FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (TMF Debit)

Staples, Inc.
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One Research Drive
P.O. Box 5114
Westborough, MA 01581-5114
(508) 370-8500

Office Depot
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2200 Old Germantown Road
Delray Beach, FL 33445
(407) 278-4800

UNION CITY, Ca., September 4, 1996/FOOLWIRE/ --- Staples and Office Depot held a conference call for analysts this afternoon to discuss the details of their merger. In management's opinion, this is a grand slam deal for all the stake holders in the combined companies. They pointed out that often, when you see two companies merge, there are winners and losers -- the customer wins, the employees lose, etc. In this case, they feel every single significant stake holder in the combined companies comes out a winner.

For customers, these are two companies that revolutionized the office products business. Back before Office Depot and Staples came along in 1986, if you were a small business, you paid about $70 for a case of copy paper. Today you pay a little over $20. You paid $3.68 for a dozen Bic pens back then. Today depending on where you are in the country it is somewhere between $0.79 and $0.89. This idea goes down through all the essentials for small business. Their vision is to continue that tradition of saving customers money and gaining market share by offering better value. So clearly the customer comes out ahead here.

For associates, the company emphasized that this is not a deal being done on the backs of their associates. The real game plan is to add value through all of the potential opportunities they have in adopting best practices in both companies, not laying off people. They have, in fact, assured associates that they are not laying off workers as a result of the merger.

For vendors, clearly this is an opportunity to form very large global partnerships with a company that has the scale and scope to become a huge customer.

For shareholders, they expect this deal to be accretive to both sets of shareholders and provide excellent value from the first day after one-time and merger related charges.

These two companies are unique not just in their cost-saving traditions, but in their financial accomplishments. There have only been six companies in business history to achieve $3 billion in revenues on their own in less than 10 years. These two companies are two of those 6 companies. In fact, Office Depot was close to $5 billion in 10 years. They feel they will have the ability to save customers more money. They think they have highly complementary store organizations and geography. The merger will give them instant national scale and scope. They see enormous synergies, even construed in the most conservative way.

Since their inception, the two companies estimate that they have saved small business and home office customers close to $7 billion. Their goal going forward is to amplify that several-fold and make that an annual goal rather than a historical goal. Their goal is not to Staple-ize Office Depot, but to utilize the best of both management teams, the best of their respective operating practices, the best of their customer service practices, and the best of their systems. As they go through identifying this, in some cases they will use one company's methods, in some cases the other's, and in some cases a little of both.

They think they have an extremely attractive geographic fit. This new company, in fact, which will have $10 billion in revenues, over 1100 stores, over 50,000 associates, 35 customer service centers and delivery hubs, is still currently present in the superstore format only in 21% or 30 of the top 140 markets. That is to say, with 140 markets there are only 30 markets where there are both Office Depot and Staples stores present today. Those 30 markets include areas like Metro New York, where Office Depot has 3 or 4 stores and Staples has 80; and the South Carolina markets where Office Depot has 20-30 stores and Staples has 1-2 stores. So, it is an incredible geographic fit. Office Depot is extremely predominant in the vast heartland of America, and Staples is not. There is a strong Staples presence in the Northeastern US and relatively little Office Depot presence. There are similar fits in the contract and commercial business although it does look like they have a few more overlaps -- but even that is deceptive. In places like Atlanta and Detroit, Office Depot is highly modern with 150,000 square foot plus business service delivery centers. Staples has a small 30,000 square foot center in Atlanta that's an embarrassment to show their customers. Though it would appear there are serious overlaps, there really aren't because Staples' presence would have had to be replaced by one much like the Office Depot facilities in time.

Other synergies exist in purchasing, distribution, marketing, advertising, G&A, and particularly in shared best practices.

Office Depot may be struggling from a comp perspective today but the reason is that they have filled the glass. The Office Depot store today does $8.5 million at retail. The Staples store lags that number by some $2.5 million. Clearly some of Staples' accelerated comps have been the result of their copying what Office Depot has been doing. By virtue of merging, as opposed to guessing at the recipe, Staples has it handed to them. That synergy, more than any of the synergy numbers they talked about quantitatively is arguably bigger than any of the cost-saving type synergies. This is also a company that has made a lot of, in some cases, very painful investments to learn how to do business overseas. After one-time charges, the combined company will have an extremely solid balance sheet with over $1.6 billion in equity.

The deal is a stock-for-stock merger transaction. It will be treated as a tax-free reorganization. They expect it to be a pooling of interests transaction. The exchange ratio is 1.14 shares of Staples/Office Depot for each share of Office Depot stock. They expect the transaction to close in 3-4 months, but that is subject to shareholder approval and subject to regulatory approval.

