-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PYaHfr5Y58Z2ijbncpP+81KPfC311nRugEyOF94Ham0o7RduR1evK34Xk3qos8eQ DgrJI3ZRClwmkTR7D57oJA== 0000927356-98-001185.txt : 19980803 0000927356-98-001185.hdr.sgml : 19980803 ACCESSION NUMBER: 0000927356-98-001185 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980723 ITEM INFORMATION: FILED AS OF DATE: 19980729 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORPORATE EXPRESS INC CENTRAL INDEX KEY: 0000878130 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 840978360 STATE OF INCORPORATION: CO FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-24642 FILM NUMBER: 98673552 BUSINESS ADDRESS: STREET 1: 1 ENVIRONMENTAL WAY CITY: BROOMFIELD STATE: CO ZIP: 80021 BUSINESS PHONE: 3033732800 MAIL ADDRESS: STREET 1: 1 ENVIRONMENTAL WAY CITY: BROOMFIELD STATE: CO ZIP: 80021 8-K 1 FORM 8-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange act of 1934 Date of Report (Date of earliest event report): July 27, 1998 ----------------- CORPORATE EXPRESS, INC. ----------------------------- (Exact name of registrant as specified in its charter) Colorado 0-24642 84-0978360 - ------------------ ------------- ------------- (State or other (Commission (IRS Employer jurisdiction File Number) Identification No.) of incorporation) 1 Environmental Way Broomfield, CO 80021 ---------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (303) 664-2000 -------------- Item 5 - Other Events - --------------------- On May 29, 1998, CEX Holdings, Inc. ("CEX Holdings"), a wholly owned subsidiary of the Registrant, completed a private placement of $350 million principal amount of 9.625% Senior Subordinated Notes due 2008 (the "Notes"). The Notes are fully and unconditionally guaranteed on a joint and several basis by the Registrant (the "Parent Guarantor") and certain of the Registrant's subsidiaries. In connection with a proposed exchange offer involving the Notes and the filing of a Registration Statement on Form S-4 (the "Form S-4") with respect to such exchange offer, and pursuant to the requirements of Staff Accounting Bulletin Paragraph G and H of Topic 1 (SAB No. 53), the Registrant has added a footnote to its previously filed consolidated financial statements for the quarterly period ended May 2, 1998 (see (A) below) and the transition period from March 2, 1997 to January 31, 1998 (see (B) below) which includes condensed consolidating financial statement information for the Parent Guarantor, CEX Holdings, the Subsidiary Guarantors and the Subsidiary Non-Guarantors. There has been no change to the previously filed consolidated financial statements contained in the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended May 2, 1998 or the Registrant's Annual Report on Form 10- K for the transition period from March 2, 1997 to January 31, 1998, other than the addition of Note 10 - Supplemental Guarantor Information and Note 19 - Supplemental Guarantor Information, respectively. Also in connection with the proposed exchange offer involving the Notes and the Form S-4, the Registrant has included in this report, for the purpose of incorporating by reference into the Form S-4, the previously filed (i) audited financial statements of Data Documents Incorporated ("DDI") for the year ended December 31, 1996 (see (C) below) and (ii) unaudited financial statements of DDI for the quarter ended September 30, 1997 (see (D) below). DDI was acquired by the Registrant on November 26, 1997. -2- (A) CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTERLY PERIOD ENDED MAY 2, 1998 - ADDITIONAL FOOTNOTE In connection with a proposed exchange offer involving the Notes and the filing of a Registration Statement on Form S-4 with respect to such exchange offer, and pursuant to the requirements of Staff Accounting Bulletin Paragraph G and H of Topic 1 (SAB No. 53), the Registrant has added a footnote to its previously filed consolidated financial statements for the quarterly period ended May 2, 1998 which includes condensed consolidating financial statement information for the Parent Guarantor, CEX Holdings, the Subsidiary Guarantors and the Subsidiary Non-Guarantors. There has been no change to the previously filed consolidated financial statements contained in the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended May 2, 1998 other than the addition of Note 10- Supplemental Guarantor Information. -3- CORPORATE EXPRESS, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts)
ASSETS May 2, January 31, 1998 1998 ----------- ----------- (Unaudited) Current assets: Cash and cash equivalents $ 36,906 $ 44,362 Trade accounts receivable, net of allowance of $15,292 and $14,523, respectively 647,467 616,574 Notes and other receivables 79,356 86,687 Inventories 275,453 251,108 Deferred income taxes 37,506 40,729 Other current assets 40,896 41,713 ----------- ----------- Total current assets 1,117,584 1,081,173 Property and equipment: Land 17,564 17,540 Buildings and leasehold improvements 129,839 126,006 Furniture and equipment 356,258 339,577 ----------- ----------- 503,661 483,123 Less accumulated depreciation (140,873) (131,756) ----------- ----------- 362,788 351,367 Goodwill, net of $64,369 and $57,558 of accumulated amortization, respectively 860,357 847,544 Other assets, net 88,192 69,575 ----------- ----------- Total assets $ 2,428,921 $ 2,349,659 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. CORPORATE EXPRESS, INC. CONSOLIDATED BALANCE SHEETS, Continued (In thousands, except share and per share amounts) LIABILITIES AND SHAREHOLDERS' EQUITY
May 2, January 31, 1998 1998 -------------- ------------- (Unaudited) Current liabilities: Accounts payable - trade $ 378,982 $ 354,915 Accounts payable - acquisitions 2,264 6,106 Accrued payroll and benefits 56,750 61,308 Accrued purchase costs 9,087 9,378 Accrued merger and related costs 12,846 15,512 Other accrued liabilities 96,975 80,214 Current portion of long-term debt and capital leases 34,359 36,264 ----------- ----------- Total current liabilities 591,263 563,697 Capital lease obligations 7,381 9,414 Long-term debt 1,161,281 753,829 Deferred income taxes 57,127 52,515 Minority interest in subsidiaries 19,654 20,791 Other non-current liabilities 16,919 16,980 ----------- ----------- Total liabilities 1,853,625 1,417,226 Contingencies (Note 7) Shareholders' equity: Preferred stock, $.0001 par value, 25,000,000 shares authorized, none issued or outstanding -- -- Common stock, $.0002 par value, 300,000,000 shares authorized, 143,002,580 and 142,392,845 shares issued and outstanding, respectively 28 28 Common stock, non-voting, $.0002 par value, 3,000,000 shares authorized, none issued or outstanding -- -- Additional paid-in capital 855,944 852,507 Retained earnings 106,595 91,887 Accumulated other comprehensive expense (8,021) (11,989) ----------- ----------- 954,546 932,433 Less: Treasury stock, at cost, 35,000,000 shares at May 2, 1998 (379,250) -- ----------- ----------- Total shareholders' equity 575,296 932,433 Total liabilities and shareholders' equity $ 2,428,921 $ 2,349,659 ----------- -----------
The accompanying notes are an integral part of the consolidated financial statements. -5- CORPORATE EXPRESS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
Three Months Ended ------------------------------ May 2, May 3, 1998 1997 ------------- ------------ (Unaudited) Net sales $ 1,108,061 $ 921,455 Cost of sales 850,291 703,650 ----------- ----------- Gross profit 257,770 217,805 Warehouse operating and selling expenses 182,825 160,757 Corporate general and administrative expenses 33,102 29,098 ----------- ----------- Operating profit 41,843 27,950 Interest expense and other, net 12,791 8,953 ----------- ----------- Income before income taxes 29,052 18,997 Income tax expense 13,044 7,500 ----------- ----------- Income before minority interest 16,008 11,497 Minority interest expense (income) 196 (911) ----------- ----------- Income before extraordinary item 15,812 12,408 Extraordinary item, net of tax: Loss on early extinguishment of debt 1,104 -- ----------- ----------- Net income $ 14,708 $ 12,408 =========== =========== Net income per share - Basic: Net income before extraordinary item $ 0.12 $ 0.10 Extraordinary item (0.01) -- ----------- ----------- Net income $ 0.11 $ 0.10 =========== =========== Net income per share - Diluted: Net income before extraordinary item $ 0.12 $ 0.09 Extraordinary item (0.01) -- ----------- ----------- Net income $ 0.11 $ 0.09 =========== =========== Weighted average common shares outstanding: Basic 134,410 126,067 Diluted 136,729 131,268
-6- CORPORATE EXPRESS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Three Months Ended --------------------------------- May 2, May 3, 1998 1997 ------------- ------------- (Unaudited) Cash flows from operating activities: Net income $ 14,708 $ 12,408 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 12,004 9,579 Amortization 6,916 5,458 Non-cash portion of merger and restructuring charge -- 1,396 Loss on early extinguishment of debt 1,104 -- Minority interest (income) expense 196 (911) Other 678 95 Changes in assets and liabilities, excluding acquisitions: (Increase) decrease in accounts receivable 2,797 17,465 (Increase) decrease in inventory (17,014) (6,400) (Increase) decrease in other current assets 3,662 (4,131) (Increase) decrease in other assets (2,812) (939) Increase (decrease) in accounts payable (1,706) (29,688) Increase (decrease) in accrued liabilities 11,281 (22,283) --------- --------- Net cash provided by (used in) operating activities 31,814 (17,951) --------- --------- Cash flows from investing activities: Proceeds from sale of assets 703 637 Capital expenditures (21,501) (30,542) Payment for acquisitions, net of cash acquired (21,047) (10,854) Investment in marketable securities (994) 572 Other, net (71) 13 --------- --------- Net cash used in investing activities (42,910) (40,174) --------- --------- Cash flows from financing activities: Issuance of common stock 156 8,641 Repurchase of common stock (379,250) -- Debt issuance costs (15,150) (151) Proceeds from long-term borrowings 252,179 11,515 Repayments of long-term borrowings (6,936) (29,539) Proceeds from short-term borrowings 1,188 358 Repayments of short-term borrowings (2,075) (1,997) Net proceeds from (payments on) line of credit 153,752 49,778 Other (77) 86 --------- --------- Net cash provided by financing activities 3,787 38,691 --------- --------- Effect of foreign currency exchange rate changes on cash (147) (303) --------- --------- (Decrease) increase in cash and cash equivalents (7,456) (19,737) Cash and cash equivalents, beginning of period 44,362 58,993 ========= ========= Cash and cash equivalents, end of period $ 36,906 $ 39,256 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. -7- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements include the accounts of Corporate Express, Inc. ("Corporate Express" or the "Company") and its majority-owned subsidiaries. Acquisitions accounted for as purchases are included in the accounts and operations as of the effective date of the acquisition and immaterial acquisitions accounted for as poolings of interests are included in the accounts and operations as of the beginning of the fiscal quarter in which the acquisition is effective. The Company accounts for its investments in less than 50% owned entities using the equity or cost methods. All intercompany balances and transactions have been eliminated. These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, such interim statements reflect all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position and the results of operations and cash flows for the interim periods presented. The results of operations for these interim periods are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the eleven months ended January 31, 1998. In January 1998 the Company changed its fiscal year end from the end of February to January 31, 1998. The consolidated financial statements for the previously reported prior year first quarter have been restated to conform to the new fiscal year and accordingly reflect the three-month period ended May 3, 1997. Certain reclassifications have been made to the consolidated financial statements for the three-month period ended May 3, 1997 to conform to the three- month period ended May 2, 1998 presentation. These reclassifications had no impact on net income. The Company capitalizes certain salaries and wages and payments to outside firms for direct services related to the development and implementation of its software. All software is amortized over its economic useful life of three to seven years using the straight-line method. New Accounting Standards: In the first quarter of fiscal 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." Comprehensive income, consisting of net income, the change in the foreign currency translation adjustment and an unrealized holding gain or loss on marketable securities, totaled $18,676,000 for the three months ended May 2, 1998 and $8,004,000 for the three months ended May 3, 1997. The Company is required to adopt SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," in the fourth quarter of fiscal 1998. SFAS No. 131 will supercede the business segment disclosure requirements currently in effect under SFAS No. 14. SFAS No. 131, among other things, establishes standards regarding the information a company is required to disclose about its operating segments and provides guidance regarding what constitutes a reportable operating segment. The Company is currently evaluating disclosures under SFAS No. 131 compared to current disclosures. The Company is required to adopt the disclosure requirements of SFAS No. 132, "Employer's Disclosures about Pensions and Other Postretirement Benefits," in the fourth quarter of fiscal 1998. SFAS No. 132 revises disclosure requirements for such pension and postretirement benefit plans to, among other things, standardize certain disclosures and eliminate certain other disclosures no longer deemed useful. SFAS No. 132 does not change the measurement or recognition criteria for such plans. -8- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On March 4, 1998, the Accounting Standards Executive Committee (AcSEC) issued Statement of Position (SOP) 98-1 providing guidance on accounting for the costs of computer software developed or obtained for internal use. The effective date of this pronouncement is for fiscal years beginning after December 15, 1998. The Company is in the process of reviewing its current policies for accounting for costs associated with internal software development projects and how they may be affected by SOP 98-1. The Company believes its current policies are materially consistent with the SOP; however, the ultimate impact on the Company's future results of operations has not yet been determined. 2. ACCRUED PURCHASE COSTS In conjunction with acquisitions accounted for as purchases, the Company accrues certain of the direct external costs associated with closing redundant facilities of acquired companies, and severance and relocation payments for the acquired companies' employees. All consolidation projects are planned to be completed within two years of the acquisition date. Remaining balances primarily represent international and the recent Data Documents Incorporated ("DDI") consolidation plans. The following table sets forth activity in the Company's accrued purchase costs liability account for the three months ended May 2, 1998:
Disposition Facility Redundant of Assets Total Exit Costs Facilities Severance & Other ------------ ----------- ----------- ---------- ----------- (In thousands) Balance, January 31, 1998 $ 9,378 $ 464 $3,128 $4,400 $1,386 Additions 712 -- 152 544 16 Payments (1,003) (128) (301) (382) (192) ------------ ----------- ----------- ---------- ----------- Balance, May 2, 1998 $ 9,087 $ 336 $ 2,979 $ 4,562 $ 1,210 ============ =========== =========== ========== ===========
3. MERGER AND OTHER NONRECURRING CHARGES The Company accrues, among other things, costs to complete pooling of interests transactions, costs of merging and closing redundant facilities, and costs associated with personnel reductions and centralizing certain administrative functions. The following table sets forth activity in the Company's accrued merger and other non-recurring charges liability account for the three months ended May 2, 1998:
Balance Cash Non- Balance 1/31/98 Payments Cash Usage 5/2/98 --------- -------- ---------- --------- (In thousands) Merger transaction costs (1) $ 611 $ (299) $ 312 Employee severance and termination costs (2) 9,696 (1,690) 8,006 Facility closure and consolidation costs (3) 5,205 (677) 4,528 -------- ------- ------- Accrued merger and related costs, balance 15,512 (2,666) 12,846 Other asset write-downs and costs (4) 2,759 --- $(203) 2,556 -------- ------- ---------- ------- Total $ 18,271 $(2,666) $(203) $15,402 ======== ======= ---------- =======
-9- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Merger transaction costs are the direct costs from the pooling of interests transactions and those direct costs incurred by DDI, and include legal, accounting, investment banking, printing, contract buy-outs and other related costs. (2) Employee severance and termination costs are related to the elimination of duplicate management positions, facility closures and consolidations, and centralization of certain shared services. Of the 1,716 employees planned to be terminated, 782 have been terminated as of May 2, 1998. The Company expects to complete the facility closures and related terminations for the fiscal 1995 charge, which balance totals $1,589,000 and the fiscal 1996 charge, which balance totals $1,009,000, by the end of fiscal 1998. The centralization of certain shared services began in the second quarter of fiscal 1997 and will continue through fiscal 1998. The Company expects to complete the facility closures and related terminations for the fiscal year 1997 charge, which balance totals $5,408,000, by the end of fiscal 1998. (3) Facility closure and consolidation costs are the estimated costs to close redundant facilities, lease costs and other costs associated with closed facilities. Of the 215 facilities planned to be closed or consolidated, 144 have been closed or consolidated as of May 2, 1998. The remaining facilities included in the fiscal 1995 and 1996 charges, and the facilities identified in the fiscal 1997 charge are expected to be closed by the end of fiscal 1998. (4) Other asset write-downs and costs are recorded as contra assets, and include the expected loss on sale of assets and leasehold improvements and equipment being abandoned or written off as a result of the exit plans. The remaining balance primarily represents assets that will be disposed of in conjunction with facility closures, which are expected to be completed by the end of fiscal 1998. 4. PRO FORMA ACQUISITION RESULTS Effective November 26, 1997 the Company issued approximately 10,740,000 shares of common stock in exchange for all of the outstanding stock of DDI, a provider of forms management services and systems, custom business forms and pressure-sensitive labels. The operating results of DDI are included in the Company's consolidated statement of operations from the effective date of the acquisition. The following pro forma financial information assumes the DDI acquisition occurred at the beginning of the three-month period ended May 3, 1997 and primarily reflects goodwill amortization, debt retirement and the issuance of shares. These results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the transaction occurred at the beginning of the period, or of results which may occur in the future.
