Staples 2006 Annual Report Download

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2 0 0 6 A N N U A L R E P O R T | Notice of Annual Meeting and Proxy Statement

Table of contents

  • Page 1
    2 0 0 6 A N N U A L R E P O R T | Notice of Annual Meeting and Proxy Statement

  • Page 2
    ... and South America, Europe, and Asia. Headquartered outside of Boston, Staples operates approximately 1,900 office superstores and also serves its customers through mail order catalog, eCommerce, and contract businesses. More information is available at www.staples.com. NA Retail 55% NA Delivery 32...

  • Page 3
    ... the South Florida market in 2006, and we're off to a great start. We plan to repeat these successes with our 2007 entry into Denver and future market launches in 10 other major cities in America where Staples currently has no retail presence. More than 40% of our stores feature the easy-to-shop...

  • Page 4
    ... on-line, making Staples one of the largest internet retailers in the world. We plan to keep the momentum going by working hard to acquire more customers in each of our three delivery businesses, Contract, Quill, and Staples Business Delivery. In addition to adding to our sales force and driving...

  • Page 5
    ...Staples in our customers' eyes through our Easy brand positioning, and by continuing to develop competitive advantages like our Contract sales model, customer service, and our extensive retail network. We'll push forward with our portfolio of promising growth and margin opportunities that will drive...

  • Page 6
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  • Page 7
    ... our brand, supporting the development of innovative new products and services, promoting new operational efficiencies, attracting and retaining customers and associates, and mitigating business risks. A summary of Staples' corporate responsibility efforts in fiscal year 2006 and a brief description...

  • Page 8
    ... honest communication and encourage sound decision making. Launching new tools, such as an intranet-based ethics resource center and customized online training, to provide practical information that helps our associates make ethical decisions. Introducing a new ethics case management system to drive...

  • Page 9
    ... Youth Venture program in five countries in Europe and South America -- Germany, France, Spain, Argentina and Brazil - where Staples operates. The foundation also began support of the Hispanic Heritage Foundation's Hispanic Heritage Youth Awards (HHYA), which identify and promote the next generation...

  • Page 10
    ... to support City of Hope with various fundraising activities in 2007. In-Kind Donations To empower Staples® stores, distribution centers and delivery fulfillment centers to make donations to local charities of their choice, Staples offers the "We Care" gift card program. The "We Care" program...

  • Page 11
    ...in 2006. Education Staples sponsors www.earth911business.org, which houses a wealth of information for businesses on how and where to recycle a variety of items based on zip code location. The Web site also offers guidance on how to implement recycling programs and source more environmental products...

  • Page 12
    ... is launching our Code of Ethics training in Canada. To provide an easy way for Staples associates to get more information and help, we established a new online ethics resource center on the Staples intranet. We also introduced our Speak Up program. Speak Up enlists associates at all levels of the...

  • Page 13
    ... our international operations. Increase global awareness of our Code of Ethics through communication and training. Expand the global reach of our privacy and information protection program, starting with Europe. Roll out online Code of Ethics and Information Protection and Privacy training in Canada...

  • Page 14
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  • Page 15
    ... of record at the close of business on April 17, 2007 will be entitled to notice of and to vote at the meeting or any adjournment thereof. The stock transfer books will remain open. By Order of the Board of Directors, Jack A. VanWoerkom, Corporate Secretary Framingham, Massachusetts May 3, 2007 IT...

  • Page 16
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  • Page 17
    ..., INC. 500 Staples Drive Framingham, Massachusetts 01702 PROXY STATEMENT For the Annual Meeting of Stockholders on June 11, 2007 This proxy statement is furnished in connection with the solicitation of proxies by the Board of Directors of Staples, Inc. ("We," "Staples" or the "Company") for use at...

  • Page 18
    ...return my proxy card? Yes. Any proxy may be revoked by a stockholder at any time before it is exercised at the Annual Meeting by delivering to our Corporate Secretary a written notice of revocation or a duly executed proxy bearing a later date, or by voting in person at the meeting. What is the vote...

  • Page 19
    ... in our proxy materials relating to that meeting should contact our Corporate Secretary at 500 Staples Drive, Framingham, Massachusetts 01702. Such stockholder proposals must be received at our principal corporate offices in Framingham, Massachusetts at the address set forth in the preceding...

  • Page 20
    ... printing and mailing costs, by signing up to receive your stockholder communications via e-mail. To sign up for electronic delivery: • If you are a registered holder (you hold your Staples shares in your own name through our transfer agent, Mellon Investor Services), visit www.melloninvestor.com...