They spent a lot of time talking about locations of people and management structure and have made the decision to locate the corporate headquarters in Boston. They also have decided that, because of the significant presence in the owned facilities they operate in Delray Beach in Florida, that those facilities will be maintained and continue to be operative. In those facilities, at a minimum, they expect the Office Depot information systems structure to remain as well as the major portion of the Office Depot Business Services Division.

Office Depot thinks that three years ago they made what were then some unpopular decisions relative to computers. In the face of a lot of people that thought they were wrong, they began a serious investment in mainframe computing to make sure they could create unlimited upward expansion potential within their computer system. While that project is certainly not finished, they are clearly 2.5 years down the road on a project that definitely would need to be done at Staples as well. They think that clearly will make the integration of the two companies a lot easier. As well, the Staples information systems have to continue operating to maintain their organization's presence during this transition period from the announcement of the deal to the close of the deal as well as the inevitable one to two years of transition that will occur after a deal. They also anticipate that the Staples contract and commercial portion will remain in Boston.

In terms of the executive management team, Office Depot head David Fuentes will be chairman of the new company. Martin Hanaka, now Staples' chief operating officer and president, will keep his title. Staples' chairman and chief exective, Thomas Stemberg, will be CEO of the new company. They have composed a Board of Directors that will consist of 8 current Staples Board members including Martin Hanaka and Tom Stemberg and 6 current Office Depot Board members including David Fuentes and they expect to add 1-2 more members to that organization. Fuentes feels that he can be most helpful in the transition if he focuses his attention on information systems, consolidating the Office Depot Business Services Division and the Staples Contract and Commercial Division.

In terms of a senior management team, they think it is fair to say that the two companies, while having excellent management, have not always been characterized by depth in management. The result of that has been that many projects they have worked on have been projects that haven't received the depth of attention that they need -- particularly in areas like information systems. The merger will pull two very talented groups of people together into one team that should be able to progress at twice the pace in creating world-class information systems as well as consolidating the Commercial, Contracts, and Business Services Divisions of the two companies. In putting together this senior management team, it is their expectation as all the key managers in Office Depot and Staples will continue with the company because there is clearly a role for every one of them.

Integration is a big task and they are going to have dedicated resources for integration. It is going to take them 18 months to two years. They will have 1064 stores with a net of 50 to be added next year. They have to get them all down to a dominant single brand. Both companies found themselves evolving their distribution system to one with an optimal path for each product based on its characteristics. They hope to work together to optimize the new system and get it put in place faster. They will close some stores -- there are about 50-70 that overlap, but there will be a net addition of 50 in 1997. And, as they get into 1998 and 1999, they will add a minimum of 120 new stores between the two old companies.

One-time charges associated with this deal include $180 million in 1997, $135 million in 1998, and then approximately $15 million in 1999. The charges are for remodels, signage, some IS expenditures, distribution, and some headquarters costs. The one-time charges which is $520 million are potential facilities closings (stores and warehouses) -- they currently estimate about $105 million for stores and $20 million for warehouse closures. For remodeling, about $94,000 per copy, signage at about $50,000 per copy for a total of $150 million. The inventory integration, they think is a ceiling number, is about $100 million which is based on about $100,000 in costs per store. Transaction and other costs are some systems write-offs, severance, relocation costs, deal closing costs, distribution, advertising and launching the new brand, and training associated with new processes/methods of doing business/new systems.

SYNERGY POTENTIAL

These are all minimum numbers that they are comfortable committing to.

For product costs, in 1997 they expect to save $31 million, in 1998 $41 million, and in 1999 $76 million. There are several ways they can achieve this -- supplier partnerships, best buying practices, and more direct sourcing.

In advertising and marketing they will eliminate a ton of redundancy between the two companies. In 1997 this is estimated to save $50 million, in 1998 $70 million, and in 1999 $85 million. Redundancy is one area, national scale -- buying national TV versus regional -- should give them significant savings of about 40%, and also better buying by combining their buying power and the points they want based on the target audience.

In G&A costs, they think non-product vendor partnerships is an area where they can derive savings. The savings are $10 million for 1997, $35 million for 1998, and $50 million for 1999. They will do that by copying best practices between the two companies and slower headcount growth. They will not eliminate headcount but they will reduce headcount additions. Between the two companies, they have been adding about 500 jobs between them over the past two years at headquarters alone. They expect to also be able to cut better deals for things like telecommunications and benefits packages because they are buying for a much larger group. Finally, potential facilities closures is cost savings and revenue retention.