Three Months Ended May 3, 1997 ----------- (In thousands, except per share amounts) (Unaudited) Net sales $985,304 Net income 14,388 Net income per share - Basic 0.11 Net income per share Diluted 0.10
5. REPURCHASE OF COMMON STOCK On February 5, 1998 the Company commenced a Dutch Auction issuer tender offer to purchase for cash up to 35,000,000 shares of its issued and outstanding common stock, par value $.0002 per share. The terms of the tender offer invited the Company's shareholders to tender up to 35,000,000 shares of the Company's common stock to the Company at prices not greater than $11.50 nor less than $10.00 per share, as specified by the tendering shareholders. On April 10, 1998 the Company closed the tender offer and -10- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS purchased 35,000,000 shares tendered at a price of $10.75 per share. Shares tendered at prices in excess of the purchase price and shares not purchased because of proration were returned to shareholders. The 35,000,000 treasury shares resulting from this transaction are reflected on the balance sheet at cost plus applicable fees and expenses of approximately $3,000,000. 6. DEBT On April 22, 1998 the Company executed a new $1 billion Senior Secured Credit Facility ("Senior Secured Credit Facility") consisting of a $250,000,000, seven-year term loan and a $750,000,000 five-year revolving credit facility and terminated the existing $500,000,000 Credit Facility ("Senior Credit Facility"). The Company has utilized borrowings under the new credit facility to fund the purchase of 35,000,000 shares of its common stock pursuant to its Dutch Auction tender offer, to repay and terminate the previously existing Senior Credit Facility and for general corporate and working capital requirements. The Senior Secured Credit Facility is guaranteed by substantially all domestic subsidiaries of the Company and is collateralized by all tangible and intangible property of the guarantors including inventory and receivables. At the borrower's option interest rates are at a base rate or a Eurodollar rate plus an applicable margin determined by a leverage ratio as defined in the loan agreements. The term loan's interest rate ranges from 0.25% to 0.75% above the revolving loan. The Company is subject to usual convenants customary for this type of facility including restrictions on dividends, additional borrowings and certain financial covenants. Approximately $1,810,000 of deferred financing costs related to the terminated Senior Credit Facility were expensed in the first quarter of fiscal 1998 and are reflected as an extraordinary item of $1,104,000, net of tax of $706,000. 7. CONTINGENCIES In the normal course of business, the Company is subject to certain legal proceedings. In the opinion of management, the outcome of such litigation will not have a material adverse effect on the Company's financial position or operating results. The Company has a dispute with a former shareholder of a company acquired by the Company in fiscal 1996. No legal proceedings have been commenced by the shareholder, and the Company cannot determine if any legal action will be initiated, or the results or materiality of any such action. 8. EARNINGS PER SHARE Basic and diluted earnings per share are calculated as follows: Three Months Three Months Ended Ended May 2, 1998 May 3, 1997 ------------ ------------ (In thousands, except per share data) Numerator for basic and diluted EPS: Income before extraordinary item $ 15,812 $ 12,408 Extraordinary item (1,104) --- ----------- ----------- Net income $ 14,708 $ 12,408 =========== =========== Basic EPS Calculation: Denominator: Average common shares outstanding 134,410(1) 126,067 =========== =========== Earnings per common share: Income before extraordinary item $ 0.12 $ 0.10 Extraordinary item (0.01) -- ----------- ----------- -11- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Net income $ 0.11 $ 0.10 ========= ======== Diluted EPS Calculation: Denominator (2): Basic shares 134,410 126,067 Dilutive stock options and warrants 2,319 5,201 -------- -------- Diluted shares 136,729 131,268 ======== ======== Earnings per common share: Income before extraordinary item $ 0.12 $ 0.09 Extraordinary item (0.01) --- -------- -------- Net income $ 0.11 $ 0.09 ======== ========
(1) Reflects the shares repurchased only from the April 10, 1998 purchase date. (2) Antidilutive stock options omitted from the denominator were immaterial. Also excluded from the calculation are the Convertible Notes with an exercise price of $33.33 per share which is greater than the average market price of the common shares. 9. SUBSEQUENT EVENTS On May 29, 1998 the Company issued at par $350,000,000 principal amount of unsecured 9 5/8% Senior Subordinated Notes due 2008. The notes are guaranteed by all material domestic subsidiaries of the Company and are subordinated in right of payment to all senior debt including the Senior Secured Credit Facility. On or after June 1, 2003 through maturity the notes may be redeemed at the option of the Company, in whole or in part, at redemption rates ranging from 104.813% to 100%. At any time on or before June 1, 2001 the Company may redeem up to 35% of the notes with the net cash proceeds of one or more public equity offerings at a redemption price equal to 109.625% of the principal amount thereof, subject to certain restrictions. Semi-annual interest payments are due on June 1 and December 1 commencing on December 1, 1998. A portion of the proceeds from the sale of these notes was used to repay prior to maturity substantially all of the $90,000,000 9 1/8% Senior Subordinated Notes Series B due 2004 and to repay a portion of the Senior Secured Credit Facility. As a result of this repayment, the Company will record an extraordinary loss of approximately $5,000,000, net of tax, in the second quarter of fiscal 1998. During the fourth quarter of fiscal 1997, the Company entered into an interest rate hedging contract based on $300,000,000 of U.S. Treasury notes to manage the Company's exposure related to an anticipated debt offering which the Company has completed. The cost of the settlement of the contract will be amortized over the ten-year term of the Senior Secured Credit Facility as an adjustment to the effective interest rate of the debt agreement. 10. SUPPLEMENTAL GUARANTOR INFORMATION On May 29, 1998, CEX Holdings, Inc. ("CEX Holdings" or the "Issuer"), a wholly owned subsidiary of the Registrant, completed a private placement of $350 million principal amount of 9.625% Senior Subordinated Notes due 2008 (the "Notes"). The Notes are fully and unconditionally guaranteed on a joint and several basis by the Registrant (the "Parent Guarantor") and certain of the Registrant's subsidiaries. Substantially all of the Issuer's income and cash flow is generated by its subsidiaries. As a result, funds necessary to meet the Issuer's debt service obligations are provided in large part by distributions or advances from its subsidiaries. Under certain circumstances, contractual and legal restrictions, as well as the financial condition and operating requirements of the Issuer's subsidiaries, could limit the Issuer's ability to obtain cash from its subsidiaries for the purpose of meeting its debt service obligations, including the payment of principal and interest on the Notes. The following information sets forth the condensed consolidating balance sheet of the Registrant as of May 2, 1998 and condensed consolidating statements of operations and cash flows for the three months ended May 2, 1998 and May 3, 1997. Investments in subsidiaries are accounted for on the equity method; accordingly entries necessary to consolidate the Parent Guarantor, CEX Holdings, Inc., and all of its -12- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS subsidiaries are reflected in the eliminations column. Separate complete financial statements of the Issuer (CEX Holdings) and the Subsidiary Guarantors would not provide additional material information that would be useful in assessing the financial composition of the Guarantors. -13- CORPORATE EXPRESS, INC. CONDENSED CONSOLIDATING BALANCE SHEET MAY 2, 1998
Subsidiary Parent Issuer Subsidiary Non Guarantor of Notes Guarantors Guarantors ------------- ------------ --------------- -------------- ASSETS Current assets: Cash and cash equivalents 3,169 25,964 7,773 Trade accounts receivable, net 439,847 207,620 Notes and other receivables 63,056 16,300 Inventories 179,941 95,512 Deferred income taxes 706 31,081 5,719 Other current assets 28,726 12,170 ------------- ------------ --------------- -------------- Total current assets 3,875 768,615 345,094 Property and equipment: Land 10,684 6,880 Buildings and leasehold improvements 96,534 33,305 Property and equipment 287,084 69,174 ------------- ------------ --------------- -------------- 394,302 109,359 Less accumulated depreciation (125,025) (15,848) ------------- ------------ --------------- -------------- 269,277 93,511 Goodwill, net 646,916 213,441 Net investment in and advances to subsidiaries 943,767 1,629,319 (187,999) Other assets, net 4,115 46,358 23,925 13,794 ------------- ------------ --------------- -------------- Total assets 947,882 1,679,552 1,708,733 477,841 ============= ============ =============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable - trade 33,962 223,376 121,644 Accounts payable - acquisition 1,440 824 Accrued payroll and benefits 44,678 12,072 Accrued purchase costs 2,661 6,426 Accrued merger and related costs 12,028 818 Other accrued liabilities 13,624 2,679 47,545 33,127 Current portion of long-term debt and capital leases 8,616 25,743 ------------- ------------ --------------- -------------- Total current liabilities 47,586 2,679 340,344 200,654 Capital lease obligations 5,676 1,705 Long-term debt 325,000 733,106 22,418 80,757 Deferred income taxes 56,777 350 Minority interest 19,654 Other non-current liabilities 6,207 10,712 ------------- ------------ --------------- -------------- Total liabilities 372,586 735,785 431,422 313,832 Total shareholders' equity 575,296 943,767 1,277,311 164,009 ------------- ------------ --------------- -------------- Total liabilities and shareholders' equity 947,882 1,679,552 1,708,733 477,841 ============= ============ =============== ============== Eliminations Consolidated ---------------- ---------------- ASSETS Current assets: Cash and cash equivalents 36,906 Trade accounts receivable, net 647,467 Notes and other receivables 79,356 Inventories 275,453 Deferred income taxes 37,506 Other current assets 40,896 ---------------- ---------------- Total current assets 1,117,584 Property and equipment: Land 17,564 Buildings and leasehold improvements 129,839 Property and equipment 356,258 ---------------- ---------------- 503,661 Less accumulated depreciation (140,873) ---------------- ---------------- 362,788 Goodwill, net 860,357 Net investment in and advances to subsidiaries (2,385,087) Other assets, net 88,192 ---------------- ---------------- Total assets (2,385,087) 2,428,921 ================ ================ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable - trade 378,982 Accounts payable - acquisition 2,264 Accrued payroll and benefits 56,750 Accrued purchase costs 9,087 Accrued merger and related costs 12,846 Other accrued liabilities 96,975 Current portion of long-term debt and capital leases 34,359 ---------------- ---------------- Total current liabilities 591,263 Capital lease obligations 7,381 Long-term debt 1,161,281 Deferred income taxes 57,127 Minority interest 19,654 Other non-current liabilities 16,919 ---------------- ---------------- Total liabilities 1,853,625 Total shareholders' equity (2,385,087) 575,296 ---------------- ---------------- Total liabilities and shareholders' equity (2,385,087) 2,428,921 ================ ================
CORPORATE EXPRESS, INC. CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS THREE MONTHS ENDED MAY 2, 1998
Subsidiary Parent Issuer Subsidiary Non Guarantor of Notes Guarantors Guarantors Eliminations Consolidated ------------- ---------- -------------- ------------- -------------- ------------- Net sales 813,981 294,080 1,108,061 Cost of sales 620,945 229,346 850,291 Equity in subsidiary earnings 17,025 21,021 (38,046) ----------- --------- ---------- --------- ----------- ---------- Gross profit 17,025 21,021 193,036 64,734 (38,046) 257,770 Warehouse operating and selling expenses 137,157 45,668 182,825 Corporate general and administrative expenses 27,595 5,507 33,102 ----------- --------- ---------- --------- ----------- ---------- Operating profit 17,025 21,021 28,284 13,559 (38,046) 41,843 Interest expense and other, net 4,134 5,160 532 2,965 12,791 ----------- --------- ---------- --------- ----------- ---------- Income before income taxes 12,891 15,861 27,752 10,594 (38,046) 29,052 Income tax expense (benefit) (1,817) (2,268) 12,196 4,933 13,044 ----------- --------- ---------- --------- ----------- ---------- Income before minority interest 14,708 18,129 15,556 5,661 (38,046) 16,008 Minority interest expense 196 196 ----------- --------- ---------- --------- ----------- ---------- Income before extraordinary item 14,708 18,129 15,556 5,465 (38,046) 15,812 Extraordinary item: Loss on early extinguishment of debt 1,104 1,104 ----------- --------- ---------- --------- ----------- ---------- Net income 14,708 17,025 15,556 5,465 (38,046) 14,708 =========== ========= ========== ========= =========== ==========
CORPORATE EXPRESS, INC. CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS THREE MONTHS ENDED MAY 3, 1997
Parent Issuer Subsidiary Guarantor of Notes Guarantors ---------------- ---------------- -------------------- Net sales 746,765 Cost of sales 569,836 Equity in earnings of subsidiaries 14,798 16,350 ---------------- ---------------- -------------------- Gross profit 14,798 16,350 176,929 Warehouse operating and selling expenses 126,577 Corporate general and administrative expenses 23,990 ---------------- ---------------- ---------------------- Operating profit 14,798 16,350 26,362 Interest expense and other, net 3,903 2,534 (297) ---------------- ---------------- ---------------------- Income before income taxes 10,895 13,816 26,659 Income tax expense (benefit) (1,513) (982) 10,332 ---------------- ---------------- ---------------------- Income before minority interest 12,408 14,798 16,327 Minority interest (income) expense ---------------- ---------------- ---------------------- Net income 12,408 14,798 16,327 ================ ================ ====================== Subsidiary Non Guarantors Eliminations Consolidated --------------------- -------------------- --------------------- Net sales 174,690 921,455 Cost of sales 133,814 703,650 Equity in earnings of subsidiaries (31,148) --------------------- -------------------- --------------------- Gross Profit 40,876 (31,148) 217,805 Warehouse operating and selling expenses 34,180 160,757 Corporate general and administrative expenses 5,108 29,098 --------------------- -------------------- --------------------- Operating profit 1,588 (31,148) 27,950 Interest expense and other, net 2,813 8,953 --------------------- -------------------- --------------------- Income before income taxes (1,225) (31,148) 18,997 Income tax expense (benefit) (337) 7,500 --------------------- -------------------- --------------------- Income before minority interest (888) (31,148) 11,497 Minority interest (income) expense (911) (911) --------------------- -------------------- --------------------- Net income 23 (31,148) 12,408 ===================== ==================== =====================
CORPORATE EXPRESS, INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS THREE MONTHS ENDED MAY 2, 1998
Parent Issuer Subsidiary Guarantor of Notes Guarantors ------------- ------------- -------------- Net cash provided by (used in) operating activities (18,956) (19,430) 87,299 ------------- ------------- -------------- Cash flows from investing activities: Proceeds from sale of assets 597 Capital expenditures (18,781) Payment for acquisitions, net of cash acquired (1,687) Investment in marketable securities Other, net (71) ------------- ------------- -------------- Net cash used in investing activities (19,942) ------------- ------------- -------------- Cash flows from financing activities: Issuance of common stock 156 Purchase of treasury stock (379,250) Debt issuance costs (15,150) Proceeds from long-term borrowings 250,000 Repayments of long-term borrowings (4,344) Proceeds from short-term borrowings Repayments of short-term borrowings (4) Net proceeds from (payments on) line of credit 139,068 (10,743) Net activity in investment in and advances to (from) subsidiaries 398,050 (351,691) (59,387) Other (77) ------------- ------------- -------------- Net cash provided by (used in) financing activities 18,956 22,227 (74,555) ------------- ------------- -------------- Effect of foreign currency exchange rates changes on cash ------------- ------------- -------------- Increase (decrease) in cash and cash equivalents 2,797 (7,198) Cash and cash equivalents, beginning of period 372 33,162 ------------- ------------- -------------- Cash and cash equivalents, end of period 3,169 25,964 ============= ============= ============== Subsidiary Non Guarantors Consolidated ---------------- --------------- Net cash provided by (used in) operating activities (17,099) 31,814 ---------------- --------------- Cash flows from investing activities: Proceeds from sale of assets 106 703 Capital expenditures (2,720) (21,501) Payment for acquisitions, net of cash acquired (19,360) (21,047) Investment in marketable securities (994) (994) Other, net (71) ---------------- --------------- Net cash used in investing activities (22,968) (42,910) ---------------- --------------- Cash flows from financing activities: Issuance of common stock 156 Purchase of treasury stock (379,250) Debt issuance costs (15,150) Proceeds from long-term borrowings 2,179 252,179 Repayments of long-term borrowings (2,592) (6,936) Proceeds from short-term borrowings 1,188 1,188 Repayments of short-term borrowings (2,071) (2,075) Net proceeds from (payments on) line of credit 25,427 153,752 Net activity in investment in and advances to (from) subsidiaries 13,028 Other (77) ---------------- ----------------- Net cash provided by (used in) financing activities 37,159 3,787 ---------------- ----------------- Effect of foreign currency exchange rates changes on cash (147) (147) ---------------- ----------------- Increase (decrease) in cash and cash equivalents (3,055) (7,456) Cash and cash equivalents, beginning of period 10,828 44,362 ---------------- --------------- Cash and cash equivalents, end of period 7,773 36,906 ================ ===============
CORPORATE EXPRESS, INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS THREE MONTHS ENDED MAY 3, 1997
Subsidiary Parent Issuer Subsidiary Non Guarantor of Notes Guarantors Guarantors Consolidated ----------- ---------- ------------ ------------ -------------- Net cash used in operating activities (35,411) (3,376) 28,822 (7,986) (17,951) ----------- ---------- ------------ ------------ -------------- Cash flows from investing activities: Proceeds from sale of assets 467 170 637 Capital expenditures (24,126) (6,416) (30,542) Payment for acquisitions, net of cash acquired 4,486 (15,340) (10,854) Investment in marketable securities 572 572 Other, net (2,407) 2,420 13 ----------- ---------- ------------ ------------ -------------- Net cash used in investing activities (21,580) (18,594) (40,174) ----------- ---------- ------------ ------------ -------------- Cash flows from financing activities: Issuance of common stock 8,641 8,641 Debt issuance costs (151) (151) Proceeds from long-term borrowings 2,898 8,617 11,515 Repayments of long-term borrowings (14,616) (14,923) (29,539) Proceeds from short-term borrowings 358 358 Repayments of short-term borrowings (929) (1,068) (1,997) Net proceeds from (payments on) line of credit 38,500 (380) 11,658 49,778 Net activity in investment in and advances to from subsidiaries 26,770 (33,827) (13,981) 21,038 Other 159 (73) 86 ----------- ---------- ------------ ------------ -------------- Net cash provided by (used in) financing activities 35,411 4,522 (26,491) 25,249 38,691 ----------- ---------- ------------ ------------ -------------- Effect of foreign currency exchange rates changes on cash (303) (303) ----------- ---------- ------------ ------------ -------------- Increase (decrease) in cash and cash equivalents 1,146 (19,249) (1,634) (19,737) Cash and cash equivalents, beginning of period 52,617 6,376 58,993 ----------- ---------- ------------ ------------ -------------- Cash and cash equivalents, end of period 1,146 33,368 4,742 39,256 =========== ========== ============ ============ ==============
(B) CONSOLIDATED FINANCIAL STATEMENTS FOR THE TRANSITION PERIOD FROM MARCH 2, 1997 TO JANUARY 31,1998 - ADDITIONAL FOOTNOTE In connection with a proposed exchange offer involving the Notes and the filing of a Registration Statement on Form S-4 with respect to such exchange offer, and pursuant to the requirements of Staff Accounting Bulletin Paragraph G and H of Topic 1 (SAB No. 53), the Registrant has added a footnote to its previously filed consolidated financial statements for the transition period from March 2, 1997 to January 31, 1998 which includes condensed consolidating financial statement information for the Parent Guarantor, CEX Holdings, the Subsidiary Guarantors and the Subsidiary Non-Guarantors. There has been no change to the previously filed consolidated financial statements contained in the Registrant's Annual Report on Form 10-K for the transition period from March 2, 1997 to January 31, 1998 other than the addition of Note 19-Supplemental Guarantor Information. REPORT OF INDEPENDENT ACCOUNTANTS --------------------------------- To the Shareholders of Corporate Express, Inc.: We have audited the accompanying consolidated financial statements of Corporate Express, Inc. as of January 31, 1998, March 1, 1997 and March 2, 1996 and for the eleven month period ended January 31, 1998 and the years ended March 1, 1997, March 2, 1996 and February 25, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Corporate Express, Inc. as of January 31, 1998, March 1, 1997 and March 2, 1996 and the consolidated results of their operations and their cash flows for the eleven month period ended January 31, 1998 and the years ended March 1, 1997, March 2, 1996, and February 25, 1995, in conformity with generally accepted accounting principles. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Denver, Colorado April 6, 1998 except for Note 18, for which the date is April 22, 1998 and Note 19, for which the date is July 17, 1998 CORPORATE EXPRESS, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) ASSETS
January 31, March 1, March 2, 1998 1997 1996 -------------------- -------------------- ------------------- Current assets: Cash and cash equivalents $ 44,362 $ 54,499 $ 29,813 Trade accounts receivable, net of allowance of $14,523, $13,004 and $6,964, respectively 616,574 494,199 320,483 Notes and other receivables 86,687 55,530 30,046 Inventories 251,108 187,558 128,803 Deferred income taxes 40,729 29,076 18,470 Other current assets 41,713 28,548 27,357 -------------- ---------------- --------------- Total current assets 1,081,173 849,410 554,972 Property and equipment: Land 17,540 14,105 8,715 Buildings and leasehold improvements 126,006 106,824 38,663 Furniture and equipment 339,577 249,693 130,497 -------------- ---------------- --------------- 483,123 370,622 177,875 Less accumulated depreciation (131,756) (106,891) (60,744) -------------- ---------------- --------------- 351,367 263,731 117,131 Goodwill, net of accumulated amortization of $57,558, $36,471 and $16,292, respectively 847,544 671,967 333,161 Other assets, net 69,575 58,869 18,101 -------------- ---------------- --------------- Total assets $ 2,349,659 $ 1,843,977 $ 1,023,365 ============== ================ ===============
The accompanying notes are an integral part of the consolidated financial statements. CORPORATE EXPRESS, INC. CONSOLIDATED BALANCE SHEETS, Continued (In thousands, except share and per share amounts)
