Staples 2004 Annual Report Download - page 86

STAPLES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
we may not be able to realize all or part of our net deferred tax assets and additional valuation allowances may be
required.
New Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board (‘‘FASB’’) issued Statement No. 123 (revised
2004), ‘‘Share Based Payment’’ (‘‘SFAS No. 123R’’), which is a revision of Statement No. 123, ‘‘Accounting for Stock-
Based Compensation’’ (‘‘SFAS No. 123’’). SFAS No. 123R supersedes APB Opinion No. 25, ‘‘Accounting for Stock
Issued to Employees’’ and amends Statement No. 95, ‘‘Statement of Cash Flows.’’ Under SFAS No. 123R, companies
must calculate and record in the income statement the cost of equity instruments, such as stock options, awarded to
employees for services received; pro forma disclosure is no longer permitted. The cost of the equity instruments is to be
measured based on the fair value of the instruments on the date they are granted and is required to be recognized over
the period during which the employees are required to provide services in exchange for the equity instruments. The
statement is effective in the first interim or annual reporting period beginning after June 15, 2005.
SFAS No. 123R provides two alternatives for adoption: (1) a ‘‘modified prospective’’ method in which compensation
cost is recognized for all awards granted subsequent to the effective date of this statement as well as for the unvested
portion of awards outstanding as of the effective date; or (2) a ‘‘modified retrospective’’ method which follows the
approach in the ‘‘modified prospective’’ method, but also permits entities to restate prior periods to record compensation
cost calculated under SFAS No. 123 for the pro forma disclosure. We plan to adopt SFAS No. 123R using the modified
retrospective method. Since we currently account for stock options granted to employees and shares issued under our
employee stock purchase plans in accordance with the intrinsic value method permitted under APB Opinion No. 25, no
compensation expense is recognized. The adoption of SFAS No. 123R is expected to have a significant impact on our
results of operations, although it will have no impact on our overall financial position. The impact of adopting SFAS
No. 123R cannot be accurately estimated at this time, as it will depend on the market value and the amount of share
based awards granted in future periods. However, had we adopted SFAS No. 123R in a prior period, the impact would
approximate the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share
in Note A to the Consolidated Financial Statements. SFAS No. 123R also requires that tax benefits received in excess of
compensation cost be reclassified from operating cash flows to financing cash flows in the Consolidated Statement of
Cash Flows. This change in classification will reduce net operating cash flows and increase net financing cash flows in the
periods after adoption. While the amount of this change cannot be estimated at this time, the amount of operating cash
flows recognized in prior periods for such excess tax deductions were $72.5 million, $30.3 million and $22.8 million in
fiscal 2004, 2003 and 2002, respectively.
Liquidity and Capital Resources
Cash Flows
Cash provided by operations increased to $1.18 billion in fiscal 2004, from $1.02 billion in fiscal 2003 and
$914.4 million in fiscal 2002. As a result of the application of Issue 02-16 in 2003, net income and merchandise
inventories decreased and deferred income taxes increased, resulting in no aggregate impact on cash flows from
operations. The increase in cash flow from operations in fiscal 2004 and fiscal 2003 is primarily due to the increase in net
income adjusted for non-cash charges, combined with our improvements in working capital.
Cash used in investing activities was $14.4 million in fiscal 2004, compared to $1.11 billion in fiscal 2003 and
$1.54 billion in fiscal 2002. The change in investing activities each year reflects a shift in our investment strategy, as well
as changes in the level of acquisitions completed in each fiscal year, with the 2002 acquisitions totaling $1.17 billion and
the 2004 acquisitions totaling $111.7 million. In 2004, our investment strategy changed, and we reduced the amount of
market auction rate preferred stock and debt securities we held and increased our holdings of cash equivalents, including
commercial paper and money market investments. In 2003, we increased our holdings of market auction rate preferred
stock and debt securities and decreased our holdings of cash and cash equivalents.
Cash used in financing activities was $639.9 million in fiscal 2004, compared to cash provided by financing activities
of $35.3 million in fiscal 2003 and $714.1 million in fiscal 2002. In 2004, we repurchased 17.4 million shares of our
common stock for a total purchase price (including commissions) of $502.7 million under our share repurchase program,
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