  • Page 21
    ... ownership of voting common stock and the execution of the shareholders' voting agreement, members of the Johnson family may be deemed to form a controlling group with respect to FMR. Neither FMR nor Johnson has the sole power to vote or direct the voting of the shares owned directly by Fidelity...

  • Page 22
    ... 2005 GRAT. Also includes 1,462 shares owned by Trust Family Foundation, 25,624 shares owned by Diane Trust and 36,204 shares owned by 1999 MTDT Descendants' Trust, all of which Mr. Trust disclaims beneficial ownership. (9) Mr. Vishwanath was elected to our Board of Directors on March 23, 2007. (10...

  • Page 23
    ... President and Chief Executive Officer of AMB Group, LLC, a business management company, since February 2001. Mr. Blank is a co-founder of The Home Depot, Inc., a home improvement retailer, and served as its President from 1978 to 2000, a director from 1978 to 2001, and Co-Chairman of the Board from...

  • Page 24
    ... Dr. Moriarty was Professor of Business Administration at Harvard Business School. He is also a director of Wright Express Corporation. 1986 Robert C. Nakasone, age 59 Chief Executive Officer of NAK Enterprises, L.L.C., a family-owned investment and consulting company, since January 2000. Prior to...

  • Page 25
    ... uses pursuant to the existing director resignation policy. Also, if this proposal is approved by our stockholders, Board approved amendments to the advance notice provisions of our by-laws that are designed to address certain procedural and timing matters relating to the adoption of a majority vote...

  • Page 26
    ... the shares of our common stock issued, outstanding and entitled to vote. If our stockholders approve this proposal, the by-law amendment will become effective on the date of our 2007 Annual Meeting and the majority vote standard would be applicable to any uncontested election of directors following...

  • Page 27
    .... For instance in 2006 it was reported (and certain concerns are noted): • The Corporate Library (TCL) http://www.thecorporatelibrary.com/ an independent investment research firm rated our company "High Concern" in Board Composition. • There are too many active CEOs on our board with 7 - Over...

  • Page 28
    ... to protect stockholders against abusive tactics during a takeover process. Our Board of Directors believes that our limited two-thirds vote requirement continues to be in the best interests of Staples and our stockholders by ensuring that a sale, merger or dissolution of Staples is supported by...

  • Page 29
    ... communications between other independent directors and the Chairman of the Board and Chief Executive Officer, (3) chairing the annual performance review of our Chief Executive Officer and (4) consulting with the Chairman of the Board and Chief Executive Officer on matters relating to corporate...

  • Page 30
    ... our Board. Paul F. Walsh was the Chief Executive Officer of Clareon Corporation, a privately held electronic payments provider, from March 2000 to September 2002. In October 2002, to facilitate its acquisition by Fleet Boston Corp., Clareon Corporation filed for Chapter 11 bankruptcy protection. On...

  • Page 31
    ... had business relationships involving the purchase or sale of products or services with the following companies at which certain of our independent directors serve, or during the last completed fiscal year served, as executive officers, partners or directors: AMB Group, LLC; American Express Company...

  • Page 32
    ... setting the compensation levels of directors and executive officers, including our Chief Executive Officer, reviewing and providing recommendations to our Board regarding compensation programs, administering our equity incentive, stock purchase and other employee benefit plans and authorizing...

  • Page 33
    ... Board and our Chief Executive Officer, reviews and resolves conflict of interest situations, reviews and approves related party transactions and, if necessary, other than with respect to executive officers and directors, grants waivers to our Code of Ethics. The Nominating and Corporate Governance...

  • Page 34
    ... on any topic to our Board should address such communications to The Board of Directors, c/o Corporate Secretary, Staples, Inc., 500 Staples Drive, Framingham, Massachusetts 01702. Director Compensation The Compensation Committee is responsible for reviewing and making recommendations to our...

  • Page 35
    ... of executive and board compensation analyses, and published outside director pay studies, including a study conducted by Hewitt Associates, the Compensation Committee's independent advisor during our 2006 fiscal year. Based on the results of its 2006 annual review, the Compensation Committee...

  • Page 36
    ... date, provided that the director continues to serve as a member of our Board. The shares of restricted stock awarded to a director who meets the age and length of service requirement under our rule of 65 will fully vest upon retirement, should such director retire before the end of the applicable...