LIABILITIES AND SHAREHOLDERS' EQUITY January 31, March 1, March 2, 1998 1997 1996 ---------------- ---------------- ------------- Current liabilities: Accounts payable - trade 354,915 $ 292,041 $ 177,295 Accounts payable - acquisitions 6,106 5,078 2,063 Accrued payroll and benefits 61,308 45,512 26,648 Accrued purchase costs 9,378 12,888 3,049 Accrued merger and related costs 15,512 18,484 24,880 Other accrued liabilities 80,214 52,012 42,955 Current portion of long-term debt and capital leases 36,264 29,742 24,389 ------------- ----------- ----------- Total current liabilities 563,697 455,757 301,279 Capital lease obligations 9,414 11,545 9,568 Long-term debt 753,829 621,705 153,831 Deferred income taxes 52,515 26,819 7,374 Minority interest in subsidiaries 20,791 22,015 24,843 Other non-current liabilities 16,980 12,529 4,694 ------------- ----------- ----------- Total liabilities 1,417,226 1,150,370 501,589 Commitments and contingencies (Notes 8 and 9) Shareholders' equity: Preferred stock, $.0001 par value, 25,000,000 shares authorized, none issued or outstanding -- -- -- Common stock, $.0002 par value, 300,000,000 shares authorized,142,392,845, 126,171,467 and 111,954,350 shares issued and outstanding, respectively 28 25 22 Common stock, non-voting, $.0002 par value, 3,000,000 shares authorized, none issued or outstanding -- -- -- Additional paid-in capital 852,507 646,536 513,358 Retained earnings 91,887 48,222 8,200 Foreign currency translation adjustments (11,989) (1,176) 196 ------------- ----------- ----------- Total shareholders' equity 932,433 693,607 521,776 ------------- ----------- ----------- Total liabilities and shareholders' equity $ 2,349,659 $ 1,843,977 $ 1,023,365 ============= =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. CORPORATE EXPRESS, INC CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
Eleven Months Ended Years Ended ----------------------------------------- January 31, March 1, March 2, February 25, 1998 1997 1996 1995 ----------- ----------- ----------- ------------ Net sales $ 3,573,311 $ 3,196,056 $ 1,890,639 $ 1,145,151 Cost of sales 2,733,308 2,417,746 1,417,366 855,361 Merger related inventory provisions -- -- 5,952 -- ----------- ----------- ----------- ------------ Gross profit 840,003 778,310 467,321 289,790 Warehouse operating and selling expenses 605,243 562,879 342,581 219,213 Corporate general and administrative expenses 105,055 95,101 49,742 29,624 Merger and other nonrecurring charges 14,890 19,840 36,838 -- ----------- ----------- ----------- ------------ Operating profit 114,815 100,490 38,160 40,953 Interest expense, net 38,115 26,949 17,968 16,915 Other income 842 244 1,786 562 ----------- ----------- ----------- ------------ Income before income taxes 77,542 73,785 21,978 24,600 Income tax expense 34,457 33,649 13,766 8,294 ----------- ----------- ----------- ------------ Income before minority interest 43,085 40,136 8,212 16,306 Minority interest (income) expense (1,319) (1,860) 1,436 69 ----------- ----------- ----------- ------------ Income from continuing operations 44,404 41,996 6,776 16,237 Discontinued operations: Loss from discontinued operations -- -- -- 327 Loss on disposals -- -- 1,225 -- ----------- ----------- ----------- ------------ Income before extraordinary item 44,404 41,996 5,551 15,910 Extraordinary item: Gain on early extinguishment of debt -- -- -- 586 ----------- ----------- ----------- ------------ Net income $ 44,404 $ 41,996 $ 5,551 $ 16,496 =========== =========== =========== ============ Pro forma net income (Note 14) $ 44,404 $ 40,281 $ 5,140 $ 15,769 =========== =========== =========== ============ Pro forma net income (loss) per share - Basic: Continuing operations $ .34 $ .33 $ .06 $ .20 Discontinued operations -- -- (.01) .00 Extraordinary item -- -- -- .00 ----------- ----------- ----------- ------------ Net income $ .34 $ .33 $ .05 $ .20 =========== =========== =========== ============ Pro forma net income (loss) per share - Diluted: Continuing operations $ .32 $ .31 $ .06 $ .19 Discontinued operations -- -- (.01) .00 Extraordinary item -- -- -- .00 ----------- ----------- ----------- ------------ Net income $ .32 $ .31 $ .05 $ .19 =========== =========== =========== ============ Weighted average common shares outstanding: Basic 131,423 121,901 104,162 75,400 Diluted 137,858 130,029 110,408 79,026
The accompanying notes are an integral part of the consolidated financial statements. CORPORATE EXPRESS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY for the years ended February 25, 1995, March 2, 1996 and March 1, 1997 and Eleven Months Ended January 31, 1998 (In thousands, except share amounts)
Preferred Stock Common Stock --------------- ------------ Shares Amount Shares Amount ------ ------ ------ ------ Balance, February 28, 1994 26,980,000 $ 7,502 38,378,246 $ 8 Issuance of common stock 31,602,150 6 Conversion of common stock 100,000 (112,500) Conversion of preferred stock (19,580,000) (2) 22,027,500 4 Redemption of preferred stock (7,500,000) (7,500) Preferred stock dividend S Corporation dividends and other equity transactions of pooled companies Net income Foreign currency translation adjustment ----------- -------- ----------- ------ Balance, February 25, 1995 - - 91,895,396 18 Issuance of common stock 20,058,954 4 Young capital contribution Adjustment to conform fiscal year ends of certain pooled companies S Corporation dividends and other equity transactions of pooled companies Net income Foreign currency translation adjustment ----------- -------- ----------- ------ Balance, March 2, 1996 - - 111,954,350 22 Issuance of common stock 14,217,117 3 Tax benefit on non-qualified stock options exercised Adjustment to conform fiscal year ends of certain pooled companies S Corporation dividends and other equity transactions of pooled companies Net income Foreign currency translation adjustment ----------- -------- ----------- ------ Balance, March 1, 1997 - - 126,171,467 $ 25 Issuance of common stock 16,221,378 $ 3 Tax benefit on non-qualified stock option exercised Equity transactions of pooled companies Net income Foreign currency translation adjustment - - - - ----------- -------- ----------- ------ Balance, January 31, 1998 - $ - 142,392,845 $ 28 =========== ======== =========== ====== Foreign Additional Currency Paid-in Translation Retained Capital Adjustment Earnings ---------- ---------- ---------- Balance, February 28, 1994 $ 115,805 $ 9 $ (6,963) Issuance of common stock 138,300 Conversion of common stock - Conversion of preferred stock (2) Redemption of preferred stock Preferred stock dividend (432) S Corporation dividends and other equity transactions of pooled companies 117 (4,076) Net income 16,496 Foreign currency translation adjustment 50 ---------- ---------- ---------- Balance, February 25, 1995 254,220 59 5,025 Issuance of common stock 245,573 Young capital contribution 12,182 Adjustment to conform fiscal year ends of certain pooled companies 1,876 S Corporation dividends and other equity transactions of pooled companies 1,383 (4,252) Net income 5,551 Foreign currency translation adjustment 137 ---------- ---------- ---------- Balance, March 2, 1996 513,358 196 8,200 Issuance of common stock 119,274 Tax benefit on non-qualified stock options exercised 11,161 Adjustment to conform fiscal year ends of certain pooled companies (430) S Corporation dividends and other equity transactions of pooled companies 2,743 (1,544) Net income 41,996 Foreign currency translation adjustment (1,372) ---------- ---------- ---------- Balance, March 1, 1997 $ 646,536 $ (1,176) $ 48,222 Issuance of common stock 198,095 Tax benefit on non-qualified stock option exercised 4,673 Equity transactions of pooled companies 3,203 (739) Net income 44,404 Foreign currency translation adjustment - (10,813) - ---------- ---------- ---------- Balance, January 31, 1998 $ 852,507 $ (11,989) $ 91,887 ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. CORPORATE EXPRESS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Eleven Months Ended Years Ended ------------------------------------- January 31, March 1, March 2, February 25, 1998 1997 1996 1995 ---------- --------- --------- ------------ Cash flows from operating activities: Net income $ 44,404 $ 41,996 $ 5,551 $ 16,496 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 39,477 30,319 18,765 10,705 Amortization 21,188 18,417 9,733 6,373 Non-cash portion of merger and restructuring charge 2,197 3,761 10,268 -- Adjustment to conform fiscal years -- (430) 1,876 -- Gain on early extinguishment of debt -- -- -- (700) Minority interest (income)/expense (1,319) (1,860) 1,436 69 Other 3,743 1,496 (1,263) 492 Changes in assets and liabilities, excluding acquisitions: (Increase) decrease in accounts receivable (99,758) (45,552) (43,173) (29,672) (Increase) decrease in inventory (23,369) (12,015) (11,538) (5,934) (Increase) decrease in other current assets (16,632) (1,984) (12,494) (3,338) (Increase) decrease in other assets 8,348 3,694 (2,194) (1,260) Increase (decrease) in accounts payable 23,144 (667) (8,798) 16,167 Increase (decrease) in accrued liabilities 25,493 (11,422) 15,398 2,638 --------- --------- --------- --------- Net cash provided by (used in) operating activities 26,916 25,753 (16,433) 12,036 --------- --------- --------- --------- Cash flows from investing activities: Proceeds from sale of assets 21,100 3,026 5,899 463 Capital expenditures (82,959) (119,639) (53,124) (18,670) Payment for acquisitions, net of cash acquired (33,369) (255,830) (124,300) (87,886) Investment in marketable securities (5,229) (15,602) -- -- Other, net 5,012 (1,978) 72 (612) --------- --------- --------- --------- Net cash used in investing activities (95,445) (390,023) (171,453) (106,705) --------- --------- --------- --------- Cash flows from financing activities: Issuance of preferred and common stock 8,104 12,643 449,288 134,993 Stock offering costs -- -- (20,313) (9,388) Issuance of subsidiary common stock 2,434 2,258 7,733 -- Young capital contribution -- -- 12,182 -- Purchase of common stock held by OfficeMax -- -- (195,831) -- Preferred stock redemption -- -- -- (7,500) Debt issuance costs (1,083) (8,818) -- (869) Proceeds from long-term borrowings 10,241 347,829 44,208 35,189 Repayments of long-term borrowings (31,575) (37,948) (71,813) (35,422) Proceeds from short-term borrowings 15,308 772 12,835 -- Repayments of short-term borrowings (4,367) (26,945) (11,592) (11,095) Cash paid to retire bonds (62,178) -- -- (9,300) Net proceeds from (payments on) line of credit 122,376 104,382 (18,871) 1,778 Other (22) (4,833) (4,245) (1,647) --------- --------- --------- --------- Net cash provided by financing activities 59,238 389,340 203,581 96,739 --------- --------- --------- --------- Net cash provided by (used in) discontinued operations (12) 61 (222) (600) --------- --------- --------- --------- Effect of foreign currency exchange rate changes on cash (834) (445) (1,159) 25 --------- --------- --------- --------- Increase (decrease) in cash and cash equivalents (10,137) 24,686 14,314 1,495 Cash and cash equivalents, beginning of period 54,499 29,813 15,499 14,004 --------- --------- --------- --------- Cash and cash equivalents, end of period $ 44,362 $ 54,499 $ 29,813 $ 15,499 ========= ========= ========= ========= Supplemental disclosure of cash flow information: Cash paid during the period for interest, net of amounts capitalized $ 42,593 $ 35,526 $ 20,469 $ 13,829 Cash paid (received) during the period for taxes $ (7,686) $ 25,413 $ 16,046 $ 6,082
The accompanying notes are an integral part of the consolidated financial statements. CORPORATE EXPRESS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED Supplemental schedule of noncash investing and financing activities: Capital lease obligations in the amount of $5,212,000, $7,198,000, $4,305,000 and $3,103,000 were incurred during fiscal 1997, 1996, 1995 and 1994, respectively. During the eleven months ended January 31, 1998, the Company acquired for a net cash purchase price of $24,572,000 and approximately 14,895,000 shares of common stock, 16 domestic product distributors and 15 international product distributors. Included in the 16 domestic product distributors, is the acquisition of Data Documents, Incorporated ("DDI"), a provider of forms management services, custom business forms and pressure-sensitive labels for large corporate customers, for approximately 10,740,000 shares of common stock. There were no material pooling of interests transactions during fiscal 1997. During fiscal 1996, the Company acquired, for a net cash purchase price of $241,846,000 and 5,542,000 shares of common stock, 77 office products distributors and 23 service companies. Of these 100 acquisitions, 86 were accounted for as purchases and 14 were accounted for as immaterial poolings of interest. In addition, the Company acquired UT, which was accounted for as a pooling of interests with financial results included from March 3, 1996 for 6,332,000 shares of common stock and Nimsa, which was accounted for as a pooling of interests with financial results included beginning in fiscal 1995 for 1,125,000 shares of common stock. The Company completed 52 acquisitions for a net cash outlay in fiscal 1995 of $118,256,000. During fiscal 1994, the Company completed 24 acquisitions for a net cash outlay of $74,707,000. In conjunction with the acquisitions, liabilities were assumed as follows:
Eleven Months Ended Years Ended --------------------------------------- January 31, March 1, March 2, February 25, 1998 1997 1996 1995 ------------- ---------- ------------ ------------- Fair value of assets acquired $ 383,840 $ 620,252 $ 271,264 $135,248 Cash paid, net of cash acquired (24,572) (241,846) (118,256) (74,707) Issuance of notes payable --- (4,650) (11,111) --- Issuance of stock (184,264) (86,922) (9,562) (4,614) Forgiveness of debt --- --- (11,138) (150) Purchase price payable, included in current liabilities (3,076) (4,057) (2,750) (5,325) --------- --------- --------- -------- Liabilities assumed $ 171,928 $ 282,777 $ 118,447 $ 50,452 ========= ========= ========= ========
During the eleven months ended January 31, 1998, the Company paid $8,797,000 and issued 252,000 shares of common stock for prior period acquisitions including its purchase of the remaining 49% interest in Corporate Express United Kingdom. During fiscal 1996, the Company paid $11,695,000 for prior period acquisitions, $2,289,000 to dissenting shareholders of a pooled company, purchased a warehouse facility for 202,250 shares of common stock, and issued 107,207 shares of common stock to retire convertible debt of $1,449,400 previously issued by one of the Company's acquired subsidiaries. During fiscal 1995, the Company paid $6,044,000 for prior period acquisitions. During fiscal 1994, the Company paid $11,643,000 for prior period acquisitions, recorded a liability of $1,855,000 for subsequent payments due to the sellers of a company acquired by Lucas in fiscal 1993, issued 14,610,000 shares of common stock upon conversion of its Series A, B and C preferred stock on a two for one basis, and purchased for $350,000 in cash and $100,000 in notes payable a 45% interest in an office products distributor. Additionally, Delivery distributed non-cash dividends of $493,000 to certain Delivery stockholders and Young accrued dividends of $2,044,000 on Young's preferred stock which were converted to a subordinated promissory note. This note and accrued interest was contributed as additional paid in capital. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Operations and Summary of Significant Accounting Policies Nature of Operations Corporate Express, Inc. ("Corporate Express" or the "Company") is a leading global provider of essential goods and services to large corporations and organizations. The Company's current product and service offerings include office supplies, paper, computer and imaging supplies, computer desktop software, office furniture, janitorial and cleaning supplies, advertising specialties, custom business forms, pressure-sensitive label products, forms management services, printing, same-day local delivery services and distribution logistics management. The Company's target customers are large corporations which operate from multiple locations and can benefit from selecting suppliers who can service them in many of their locations nationally and internationally. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. As more fully described in Note 3, the Company has consummated numerous acquisitions certain of which were accounted for as poolings of interests and, accordingly, the accompanying financial statements have been restated to include the accounts and operations of Delivery, Young, Nimsa, HMI and Sofco for all applicable periods. The accompanying financial statements have been restated to include the operations of UT effective March 3, 1996 and Nimsa effective from its formation in fiscal 1995; prior UT results were immaterial. Acquisitions accounted for as purchases are included in the accounts and operations as of the effective date of the transaction and immaterial acquisitions accounted for as poolings of interests are included in the accounts and operations as of the beginning of the fiscal quarter in which the transaction is effective. The Company accounts for its investments in less than 50% owned entities using the equity or cost methods. All intercompany balances and transactions have been eliminated. Definition of Fiscal Year As used in these consolidated financial statements and notes to consolidated financial statements, "fiscal 1997" refers to the eleven-month period ended January 31, 1998 and "fiscal 1996," "fiscal 1995," and "fiscal 1994" refer to the Company's fiscal years ended March 1, 1997, March 2, 1996 and February 25, 1995, respectively. In connection with the mergers, Nimsa, UT and HMI changed their 1996 fiscal year ends, Sofco changed its 1996 and 1995 fiscal year ends, and Delivery and Young changed their 1995 fiscal year ends to conform to the fiscal year ends of the Company. References to fiscal 1995 for Nimsa refers to Nimsa's June 1996 year end; references to fiscal 1995 and prior fiscal years for HMI refers to HMI's December year end; and references to fiscal 1994 and prior fiscal years for Sofco, Delivery and Young refer to Sofco's May year end, Delivery's December year end and Young's September year end. Cash and Cash Equivalents All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. All cash equivalents are carried at cost, which approximates fair value. Inventories Inventories primarily consist of finished goods which are valued at the lower of first-in, first-out (FIFO) cost or market. The Company periodically assesses its inventory to determine market value based upon such factors as historical sales and purchases, inclusion in the Company's proprietary In-Stock Catalog and other factors. Included in cost of sales for fiscal 1995 is a merger related inventory provision of $5,952,000. This provision reflects the write-down to fair market value of certain inventory which the Company decided to eliminate from its product line. CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Property and Equipment Property and equipment are carried at cost. Depreciation is computed using the straight-line method over estimated useful lives which range from three to seven years for furniture and equipment; up to 40 years for buildings; and over the life of the lease for leasehold improvements. Ordinary maintenance and repairs are charged to operations while expenditures which extend the physical or economic life of property and equipment are capitalized. Gains and losses on disposition of property and equipment are recognized in operations in the year of disposition. The Company capitalizes certain internal and external software costs that benefit future years. The amortization commencement is dependent on when the software is placed in service (for purchased software) or when the software is ready for its intended use (for internally developed software). All software is amortized over its economic useful life, which is three to seven years using the straight-line method. Capitalized internally developed software balances were $83,474,000, $50,658,000 and $16,790,000 at January 31, 1998, March 1, 1997, and March 2, 1996, respectively. Capitalized costs include, primarily, payments to outside firms for direct services related to the development of the software, salaries and wages of individuals dedicated to the development of the software, and capitalized interest. Software amortization expense was $2,259,000 and $476,000 for the periods ending January 31, 1998 and March 1, 1997, respectively. There was no amortization expense in the period ended March 2, 1996. On November 11, 1997, the FASB Emerging Issues Task Force (EITF) issued EITF 97-13 providing guidance on the treatment of business process reengineering costs ("BPR") for companies that have undertaken enterprise software projects. The EITF required all previously capitalized BPR costs be written off through a cumulative catch-up adjustment in the current period. The effect of adopting EITF 97-13 was not material to the Company's consolidated financial results. Concentration of Credit Risk The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents. The Company places its cash and temporary cash investments with high quality credit institutions. At times, such investments may be in excess of the FDIC insurance limit. Concentration of credit risk with respect to trade receivables is limited due to the wide variety of customers and markets into which the Company's products are sold, as well as their dispersion across many geographic areas. As a result, as of January 31, 1998, the Company did not consider itself to have any significant concentrations of credit risk. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company does not enter into financial instruments for trading or speculative purposes. The counterparts to all financial instrument contracts outstanding are major financial institutions, and the Company does not have significant exposure to any one counterparty. The Company maintains allowances for potential credit losses and historical losses have been within management's expectations. CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Intangible Assets Goodwill is amortized on a straight-line basis over periods of 25 and 40 years. Noncompete agreements, which are included in other assets, are amortized on a straight-line basis over periods of two to ten years. The Company evaluates intangible assets periodically in accordance with Statement of Financial Accounting Standards No. 121 to determine whether they are properly reflected in the financial statements based upon future undiscounted operating cash flows. If an impairment is determined to exist, the impaired asset is written down to fair market value. The balance of $847,544,000 at January 31, 1998 reflects fiscal period 1997 additions from acquisitions of $197,250,000. Accrued Purchase Costs The Company accrues direct external costs incurred to consummate an acquisition, other external costs and liabilities to close the acquired entity's facilities, and severance and relocation payments to the acquired entity's employees. Prior to the adoption of EITF 95-3 effective with the consensus, the Company also accrued the external incremental costs of converting certain computer systems to the Company's systems. Accrued Merger and Related Costs Accrued merger and related costs include the actual costs of completing acquisitions accounted for as pooling of interests transactions, additional costs associated with integrating the combined companies' operations, including liabilities for severance benefits for employees expected to be terminated, and costs to restructure the Company's existing operations. Revenue Recognition Revenue is recognized upon the shipment of products and completion of service to customers. Cost of Sales Vendor rebates and similar payments are recognized on an accrual basis in the period earned and are recorded as a reduction to cost of sales. Delivery and occupancy costs are included as an increase to cost of sales. Warehouse Operating and Selling Expenses Warehouse operating and selling expenses include all costs associated with operating regional warehouses and sales offices, including warehouse labor, related warehouse general and administrative expenses (excluding occupancy), selling expenses and commissions related to the Company's direct sales force, and warehouse assimilation costs. Foreign Currency Translation Balance sheet accounts of foreign operations are translated using the year- end exchange rate, and income statement accounts are translated on a monthly basis using the average exchange rate for the period. Translation gains and losses are recorded in shareholders' equity, and realized gains and losses from transactions are reflected in income. An aggregate transaction gain of $116,000 and a loss of $37,000 were included in the determination of net income in fiscal 1996 and 1995, respectively. No material transaction gains or losses were included in the determination of net income in fiscal 1997 and 1994. The Company does not currently hedge foreign currency risk exposure. CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Income Taxes For all periods presented, income taxes are calculated using the liability method in accordance with the provisions set forth in Statement of Financial Accounting Standards (SFAS) No. 109. Pro Forma Income Taxes In fiscal 1996, the Company acquired an entity in a pooling of interests transaction, which was previously an S Corporation for income tax purposes prior to its acquisition by Corporate Express, and accordingly, any income tax liabilities for the periods prior to the acquisition are the responsibility of the previous owner. For purposes of these consolidated financial statements, federal and state income taxes have been provided as a pro forma adjustment as if the acquired entity had filed C Corporation tax returns for the pre- acquisition periods (See Note 14). Pro Forma Net Income Per Share Effective for the eleven months ended January 31, 1998, pro forma earnings per share (EPS) is computed and presented in accordance with SFAS No. 128, "Earnings Per Share." SFAS No. 128 supersedes all prior EPS guidance found in APB Opinion No. 15. Basic EPS excludes dilution and is computed by dividing income available to common stockholders (net income after giving effect to the pro forma tax adjustment and after preferred stock dividend requirements of Young of $432,000 for the year ended February 25, 1995) by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. All prior periods have been restated to conform with SFAS No. 128. Stock Split and Stock Dividends In connection with its initial public offering, the Company effected a one- for-two reverse stock split in August 1994 and converted all of its outstanding preferred stock to common stock on a three-for-two share basis in September 1994. The Company distributed a 50% share dividend in June 1995 and January 1997. All share numbers and prices have been adjusted to reflect the reverse stock split, the conversion of preferred to common and the 50% share dividends. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain reclassifications have been made to the fiscal 1996, 1995 and 1994 consolidated financial statements to conform to the fiscal 1997 presentation. These reclassifications had no impact on net income. New Accounting Standards The Company is required to adopt SFAS No. 130, "Reporting Comprehensive Income," in the first quarter of 1998. Upon adoption of SFAS No. 130, the Company will report all changes in the Company's stockholders' equity other than transactions with stockholders. Comprehensive income pursuant to SFAS No. 130 would include net income, as reported in the Consolidated Statement of Operations, plus the net changes in the foreign currency translation component of stockholders' equity. CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The Company is required to adopt SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," in the fourth quarter of 1998. SFAS No. 131 will supercede the business segment disclosure requirements currently in effect under SFAS No. 14. SFAS No. 131, among other things, establishes standards regarding the information a company is required to disclose about its operating segments and provides guidance regarding what constitutes a reportable operating segment. The Company is currently evaluating disclosures under SFAS No. 131 compared to current disclosures. The Company is required to adopt the disclosure requirements of SFAS No. 132, "Employer's Disclosures about Pensions and Other Postretirement Benefits," in the fourth quarter of 1998. SFAS No. 132 revises disclosure requirements for such pension and postretirement benefit plans to, among other things, standardize certain disclosures and eliminate certain other disclosures no longer deemed useful. SFAS No. 132 does not change the measurement or recognition criteria for such plans. On March 4, 1998, the Accounting Standards Executive Committee (AcSEC) issued Statement of Position (SOP) 98-1 providing guidance on accounting for the costs of computer software developed or obtained for internal use. The effective date of this pronouncement is for fiscal years beginning after December 15, 1998. The Company is in the process of reviewing its current policies for accounting for costs associated with internal software development projects and how they may be affected by SOP 98-1. The Company believes its current policies are materially consistent with the SOP; however, the ultimate impact on the Company's future results of operations has not yet been determined. 2. CHANGE IN YEAR END In January 1998, the Company changed its fiscal year end from the end of February to January 31,1998. The results of operations of the Company for the eleven months ended January 31, 1998 and February 1, 1997 are as follows:
Eleven Months Eleven Months Ended Ended January 31, 1998 February 1, 1997 ---------------- ---------------- (Audited) (Unaudited) Net sales $3,573,311 $2,911,189 Cost of sales 2,733,308 2,205,359 ---------- ---------- Gross profit 840,003 705,830 Warehouse operating and selling expenses 605,243 508,676 Corporate general and administrative expenses 105,055 87,793 Merger and other non-recurring items 14,890 19,841 ---------- ---------- Operating profit 114,815 89,520 Net interest expense 38,115 24,550 Other income 842 152 ---------- ---------- Income before income taxes 77,542 65,122 Income tax expense 34,457 30,728 Minority interest income 1,319 1,314 ---------- ---------- Net income $ 44,404 $ 35,708 ========== ---------- Pro forma net income (1) $ 44,404 $ 33,993 ========== ========== Pro forma net income per common share - Basic $ 0.34 $ 0.28 Pro forma net income per common share - Diluted $ 0.32 $ 0.26
(1) Pro forma net income for the eleven months ended February 1, 1997 reflects the tax impact for a subchapter S acquisition as if the acquired company was a C corporation. CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 3. POOLING OF INTERESTS Fiscal 1997 The Company completed 6 acquisitions which were accounted for as immaterial poolings of interests for approximately 2,208,000 shares of common stock. The financial statements for these immaterial acquisitions for periods prior to the acquisition have not been restated. There were no material pooling of interests transactions in fiscal 1997. Fiscal 1996 Effective January 30, 1997, the Company issued approximately 4,650,000 shares of common stock in exchange for all of the outstanding stock of HMI, the largest privately-held supplier of promotional products to large corporations. Effective January 24, 1997, the Company issued approximately 2,550,000 shares of common stock in exchange for all of the outstanding stock of Sofco, one of the largest suppliers of janitorial and cleaning supplies in the United States. Effective November 8, 1996, the Company issued approximately 6,332,000 shares of common stock in exchange for all of the outstanding stock of UT, the second largest same-day delivery service provider in the United States. Effective October 31, 1996, the Company issued approximately 1,125,000 shares of common stock and paid approximately $2,289,000 to the consenting and dissenting shareholders, respectively, of Nimsa, a computer software reseller located in Paris, France, in exchange for all of Nimsa's outstanding stock. In addition to the above acquisitions, the Company completed 14 other acquisitions which were accounted for as immaterial poolings of interests for approximately 1,942,000 shares of common stock during fiscal 1996. The financial statements for these immaterial acquisitions for periods prior to the acquisition have not been restated. Fiscal 1995 Effective March 1, 1996, the Company issued approximately 23,409,000 shares of common stock in exchange for all of the outstanding stock of Delivery, a provider of same-day local delivery services. Effective February 27, 1996, the Company issued approximately 4,398,000 shares of common stock in exchange for all of the outstanding stock of Young, a distributor of computer and imaging supplies and accessories. Also in fiscal 1995, prior to merging with the Company, Delivery acquired the outstanding stock of 14 companies in exchange for approximately 3,951,000 shares of Delivery common stock. Fiscal 1994 Delivery acquired the stock of six companies in exchange for approximately 1,722,000 shares of Delivery common stock. Results of Pooled Companies Prior to Merger Separate results of operations for Corporate Express and the pooled operations for the periods prior to the mergers are as follows: CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Year Ended --------------------------------------- March 1, March 2, February 25, 1997 1996 1995 ----------- ----------- ------------- (In thousands) Net sales: Corporate Express $2,715,785 $1,132,012 $ 621,469 HMI 92,080 84,013 83,752 Sofco 139,734 144,621 133,481 UT 196,199 --- --- Nimsa 52,258 71,901 --- Young --- 115,628 86,184 Delivery --- 306,364 109,865 Delivery poolings prior to merger with Delivery --- 36,100 110,400 ---------- ---------- ---------- Combined $3,196,056 $1,890,639 $1,145,151 ========== ========== ========== Net income (loss): Corporate Express $ 31,710 $ 3,702 $ 5,248 HMI 4,182 990 1,772 Sofco 3,529 319 1,989 UT 1,369 --- --- Nimsa 1,206 1,762 --- Young --- (3,073) 1,264 Delivery --- 815 4,223 Delivery poolings prior to merger with Delivery --- 1,036 2,000 ---------- ---------- ---------- Combined $ 41,996 $ 5,551 $ 16,496 ========== ========== ========== Other changes in shareholders' equity: Corporate Express $ 106,299 $ 229,356 $ 115,024 HMI (3,761) (2,193) (1,917) Sofco 1,538 (230) 694 UT 26,135 -- -- Nimsa (376) 6,026 -- Young -- 13,028 (7,932) Delivery -- 12,032 23,211 Delivery poolings prior to merger with Delivery -- (1,116) (2,613) ---------- ---------- ---------- Combined $ 129,835 $ 256,903 $ 126,467 ========== ========== ==========
Certain reclassifications and adjustments have been made to the prior financial statements of the pooled companies to conform to the Corporate Express financial presentation and policies which adjustments had an immaterial effect on net income. All intercompany transactions have been eliminated. The consolidated statement of operations for fiscal 1996 includes the income and expenses of Corporate Express (including Young and Delivery), HMI, Sofco, UT and Nimsa for the twelve months ended March 1, 1997. The consolidated statement of operations for fiscal 1995 includes the income and expenses of Corporate Express, Sofco, Young and Delivery for the twelve months ended March 2, 1996, of HMI for the twelve months ended December 31, 1995, and of Nimsa for the twelve months ended June 30, 1996. In order to conform the HMI and Nimsa year ends to Corporate Express' fiscal year end, Nimsa net income for the March 1996 to June 1996 CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) period was included in both fiscal 1995 and 1996, and HMI net income for the January 1996 to February 1996 period was excluded from fiscal 1995. Accordingly, an adjustment has been made in fiscal 1996 to debit retained earnings directly for the March 1996 to June 1996 Nimsa net income of $630,000 and to credit retained earnings directly for the January 1996 to February 1996 HMI net income of $200,000. The consolidated statement of operations for fiscal 1994 includes the income and expenses of Corporate Express for the twelve months ended February 25, 1995, of Sofco for the twelve months ended May 26, 1995, of HMI for the twelve months ended December 31, 1994, of Young for the twelve months ended September 30, 1994, and of Delivery for the twelve months ended December 31, 1994. In order to conform the Sofco, Young and Delivery year ends to Corporate Express' fiscal year end, Sofco net income for the March 1995 to May 1995 period was included in both fiscal 1994 and 1995, Young net income for the October 1994 to February 1995 period was excluded from fiscal 1994, and Delivery net income for the January 1995 to February 1995 period was excluded from fiscal 1994. Accordingly, an adjustment has been made in fiscal 1995 to debit retained earnings directly for the March 1995 to May 1995 Sofco net income of $747,000, and to credit retained earnings for the October 1994 to February 1995 Young net income of $846,000 and the January 1995 to February 1995 Delivery net income of $1,777,000. The results of operations for the adjustment periods are as follows:
Period Net Sales Net Income ------ --------- ---------- (in thousands) Nimsa 3/96-6/96 $25,986 $ 630 HMI 1/96-2/96 15,415 200 Sofco 3/95-5/95 33,085 747 Young 10/94-2/95 39,683 846 Delivery 1/95-2/95 50,382 1,777
4. MERGER AND OTHER NONRECURRING COSTS During fiscal 1997, the Company recorded a net merger and other nonrecurring charge of $14,890,000. This net charge is comprised of $18,827,000 in merger and other nonrecurring charges in connection with the Company's acquisition of DDI, several acquisitions accounted for as immaterial poolings of interests, the continued integration of delivery services and certain provisions for reductions in force and facility closures at other locations, offset by $3,937,000 in revisions to the merger and other nonrecurring charges established in previous periods to reflect the final transaction and exit costs incurred. These revisions reflect the finalization of employee contract buyouts and delays in closing certain facilities and disposition of related assets. The 1997 fiscal period charge includes the planned closure of 34 facilities and the reduction of 722 employees. As of January 31, 1998, no facilities have been closed or consolidated and 93 employees have been terminated. During fiscal year 1996, the Company recorded an estimated net merger and other nonrecurring charge of $19,840,000. This net charge is comprised of $27,411,000 in merger and other nonrecurring charges primarily in conjunction with the acquisitions of UT, Nimsa, HMI and Sofco, offset by $7,571,000 in revisions to the merger and other nonrecurring charge established in the fourth quarter of fiscal 1995. The fiscal 1995 charge included an exit plan for the integration of the newly acquired delivery business into the Company's core product distribution business. In the third quarter of fiscal 1996, nine months after the creation of the original exit plan, the Company acquired UT, approximately doubling its delivery services capacity. At that time, the Company adopted a new plan to integrate the delivery services business separate from the core product distribution business. In connection with the new exit plan, the Company evaluated its facility and personnel requirements and identified duplicate facilities consistent with the new plan. As a result of this new plan, the closure of thirteen delivery facilities and five distribution facilities, incorporated in the original fiscal 1995 plan, was superseded. Included in the distribution facilities that were to be retained, was the South Carolina facility which was expected to be merged into the Atlanta CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) and planned North Carolina facilities. Due to significant new business in the Atlanta area and several unexpected acquisitions, the Atlanta facility is at full capacity and this closure plan was terminated. Additionally, several subsequent acquisitions in fiscal 1996, which were not contemplated at the end of fiscal 1995, were completed in the Carolinas and surrounding markets, which eliminated the opportunity to close the South Carolina facility and maintain a high level of customer service. The fiscal year 1996 charges include the actual costs of completing the acquisitions, anticipated costs for integrating the delivery business, closing other redundant facilities, and severance for employee terminations, merging various UT facilities into Company locations and closing redundant facilities. The original charge included the closure of 115 facilities and the reduction of 484 employees; as a result of revised estimates during the third quarter ended November 29, 1997, 172 additional employees were identified to be terminated. To date 82 facilities have been closed or consolidated, 522 employees have been terminated, and 54 employees will no longer be terminated as the result of revised exit plans. The fiscal 1995 merger and other nonrecurring charge of $36,838,000 consisted of merger transaction related costs of $13,273,000; severance and employee termination costs of $7,457,000 (representing approximately 760 employees); facility closure and consolidation costs of $9,693,000; and other asset write-downs and costs of $6,415,000. Of the $36,838,000 charges, $7,724,000 are non-cash charges. This liability was adjusted in fiscal 1996 to reflect the actual merger transaction costs incurred and to eliminate the original liability established for specific facilities which will not be closed as a result of the significant change in circumstances due to the acquisition of UT. The initial plan included the closure of 88 facilities and a reduction of 767 employees. To date 57 facilities have been closed or consolidated and 100 employees have been terminated. Revisions in the plan have eliminated the closure of 22 facilities and the reduction of 375 employees. The following table summarizes the merger and other nonrecurring charges and sets forth their usage for the periods indicated:
Employee Accrued Merger Severance & Facility Merger & Other Asset Transaction Termination Closure & Related Costs, Write Downs Costs (1) Costs(2) Consolidations (3) Balance & Costs (4) Total -------- -------- ------------------ ------- ----------- ----- (in thousands) Fiscal 1995 charge $13,273 $ 7,457 $ 9,693 $30,423 $ 6,415 $ 36,838 Payments (4,112) (292) (1,139) (5,543) (5,543) Non-cash usage (2,626) (2,626) ------- -------- ------- ------- -------- -------- Balance, March 2, 1996 9,161 7,165 8,554 24,880 3,789 28,669 Additions, net of reversals 15,015 2,783 (546) 17,252 2,588 19,840 Payments (20,094) (2,283) (1,271) (23,648) (23,648) Non-cash usage (2,225) (2,225) ------- -------- ------- ------- -------- -------- Balance, March 1, 1997 4,082 7,665 6,737 18,484 4,152 22,636 Additions, net of reversals 4,485 7,745 463 12,693 2,197 14,890 Payments (7,956) (5,714) (1,995) (15,665) (15,665) Non-cash usage (3,590) (3,590) ------- -------- ------- ------- -------- -------- Balance, January 31, 1998 $ 611 $ 9,696 $ 5,205 $15,512 $ 2,759 $ 18,271 ======= ======== ======= ======= ======== ========
(1) Merger transaction costs are the direct costs from the pooling transactions and those direct costs incurred by DDI, and include legal, accounting, investment banking, printing, contract buy-outs and other related costs. (2) Severance and employee termination costs are related to the elimination of duplicate management positions, facility closures and consolidations, and centralization of certain shared services. Of the 1,716 employees currently planned to be terminated, 715 have been terminated as of January 31, 1998. The Company expects to complete the facility closures and related terminations for the fiscal 1995 charge, which totals $1,638,000, and the fiscal 1996 charge, which totals $1,838,000, by the end of fiscal 1998. The centralization of certain shared CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) services began in the second quarter of fiscal 1997 and will continue through fiscal 1998. The Company expects to complete the facility closures and related terminations for the fiscal year 1997 charge, which totals $6,220,000, by the end of fiscal 1998. (3) Facility closure and consolidation costs are the estimated costs to close redundant facilities, lease costs and other costs associated with closed facilities. Of the 215 facilities currently planned to be closed or consolidated, 139 have been closed or consolidated. The remaining facilities in the fiscal 1995 and 1996 charges, and the facilities identified in the 1997 charge are expected to be closed by the end of fiscal 1998. (4) Other asset write-downs and costs are recorded as contra assets, and include the loss on sale of assets and leasehold improvements and equipment being abandoned or written off as a result of the exit plans. The remaining balance primarily represents assets that will be disposed of in conjunction with facility closures, which are expected to be completed by the end of fiscal 1998. 5. PURCHASES Fiscal 1997 The Company acquired for a net cash purchase price of $24,572,000 and approximately 12,687,000 shares of common stock, 10 domestic product distributors, and 15 international product distributors. The excess of the purchase price over the fair market value of the net tangible assets acquired was allocated to goodwill and is being amortized over 40 years. Additionally, the Company completed six acquisitions which were accounted for as immaterial poolings of interest for approximately 2,208,000 shares of common stock. Included in the 10 domestic product distributors, is the acquisition of DDI, a provider of forms management services, custom business forms and pressure- sensitive labels for large corporate customers, purchased for approximately 10,740,000 shares of common stock. In June 1997, the Company purchased the remaining 49% interest in Corporate Express United Kingdom by issuance of shares of Corporate Express common stock. Fiscal 1996 The Company acquired for a net cash purchase price of $241,846,000 and approximately 3,600,000 shares of common stock, 46 domestic office product distributors, 29 international office product distributors and 11 delivery service companies. The excess of the purchase price over the fair market value of the net tangible assets acquired was allocated to goodwill and is being amortized over 40 years for office product distributors and 25 years for delivery service companies. Included in the 46 domestic product acquisitions are three purchases and one immaterial pooling consummated by UT prior to its acquisition by Corporate Express, and ASAP Software Express, Inc. ("ASAP"), a distributor of software to large corporations. The ASAP purchase price was $97,611,000 offset by cash acquired of $13,792,000. Included in the 29 international product acquisitions is Boulevard Produits De Bureau, Inc. ("Boulevard"), a seller of office supplies, furniture and equipment, for a net cash purchase price of $16,102,000. The Company also repaid $9,498,000 of Boulevard promissory notes with cash of $731,900 and 356,832 shares of the Company's common stock. In January 1997, Corporate Express Australia ("CEA") shareholders approved a one-for-five non-renounceable common stock rights offer at a price of A$.85 (US$.65) per share. Pursuant to the rights offer, on February 27, 1997, CEA issued 8,216,721 shares to Corporate Express and 3,553,370 shares to institutional investors. As of March 1, 1997, Corporate Express interest in CEA was 54.6%. On March 10, 1997, an additional 3,750,000 shares were issued to institutional investors which changed the Corporate Express interest in CEA to 52.4%. Fiscal 1995 Corporate Express purchased for a net cash purchase price of $79,111,000, 27 office product distributors including five distributors purchased by CEA and a software distributor purchased by Nimsa. Also included in the CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) above purchases is one office product distributor purchased by the Chisholm Group, a United Kingdom contract stationer, in which Corporate Express acquired a 51% interest in February 1996. Young repurchased its remaining seven franchises for approximately $20,512,000, terminated four franchises for consideration of $233,000 and purchased substantially all of the business, properties and assets of a computer supplies distributor for a purchase price of $675,000. The excess of the purchase price over the fair value of the net tangible assets acquired was allocated to goodwill and is being amortized over 40 years. Delivery completed 16 acquisitions accounted for as purchases. The net cash purchase price paid in these transactions was $15,208,000 in cash, 378,000 shares of Delivery common stock and $5,565,000 in convertible notes. The excess of the purchase price over the fair value of the net tangible assets acquired has been allocated to goodwill and is being amortized over 25 years. All of the companies acquired provide same-day delivery service. In February 1996, CEA shareholders approved the issue of an additional 12,939,000 shares and 50,000 shares of its common stock at a price of A$1.30 (US$.96) per share and A$1.00 (US$.74) per share, respectively. Of the shares issued, 5,789,000 were purchased by Corporate Express, 4,600,000 were purchased by institutional investors and 2,600,000 shares were approved for issue to CEA officers and employees as employee incentive shares (of which 1,710,000 were issued as of March 2, 1996). As a result, at March 2, 1996, Corporate Express' interest in CEA was 51.8%. On December 21, 1995 CEA issued an additional 6,110,000 shares of its common stock at a price of A$1.30 (US$.96) per share. Of the shares offered, 3,110,000 were purchased by Corporate Express and 3,000,000 were purchased by institutional investors for cash. As a result, Corporate Express' interest in CEA changed from 52.7% to 52.5%. Pro Forma Results of Acquired Companies The operating results of all of the above acquisitions, which were accounted for as purchases, are included in the Company's consolidated statements of operations from the dates of acquisition. The following pro forma financial information assumes the acquisitions occurred at the beginning of the earliest period presented. These results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisitions been made at the beginning of the year, or of results which may occur in the future. The pro forma results listed below are unaudited and reflect the impact of purchase price adjustments.