None of these numbers take into account the sales gap that Staples has in per store sales that can be improved with the Office Depot systems. Just taking a 10-15% estimate in terms of improved per store sales numbers multiplied by the number of stores affected would blow away any of the savings listed above. Nor do they take into account in-bound transportation or any of the logistics savings they can derive.

When asked about the productivity gains, the management at Staples responded that it would be easier to understand if people knew how much time Staples has spent trying to emulate Office Depot. They recalled three or four years ago analyzing data about why Office Depot was doing so much better than them. A lot of things that drove Office Depot's $8.5 million per retail store involved execution. When they looked at the numbers it was more people offering help, better industry shopping, better service levels in the Office Depot stores, better selection and number of categories, more advertising. They learned a lot, but spent days and weeks and months trying to emulate Office Depot's performance.

What they are going to do on a case by case basis is look at every single category on a category performance basis and go to best practices. Given the fact that Office Depot does more than Staples, oftentimes they will have the better practice, and that will be what is used to help the Staples portion of the merger achieve better performances. They have found so far that the lion's share of differences between the two companies is in the distribution methodologies and the fact that Office Depot has devoted far more space to furniture and technology products than Staples has. The other categories are very similar in terms of numbers. Therefore, if there are significant differences in performance in these other categories, that will highlight an opportunity to improve Staples' performance by taking a look at what Office Depot does differently to achieve the better result. They will also look at mix in terms of furniture, technology products, and other differences on a store by store, market by market basis to determine the best approach to use to address the needs of a particular area.

GROWTH

On top of all the synergies and economics that favor this deal it is also a great business. They compete, just in the goods and services they sell today, in a $185 billion marketplace. The market overall, depending whose numbers you believe and how you weight them, is growing either in high single digits or low double digits. Small office and home office segments are growing four times as fast as the corporate segment. Both companies' sales are heavily weighted in the small office/home office segments. The underlying growth of their segments or the markets they compete in is in double digits.

Yet, their market shares are still infinitessimally small, despite the kind of huge scale they have achieved in the joint company. In the retail business, Staples and Office Depot alone will represent roughly 10% of retail office product sales in North America in 1996. The remaining 4 of the 6 largest resellers include companies like CompUSA, Price/Costco, Sam's/Wal-Mart, etc. Even added together, the top 6 are only 21% of the market in total. Moving to the contract and commercial business, the top 6 players account for 33% of the market and Office Depot and Staples combined are a mere 6%. In the mail order and direct marketing business, including direct marketing of office products and personal computer products, their share would be 5% and adding the top 6 players combined is still only 10%. And they don't compete in the VAR business and networks etc. at all. This is a huge market with ample opportunities even for a $10 billion company.

And this market does not include anything they could do overseas, which is an incredible opportunity for them. It doesn't include providing value to small businesses and other businesses and home offices on a lot of other goods and services and they see extraordinary opportunities there as well.

Moving back to the core focus of office superstores where the bulk of their profit comes from, they think that the company could grow to between 3,000 and 3,500 office superstores domestically. That means that, as an industry, they are less than halfway there. The marketplace in Europe is bigger than the North American market and every bit as paper-intensive. Today, the company is nowhere there.

From a growth perspective, more is possible than they have planned. They have taken the position that they are going to have a tremendous amount of work on their hands integrating the two companies. Some of the stores that each company was planning to open are not going to make sense going forward. They looked at opening about 120 stores next year and if they close 70 that would be a net addition of 50. The following years they again modeled 120. They would like to think that their team could ratchet that number up to 150 or more by 1998, but their current financial projections only encompass 120.

In terms of EPS growth, it will be extremely aggressive from the Staples' shareholder perspective. For 1996 and 1997 they are comfortable with 40% earnings growth in 1997. They are very comfortable for at least two years beyond 1997, of at least 30% EPS growth on the basis of the very large combined company. All these numbers are based on the current consensus estimates for Staples as a standalone. Staples, on a standalone basis, consensus estimates right now are $0.82 and they would be comfortable with significantly more than 40% EPS growth from this year until next year.

On all the numbers presented, the companies emphasized that they didn't want to be on the wrong side of missing any of the projections. They tried to err on the high side in terms of write-offs, charges, and expenses and on the low side in terms of cost savings, synergies, and growth estimates. Their internal goals are to do much better than these numbers, but they tried to give themselves a very comfortable margin of error because they recognize that things don't always kick in when and at the level they are expected to.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.

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