  • Page 37
    ... Crittenden had 10,200 shares of unvested restricted stock outstanding. (12) Reflects the 2006 expense associated with stock option awards granted in 2004, 2005 and 2006. For our 2006 fiscal year, Mr. Crittenden received an award of 4,500 stock options with a FASB 123(R) grant date fair value of $35...

  • Page 38
    ... to purchase an aggregate of 49,500 shares of our common stock. (17) Reflects payment of $37,500 for consulting services provided by Mr. Mitchell to Staples and $7,080 for dividend equivalents on restricted stock. (18) Reflects the 2006 expense associated with awards of restricted stock granted in...

  • Page 39
    ... The Audit Committee of the Company's Board of Directors is composed of three members and acts under a written charter as amended and restated on December 12, 2006, a copy of which is available at the Company's public web site at www.staples.com in the Corporate Governance section of the About...

  • Page 40
    ... 2006 and 2005, respectively, for professional services rendered in connection with our annual audit, the audit of our internal controls over financial reporting, the review of our interim financial statements included in our Form 10-Q, statutory filings and registration statements. Audit-Related...

  • Page 41
    ... is held by our Chief Executive Officer, Chairperson or directors, by the Nominating and Corporate Governance Committee of our Board of Directors. • Directors may work or consult for or serve on the board of a company that is one of our vendors or customers if (1) such company's annual sales to or...

  • Page 42
    ... Objectives Our executive compensation program is designed to meet three principal objectives: • Attract, retain and reward executive officers who contribute to our long-term success; • Align compensation with short- and long-term business objectives; and • Motivate and reward high levels...

  • Page 43
    ... of customer service levels such as customer comment card statistics, customer relations statistics (e.g., number of customer complaints), and delivery response levels. The Committee believes that the performance objectives established each fiscal year for the Executive Officer Incentive Plan are...

  • Page 44
    ...stock were granted to our named executive officers in July 2006. In June 2006, the Compensation Committee reviewed and approved the specific awards to be issued and selected a grant date of July 3, 2006. These stock options were granted at the closing price on the date of grant and vest ratably over...

  • Page 45
    ...Chief Executive Officers. Retirement and Other Benefits The Staples Executive Benefits Program is designed to supplement our compensation strategy to attract and retain the most talented executives in the business. It offers choice and is tax effective, innovative and industry competitive. It offers...

  • Page 46
    ... for tax planning services for executive officers. The Committee views our limited executive perquisites as reasonable and competitive. Under our aircraft policy, our Chief Executive Officer is permitted to use our leased aircraft for personal use so long as the incremental cost to Staples is...

  • Page 47
    ... Group Best Buy Co., Inc. Circuit City Stores, Inc. The Gap, Inc. The Home Depot, Inc. Lowe's Companies, Inc. Office Depot, Inc. OfficeMax Incorporated The TJX Companies, Inc. Core Retail Peer Group plus: Autozone, Inc. Costco Wholesale Corporation Kohl's Corporation Limited Brands, Inc. Target...

  • Page 48
    ...of our Chief Executive Officer with the full Board. The evaluation is based on objective criteria, including the performance of the business, accomplishment of reported goals and long-term strategic objectives and the development of management. The evaluation is used by the Compensation Committee in...

  • Page 49
    ... employees out of an annual pool of 600,000 shares, although the Chairman and Chief Executive Officer generally will make such awards subject to the Compensation Committee's approval at its next quarterly meeting. The annual pool is generally used to facilitate making new hire grants and to reward...

  • Page 50
    ...Revenue Code of compensation paid to our executive officers while maintaining compensation programs that support attraction and retention of key executives. Cash bonuses paid under the Executive Officer Incentive Plan, which was approved by stockholders at our 2003 Annual Stockholders Meeting, stock...

  • Page 51
    SUMMARY COMPENSATION TABLE FOR 2006 FISCAL YEAR The following table sets forth certain information concerning our 2006 fiscal year compensation of our Chief Executive Officer, our Chief Financial Officer and the three other most highly compensated executive officers of Staples at the end of our 2006...

  • Page 52
    ... $4,721 for tax preparation services and $16,500 for dividend equivalents on restricted stock. (16) Mr. Miles' salary and non-equity incentive plan compensation represent approximately 23% of his total compensation reported in the above table. (17) Reflects the 2006 expense associated with awards of...

