Staples 2005 Annual Report Download - page 75

B-1
APPENDIX B
STAPLES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Our business is comprised of three segments: North American Retail, North American Delivery and International
Operations. Our North American Retail segment consists of the U.S. and Canadian business units that operate office
products stores. The North American Delivery segment consists of the U.S. and Canadian business units that sell and
deliver office products and services directly to customers, and includes Staples Business Delivery, Quill, and our Contract
operations (Staples National Advantage and Staples Business Advantage). The International Operations segment
consists of operating units that operate office products stores and that sell and deliver office products and services
directly to customers in 19 countries in Europe, South America and Asia. Our fiscal years ended January 28, 2006 (“fiscal
2005” or “2005”), January 29, 2005 (“fiscal 2004” or “2004”) and January 31, 2004 (“fiscal 2003” or “2003”) each
contained 52 weeks. All share and per share amounts reflect, or have been restated to reflect, the three-for-two common
stock split that was effected in the form of a common stock dividend distributed on April 15, 2005.
We acquired four businesses during 2004 (the “2004 acquisitions”). On August 4, 2004, we acquired the United
Kingdom office products company Globus Office World plc (“Office World”), strengthening our retail presence in the
United Kingdom. In September 2004, we acquired Pressel Versand International GmbH, a mail order company based in
Austria and operating in nine European countries, and Malling Beck A/S, a mail order company operating in Denmark,
expanding our delivery business into eastern Europe and Denmark and strengthening our business in western Europe
through access to new customers and product categories. On November 29, 2004, we entered the South American
market by acquiring Officenet SA, a mail order and internet business operating in Brazil and Argentina. We paid an
aggregate of $111.7 million, net of cash acquired, to acquire these businesses. The results of the acquired businesses have
been included in the consolidated financial statements since the dates of acquisition and are reported as part of our
International Operations segment for segment reporting. Additionally, in 2004, we entered the Asian market by investing
in a mail order and internet company in the People’s Republic of China, Staples Commerce and Trade (“Staples
China”). We have been the majority shareholder of Staples China since the first quarter of 2005 and have included the
operating results of Staples China in our consolidated financial statements since then. The results of Staples China are
reported as part of our International Operations segment for segment reporting.
In November 2002, the Emerging Issues Task Force (“EITF”) reached consensus on Issue No. 02-16, “Accounting
by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor” (“Issue 02-16”). Issue 02-16
addresses the accounting for vendor consideration received by a customer and is effective for new arrangements, or
modifications of existing arrangements, entered into after December 31, 2002. Under this consensus, there is a
presumption that amounts received from vendors should be considered a reduction of inventory cost unless certain
restrictive conditions are met. Under previous accounting guidance, we accounted for all non-performance based volume
rebates as a reduction of inventory cost and all cooperative advertising and other performance based rebates as a
reduction of marketing expense or cost of goods sold, as appropriate, in the period the expense was incurred. Beginning
with contracts entered into in January 2003, we adopted a policy to treat all vendor consideration as a reduction of
inventory cost rather than as an offset to the related expense because the administrative cost of tracking the actual
related expenses, to determine whether we meet the restrictive conditions required by Issue 02-16, would exceed the
benefit. To record the impact of including cooperative advertising and other performance based rebates in inventory at the
end of the first quarter of 2003, we recorded an aggregate, non-cash adjustment of $98.0 million ($61.7 million net of taxes)
as an increase to cost of goods sold and occupancy costs, or $0.09 per diluted share. This adjustment reflected all of our
outstanding vendor contracts, as substantially all contracts were either entered into or amended in the first quarter of 2003.
In addition, the new accounting method resulted in reporting $246.6 million of our cooperative advertising rebates earned
in 2003 as cost of goods sold and occupancy costs, whereas these amounts would have been reported as a reduction of
operating and selling expenses under previous accounting guidance. In accordance with this consensus, prior periods have
not been restated to reclassify amounts recorded as a reduction of operating and selling expenses to cost of goods sold and
occupancy costs.
In November 2003, the EITF reached consensus on Issue No. 03-10 “Application of Issue No. 02-16 by Resellers to
Sales Incentives Offered to Consumers by Manufacturers” (“Issue 03-10”), which addresses the accounting for
consideration received by a reseller from a vendor that is a reimbursement by the vendor for honoring the vendor’s sales