Eleven Months Year Ended Year Ended Ended March 1, March 2, January 31, 1998 1997 1996 ---------------- ---------- ---------- (In thousands, except per share amounts) Net sales $3,889,076 $4,026,121 $3,444,883 Net income before extraordinary item 53,537 52,317 34,783 Net income 53,537 52,263 31,103 Net income per common share - Basic 0.38 0.38 0.25 Net income per common share - Diluted 0.36 0.35 0.24
6. ACCRUED PURCHASE COSTS In conjunction with purchase acquisitions, the Company accrues certain of the direct external costs associated with closing redundant facilities of acquired companies, and severance and relocation payments to the acquired companys' employees. Prior to the adoption of EITF 95-3 in May 1995, the Company also accrued the external incremental costs of converting acquired company computer systems to the Company's systems. The following tables set forth activity in the Company's accrued purchase liabilities: CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Prior to EITF 95-3:
Warehouse Disposition & System Redundant of Assets Total Integrations Facilities Severance & Other ----- ------------ ---------- --------- ------ (In thousands) Balance, March 2, 1996 $1,264 $ 750 $ 403 $ 41 $ 70 Payments (675) (452) (182) (41) -- Reversals to goodwill (589) (298) (221) -- (70) ------ ----- ----- ---- ---- Balance, March 1, 1997 (1) $ 0 $ 0 $ 0 $ 0 $ 0 ====== ===== ===== ==== ====
(1) All consolidation projects relating to companies acquired prior to the adoption of EITF 95-3 have been successfully completed. After adoption of EITF 95-3:
Disposition Facility Redundant of Assets Total Exit Costs Facilities Severance & Other ----- ---------- ---------- --------- ------- (In thousands) Balance, February 25, 1995 $ -- $ -- $ -- $ -- $ -- Additions 2,414 691 202 1,065 456 Payments (629) (177) (4) (293) (155) ------- ------- ------- ------- ------- Balance, March 2, 1996 1,785 514 198 772 301 Additions 21,429 2,037 4,912 9,727 4,753 Payments (8,503) (699) (557) (4,066) (3,181) Reversals to goodwill (1,823) (7) (1,284) (284) (248) ------- ------- ------- ------- ------- Balance, March 1, 1997 12,888 1,845 3,269 6,149 1,625 Additions 6,365 807 1,477 3,788 293 Payments (9,289) (2,188) (1,379) (5,256) (466) Reversals to goodwill (586) -- (239) (281) (66) ------- ------- ------- ------- ------- Balance, January 31, 1998 (1) $ 9,378 $ 464 $ 3,128 $ 4,400 $ 1,386 ======= ======= ======= ======= =======
(1) Accrued purchase costs, after adoption of EITF 95-3, primarily relate to consolidating acquired operations into existing Company facilities. All consolidation projects are planned to be completed within two years of the acquisition date. Remaining balances primarily represent international and the recent DDI consolidation plans. 7. DISCONTINUED OPERATIONS During fiscal 1995, Sofco adopted a plan to discontinue the operations of Sofco-Eastern, Inc. ("Eastern"). Accordingly, the consolidated financial statements have been reclassified to report separately the net assets, liabilities and operating results of the Eastern operations. As of March 1, 1997, all Eastern operations have been disposed of and actual losses recorded on the disposal of the assets. The loss from discontinued operations in fiscal 1995 and fiscal 1994 were $1,225,000 (net of tax benefits of $851,000), representing the loss on disposal and $327,000 (net of tax benefits of $225,000), representing the net loss on operations. The Eastern revenues were not material to total consolidated revenues for fiscal years 1996, 1995 and 1994. CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 8. DEBT Debt consisted of the following:
January 31, March 1, March 2, 1998 1997 1996 ----------- -------- -------- (In thousands) Domestic: 4 1/2% Convertible Notes (the "Notes"), due July 1, 2000, unsecured, interest payable semi-annually commencing on January 1, 1997, convertible into shares of the Company's common stock at a conversion price of $33.33 per share. $325,000 $325,000 -- $500,000,000 unsecured multi-currency revolving line of credit (Senior Credit Facility). Interest rates at LIBOR plus .75%, (approximately 6.4% at January 31, 1998), or at a base rate (8.5%) with principal due on March 31, 2000. Balance paid in full subsequent to year end. Refer to Note 18. 254,037 136,000 8,000 9 1/8% Series B Senior Subordinated Notes, unsecured, subordinated to existing debt, guaranteed by certain operating subsidiaries of the Company. Due March 15, 2004, interest payable semi-annually. Redeemable by the Company from March 1999 to March 2001 at premiums ranging from 3.422% to 1.141%. 90,000 90,000 90,000 Senior secured notes collateralized by the assets of DDI. 7,397 -- -- Bank term loans, collateralized by equipment, with interest floating at LIBOR plus 1.75% to 2.0%, principal and interest payable monthly, maturities range from 48 months to 60 months through March 2002. 7,113 9,341 5,620 Convertible subordinated notes due between March 26, 1999 and January 31, 2000, bearing interest of 5.0% to 6.0%, payable quarterly or semi-annually, and convertible prior to maturity at the holder's option at prices ranging from $19.97 to $32.70, into 222,000 shares of common stock. 3,315 4,864 5,565 City of Aurora, Colorado Industrial Development Bonds, Series 1984, collateralized by land and building, interest at a floating rate, as defined, ranging from 4.8% in 1995 to 5.5% at January 31, 1998, payable semi-annually and principal installments of varying amounts ($100,000 in 1995, $200,000 in 1996, and $100,000 in 1997) payable annually through November 2009. 4,280 4,380 4,480 Various revolving lines of credit, collateralized by certain assets of the Company, variable interest rate of 9.25% at January 31, 1998. 2,455 -- 27,773 Other term loans, a portion collaterized by certain assets, interest from 4.8% to 16%. 20,905 12,701 20,482 International: Term loan facility collateralized by the assets of Corporate Express Canada ("CEC"). Floating interest rate, as defined, is 5.05% at January 31, 1998. $1,031,000 principal was repaid in 1997, with remaining principal payments of $2,061,000 due annually in 1998, 1999, 2000, and 2001 and final payment of $1,031,000 due in August 2002. 9,275 -- --
CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Notes payable due December 2006, variable interest rates (6.5% on January 31, 1998, 4.75% on March 1, 1997 and 5.34% on March 2, 1996), collateralized by cash deposits. 3,099 4,015 4,641 Various revolving lines of credit, collateralized by certain assets of the Company, variable interest rates ranging from 4.0% to 9.0% at January 31, 1998. 46,496 37,355 -- Other term loans, a portion collateralized by certain assets, interest from 3.8% to 9.95%. 11,252 21,851 7,422 -------- -------- -------- Total debt 784,624 645,507 173,983 Less current portion of debt 30,795 23,802 20,152 -------- -------- -------- Long-term portion of debt $753,829 $621,705 $153,831 ======== ======== ========
The annual maturities of debt for succeeding years are as follows:
Fiscal Year (In thousands) ----------- ------------- 1998 $ 30,795 1999 26,230 2000 331,722 2001 5,641 2002 5,122 Thereafter 385,114 -------- Total $784,624 ========
Certain of the debt agreements contain provisions which require maintenance of the Company's minimum net worth, certain financial ratios, including debt to cash flow and fixed charge coverage, and limit the Company's ability to pay dividends. Effective December 15, 1997 the prior $500,000,000 Senior Credit Facility, which was previously expanded on September 10, 1997 to increase the borrowing capacity from $350,000,000 to $500,000,000 and increase the cost of borrowings to LIBOR plus .75%, was amended to permit the Company's subsidiaries to guarantee up to $500,000,000 of additional debt and permit the repayment of the Company's 9 1/8% Senior Subordinated Notes due 2004. As more fully described in Note 18 the Company terminated this Senior Credit Facility and replaced it with a new Senior Secured Credit Facility. In conjunction with the purchase price allocation for the acquisition of DDI, the Company recorded DDI's 13.5% Senior Secured Notes, due in 2002, at their fair market value, then repurchased $54,068,000 of the Notes at a redemption price of 115%. On or after July 15, 1999 the Notes are redeemable, at the option of the Company, in whole or in part at redemption prices of 104.2% in 1999 decreasing to 100% in 2001. Interest on the notes is due semi-annually on January 15, 1998 and July 15, 1998. The notes are collateralized by a first priority security interest in substantially all assets of DDI other than accounts receivable. On June 24, 1996, the Company issued $325,000,000 principal amount of Convertible Notes. The Convertible Notes are convertible into the Company's common stock at a conversion price of $33.33 per share, subject to adjustments under certain conditions. A portion of the proceeds from the sale of the Notes was used to repay the Company's revolving credit facility and an acquisition note payable with the remaining proceeds being used to fund acquisitions and for other general corporate purposes. The Company's Senior Secured Credit Facility prohibits the distribution of dividends without the prior written consent of the lenders and the Indenture governing the Series B Notes which are registered under the Securities Act of 1933 prohibits the Company from paying a dividend which would cause a default under such indenture or which would cause the Company to fail to comply with certain financial covenants. CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The Company capitalized $3,239,000, $3,887,000 and $882,000 of interest expense in the fiscal 1997, 1996 and 1995 periods, respectively, primarily related to software developed for internal use and the construction of corporate facilities. No interest was capitalized in fiscal 1994. Interest Rate Risk Management During fiscal 1997, the Company entered into an interest rate hedging contract with a major U.S. financial institution. The contract is based upon a nominal value of $300,000,000 of U.S. Treasury notes and has been designated as a hedge of the Company's interest rate exposure related to an anticipated subordinated debt offering which is expected to close in the second quarter of fiscal 1998. At the closing of the debt offering, the hedging contract will be settled, and any gain or loss will be included in deferred financing costs and amortized over the term of the new debt agreement as an adjustment of the effective interest rate. As of April 27, 1998, the deferred loss under the terms of the hedging contract was $4,700,000 based on the difference between the fixed and hedged amounts, representing the cost to the Company if the contract was settled on that date. 9. COMMITMENTS AND CONTINGENCIES Operating Leases The Company has various noncancellable operating leases, primarily for warehouse buildings, delivery trucks, and computer equipment. Lease expense, net of sublease rentals of $1,430,000, $992,000, $30,000, and $127,000 for the eleven months ended January 31, 1998 and the years ended March 1, 1997, March 2, 1996, and February 25, 1995 was $68,274,000, $54,567,000, $19,195,000 and $13,906,000, respectively. Future minimum lease payments are as follows:
Fiscal Year (In thousands) ----------- ------------- 1998 $ 56,804 1999 45,017 2000 32,140 2001 20,892 2002 31,017 Thereafter 74,610 -------- Total 260,480 Less subleases 2,837 -------- Net obligation $257,643 ========
The leases generally are for periods of three to ten years and provide for renewals of one month to five years at the Company's option. The Company has entered into agreements for the sale and leaseback of certain buildings and has accounted for such transactions as operating leases in accordance with SFAS No. 98 "Accounting for Leases." As of January 31, 1998, facilities with book values totaling $17,096,000 have been removed from the balance sheet, and gains realized on the sale transactions totaling $2,569,000 have been deferred and are being amortized to income as rent expense adjustments over the lease terms. The average annual net lease payments, over the lives of the leases which expire between 2002 and 2009, are $990,602. The Company has purchase and lease renewal options at projected future fair market values under the agreements. Capital Leases The Company is the lessee of certain property and equipment under capital leases expiring in various years through 2009. Included in furniture and equipment at January 31, 1998 is $25,559,000 of assets under capital leases and related accumulated depreciation of $8,742,000. CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Future minimum lease payments required under these capital leases are as follows:
Fiscal Year (In thousands) ----------- -------------- 1998 $ 5,469 1999 4,869 2000 4,036 2001 1,910 2002 521 Thereafter 45 ------- Total minimum lease payments 16,850 Less amount representing interest 1,967 ------- Present value of minimum lease payments 14,883 Less current portion of capital lease obligations 5,469 ------- Non-current portion of capital lease obligations $ 9,414 =======
Contingencies In the normal course of business, the Company is subject to certain legal proceedings. In the opinion of management, the outcome of such litigation will not have a material adverse effect on the Company's financial position or operating results. The Company has a dispute with a former shareholder of a Company acquired by the Company in fiscal 1996. No legal proceedings have been commenced by the shareholder, and the Company cannot determine if any legal action will be initiated, or the results or materiality of any such action. 10. INCOME TAXES Federal, state and foreign income taxes consisted of the following:
Eleven Months Years Ended ------------------------------------ Ended March 1, March 2, February 25, January 31, 1998 1997 1996 1995 ----------------- -------- -------- ------------ (In thousands) Current: Federal $ 10,973 $ 202 $10,604 $ 7,707 State 1,217 615 1,089 1,218 Foreign 3,571 1,943 3,205 --- Deferred: Federal 21,785 17,149 (429) (2,499) State 2,914 5,401 1,544 (251) Foreign 130 (793) --- --- Utilization of net operating loss (10,806) --- (2,247) (1,051) Change in tax status --- (2,029) --- --- Allocated to goodwill --- --- --- 4,374 Allocated to contributed capital 4,673 11,161 --- --- Adjustment of beginning valuation allowance --- --- --- (1,204) -------- ------- ------- ------- Total income tax expense $ 34,457 $33,649 $13,766 $ 8,294 ======== ======= ======= =======
The benefit recognized in fiscal 1996 for change in tax status relates to establishing deferred tax assets for an acquired S corporation. The amounts "allocated to contributed capital" relate to deductions recognizable only for tax purposes from the exercise of non-qualified stock options and the disqualifying dispositions of stock purchased under the Company's incentive stock option plan. CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) At January 31, 1998 the Company had $32,911,000 of net operating loss carryforwards of which $5,154,000 and $27,757,000 are for United States and foreign tax purposes, respectively. The U.S. losses begin to expire in 2007, while the foreign losses are generally not subject to expiration dates. Included in the net operating loss carryforwards are losses from acquired subsidiaries. The utilization of these carryforwards may be affected by limitations under the Internal Revenue Code, and therefore, the benefit of these pre-acquisition net operation loss carryforwards may be limited. The components of the net deferred tax assets and liabilities as of January 31, 1998, March 1, 1997 and March 2, 1996 are as follows:
January 31, March 1, March 2, 1998 1997 1996 ------------ --------- --------- (In thousands) Deferred tax assets: Inventory $ 8,138 $ 5,999 $ 3,712 Allowance accounts 5,945 4,532 1,615 Accrued purchase costs 2,784 3,734 1,053 Insurance reserves 3,726 3,980 271 Accrued merger and other costs 7,767 8,760 6,767 Vacation and benefits accrual 7,773 5,407 396 Net operating loss carryforwards 12,238 13,275 4,879 Valuation allowance (2,255) (6,049) (2,433) Alternative minimum tax and other tax credits 3,075 --- --- Other 2,749 1,733 7,398 -------- -------- ------- Total deferred tax assets 51,940 41,371 23,658 -------- -------- ------- Deferred tax liabilities: Accounting methods 3,479 4,943 1,650 Property, plant and equipment 47,103 28,807 4,731 Intangible assets 6,729 3,926 5,886 Other 1,245 1,438 295 -------- -------- ------- Total deferred tax liability 58,556 39,114 12,562 -------- -------- ------- Net deferred tax asset (liability) $ (6,616) $ 2,257 $11,096 ======== ======== ======= Financial Statements Current deferred tax assets 40,729 29,076 18,470 Non-current deferred tax assets 5,170 --- --- Non-current deferred tax liabilities (52,515) (26,819) (7,374) -------- -------- ------- Net deferred tax asset (liability) $ (6,616) $ 2,257 $11,096 ======== ======== =======
The net change in the valuation allowance for deferred taxes in the year ended January 31, 1998 and March 1, 1997 is a decrease of $3,794,000 and an increase of $3,616,000, respectively. The Company reviewed the need for a valuation allowance related to deferred tax assets and determined that it was more likely than not that a portion of the deferred tax assets, comprised primarily of operating loss carryforwards of acquired companies, may not be realized. The reconciliation of the differences between the Company's expense (benefit) for income taxes and taxes at the statutory rate is as follows: CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Eleven Months Years Ended ----------------------------------- Ended March 1, March 2, February 25, January 31, 1998 1997 1996 1995 ----------------- --------- --------- ------------- (In thousands) Statutory federal income tax expense $27,140 $25,825 $ 7,692 $ 8,610 Adjustments: State income taxes, net of federal effect 3,452 3,910 1,521 886 Foreign income taxes 1,469 (123) 461 --- Merger costs 1,500 4,924 4,952 --- Amortization of goodwill 3,540 3,693 1,404 1,784 Untaxed S Corporation earnings and change in tax status --- (3,514) (347) (620) Valuation allowance on tax loss carryforward (2,386) (47) (2,247) (2,636) Other (258) (1,019) 330 270 ------- ------- ------- ------- Income tax expense $34,457 $33,649 $13,766 $ 8,294 ======= ======= ======= =======
11. EMPLOYEE BENEFIT PLANS Effective September 1, 1992, the Company implemented a retirement plan which allows employee contributions in accordance with Section 401(k) of the Internal Revenue Code. The Company matches a portion of the employees salary and all full-time employees are eligible to participate in the plan. New employees are eligible to enroll at the beginning of each calendar quarter. For the fiscal periods ended January 31, 1998, March 1, 1997, March 2, 1996, and February 25, 1995, the Company's matching contribution expense was $3,297,000, $2,204,000, $1,807,000, and $1,704,000, respectively. CEA, the Company's majority-owned Australian subsidiary since May 1995, sponsors superannuation funds for its employees (similar to 401(k) plans in the United States). Total contributions by the Company for the period ended January 31, 1998, and the years ended March 1, 1997 and March 2, 1996 were approximately $1,606,000, $1,912,000 and $980,000, respectively. On August 29, 1994, the Company's shareholders approved the adoption of the 1994 Employee Stock Purchase Plan. A maximum of 1,125,000 shares of Common Stock may be purchased by eligible employees under the 1994 Employee Stock Purchase Plan. All full-time employees with 30 days service at the start of the annual offering period are eligible to participate at contribution levels ranging from 1% to 15% of compensation. Contributions are applied to purchase common stock at a price equal to the lower of the beginning of the offering periods or end of the offering periods fair market value, less a discount of up to 15%. Contributions to this plan during fiscal 1997, 1996 and 1995 totaled approximately $3,358,000, $2,066,000 and $679,000, respectively and purchases under the plan totaled 277,571, 115,488 and 49,200 shares. There were no contributions to or stock purchases under the 1994 Employee Stock Purchase Plan during fiscal 1994. Sofco has an Employee Stock Ownership Plan ("the ESOP") covering substantially all full-time employees. The ESOP invested in the common stock of Sofco which was converted to Corporate Express common stock upon consummation of the acquisition. As of March 1, 1997 and March 2, 1996, the ESOP owned 1,512,164 shares and 1,303,512 shares, respectively, of Corporate Express common stock or equivalents. Of the shares owned, 329,034 were is escrow as of March 2, 1996. Employer contributions were $436,000 for fiscal 1996, $1,925,000 for fiscal 1995, and $805,000 for fiscal 1994. In December 1990, Sofco guaranteed a $4,000,000 loan to the ESOP which is collateralized by the stock held in escrow and a security interest in accounts receivable and inventory. The loan had an approximate interest rate of 85% of prime and was repaid in full in August 1996. The loan balance at March 2, 1996 was $1,047,619 and is included in liabilities on the Company's consolidated balance sheets with a corresponding reduction in additional paid-in capital. The Sofco Employee Stock Ownership Plan ("the ESOP") CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) was merged into the Corporate Express, Inc. 401(k) Retirement Plan on September 3, 1997. A total of 1,494,152 shares were transferred and allocated to the participants. A total of 16 other qualified plans were merged into the Corporate Express, Inc. 401(k) Retirement Plan during fiscal 1997. The total amount of assets transferred into the Plan were $9,482,000. 