  • Page 53
    ...$8,584 for tax preparation services and $18,157 for dividend equivalents on restricted stock. (20) Mr. Doody's salary and non-equity incentive plan compensation represent approximately 25% of his total compensation reported in the above table. (21) Reflects the 2006 expense associated with awards of...

  • Page 54
    ... The following table sets forth summary information regarding grants of plan-based awards made to the named executive officers for our 2006 fiscal year. All Other All Other Stock Option Awards: Awards: Estimated Possible Payouts Estimated Future Payouts Number Number of Under Non-Equity Incentive...

  • Page 55
    ... our performance share award agreement, a change-in-control would result in the number of shares associated with target performance objectives being issued before the end of the performance period if (a) the named executive officer does not accept employment with the surviving corporation upon the...

  • Page 56
    ...splits. OUTSTANDING EQUITY AWARDS AT 2006 FISCAL YEAR END The following table sets forth summary information regarding the outstanding equity awards granted to each of the named executive officers as of the end of our 2006 fiscal year. Option Awards Equity Incentive Plan Awards: Number of Securities...

  • Page 57
    ... 1, 2006. Mr. Anderson's equity awards for service on our Board of Directors following his retirement are included in the Director Compensation For 2006 Fiscal Year table elsewhere in this proxy statement. (1) Based on the fair market value of our common stock on February 3, 2007 ($26.45 per share...

  • Page 58
    ... exercise price represent a former class of stock subsequently reclassified to our common stock. (15) Stock options vest at the rate of 25% per year on 6/6/2001 and then 2.083% each month beginning 7/6/2001 and ending 6/6/2004. (16) Stock options vest in full on the third anniversary of the date of...

  • Page 59
    ...,460 $ 2,527,418 $ 924,989 $ 924,989 $ 0* Excludes options awarded to Mr. Anderson in connection with service on our Board of Directors and its committees following his retirement as our Vice Chairman, which are included in the Director Compensation For 2006 Fiscal Year table earlier in this proxy...

  • Page 60
    ...6, 2001 with an exercise price of $9.7466 per share exercised on September 20, 2006 at the fair market value of $25.0039 per share. (8) Represents 37,500 shares of PARS awarded in the 2004 fiscal year which vested in full in March 2006 as a result of achieving our earnings target for the 2005 fiscal...

  • Page 61
    ... DEFERRED COMPENSATION FOR 2006 FISCAL YEAR The following table sets forth summary information with respect to each of the named executive officers regarding contributions to our Supplemental Executive Retirement Plan (SERP) for our 2006 fiscal year. Executive Contributions in last FY ($) Company...

  • Page 62
    ...Payment ...Value of Accelerated Vesting of Equity Compensation...309,381 0 5,596,702 195,001 0 1,500,000 2,276,851 9,568,554 0 2,528,...share payout, if any, will be based on actual results and occur at the end of the performance period as if he had been employed on such date. A named executive officer...

  • Page 63
    ...his performance share awards. The named executive officer's benefits under our Supplemental Executive Retirement Plan (SERP), which include contributions by us and the named executive officer and any investment gains, generally will be paid in accordance with a predefined distribution schedule based...

  • Page 64
    ... Revenue Code. Our Board of Directors may also direct that any benefits under our SERP be distributed within 12 months of the change-in-control and that all participants are fully vested in their accounts. The continuation of benefits listed in the tables above include health, dental and executive...

  • Page 65
    ... with his distribution election on file. We will also pay premiums for long-term care insurance for Mr. Anderson beginning at age 65 until his death, the approximate value of which is $23,204. Agreements Affecting Payments Each of the named executive officers has executed a Non-Competition and Non...

  • Page 66
    ...Related Share Option Plan, of which 12,500 shares are issuable in connection with the current outstanding options assuming associates elect to use all of their savings under that plan to purchase our common stock. Includes 779,226 shares issuable under our Amended and Restated International Employee...

  • Page 67
    ... person or group. 1997 United Kingdom Company Share Option Plan In August 1997, our Board of Directors adopted the 1997 United Kingdom Company Share Option Plan (the "UK Option Plan"), pursuant to which stock options for up to 1,687,500 shares of our common stock could be granted to our associates...

  • Page 68
    ... DC 20549. If you would like to receive a copy of our Annual Report on Form 10-K for our 2006 fiscal year, or any of the exhibits listed therein, please call or submit a request in writing to Investor Relations, Staples, Inc., 500 Staples Drive, Framingham, MA 01702, telephone (800) 468-7751, and we...

