related to net future lease obligations and
severance related to these charges. In fiscal 2000, we recognized impairment losses of $205.8 million. The assets that
were impaired consisted of the goodwill and fixed assets associated with Staples Communications of $156.3 million. Also
included in this charge was the write-down of investment values in various e-commerce companies of $49.5 million due to
an other than temporary decline in value.
Store Closure Charge: In January 2002, we committed to a plan to close 31 underperforming stores and recorded a
charge of $50.1 million related to these closings. This charge included $31.5 million for net lease obligations, $12.5 mil-
lion for asset write-offs, $5.5 million in fees and other expenses related to the store closures and $0.6 million in
severance. All of the store closures were completed by the end of the first quarter of fiscal 2002. At February 1, 2003, we
had $29.1 million remaining in accrued expenses and other current liabilities related to net future lease obligations. In
December 1998, we committed to a plan to close and relocate stores which could not be expanded and upgraded to our
current store model. In connection with this plan, we recorded a charge of $49.7 million. During the first quarter of fiscal
year 2000, we decided not to close several stores that were included in the original store closure plan due to changes in
market conditions. Accordingly, we reversed a portion of the charge in the amount of $7.3 million relating to the stores
that we did not close.
Interest and Other Expense, Net: Net interest and other expense totaled $20.6 million in fiscal 2002, $27.2 million in
fiscal 2001 and $45.2 million in fiscal 2000. Interest and other expense relates primarily to interest on existing borrowings.
The decrease in interest expense in fiscal 2002 and 2001 reflects a decrease in interest rates as well as a decrease in
borrowings during fiscal 2001 and the first half of fiscal 2002 due to an increase in cash generated from operations. These
decreases were offset by increased borrowings in the second half of 2002 for our two acquisitions.
Income Taxes: Our provision for income tax as a percentage of income before income taxes was 32.6% for fiscal
2002, 38.5% for fiscal 2001 and 75.6% for fiscal 2000. In fiscal 2000, we recognized impairment losses related to the
goodwill and fixed assets of Staples Communications and the write-down of investment values in various e-commerce
companies that were not benefited for tax purposes in 2000 due to the uncertainty concerning the ultimate deductibility
of the losses. During fiscal 2001, we sold our Staples Communications business and applied for a pre-filing agreement
with the Internal Revenue Service regarding deductibility of our investment in, and advances to, Staples Communica-
tions. In fiscal 2002, the Internal Revenue Service agreed to allow, as an ordinary deduction, our investment in, and
advances to, Staples Communications. Accordingly, the provision for income taxes in 2002 includes a $29.0 million tax
benefit attributable to the Staples Communications losses. Excluding these events, Staples’ effective tax rate was 37.0%
in 2002, 38.5% in 2001 and 41.0% in 2000. The decrease in our effective income tax rate from 2000 to 2002 is primarily
due to an increase in international activity, which is generally taxed at lower rates.
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