12. COMMON STOCK As of January 31, 1998, March 1, 1997 and March 2, 1996 there were 142,392,845, 126,171,467 and 111,954,350 common shares outstanding, respectively (after giving effect to the three-for-two stock split effected in the form of a stock dividend in January 1997). On January 31, 1997, a 50% share dividend of approximately 39,979,000 shares of common stock was distributed to shareholders of record as of January 24, 1997. On April 10, 1998, after close of fiscal 1997, the Company repurchased in a tender offer 35,000,000 common shares. See Note 18. On January 14, 1998, the Board of Directors of the Company adopted a Shareholder Rights Plan, pursuant to which the Company distributed a dividend consisting of one right for each share of Common Stock to holders of record on January 30, 1998. The rights, which are to purchase newly created Series A Junior Participating Preferred Stock, become exercisable only in the event, with certain exceptions which include a permitted waiver by the Board of Directors, that a party accumulates 15% or more of the Company's Common Stock. The rights expire ten years from the issuance date. In addition, upon the occurrence of certain events, holders of the rights are entitled to purchase either the Company's Common Stock or stock in an "acquiring entity" at half the market value. The Company is entitled to redeem the rights at $0.01 per right at any time until a certain time following the acquisition of a 15% position in its voting stock. On September 15, 1995, the Company sold 24,486,792 shares in a follow-on public offering of its common stock, and selling shareholders sold 3,113,208 shares at a price of $16.00 per share. Of the $375,200,000 of net proceeds to the Company from the offering, $195,800,000 was used to pay for the prior purchase of the Company shares held by OfficeMax, Inc., the Company's largest shareholder, and $61,000,000 was used to repay existing indebtedness. The remaining proceeds were used to finance the Company's acquisitions and for general corporate purposes. On June 21, 1995, a 50% share dividend of approximately 21,075,000 shares of common stock was distributed to shareholders of record as of June 15, 1995. On March 30, 1995, a follow-on public offering of 10,155,938 shares of common stock was consummated at a price to the public of $11.12 per share. Of the shares offered, 4,500,000 shares were sold by the Company and 5,655,938 shares were sold by selling security holders, including 397,407 shares issued upon exercise of warrants purchased by the underwriters. On September 30, 1994, the Company consummated its initial public offering of 15,750,000 shares of common stock at a price of $7.11 per share. Selling shareholders sold an additional 3,656,250 shares of common stock in the initial public offering. In connection with this offering, the Company effected a one- for-two reverse stock split in August 1994 and converted all of its outstanding preferred stock to common stock on a three-for-two basis in September 1994. The Company has authorized 3,000,000 shares of Non-Voting Common Stock, par value $.0002 per share. No shares of the Non-Voting Common Stock are issued or outstanding at March 1, 1997 or March 2, 1996. In addition, the Company has authorized 25,000,000 shares of Preferred Stock, par value $.0001 per share. No shares of Preferred Stock are issued or outstanding at March 1, 1997 or March 2, 1996. CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) STOCK-BASED COMPENSATION PLANS: Stock Options 1992 Stock Option Plan. In February 1992, the Company adopted the Corporate Express, Inc. 1992 Stock Option Plan (the "1992 Stock Option Plan"). The 1992 Stock Option Plan was approved by the Company's shareholders in May 1992 and amended in January 1994. Options were granted under the 1992 Stock Option Plan at the fair market value at the time of grant as determined by the Board of Directors or the Compensation Committee, based on recent stock transactions. Options granted under the 1992 Stock Option Plan typically vest in equal monthly installments over a five-year period, beginning on the month after the first anniversary of the grant date. The options generally expire on the seventh anniversary of the grant date. Executive Plan. In June 1994, the Board of Directors adopted the 1994 Executive Stock Option Plan (the "Executive Plan") which permits the grant of stock options to the Company's executive officers. The Compensation Committee administers the plan and establishes the terms of the options granted, including the number of shares, the exercise price, vesting schedule and termination provisions. The particular terms of each grant are set forth in separate stock option agreements entered into between the Company and the executive officer. The maximum aggregate number of shares of common stock for which options may be granted under this plan originally was 3,375,000 and was increased to 5,625,000 in August 1995, which increase was approved by shareholders in August 1996, and no single executive officer may be granted options covering more than 750,000 shares of common stock in any calendar year. Vesting accelerates upon occurrence of certain conditions, including increases in the Company's stock price and changes in control of the Company. The options expire ten years from the date of grant. 1994 Stock Option Plan. The 1994 Stock Option and Incentive Plan (the "1994 Stock Option Plan") was adopted by the Board of Directors and approved by shareholders in August 1994. This plan replaced, for future grants, the 1992 Stock Option Plan. The 1994 Stock Option Plan permits the Company to grant incentive stock options and nonqualified stock options. The maximum aggregate number of shares of common stock which may be issued under the 1994 Stock Option Plan was 2,812,500 and was increased to 9,562,500 in March 1996 and approved by the shareholders in August 1996. Options granted under the 1994 Stock Option Plan vest as specified in individual stock option agreements, which typically provide vesting in equal monthly installments over a period of five years, beginning in the month after the first anniversary of the grant date. The options generally expire on the seventh anniversary of the grant date. Options and awards that expire, terminate or are cancelled or forfeited will again be available for grant or award under the plan. Delivery Plan. Delivery had a stock option plan which was approved by its shareholders in January 1994. On March 1, 1996, effective with the merger with Corporate Express, all Delivery options became vested and were exercisable into shares of common stock, as adjusted to reflect the exchange ratio as defined in the merger agreement. UT Plan. Effective with the merger with Corporate Express on November 8, 1996, all UT stock options became vested and were exercisable into shares of the Company's common stock, as adjusted to reflect the exchange ratio as defined in the merger agreement. Directors Plan. The 1996 Stock Option Plan for Outside Directors (the "Directors Plan") was adopted by the Board of Directors and approved by shareholders in August 1996. The maximum aggregate number of shares of common stock for which options may be granted under this plan is 375,000. Initial options granted under the Directors Plan vest at 40% on the first anniversary of the date of grant, 40% on the second anniversary and the remaining 20% on the third anniversary. All other stock options shall become exercisable at 50% on the first anniversary of the date of grant and the remaining 50% on the second anniversary of the date of grant. Each eligible director who first becomes a member of the Board shall automatically be granted stock options to purchase 37,500 shares on the date of his or her selection or election to the Board. Each eligible director shall also automatically be CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) granted stock options to purchase 15,000 shares on each anniversary of the date of such initial grant (beginning on the second such anniversary). Supplemental Plan. The 1996 Supplemental Stock Option Plan (the "Supplemental Plan") was adopted by the Board of Directors in December 1996. The maximum aggregate number of shares of common stock for which options may be granted under this plan is 10,000,000. Option grants under the Supplemental Plan and the terms of the grants are identical to the 1994 Stock Option Plan. DRC Plan. Effective with the merger with Corporate Express on May 30, 1997, all Distribution Resources Company stock options became vested and were exercisable into shares of the Company's common stock, as adjusted to reflect the exchange ratio as defined in the merger agreement. CSI Plan. Effective with the merger with Corporate Express on June 6, 1997, all Computer Software stock options will become vested and exercisable into shares of the Company's common stock one year from the effective date, as adjusted to reflect the exchange ratio as defined in the merger agreement. DDI Plan. Effective with the merger with Corporate Express on November 26, 1997, all DDI stock options became vested and were exercisable into shares of the Company's common stock, as adjusted to reflect the exchange ratio as defined in the merger agreement. The summary of the status of the Company's seven fixed stock option plans as of January 31, 1998, March 1, 1997, March 2, 1996 and February 25, 1995, and changes during the years ending on those dates is presented below:
January 31, 1998 March 1, 1997 March 2, 1996 February 25, 1995 ---------------------- ----------------------- -------------------- ------------------- Weighted- Weighted- Weighted- Weighted- Average Average Average Average Shares Exercise Shares Exercise Shares Exercise Shares Exercise (000s) Price (000s) Price (000s) Price (000s) Price ------ -------- ----- --------- ------- -------- ------ -------- Outstanding at beginning of year 16,833 $13.59 15,216 $10.90 6,465 $ 4.57 2,914 $2.88 Granted 11,797 10.15 4,405 21.15 9,872 14.21 4,076 5.74 Exercised (1,501) 5.83 (1,686) 5.98 (819) 2.03 (240) 3.83 Forfeited (3,508) 17.46 (1,102) 18.46 (302) 7.67 (285) 4.62 ------- ------- ------- ------ Outstanding at end of year 23,621 11.78 16,833 13.59 15,216 10.90 6,465 4.57 ======= ======= ======= ====== Options vested and exercisable at year end 6,365 5,407 3,324 716 Weighted-average fair value of options granted during the year $3.85 $7.61 $6.26
The following table summarizes information about fixed stock options outstanding as of January 31. 1998:
Options Outstanding Options Exercisable - -------------------------------------------------------------------------------- ---------------------- Number Weighted-Average Number Outstanding Remaining Exercisable Range of at 1/31/98 Option Term Weighted-Average at 1/31/98 Weighted-Average Exercise Prices (000s) (in Years) Exercise Price (000s) Exercise Price --------------- ------ ---------- -------------- --------- -------------- $ .10 to 3.55 1,068 3.1 $ 3.25 740 $ 3.33 3.56 to 7.10 3,382 6.1 5.15 2,207 5.09 7.11 to 11.11 9,545 6.2 9.68 930 8.63 11.12 to 14.66 4,772 6.6 13.57 1,188 13.15 14.68 to 19.83 2,974 5.4 19.23 882 18.10
CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 19.84 to 38.70 1,880 5.6 22.97 418 23.67 ------ ------ 23,621 6.0 11.78 6,365 9.93 ====== ======
The Company applies APB Opinion 25 and related interpretations in accounting for the above plans. Accordingly, no compensation cost has been recognized for its fixed stock-based plans. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions for fiscal 1997, 1996 and 1995: risk-free interest rates ranging from 5.66% to 6.69%, expected life of four years; volatility of 35%; dividend yield of 0%. Had compensation cost been determined based on the fair value at the grant dates for stock option grants under those plans consistent with the method of FASB Statement 123, the Company's net income and net income per common share would have been reduced to the pro forma amounts indicated below:
Eleven Months Ended Year Ended --------------------------- January 31, March 1, March 2, 1998 1997 1996 ----------- ------- --------- Net income As reported $ 44,404 $ 40,281 $ 5,140 (1) Pro forma 33,673 32,062 1,718 Net income per common share - Basic As reported $ 0.34 $ 0.33 $ 0.05 (1) Pro forma 0.26 0.26 0.02 Net income per common share - Diluted As reported $ 0.32 $ 0.31 $ 0.05 Pro forma 0.24 0.25 0.02
(1) Net income and net income per common share as reported represent pro forma net income and pro forma net income per common share as adjusted for the effects of pro forma S Corporation taxes as more fully described in Note 14. Subsequent to year end the Company offered employees the opportunity to cancel existing stock options in exchange for fewer replacement stock options priced at market value on the date of the new grant. Approximately 4,097,000 stock options were canceled, and new grants totaling approximately 3,227,000 were issued for replacement stock options. Warrants As of February 25, 1995, warrants to purchase 1,489,500 shares of the Company's common stock, had been issued with exercise prices of $.02 per share for 6,750 shares, $4.89 per share for 562,500 shares and $1.78 for the remaining 920,250 shares. As of January 31, 1998, warrants to purchase 675,000 shares of common stock were outstanding, with exercise prices of $4.89 per share for 562,500 shares and $1.78 per share for the remaining 112,500 shares. The warrants expire on various dates through January 31, 1999. Outstanding warrants to purchase Delivery common stock are vested and exercisable into shares of Corporate Express common stock, effective with the merger with Corporate Express on March 1, 1996, at an exchange ratio as defined in the merger agreement. As of January 31, 1998, warrants to purchase 36,000 shares of Corporate Express common stock were outstanding at a price of $9.44 per share. Concurrent with the DDI merger on November 26, 1997, outstanding warrants to purchase DDI common stock were vested and exercisable into 135,411 shares of Corporate Express stock. CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 13. FAIR VALUE OF FINANCIAL INSTRUMENTS Pursuant to SFAS No. 107, "Disclosure About Fair Value of Financial Instruments," the Company has estimated the fair value of its financial instruments using the following methods and assumptions: . The carrying amount of accounts receivable, accounts payable and accrued liabilities approximate their fair values; . The fair value of the Convertible Notes is based on quoted market prices and was approximately $289,445,000 at January 31, 1998; . The fair value of the Series B Notes is based on quoted market prices and was approximately $91,800,000 at January 31, 1998; . The carrying amounts of the Company's debt, other than the Convertible Notes and the Series B Notes, approximates fair value, estimated by discounted cash flow analyses based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. 14. PRO FORMA NET INCOME The pro forma net income and pro forma net income per share reflects the tax adjustment for a fiscal 1996 acquisition accounted for as a pooling of interests that was previously an S corporation for income tax purposes, as if the acquired company had filed a C corporation tax return for all periods presented. The effect is as follows:
Fiscal Year ---------------------------- 1996 1995 1994 ---- ---- ---- (In thousands) Net income before pro forma adjustments, per consolidated statements of operations $41,996 $5,551 $16,496 Pro forma provision for income taxes 1,715 411 727 ------- ------ ------- Pro forma net income $40,281 $5,140 $15,769 ======= ====== =======
CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 15. EARNINGS PER SHARE Basic and diluted earnings per share are calculated as follows:
Eleven Months Ended Years Ended ----------------------------------------------- January 31, March 1, March 2 February 25, 1998 1997 1996 1995 ---- ---- ---- ---- (In thousands, except per share data) Numerator for basic and diluted EPS: Income from continuing operations $ 44,404 $ 41,996 $ 6,776 $ 16,237 Less: Pro forma taxes (Note 14) --- (1,715) (411) (727) Young preferred stock dividends --- --- --- (432) ---------- --------- --------- --------- Income available to common shareholders 44,404 40,281 6,365 15,078 Discontinued operations --- --- (1,225) (327) Extraordinary item --- --- --- 586 ---------- --------- --------- --------- Net income $ 44,404 $ 40,281 $ 5,140 $ 15,337 ========== ========= ========= ========= Basic EPS Calculation: Denominator: Average common shares outstanding 131,423 121,901 104,162 70,612 Convertible preferred stock (1) --- --- --- 4,788 --------- -------- -------- --------- 131,423 121,901 104,162 75,400 ========= ======== ======== ========= Earnings per common share: Continuing operations $ 0.34 $ 0.33 $ 0.06 $ 0.20 Discontinued operations --- --- (0.01) 0.00 Extraordinary item --- --- --- 0.00 --------- -------- -------- --------- Net income $ 0.34 $ 0.33 $ 0.05 $ 0.20 ========= ======== ======== ========= Diluted EPS Calculation: Denominator (2): Basic shares 131,423 121,901 104,162 75,400 Dilutive stock options and warrants 6,435 8,128 6,246 3,626 -------- -------- -------- --------- Diluted shares 137,858 130,029 110,408 79,026 ======== ======== ======== ========= Earnings per common share: Continuing operations $ 0.32 $ 0.31 $ 0.06 $ 0.19 Discontinued operations --- --- (0.01) 0.00 Extraordinary item --- --- --- 0.00 -------- -------- -------- --------- Net income $ 0.32 $ 0.31 $ 0.05 $ 0.19 ======== ======== ======== =========
(1) Preferred stock is included even though antidilutive due to automatic conversion to common on a two-for-one basis upon completion of an initial public offering. Had preferred stock been excluded from the calculation above, basic earnings per share would have been $.22 and diluted earnings per share would have been $.21 for the year ended February 25, 1995. (2) Antidilutive stock options omitted from the denominator were immaterial. Also excluded from the calculation are the Convertible Notes with an exercise price of $33.33 per share which is greater than the average market price of the common shares. CORPORATE EXPRESS, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) As more fully described in Note 18, the Company repurchased 35,000,000 shares of its common stock. 16. INDUSTRY AND GEOGRAPHIC AREA SEGMENT INFORMATION The Company's major operations consist of providing the distribution of products and services. The product distribution segment has operations in the United States, Australia, New Zealand, Canada, the United Kingdom, Germany, France, Italy, Ireland and Switzerland. Currently, the largest operations in the international segment are in Australia. The service segment includes same day delivery, distribution and logistics management and call center. Net sales, merger and other nonrecurring charges, operating profit, identifiable assets, capital expenditures and depreciation and amortization pertaining to the industries and geographic areas in which the Company operates are presented below. INDUSTRY SEGMENTS
Corporate Express Product Consolidated Distribution Services ------------ ------------ -------- (In thousands) ELEVEN MONTHS ENDED JANUARY 31, 1998 Net Sales $3,573,311 $2,816,244 $757,067 Merger and other nonrecurring charges 14,890 11,346 3,544 Operating profit 114,815 101,615 13,200 Identifiable assets 2,349,659 2,178,401 171,258 Capital expenditures 82,959 70,959 12,000 Depreciation and amortization 60,665 44,194 16,471 FISCAL YEAR ENDED MARCH 1, 1997 Net sales $3,196,056 $2,436,296 $759,760 Merger and other nonrecurring charges 19,840 8,406 11,434 Operating profit 100,490 80,396 20,094 Identifiable assets 1,843,977 1,685,716 158,261 Capital expenditures 119,639 104,432 15,207 Depreciation and amortization 48,736 33,446 15,290 FISCAL YEAR ENDED MARCH 2, 1996 Net sales $1,890,639 $1,548,175 $342,464 Merger and other nonrecurring charges 42,790 29,203 13,587 Operating profit 38,160 29,191 8,969 Identifiable assets 1,023,365 900,722 122,643 Capital expenditures 53,124 41,469 11,655 Depreciation and amortization 28,498 19,977 8,521 FISCAL YEAR ENDED FEBRUARY 25, 1995 Net sales $1,145,151 $ 924,886 $220,265 Operating profit 40,953 29,811 11,142 Identifiable assets 645,309 568,562 76,747 Capital expenditures 18,670 11,525 7,145 Depreciation and amortization 17,078 12,694 4,384
CORPORATE EXPRESS, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) GEOGRAPHICAL SEGMENTS
Corporate Express Domestic International Consolidated Operations Operations ------------ ---------- ---------- (In thousands) ELEVEN MONTHS ENDED JANUARY 31, 1998 Net Sales $3,573,311 $2,901,744 $671,567 Merger and other nonrecurring charges 14,890 13,285 1,605 Operating profit 114,815 103,199 11,616 Identifiable assets 2,349,659 1,987,177 362,482 Capital expenditures 82,959 71,921 11,038 Depreciation and amortization 60,665 50,844 9,821 FISCAL YEAR ENDED MARCH 1, 1997 Net sales $3,196,056 $2,630,930 $565,126 Merger and other nonrecurring charges 19,840 18,511 1,329 Operating profit 100,490 95,788 4,702 Identifiable assets 1,843,977 1,519,152 324,825 Capital expenditures 119,639 108,655 10,984 Depreciation and amortization 48,736 41,598 7,138 FISCAL YEAR ENDED MARCH 2, 1996 Net sales $1,890,639 $1,652,438 $238,201 Merger and other nonrecurring charges 42,790 42,790 --- Operating profit 38,160 28,943 9,217 Identifiable assets 1,023,365 868,227 155,138 Capital expenditures 53,124 50,963 2,161 Depreciation and amortization 28,498 26,010 2,488 FISCAL YEAR ENDED FEBRUARY 25, 1995 Net sales $1,145,151 $1,143,457 $ 1,694 Operating profit 40,953 40,939 14 Identifiable assets 645,309 641,898 3,411 Capital expenditures 18,670 18,665 5 Depreciation and amortization 17,078 17,066 12
17. QUARTERLY FINANCIAL DATA (UNAUDITED)(A)
First Second Third Fourth Quarter Quarter Quarter Quarter Ended Ended Ended Ended May 31, August 30, November 29, January 31, 1997 1997 1997 1998 ---------- ---------- ------------ ----------- (In thousands, except per share data) ELEVEN MONTHS ENDED JANUARY 31, 1998 Net sales $ 913,342 $ 941,634 $996,160 $722,175 (b) Gross profit 214,228 222,224 241,935 161,616 (b) Net income 10,022 14,567 14,523 (c) 5,292 (b) Net income per common share: Basic .08 .11 .11 .04 Diluted .08 .11 .10 .04
CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
FISCAL YEAR ENDED MARCH 1, 1997 Net sales $650,861 $755,009 $889,563 $ 900,623 Gross profit 164,329 182,814 217,197 213,970 Net income 12,081 13,417 9,290 (c) 7,208 (c) Pro forma net income 11,752 13,090 8,918 6,521 Pro forma net income per common share: Basic .10 .11 .07 .05 Diluted .09 .10 .07 .05 FISCAL YEAR ENDED MARCH 2, 1996 Net sales $394,115 $452,540 $493,725 $ 550,259 Gross profit 99,211 111,075 125,670 131,365 Income (loss) from continuing operations 7,154 7,637 11,898 (19,913) Net income (loss) 6,069 7,637 11,898 (20,053) (d) Pro forma income (loss) from continuing operations 7,236 7,501 11,691 (20,064) Pro forma net income (loss) 6,152 7,501 11,691 (20,204) Pro forma income (loss) from continuing operations per common share: Basic .07 .08 .11 (.18) Diluted .07 .07 .10 (.18) Pro forma net income (loss) per common share: Basic .06 .08 .11 (.18) Diluted .06 .07 .10 (.18)
During fiscal 1997, the Company changed its fiscal year end from February 28 to January 31. Quarterly results restated for the twelve months ended January 31, 1998 are as follows:
First Second Third Fourth Quarter Quarter Quarter Quarter Ended Ended Ended Ended May 3, August 2, November 1, January 31, 1997 1997 1997 1998 -------- --------- ----------- ----------- (In thousands, except per share data) TWELVE MONTHS ENDED JANUARY 31, 1998 Net sales $921,453 $925,084 $983,108 $1,028,530 Gross profit 220,503 216,523 230,282 245,173 Net income 12,411 12,261 17,483 8,521 Net income per common share: Basic 0.10 0.10 0.13 0.06 Diluted 0.09 0.09 0.12 0.06