  • Page 69
    ..., at any meeting of the stockholders a majority of all shares of stock then issued, outstanding and entitled to vote shall constitute a quorum for the transaction of any business. Though less than a quorum be present, any meeting may without further notice be adjourned to a subsequent date or until...

  • Page 70
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  • Page 71
    ... based on the last sale price of Staples' common stock on July 28, 2006, as reported by NASDAQ, was approximately $15.7 billion. In determining the market value of non-affiliate voting stock, shares of Staples' common stock beneficially owned by each executive officer and director have been excluded...

  • Page 72
    ... in both retail and delivery to improve the customer experience, infused the "Easy" brand personality in all of our marketing vehicles, web sites, and store signage, actively promoted our advertising tagline, "that was easy", and increased the quality and value of our Staples brand products. To...

  • Page 73
    .... As part of our strategy of delivering on our "Easy" brand promise, we focus on several key categories for which our customers rely on us to be an authority: ink and toner, paper, business machines, and copy and print services. For instance, to make it easier to shop for printer cartridges, we...

  • Page 74
    ... margin "share of wallet" categories such as janitorial and break room supplies and copy and print services are designed to drive profitability in each of the three business units in North American Delivery. International Operations Our International Operations consist of retail stores, catalog...

  • Page 75
    ... services. In our retail business, we are implementing strategies that were successful in North America, which focus on developing relationships with small business customers and home offices by driving steady sales of consumable office supplies. We plan to open approximately 10 new stores in Europe...

  • Page 76
    ...orders and invoices processed results in significant administrative cost savings. Our centralized purchasing and distribution systems also permit our store associates to spend more time on customer service and store presentation. Since our distribution centers maintain backup inventory, our in-store...

  • Page 77
    ... communicating the brand across all channels and customer touch points, including our signage, television commercials, product placement on national television programs, catalogs, web sites, circulars, direct marketing, and store uniforms. Associates and Training We have a strong corporate...

  • Page 78
    ... serving customers; a wide assortment of office supplies that are in-stock and easy to find; fast checkout; easy to use web sites; reliability and speed of order shipment; convenient store locations; hasslefree returns and fair prices. Trademarks In connection with our North American Retail business...

  • Page 79
    ... to January 2006, Chief Operating Officer from November 1998 to February 2002, President-North American Operations from October 1997 to November 1998, and President-Staples Contract & Commercial from June 1994 to October 1997. Jack A. VanWoerkom, age 53 Mr. VanWoerkom has served as Executive Vice...

  • Page 80
    ..., computer and electronics superstores such as Best Buy, copy and print businesses such as FedEx Kinko's, ink cartridge specialty stores, and other discount retailers. In addition, both our retail stores and delivery operations compete with numerous mail order firms, contract stationer businesses...

  • Page 81
    ... or profit levels as our existing stores. Also, our expansion strategy includes opening new stores in markets where we already have a presence so we 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...

  • Page 82
    ... the supply, design, function or cost of many of the products that we offer for sale and are dependent on the availability and pricing of key products, including, without limitation, paper, ink, toner and technology products. Disruptions in the availability of raw materials used in production of...

  • Page 83
    ... certain personal information that our customers provide to purchase products or services, enroll in promotional programs, register on our website, or otherwise communicate and interact with us. We also gather and retain information about our associates in the normal course of business. We may share...

  • Page 84
    .../Region Number of Centers United States California ...Colorado ...Connecticut ...Florida...Georgia ...Illinois ...Indiana ...Kansas ...Maryland...Massachusetts...Minnesota ...New Jersey ...New York ...North Carolina ... 4 1 2 1 2 1 1 1 1 1 1 1 2 1 Ohio ...Oregon ...Pennsylvania ...South Carolina...

  • Page 85
    ... periods indicated the high and low sales prices per share of our common stock on the NASDAQ Global Select Market, as reported by NASDAQ and reflecting the three-for-two common stock split that was effected in the form of a common stock dividend distributed on April 15, 2005. High Low Fiscal Year...

  • Page 86
    ...by our Board of Directors and will depend upon our earnings, financial condition and other factors. For information regarding securities authorized for issuance under our equity compensation plans, please see Note H in the Notes to Consolidated Financial Statements contained in this Annual Report on...

  • Page 87
    ...that our Board of Directors approved the repurchase of $1.5 billion of our common stock through February 2, 2008 following the completion of our prior $1.0 billion repurchase program. Item 6. Selected Financial Data The information required by this Item is attached as Appendix A. Item 7. Management...