_________ (a) Quarterly amounts have been restated to include the accounts and operations of HMI, Sofco, Nimsa and UT for fiscal 1996, and HMI, Sofco, Nimsa, Delivery and Young for fiscal 1995. (b) Fourth Quarter Ended January 31, 1998 reflects results for the two months ended January 31, 1998. (c) In the third quarter of fiscal 1997, the Company recognized pre-tax charges of $15.0 million, primarily related to the DDI acquisition, the continued integration of delivery and certain provisions for reductions in force and facility closures at other locations. In the third and fourth quarters of fiscal 1996, the Company recognized pretax charges of $12.4 million and $7.5 million, respectively, related to merger and other nonrecurring items. Net income reflects these charges in the applicable periods. CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (d) In the fourth quarter of fiscal 1995, the Company recognized pretax charges of $42.8 million related to merger and other nonrecurring items. 18. SUBSEQUENT EVENTS During April 1998, the Company closed its Dutch Auction tender offer and purchased 35,000,000 shares tendered at a price of $10.75 per share On April 22, 1998, the Company executed a new $1 billion Senior Secured Credit Facility and terminated the Senior Credit Facility. The Company has utilized borrowings under the new credit facility to fund the purchase of 35,000,000 shares of its common stock pursuant to its Dutch Auction tender offer, to repay and terminate the previously existing bank credit facility and for general corporate and working capital requirements. Approximately $1,960,000 of deferred financing costs related to the terminated Senior Credit Facility will be expensed in the first quarter of fiscal 1998. This Senior Secured Credit Facility consists of a $250 million, seven-year term loan and a $750 million five-year revolving credit facility. The Senior Secured Credit Facility is guaranteed by substantially all domestic subsidiaries of Corporate Express and is collateralized by all tangible and intangible property of the guarantors including inventory and receivables. At the borrower's option interest rates are at a base rate or a Eurodollar rate plus an applicable margin determined by a leverage ratio as defined in the loan agreements. The term loan's interest rate ranges from 0.25% to 0.75% above the revolving loan. The Company is subject to usual covenants customary for this type of facility including restrictions on dividends, additional borrowings and certain financial covenants. 19. SUPPLEMENTAL GUARANTOR INFORMATION On May 29, 1998, CEX Holdings, Inc. ("CEX Holdings" or the "Issuer"), a wholly owned subsidiary of the Registrant, completed a private placement of $350 million principal amount of 9.625% Senior Subordinated Notes due 2008 (the "Notes"). The Notes are fully and unconditionally guaranteed on a joint and several basis by the Registrant (the "Parent Guarantor") and certain of the Registrant's subsidiaries. Substantially all of the Issuer's income and cash flow is generated by its subsidiaries. As a result, funds necessary to meet the Issuer's debt service obligations are provided in large part by distributions or advances from its subsidiaries. Under certain circumstances, contractual and legal restrictions, as well as the financial condition and operating requirements of the Issuer's subsidiaries, could limit the Issuer's ability to obtain cash from its subsidiaries for the purpose of meeting its debt service obligations, including the payment of principal and interest on the Notes. The following information sets forth the condensed consolidating balance sheet of the Registrant as of January 31, 1998, March 1, 1997, and March 2, 1996, and condensed consolidating statements of operations and cash flows for the eleven months ended January 31, 1998 and the years ended March 1, 1997, March 2, 1996 and February 25, 1995. Investments in subsidiaries are accounted for on the equity method; accordingly entries necessary to consolidate the Parent Guarantor, CEX Holdings, Inc., and all of its subsidiaries are reflected in the eliminations column. Separate complete financial statements of the Issuer (CEX Holdings) and the Subsidiary Guarantors would not provide additional material information that would be useful in assessing the financial composition of the Guarantors. CORPORATE EXPRESS, INC. CONDENSED CONSOLIDATING BALANCE SHEET JANUARY 31, 1998
Parent Issuer Subsidiary Guarantor of Notes Guarantors ------------------ ---------------------- --------------------- ASSETS Current assets: Cash and cash equivalents 372 33,162 Trade accounts receivable, net 435,346 Notes and other receivables 71,751 Inventories 167,184 Deferred income taxes 30,691 Other current assets 29,361 ------------------ ---------------------- --------------------- Total current assets 372 767,495 Property and equipment: Land 10,679 Buildings and leasehold improvements 93,341 Property and equipment 272,723 ------------------ ---------------------- --------------------- 376,743 Less accumulated depreciation (117,907) ------------------ ---------------------- --------------------- 258,836 Goodwill, net 650,545 Net investment in and advances to subsidiaries 1,317,540 1,634,064 Other assets, net 4,583 31,384 22,818 ------------------ ---------------------- --------------------- Total assets 1,322,123 1,665,820 1,699,694 ================== ====================== ===================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable - trade 59,121 173,987 Accounts payable - acquisition 1,440 Accrued payroll and benefits 50,084 Accrued purchase costs 3,183 Accrued merger and related costs 14,545 Other accrued liabilities 5,569 4,243 44,545 Current portion of long-term debt and capital leases 8,810 ------------------ ---------------------- --------------------- Total current liabilities 64,690 4,243 296,594 Capital lease obligations 5,996 Long-term debt 325,000 344,037 22,899 Deferred income taxes 46,445 Minority interest Other non-current liabilities 6,928 ------------------ ---------------------- --------------------- Total liabilities 389,690 348,280 378,862 Total shareholders' equity 932,433 1,317,540 1,320,832 ------------------ ---------------------- --------------------- Total liabilities and Shareholders' equity 1,322,123 1,665,820 1,699,694 =================== ====================== ===================== Subsidiary Non Guarantors Eliminations Consolidated -------------------- -------------------- -------------------- ASSETS Current assets: Cash and cash equivalents 10,828 44,362 Trade accounts receivable, net 181,228 616,574 Notes and other receivables 14,936 86,687 Inventories 83,924 251,108 Deferred income taxes 10,038 40,729 Other current assets 12,352 41,713 -------------------- --------------------- -------------------- Total current assets 313,306 1,081,173 Property and equipment: Land 6,861 17,540 Buildings and leasehold improvements 32,665 126,006 Property and equipment 66,854 339,577 -------------------- --------------------- -------------------- 106,380 483,123 Less accumulated depreciation (13,849) (131,756) -------------------- --------------------- -------------------- 92,531 351,367 Goodwill, net 196,999 847,544 Net investment in and advances to subsidiaries (164,841) (2,786,763) Other assets, net 10,790 69,575 -------------------- --------------------- -------------------- Total assets 448,785 (2,786,763) 2,349,659 ==================== ===================== ==================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable - trade 121,807 354,915 Accounts payable - acquisition 4,666 6,106 Accrued payroll and benefits 11,224 61,308 Accrued purchase costs 6,195 9,378 Accrued merger and related costs 967 15,512 Other accrued liabilities 25,857 80,214 Current portion of long-term debt an capital leases 27,454 36,264 -------------------- --------------------- -------------------- Total current liabilities 198,170 563,697 Capital lease obligations 3,418 9,414 Long-term debt 61,893 753,829 Deferred income taxes 6,070 52,515 Minority interest 20,791 20,791 Other non-current liabilities 10,052 16,980 -------------------- --------------------- -------------------- Total liabilities 300,394 1,417,226 Total shareholders' equity 148,391 (2,786,763) 932,433 -------------------- --------------------- -------------------- Total liabilities and Shareholders' equity 448,785 (2,786,763) 2,349,659 ==================== ===================== ====================
CORPORATE EXPRESS, INC. CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS ELEVEN MONTHS ENDED JANUARY 31, 1998
Subsidiary Parent Issuer Subsidiary Non Guarantor of Notes Guarantors Guarantors Eliminations --------- -------- ---------- ---------- ------------ Net sales 2,857,298 716,013 Cost of sales 2,177,549 555,759 Equity in subsidiary earnings 53,291 59,553 (112,844) -------- -------- --------- ---------- ---------- Gross profit 53,291 59,553 679,749 160,254 (112,844) Warehouse operating and selling expenses 481,216 124,027 Corporate general and administrative expenses 85,487 19,568 Merger and other nonrecurring charges 8,996 5,894 -------- -------- ---------- ---------- ---------- Operating profit 53,291 59,553 104,050 10,765 (112,844) Interest expense and other, net 15,164 10,686 2,781 8,642 -------- -------- ---------- -------- ---------- Income before income taxes 38,127 48,867 101,269 2,123 (112,844) Income tax expense (benefit) (6,277) (4,424) 41,920 3,238 -------- ------- ---------- -------- ---------- Income before minority interest 44,404 53,291 59,349 (1,115) (112,844) Minority interest (income) expense (1,319) -------- -------- ---------- -------- ---------- Net income 44,404 53,291 59,349 204 (112,844) ======== ======== ========== ======== ========== Consolidated ------------ Net sales 3,573,311 Cost of sales 2,733,308 Equity in subsidiary earnings ---------- Gross profit 840,003 Warehouse operating and selling expenses 605,243 Corporate general and administrative expenses 105,055 Merger and other nonrecurring charges 14,890 ---------- Operating profit 114,815 Interest expense and other, net 37,273 ---------- Income before income taxes 77,542 Income tax expense (benefit) 34,457 ---------- Income before minority interest 43,085 Minority interest (income) expense (1,319) ---------- Net income 44,404 ==========
CORPORATE EXPRESS, INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS ELEVEN MONTHS ENDED JANUARY 31, 1998
Subsidiary Parent Issuer Subsidiary Non Guarantor of Notes Guarantors Guarantors Consolidated --------- -------- ---------- ---------- ------------ Net cash provided by (used in) operating activities (49) (6,531) 49,779 (16,283) 26,916 --------- --------- ---------- ---------- ------------ Cash flows from investing activities: Proceeds from sale of assets 15,111 5,989 21,100 Capital expenditures (69,667) (13,292) (82,959) Payment for acquisitions, net of cash acquired (19,024) (14,345) (33,369) Investment in marketable securities (9,164) 3,935 (5,229) Other, net 4,761 251 5,012 --------- --------- ---------- ---------- ------------ Net cash provided by (used in) investing activities (9,164) (68,819) (17,462) (95,445) --------- --------- ---------- ---------- ------------ Cash flows from financing activities: Issuance of common stock 8,104 8,104 Issuance of subsidiary common stock 2,434 2,434 Debt issuance costs (139) (944) (1,083) Proceeds from long-term borrowings 1,394 8,847 10,241 Repayments of long-term borrowings (14,264) (17,311) (31,575) Proceeds from short-term borrowings 15 15,293 15,308 Repayments of short-term borrowings (3,774) (593) (4,367) Net proceeds from (payments on) line of credit 118,037 9,430 (5,091) 122,376 Cash paid to retire bonds (62,178) (62,178) Net activity in investment in and advances to (from) subsidiaries (7,916) (101,026) 13,711 95,231 Other (33) 11 (22) --------- --------- ---------- ---------- ------------ Net cash provided by financing activities 49 16,067 6,479 36,643 59,238 --------- --------- ---------- ---------- ------------ Net cash used by discontinued operations (12) (12) Effect of foreign currency exchange rates changes on cash (834) (834) --------- --------- ---------- ---------- ------------ Increase (decrease) in cash and cash equivalents 372 (12,573) 2,064 (10,137) Cash and cash equivalents, beginning of period 45,735 8,764 54,499 --------- --------- ---------- ---------- ------------ Cash and cash equivalents, end of period 372 33,162 10,828 44,362 ========= ========= ========== ========== ============
CORPORATE EXPRESS, INC. CONDENSED CONSOLIDATING BALANCE SHEET MARCH 1, 1997
Parent Issuer Subsidiary Guarantor of Notes Guarantors ----------------- ---------------- ------------------- ASSETS Current assets: Cash and cash equivalents 45,735 Trade accounts receivable, net 378,464 Notes and other receivables 40,274 Inventories 146,157 Deferred income taxes 26,586 Other current assets 14,877 4,696 ----------------- ---------------- ------------------- Total current assets 14,877 641,912 Property and equipment: Land 10,976 Buildings and leasehold improvements 93,873 Property and equipment 218,929 ----------------- ---------------- ------------------- 323,778 Less accumulated depreciation (96,852) ----------------- ---------------- ------------------- 226,926 Goodwill, net 510,400 Net investment in and advances to subsidiaries 1,054,999 1,263,291 Other assets, net 6,160 22,231 20,737 ----------------- ---------------- ------------------- Total assets 1,076,036 1,285,522 1,399,975 ================= ================ =================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable - trade 54,969 148,046 Accounts payable - acquisition 1,505 Accrued payroll and benefits 37,547 Accrued purchase costs 3,655 Accrued merger and related costs 18,484 Other accrued liabilities 2,460 4,523 28,132 Current portion of long-term debt and capital leases 13,473 ----------------- ---------------- ------------------- Total current liabilities 57,429 4,523 250,842 Capital lease obligations 7,208 Long-term debt 325,000 226,000 21,214 Deferred income taxes 25,386 Minority interest Other non-current liabilities 6,289 ----------------- ---------------- ------------------- Total liabilities 382,429 230,523 310,939 Total shareholders' equity 693,607 1,054,999 1,089,036 ----------------- ---------------- ------------------- Total liabilities and shareholders' equity 1,076,036 1,285,522 1,399,975 ================= ================= =================== CORPORATE EXPRESS, INC. CONSOLIDATING BALANCE SHEET MARCH 1, 1997 Subsidiary Non Guarantors Eliminations Consolidated ----------------- ---------------- ------------------- ASSETS Current assets: Cash and cash equivalents 8,764 54,499 Trade accounts receivable, net 115,735 494,199 Notes and other receivables 15,256 55,530 Inventories 41,401 187,558 Deferred income taxes 2,490 29,076 Other current assets 8,975 28,548 ----------------- ---------------- ------------------- Total current assets 192,621 849,410 Property and equipment: Land 3,129 14,105 Buildings and leasehold improvements 12,951 106,824 Property and equipment 30,764 249,693 ----------------- ---------------- ------------------- 46,844 370,622 Less accumulated depreciation (10,039) (106,891) ----------------- ---------------- ------------------- 36,805 263,731 Goodwill, net 161,567 671,967 Net investment in and advances to subsidiaries (75,919) (2,242,371) Other assets, net 9,741 58,869 ----------------- ---------------- ------------------- Total assets 324,815 (2,242,371) 1,843,977 ================= ================= =================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable - trade 89,026 292,041 Accounts payable - acquisition 3,573 5,078 Accrued payroll and benefits 7,965 45,512 Accrued purchase costs 9,233 12,888 Accrued merger and related costs 18,484 Other accrued liabilities 16,897 52,012 Current portion of long-term debt and capital leases 16,269 29,742 ----------------- ---------------- ------------------- Total current liabilities 142,963 455,757 Capital lease obligations 4,337 11,545 Long-term debt 49,491 621,705 Deferred income taxes 1,433 26,819 Minority interest 22,015 22,015 Other non-current liabilities 6,240 12,529 ----------------- ---------------- ------------------- Total liabilities 226,479 1,150,370 Total shareholders' equity 98,336 (2,242,371) 693,607 ----------------- ---------------- ------------------- Total liabilities and shareholders' equity 324,815 (2,242,371) 1,843,977 ================= ================ ===================
CORPORATE EXPRESS, INC. CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS YEAR ENDED MARCH 1, 1997
Parent Issuer Subsidiary Guarantor of Notes Guarantors -------------------- --------------- --------------------- Net sales 2,630,930 Cost of sales 1,987,715 Equity in subsidiary earnings 48,339 51,262 -------------------- --------------- --------------------- Gross profit 48,339 51,262 643,215 Warehouse operating and selling expenses 451,073 Corporate general and administrative expenses 77,843 Merger and other nonrecurring charges 18,511 -------------------- --------------- --------------------- Operating profit 48,339 51,262 95,788 Interest expense and other, net 11,270 5,193 4,971 -------------------- --------------- --------------------- Income before income taxes 37,069 46,069 90,817 Income tax expense (benefit) (4,927) (2,270) 39,699 -------------------- --------------- --------------------- Income before minority interest 41,996 48,339 51,118 Minority interest (income) expense -------------------- --------------- --------------------- Net income 41,996 48,339 51,118 ==================== =============== ===================== Subsidiary Non Guarantors Eliminations Consolidated ------------------- --------------------- -------------------- Net sales 565,126 3,196,056 Cost of sales 430,031 2,417,746 Equity in subsidiary earnings (99,601) ------------------- --------------------- -------------------- Gross profit 135,095 (99,601) 778,310 Warehouse operating and selling expenses 111,806 562,879 Corporate general and administrative expenses 17,258 95,101 Merger and other nonrecurring charges 1,329 19,840 ------------------- --------------------- -------------------- Operating profit 4,702 (99,601) 100,490 Interest expense and other, net 5,271 26,705 ------------------- --------------------- -------------------- Income before income taxes (569) (99,601) 73,785 Income tax expense (benefit) 1,147 33,649 ------------------- --------------------- -------------------- Income before minority interest (1,716) (99,601) 40,136 Minority interest (income) expense (1,860) (1,860) ------------------- --------------------- -------------------- Net income 144 (99,601) 41,996 =================== ===================== ====================
CORPORATE EXPRESS, INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS YEAR ENDED MARCH 1, 1997
Parent Issuer Subsidiary Guarantor of Notes Guarantors ------------- ------------ ------------- Net cash provided by (used in) operating activities 29,251 (11,824) 33,482 ------------ ------------ -------------- Cash flows from investing activities: Proceeds from sale of assets 2,674 Capital expenditures (108,655) Payment for acquisitions, net of cash acquired (173,440) Investment in marketable securities (17,853) Other, net (4,270) ------------ ------------ -------------- Net cash used in investing activities (17,853) (283,691) ------------ ------------ -------------- Cash flows from financing activities: Issuance of common stock 12,643 Issuance of subsidiary common stock Debt issuance costs (7,374) (1,444) Proceeds from long-term borrowings 325,000 493 Repayments of long-term borrowings (9,027) Proceeds from short-term borrowings 272 Repayments of short-term borrowings (25,628) Net proceeds from (payments on) line of credit 128,000 (42,278) Net activity in investment in and advances to (from) subsidiaries (359,520) (96,879) 353,856 Other (4,891) ------------ ----------- -------------- Net cash provided by (used in) financing activities (29,251) 29,677 272,797 ------------ ----------- -------------- Net cash used by discontinued operations 61 Effect of foreign currency exchange rates changes on cash ------------ ------------ -------------- Increase in cash and cash equivalents 22,649 Cash and cash equivalents, beginning of period 23,086 ------------ ------------ -------------- Cash and cash equivalents, end of period 45,735 ============ ============ ============== Subsidiary Non Guarantors Consolidated ------------- ---------------- Net cash provided by (used in) operating activities (25,156) 25,753 ----------- ----------- Cash flows from investing activities: Proceeds from sale of assets 352 3,026 Capital expenditures (10,984) (119,639) Payment for acquisitions, net of cash acquired (82,390) (255,830) Investment in marketable securities 2,251 (15,602) Other, net 2,292 (1,978) ------------ ----------- Net cash used in investing activities (88,479) (390,023) ------------ ----------- Cash flows from financing activities: Issuance of common stock 12,643 Issuance of subsidiary common stock 2,258 2,258 Debt issuance costs (8,818) Proceeds from long-term borrowings 22,336 347,829 Repayments of long-term borrowings (28,921) (37,948) Proceeds from short-term borrowings 500 772 Repayments of short-term borrowings (1,317) (26,945) Net proceeds from (payments on) line of credit 18,660 104,382 Net activity in investment in and advances to (from) subsidiaries 102,543 - Other 58 (4,833) ----------- ----------- Net cash provided by (used in) financing activities 116,117 389,340 ----------- ----------- Net cash used by discontinued operations 61 Effect of foreign currency exchange rates changes on cash (445) (445) ----------- ----------- Increase in cash and cash equivalents 2,037 24,686 Cash and cash equivalents, beginning of period 6,727 29,813 ----------- ----------- Cash and cash equivalents, end of period 8,764 54,499 ============ ===========
CORPORATE EXPRESS, INC. CONDENSED CONSOLIDATING BALANCE SHEET MARCH 2, 1996
Subsidiary Parent Subsidiary Non Guarantor Guarantors Guarantors Eliminations Consolidated --------- ---------- ---------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents 23,086 6,727 29,813 Trade accounts receivable, net 259,415 61,068 320,483 Notes and other receivables 21,032 9,014 30,046 Inventories 110,138 18,665 128,803 Deferred income taxes 18,470 18,470 Other current assets 19,094 8,263 27,357 --------- ---------- ---------- ------------ ------------ Total current assets 451,235 103,737 554,972 Property and equipment: Land 8,490 225 8,715 Buildings and leasehold improvements 34,790 3,873 38,663 Property and equipment 118,097 12,400 130,497 --------- ---------- ---------- ------------ ------------ 161,377 16,498 177,875 Less accumulated depreciation (54,108) (6,636) (60,744) --------- ---------- ---------- ------------- ------------ 107,269 9,862 117,131 Goodwill, net 271,977 61,184 333,161 Net investment in and advances to subsidiaries 620,574 (20,399) (600,175) Other assets, net 3,936 11,865 2,300 18,101 --------- ---------- ----------- ------------- ------------ Total assets 624,510 842,346 156,684 (600,175) 1,023,365 ========= ========== =========== ============= ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable - trade 120,354 56,941 177,295 Accounts payable - acquisition 2,063 2,063 Accrued payroll and benefits 22,904 3,744 26,648 Accrued purchase costs 1,791 1,258 3,049 Accrued merger and related costs 24,880 24,880 Other accrued liabilities 4,734 29,703 8,518 42,955 Current portion of long-term debt and capital leases 21,668 2,721 24,389 --------- --------- ---------- ------------- ------------ Total current liabilities 4,734 223,363 73,182 301,279 Capital lease obligations 7,897 1,671 9,568 Long-term debt 98,000 39,815 16,016 153,831 Deferred income taxes 6,906 468 7,374 Minority interest 24,843 24,843 Other non-current liabilities 2,829 1,865 4,694 --------- ---------- ---------- ------------- ------------ Total liabilities 102,734 280,810 118,045 501,589 Total shareholders' equity 521,776 561,536 38,639 (600,175) 521,776 --------- ---------- ---------- ------------- ------------ Total liabilities and shareholders' equity 624,510 842,346 156,684 (600,175) 1,023,365 ========= ========== ========== ============= ============