  • Page 88
    ... or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements. Staples' internal control system was designed to provide reasonable assurance to the Company's management and Board of Directors regarding...

  • Page 89
    ... Registered Public Accounting Firm Report of Independent Registered Public Accounting Firm Board of Directors and Shareholders Staples, Inc. We have audited management's assessment, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting, that Staples...

  • Page 90
    ... executive officer, principal financial officer, and principal accounting officer or controller, or persons performing similar functions. Our code of ethics, which also applies to our directors and all of our officers and employees, can be found on our web site, which is located at www.staples.com...

  • Page 91
    ... the applicable accounting regulations of the Securities and Exchange Commission other than the one listed above are not required under the related instructions or are not applicable, and, therefore, have been omitted. 3. Exhibits. The exhibits which are filed or furnished with this report or which...

  • Page 92
    ...of the Board and Chief Executive Officer (Principal Executive Officer) Director Director Director Director Director Director Director Director Director Vice Chairman and Chief Financial Officer (Principal Financial Officer) Senior Vice President and Corporate Controller (Principal Accounting Officer...

  • Page 93
    ... Ended January 29, 2005(3) (52 weeks) January 31, 2004(4)(5) (52 weeks) February 1, 2003(6)(7) (52 weeks) Statement of Income Data: Sales ...Gross profit ...Net income ...Basic earnings per common share(1): Diluted earnings per common share(1): Dividends (1)...Statistical Data: Stores open at end...

  • Page 94
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  • Page 95
    ... 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...

  • Page 96
    ... to customer service, our focus on higher margin Staples brand products, strong results in our copy and print center business, the continued success of our customer acquisition and retention efforts, increased penetration of existing customers, supply chain improvements and expense management were...

  • Page 97
    ... margin categories including office supplies, copy and print services and Staples brand products as well as supply chain efficiencies which lower the cost of moving product from our vendors to our customers. Our 2006 results were partially offset by the costs associated with the opening of our new...

  • Page 98
    ... Stores Opened Net Stores Acquired Stores Closed Stores Open at End of Period 2004 2004 2004 2005 2005 2005 2006 2006 2006 North American Retail ...International Operations...Total ...North American Retail ...International Operations...Total ...North American Retail ...International Operations...

  • Page 99
    ... in business unit income for 2006 primarily reflects increased sales in higher margin categories including copy and print services, office supplies, Staples brand products as well as supply chain initiatives which lower the cost of moving product from our vendors to our customers, expense management...

  • Page 100
    ... to grow our International business by expanding our multi-channel offering in our existing European businesses and making targeted investments in high growth markets in Asia and South America. Stock-Based Compensation: Stock-based compensation increased to $168.7 million in fiscal 2006 from $129...

  • Page 101
    ... in 2005 and we repurchased 26.1 million shares of our common stock for a total purchase price of $502.7 million in 2004. We paid $160.9 million in 2006, $123.4 million in 2005 and $99.5 million in 2004 to shareholders in connection with our annual cash dividend on our common stock. In 2004, we...

  • Page 102
    STAPLES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) $457.8 million of short-term investments. During fiscal 2006, we also issued letters of credit in the ordinary course of business to satisfy certain vendor contracts. At ...

  • Page 103
    ... and fixtures, net inventory and pre-opening expense, will be approximately $1.4 million for each new store. We also plan to continue to make investments in information systems and distribution centers to improve operational efficiencies and customer service. We currently plan to spend approximately...

  • Page 104
    ... market interest rates would have the effect of causing a $5.3 million additional pre-tax charge or credit to our statement of operations. As more fully described in the notes to the consolidated financial statements, we are exposed to foreign exchange risks through subsidiaries in Canada, Austria...

  • Page 105
    ...8 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS APPENDIX C Page Report of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets-February 3, 2007 and January 28, 2006 ...Consolidated Statements of Income-Fiscal years ended February 3, 2007, January 28, 2006 and January 29, 2005...

  • Page 106
    Report of Independent Registered Public Accounting Firm Board of Directors and Shareholders Staples, Inc. We have audited the accompanying consolidated balance sheets of Staples, Inc. and subsidiaries as of February 3, 2007 and January 28, 2006, and the related consolidated statements of income, ...

  • Page 107
    STAPLES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Dollar Amounts in Thousands, Except Share Data) February 3, 2007 January 28, 2006 ASSETS Current assets: Cash and cash equivalents ...Short-term investments ...Receivables, net ...Merchandise inventories, net ...Deferred income tax asset...

  • Page 108
    ... SUBSIDIARIES Consolidated Statements of Income (Dollar Amounts in Thousands, Except Share Data) February 3, 2007 Fiscal Year Ended January 28, 2006 January 29, 2005 Sales ...Cost of goods sold and occupancy costs ...Gross profit ...Operating and other expenses: Operating and selling...General...

  • Page 109
    ... compensation...Sale of common stock under Employee Stock Purchase Plan and International Savings Plan ...Net income for the year ...Common stock dividend...Foreign currency translation adjustments ...Changes in the fair value of derivatives (net of taxes of $4,073) . Purchase of treasury shares...

  • Page 110
    ... used in investing activities ...Financing activities: Proceeds from the exercise of stock options and the sale of stock under employee stock purchase plans ...Proceeds from borrowings ...Payments on borrowings ...Cash dividends paid ...Excess tax benefits from stock-based compensation arrangements...

  • Page 111
    ... 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...

  • Page 112
    ... Financial Statements (Continued) NOTE A Summary of Significant Accounting Policies (Continued) Private Label Credit Card: Staples offers a private label credit card which is managed by a financial services company. Under the terms of the agreement, Staples is obligated to pay fees which...

  • Page 113
    ... is recognized at the point of sale for the Company's retail operations and at the time of shipment for its delivery sales. The Company offers its customers various coupons, discounts and rebates, which are treated as a reduction of revenue. Sales of extended service plans are either administered by...

  • Page 114
    ... World plc ("Office World"), a United Kingdom office products company. In connection with the acquisition of Office World, Staples accrued approximately $17.2 million for merger-related and integration costs, reflecting costs associated with planned Office World store closures, a distribution center...

  • Page 115
    ... as follows (in thousands): February 3, 2007 January 28, 2006 Taxes...Employee related ...Acquisition and store closure reserves ...Advertising and marketing ...Other ...Total ...NOTE D Debt and Credit Agreements The major components of debt outstanding are as follows (in thousands): $ 284,094 268...

  • Page 116
    ...notes were designated as a foreign currency hedge on the Company's net investments in Euro denominated subsidiaries and gains or losses were recorded in the cumulative translation adjustment line in Stockholders' Equity. Staples had available $132.6 million available under lines of credit, which had...

  • Page 117
    ...2006, 2005 and 2004, foreign currency gains (losses), net of taxes of $5.6 million, $(11.5) million and $(13.4) million, respectively were recorded in the cumulative translation adjustment line. NOTE F Commitments and Contingencies Staples leases certain retail and support facilities under long-term...

  • Page 118
    ... course of business through major financial institutions as required by certain vendor contracts. As of February 3, 2007, Staples had open letters of credit totaling $57.3 million. The Company is involved from time to time in litigation arising from the operation of its business. Various class...

  • Page 119
    ... 3, 2007 January 28, 2006 Deferred tax assets: Deferred rent ...Capitalized vendor money ...Foreign tax credit carryforwards ...Net operating loss carryforwards ...Insurance...Employee benefits ...Merger related charges...Store closure charge ...Inventory ...Unrealized loss on hedge instruments...

  • Page 120
    ... the geographic mix of earnings. The tax impact of the unrealized gain or loss on instruments designated as hedges of net investments in foreign subsidiaries is reported in the cumulative translation adjustment line in stockholders' equity. The Company operates in multiple jurisdictions and could be...

  • Page 121
    ... and restated 1990 Director Stock Option Plan (the "1990 Plan"). Unexercised options under both the 1992 Plan and the 1990 Plan remain outstanding. Under the 2004 Plan, Staples may issue up to 62.3 million shares of common stock to management and employees using various forms of awards, including...

  • Page 122
    STAPLES, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued) NOTE H Employee Benefit Plans (Continued) Stock Options Information with respect to stock options granted under the above plans is as follows: Number of Shares Weighted Average Exercise Price Per Share Aggregate ...

  • Page 123
    ... in the Company's history that would impact the value of the stock options granted to employees. The fair value of stock options is expensed over the applicable vesting period using the straight line method. In connection with the purchase of shares under the employee stock purchase plan and the...

  • Page 124
    ... and sold. Based on the terms of these awards, the Company accounts for PARS using fixed plan accounting and recognizes compensation expense over the expected life of the award on a straight-line basis. As of February 3, 2007, Staples had 944,670 PARS outstanding that were issued during fiscal year...

  • Page 125
    ...' Contract operations (Staples National Advantage and Staples Business Advantage). The International Operations segment consists of operating units that operate office supply stores and that sell and deliver office products and services directly to customers in 19 countries in Europe, South America...

  • Page 126
    ... sales and transfers and the related intercompany profit or loss are excluded from reportable segment amounts. 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...

  • Page 127
    ..., INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements (Continued) NOTE K Segment Reporting (Continued) February 3, 2007 January 28, 2006 January 29, 2005 Assets: North American Retail ...North American Delivery ...International Operations ...Total ...Elimination of net intercompany...

  • Page 128
    ... Consolidating Balance Sheet As of January 28, 2006 (in thousands) Staples, Inc. (Parent Co.) Guarantor Subsidiaries NonGuarantor Subsidiaries Eliminations Consolidated Cash and cash equivalents...Short-term investments ...Merchandise inventories ...Other current assets ...Total current assets...

  • Page 129
    ...Statement of Income For the year ended January 28, 2006 (in thousands) Staples, Inc. (Parent Co.) Guarantor Subsidiaries NonGuarantor Subsidiaries Consolidated Sales ...Cost of goods sold and occupancy costs ...Gross profit (loss)...Operating and other expenses ...Income (loss) before income taxes...

  • Page 130
    ...-term investments ...Proceeds from the sale of short-term investments ...Cash used in investing activities ...Financing activities: Payments on borrowings ...Purchase of treasury shares ...Excess tax benefits from stock-based compensation arrangements ...Cash dividends paid ...Other ...Cash (used...

  • Page 131
    ...-term investments ...Proceeds from the sale of short-term investments ...Cash provided by (used in) investing activities ...Financing activities: Payments on borrowings ...Purchase of treasury shares ...Excess tax benefits from stock-based compensation arrangements ...Cash dividends paid ...Other...

  • Page 132
    ... and an $8.6 million charge, net of taxes ($0.01 per diluted share) to correct the measurement dates used to calculate prior years' stock-based compensation (see Note H). (4) Fiscal year 2006 includes 53 weeks in accordance with our 52- week, 53-week retail calendar; accordingly, the fourth quarter...

  • Page 133
    ... account information related to operations is as follows (in thousands): Balance at Beginning of Period Additions Charged to Expense Additions from Acquisition Deductions- Write-offs, Payments and Other Adjustments Balance at End of Period Fiscal year ended: January 29, 2005 ...January 28, 2006...

  • Page 134
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  • Page 135
    ..., N.A., and Wachovia Bank, National Association, as Co-Documentation Agents, with Banc of America Securities LLC having acted as sole Lead Arranger and sole Book Manager. Filed as Exhibit 10.1 to the Company's Form 8-K filed on October 19, 2006. Employment Agreement, dated as of February 3, 2002, by...

  • Page 136
    ... Program Summary. Filed as Exhibit 10.25 to the Company's Form 10-K for the fiscal year ended January 29, 2005. Supplemental Executive Retirement Plan. Filed as Exhibit 10.26 to the Company's Form 10-K for the fiscal year ended January 29, 2005. Policy on Personal Use of Corporate Aircraft. Filed...

  • Page 137
    ... 906 of the Sarbanes-Oxley Act of 2002. * A management contract or compensatory plan or arrangement required to be filed as an exhibit to this annual report pursuant to Item 15(b) of Form 10-K. ^ An exhibit previously filed with the Securities and Exchange Commission and incorporated herein by...

  • Page 138
    ... President, Staples Business Advantage Peter J. Howard Senior Vice President, Staples Business Delivery Steven F. Mastrogiacomo Senior Vice President, Merchandise Planning and Inventory Management Donna S. Rosenberg Senior Vice President, Corporate Pricing John K. Barton Executive Vice President...

  • Page 139
    Corporate Information Corporate Offices Staples, Inc. 500 Staples Drive Framingham, MA 01702 Telephone: 1-508-253-5000 Internet address: www.staples.com Transfer Agent and Registrar Mellon Investor Services is the Transfer Agent and Registrar for the Staples, Inc. common stock and maintains ...

  • Page 140
    ... market Announced joint venture in India Launched over 600 new Staples® brand products Sold our 2 millionth Easy Button Awarded third consecutive J.D. Power and Associates certification for "An Outstanding Customer Service Experience" (We've worked really hard this year.) Staples, Inc., 500...