CORPORATE EXPRESS, INC. CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS YEAR ENDED MARCH 2, 1996
Subsidiary Parent Subsidiary Non Guarantor Guarantors Guarantors ------------------ -------------------- ------------------- Net sales 1,652,439 238,200 Cost of sales 1,233,877 183,489 Merger related inventory provisions 5,952 Equity in subsidiary earnings 7,747 ------------------ -------------------- ------------------- Gross profit 7,747 412,610 54,711 Warehouse operating and selling expenses 301,934 40,647 Corporate general and administrative expenses 44,895 4,847 Merger and other nonrecurring charges 36,838 ------------------ -------------------- ------------------- Operating profit 7,747 28,943 9,217 Interest expense and other, net 9,911 5,467 804 ------------------ -------------------- ------------------- Income before income taxes (2,164) 23,476 8,413 Income tax expense (benefit) (7,715) 18,275 3,206 ------------------ -------------------- ------------------- Income before minority interest 5,551 5,201 5,207 Minority interest expense 1,436 ------------------ -------------------- ------------------- Income from continuing operations 5,551 5,201 3,771 Discontinued operations: Loss on disposals 1,225 ------------------ -------------------- ------------------- Net income 5,551 3,976 3,771 ================== ==================== =================== Eliminations Consolidated --------------------- ----------------------- Net sales 1,890,639 Cost of sales 1,417,366 Merger related inventory provisions 5,952 Equity in subsidiary earnings (7,747) --------------------- ----------------------- Gross profit (7,747) 467,321 Warehouse operating and selling expenses 342,581 Corporate general and administrative expenses 49,742 Merger and other nonrecurring charges 36,838 --------------------- ----------------------- Operating profit (7,747) 38,160 Interest expense and other, net 16,182 --------------------- ----------------------- Income before income taxes (7,747) 21,978 Income tax expense (benefit) 13,766 --------------------- ----------------------- Income before minority interest (7,747) 8,212 Minority interest expense 1,436 --------------------- ----------------------- Income from continuing operations (7,747) 6,776 Discontinued operations: Loss on disposals 1,225 --------------------- ----------------------- Net income (7,747) 5,551 ===================== =======================
CORPORATE EXPRESS, INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS YEAR ENDED MARCH 2, 1996
Subsidiary Parent Subsidiary Non Guarantor Guarantors Guarnators Consolidated ------------- ------------- -------------- -------------- Net cash used in operating activities (869) (3,293) (12,271) (16,433) ---------- ---------- ----------- ----------- Cash flows from investing activities: Proceeds from sale of assets 5,899 5,899 Capital expenditures (51,113) (2,011) (53,124) Payment for acquisitions, net of cash acquired (86,722) (37,578) (124,300) Other, net (1,698) 1,770 72 ---------- ---------- ----------- ----------- Net cash used in investing activities (133,634) (37,819) (171,453) ---------- ---------- ----------- ----------- Cash flows from financing activities: Issuance of common stock 449,288 449,288 Stock offering costs (20,127) (186) (20,313) Issuance of subsidiary common stock 7,733 7,733 Young capital contribution 12,182 12,182 Purchase of common stock held by Officemax (195,831) (195,831) Proceeds from long-term borrowings 35,595 8,613 44,208 Repayments of long-term borrowings (71,813) (71,813) Proceeds from short-term borrowings 12,835 12,835 Repayments of short-term borrowings (11,592) (11,592) Net proceeds from (payments on) line of credit (16,600) (1,995) (276) (18,871) Net activity in investment in and advances to (from) subsidiaries (228,043) 186,440 41,603 Other (4,245) (4,245) ---------- ---------- ----------- ----------- Net cash provided by financing activities 869 145,225 57,487 203,581 ---------- ---------- ----------- ----------- Net cash used by discontinued operations (222) (222) Effect of foreign currency exchange rates changes on cash (1,159) (1,159) ---------- ---------- ----------- ----------- Increase in cash and cash equivalents 8,076 6,238 14,314 Cash and cash equivalents, beginning of period 15,010 489 15,499 ---------- ---------- ----------- ----------- Cash and cash equivalents, end of period 23,086 6,727 29,813 ========== ========== =========== ===========
CORPORATE EXPRESS, INC. CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS YEAR ENDED FEBRUARY 25, 1995
Subsidiary Parent Subsidiary Non Guarantor Guarantors Guarantors ---------------- ------------------- ---------------- Net sales 1,143,457 1,694 Cost of sales 854,141 1,220 Equity in subsidiary earnings 24,112 ---------------- ------------------- ---------------- Gross profit 24,112 289,316 474 Warehouse operating and selling expenses 218,756 457 Corporate general and administrative expenses 29,621 3 ---------------- ------------------- ---------------- Operating profit 24,112 40,939 14 Interest expense and other, net 12,428 3,914 11 ---------------- ------------------- ---------------- Income before income taxes 11,684 37,025 3 Income tax expense (benefit) (4,226) 12,518 2 ---------------- ------------------- ---------------- Income before minority interest 15,910 24,507 1 Minority interest expense 69 ---------------- ------------------- ---------------- Income from continuing operations 15,910 24,438 1 Discontinued operations Loss from discontinued operations 327 ---------------- ------------------- ---------------- Income before extraordinary item 15,910 24,111 1 Extraordinary item Gain on early extinguishment of debt 586 ---------------- ------------------- ---------------- Net income 16,496 24,111 1 ================ =================== ================ CORPORATE EXPRESS, INC. CONSOLIDATING STATEMENT OF OPERATIONS YEAR ENDED FEBRUARY 25, 1995 Eliminations Consolidated ----------------- --------------- Net sales 1,145,151 Cost of sales 855,361 Equity in subsidiary earnings (24,112) ----------------- --------------- Gross profit (24,112) 289,790 Warehouse operating and selling expenses 219,213 Corporate general and administrative expenses 29,624 ----------------- --------------- Operating profit (24,112) 40,953 Interest expense and other, net 16,353 ----------------- --------------- Income before income taxes (24,112) 24,600 Income tax expense (benefit) 8,294 ----------------- --------------- Income before minority interest (24,112) 16,306 Minority interest expense 69 ----------------- --------------- Income from continuing operations (24,112) 16,237 Discontinued operations Loss from discontinued operations 327 ----------------- --------------- Income before extraordinary item (24,112) 15,910 Extraordinary item Gain on early extinguishment of debt 586 ----------------- --------------- Net income (24,112) 16,496 ================= ===============
CORPORATE EXPRESS, INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS YEAR ENDED FEBRUARY 25, 1995
Subsidiary Parent Subsidiary Non Guarantor Guarantors Guarantor Consolidated ---------------- ---------------- ---------------- ----------------- Net cash provided by (used in) operating activities (4,113) 16,724 (575) 12,036 ---------------- ---------------- ---------------- ----------------- Cash flows from investing activities: Proceeds from sale of assets 463 463 Capital expenditures (18,670) (18,670) Payment for acquisitions, net of cash acquired (86,135) (1,751) (87,886) Other, net (524) (88) (612) ---------------- ---------------- ---------------- ----------------- Net cash used in investing activities (104,866) (1,839) (106,705) ---------------- ---------------- ---------------- ----------------- Cash flows from financing activities: Issuance of common stock 134,993 134,993 Stock offering costs (9,388) (9,388) Preferred stock redemption (7,500) (7,500) Debt issuance costs (869) (869) Proceeds from long-term borrowings 35,189 35,189 Repayments of long-term borrowings (17,550) (17,872) (35,422) Repayments of short-term borrowings (10,697) (398) (11,095) Cash paid to retire bonds (9,300) (9,300) Net proceeds from (payments on) line of credit 4,150 (549) (1,823) 1,778 Net activity in investment in and advances to (from) subsidiaries (90,423) 85,324 5,099 Other (1,647) (1,647) ---------------- ---------------- ---------------- ----------------- Net cash provided by financing activities 4,113 89,748 2,878 96,739 ---------------- ---------------- ---------------- ----------------- Net cash used by discontinued operations (600) (600) Effect of foreign currency exchange rates changes on cash 25 25 ---------------- ---------------- ---------------- ----------------- Increase in cash and cash equivalents 1,006 489 1,495 Cash and cash equivalents, beginning of period 14,004 14,004 ---------------- ---------------- ---------------- ----------------- Cash and cash equivalents, end of period 15,010 489 15,499 ================ ================ ================ =================
(C) DDI CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 There has been no change to the previously filed consolidated financial statements contained in DDI's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1997. PART I - FINANCIAL INFORMATION ITEM I. - FINANCIAL STATEMENTS DATA DOCUMENTS INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 (COLUMNAR AMOUNTS IN THOUSANDS) - --------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, --------------------------- 1997 1996 --------- --------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,371 $ 11,151 Accounts receivable, net of allowance of $506,000 and $311,000 36,817 31,459 Inventories (Note B) 39,480 37,979 Other current assets 1,474 898 --------- --------- Total Current Assets 79,142 81,487 PROPERTY, PLANT AND EQUIPMENT 43,632 37,328 GOODWILL, net of accumulated amortization of $3,039,000 and $2,689,000 18,437 9,837 DEFERRED FINANCING COSTS AND OTHER ASSETS 5,441 5,325 --------- --------- $ 146,652 $ 133,977 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued liabilities $ 20,165 $ 18,566 Accrued compensation 3,584 3,453 Accrued interest payable 2,071 4,072 Current maturities of long-term obligations 3,892 934 Current and deferred income taxes 243 1,017 --------- --------- Total Current Liabilities 29,955 28,042 POST-RETIREMENT BENEFITS 1,905 1,881 LONG-TERM OBLIGATIONS, net of current maturities 65,578 63,965 DEFERRED INCOME TAXES 3,040 2,413 COMMITMENTS AND CONTINGENCIES (Note C) COMMON STOCKHOLDERS' EQUITY: Preferred stock, $0.01 par value; 5,000,000 shares authorized; none issued -- -- Common stock, $0.001 par value; 15,000,000 shares authorized; 9,979,833 and 9,564,831 shares issued; 9,710,226 and 9,295,224 shares outstanding, respectively 10 10 Additional paid-in capital 32,024 32,020 Retained earnings 14,328 5,881 Stockholder notes receivable (188) (235) Treasury stock, 269,607 shares acquired at no cost -- -- --------- --------- Total Common Stockholders' Equity 46,174 37,676 --------- --------- $ 146,652 $ 133,977 ========= =========
See Notes to Consolidated Financial Statements. DATA DOCUMENTS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (COLUMNAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) - --------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- -------------------------- 1997 1996 1997 1996 ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) NET SALES $ 65,687 $ 59,794 $ 192,081 $ 184,472 COST OF GOODS SOLD 48,677 43,638 142,015 135,880 ----------- ----------- ----------- ----------- Gross Profit 17,010 16,156 50,066 48,592 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 9,927 9,484 28,936 28,286 ----------- ----------- ----------- ----------- Operating Income 7,083 6,672 21,130 20,306 DEBT EXPENSE, including amortization of $203,000, $206,000, $602,000 and $621,000 2,326 2,416 6,933 7,376 ----------- ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 4,757 4,256 14,197 12,930 INCOME TAX EXPENSE 1,932 1,726 5,750 5,246 ----------- ----------- ----------- ----------- INCOME BEFORE EXTRAORDINARY ITEM 2,825 2,530 8,447 7,684 EXTRAORDINARY ITEM, net of tax (Note D) -- -- -- (54) ----------- ----------- ----------- ----------- NET INCOME $ 2,825 $ 2,530 $ 8,447 $ 7,630 =========== =========== =========== =========== EARNINGS PER COMMON SHARE: Primary: Income before extraordinary item $ 0.28 $ 0.25 $ 0.85 $ 0.77 Extraordinary item -- -- -- -- ----------- ----------- ----------- ----------- Net Income $ 0.28 $ 0.25 $ 0.85 $ 0.77 =========== =========== =========== =========== WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING: Primary 10,050,942 9,955,759 9,987,460 9,940,141 =========== =========== =========== ===========
See Notes to Consolidated Financial Statements. DATA DOCUMENTS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (COLUMNAR AMOUNTS IN THOUSANDS) - --------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, --------------------- 1997 1996 -------- -------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 8,447 $ 7,630 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation 3,080 3,123 Amortization of intangibles 1,236 1,091 Extraordinary item -- 37 Provision for deferred income taxes (482) (309) Gain on sale of property, plant and equipment (16) (65) Changes in operating assets and liabilities (net of effects from purchase of Moore Labels, Inc.): Accounts receivable (3,954) 2,710 Inventories (787) 994 Other current assets (177) (370) Accounts payable and accrued liabilities 1,272 1,297 Accrued interest (2,001) (1,884) Current taxes on income and other (337) 402 Other assets (283) 380 -------- -------- Net cash flows from operating activities 5,998 15,036 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (3,819) (3,222) Proceeds from the sale of property, plant and equipment 28 117 Investment in Moore Labels, Inc. - net of cash acquired (13,972) -- -------- -------- Net cash flows from investing activities (17,763) (3,105) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from debt 2,790 -- Payment of debt (724) (1,239) Change in liability for outstanding checks (132) (3,034) Payments for stock registration costs -- (142) Proceeds from exchange of stock options and warrants 4 -- Principal receipts on stockholder notes receivable 47 23 -------- -------- Net cash flows from financing activities 1,985 (4,392) -------- -------- NET CHANGE IN CASH (9,780) 7,539 CASH AND CASH EQUIVALENTS, Beginning of period 11,151 2,024 -------- -------- CASH AND CASH EQUIVALENTS, End of period $ 1,371 $ 9,563 ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 8,719 $ 8,822 ======== ======== Income taxes $ 6,573 $ 4,986 ======== ========
See Notes to Consolidated Financial Statements. DATA DOCUMENTS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) - -------------------------------------------------------------------------------- A. MANAGEMENT STATEMENTS The consolidated financial statements of DATA DOCUMENTS INCORPORATED (Data Documents) include the accounts of its wholly-owned subsidiaries Data Documents, Inc. (DDI), PBF Washington, Inc. (PBF), Cal Emblem Labels, Inc. (Cal Emblem) and Moore Labels, Inc. (Moore Labels). The summarized financial information of DDI (see Note E) include the accounts of its wholly-owned subsidiaries PBF, Cal Emblem and Moore Labels. All significant intercompany transactions and accounts have been eliminated during consolidation. The consolidated financial statements of the Company contained herein should be read in conjunction with the financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. The consolidated financial statements are unaudited and reflect all adjustments (consisting only of normal and recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The results of operations and cash flows for the nine months ended September 30, 1997 are not necessarily indicative of the results for the year ending December 31, 1997. Certain reclassifications have been made to the 1996 financial statements to conform to those classifications used in 1997. B. INVENTORIES Inventories consisted of (in thousands):
SEPTEMBER 30, DECEMBER 31, ---------------------------------------- 1997 1996 (UNAUDITED) Finished goods $ 29,832 $ 28,739 Work in process 1,397 1,264 Raw materials 7,243 7,032 Supplies and spare parts 1,008 944 --------- -------- $ 39,480 $ 37,979 ========= ========
Substantially all inventories were valued using the LIFO method. If the FIFO method of inventory accounting had been used, inventories would have been lower than reported by $4,676,000 and $3,500,000 at September 30, 1997 and December 31, 1996, respectively. On a FIFO basis, operating income would have been lower by $890,000 and $710,000, respectively, for the three months ended September 30, 1997 and September 30, 1996, and $1,176,000 and $1,852,000 for the nine months ended September 30, 1997 and September 30, 1996. The FIFO cost of inventories approximates replacement cost. C. COMMITMENTS AND CONTINGENCIES The Company is subject to lawsuits and claims which arise out of the normal course of its business. In the opinion of management, the disposition of such claims will not have a material adverse effect on the Company's financial position or results of operations. D. EXTRAORDINARY ITEM In June 1996, the Company incurred an extraordinary charge of $54,000, net of income tax benefit of $34,000, for the write-off of unamortized deferred financing costs, unamortized original issue discount, and certain premium on reacquisition associated with the repurchase of $500,000 of Senior Notes. E. SUMMARIZED FINANCIAL INFORMATION Following is the summarized financial information of DDI and its subsidiaries (in thousands):
SEPTEMBER 30, DECEMBER 31, ----------------------------------- 1997 1996 (UNAUDITED) Current assets $ 79,142 $ 81,487 Noncurrent assets $ 67,510 $ 52,490 Current liabilities $ 29,955 $ 28,042 Noncurrent liabilities $ 70,523 $ 68,259
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- --------------------------- 1997 1996 1997 1996 (UNAUDITED) (UNAUDITED) Net sales $ 65,687 $ 59,794 $ 192,081 $ 184,472 Gross profit $ 17,010 $ 16,156 $ 50,066 $ 48,592 Net income $ 2,825 $ 2,530 $ 8,447 $ 7,630
Following is the summarized financial information of PBF and Cal Emblem (wholly-owned subsidiaries of DDI), which are guarantors of the Senior Notes.
SEPTEMBER 30, DECEMBER 31, ---------------------------------- 1997 1996 (UNAUDITED) Current assets $ 6,977 $ 6,849 Noncurrent assets $ 9,312 $ 8,813 Current liabilities $ 7,523 $ 7,474 Noncurrent liabilities $ 629 $ 883
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- ------------------------------- 1997 1996 1997 1996 (UNAUDITED) (UNAUDITED) Net sales $ 8,069 $ 8,489 $ 24,814 $ 25,169 Gross profit $ 1,577 $ 1,866 $ 4,950 $ 5,114 Net income $ 229 $ 368 $ 832 $ 755
F. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which established accounting and reporting standards for such transfers. The Company has adopted SFAS No. 125 effective January 1, 1997 as required. The impact on the Company's financial position and results of operations was not material. In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings Per Share, which specifies the computation, presentation and disclosure requirements for earnings per share. SFAS No. 128 is applicable for fiscal years ending after December 15, 1997. The objective of the statement is to simplify the computation of earnings per share and replaces primary and fully diluted earnings per share, as disclosed under certain pronouncements, with basic and diluted earnings per share. Pro forma basic earnings per share for the three months and nine months ended September 30, 1997 and 1996 are $0.29, $0.26, $0.85 and $0.77, respectively. Pro forma diluted earnings per share for the three months and nine months ended September 30, 1997 and 1996 are $0.28, $0.25, $0.85 and $0.77, respectively. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, which established presentation of financial data based on the "management approach". SFAS No. 131 is applicable for fiscal years beginning after December 15, 1997. The Company is currently in the process of reviewing this new presentation requirement. G. ACQUISITION In July 1997, the Company acquired Moore Labels, Inc. (Moore Labels) of Wichita, Kansas, a privately held supplier of pressure-sensitive labels used in the pharmaceutical, food, plastics and miscellaneous manufacturing industries. The aggregate consideration for the transfer of the capital stock of Moore Labels was approximately $14.4 million paid in cash. The consideration paid was supplied by excess cash and the use of approximately $5.0 million of the Revolving Credit Facility. This acquisition was not material to the Company. H. MERGER AGREEMENT In September 1997, the Company entered a Merger Agreement with Corporate Express, Inc. (Corporate Express), a multi-national corporation headquartered in Broomfield, Colorado. Corporate Express is a publicly traded company traded on the Nasdaq National Market (Nasdaq) and is a provider of non-production goods and services to large corporations. The exchange ratio for the merger has been fixed so that each outstanding share of Data Documents' common stock will be converted into 1.1 shares of Corporate Express common stock. The merger has been approved by the respective Boards of Directors of the companies and is subject to Data Documents stockholders' approval. Data Documents would become a wholly owned subsidiary of Corporate Express upon completion of the merger. I. SUBSEQUENT EVENT A special meeting of stockholders of Data Documents will be held on November 25, 1997 at 10:00 a.m., at which time the stockholders will be asked to approve and accept the Merger Agreement discussed in Note H. (D) DDI CONSOLIDATED FINANCIAL STATEMENTS FOR THE ANNUAL PERIOD ENDED DECEMBER 31, 1996. There has been no change to the previously filed consolidated financial statements contained in DDI's Annual Report on Form 10-K for the twelve months ended December 31, 1996. INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Data Documents Incorporated Omaha, Nebraska We have audited the accompanying consolidated balance sheets of Data Documents Incorporated and subsidiaries as of December 31, 1996 and 1995 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Data Documents Incorporated and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP February 6, 1997 Omaha, Nebraska F-1 DATA DOCUMENTS INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (COLUMNAR AMOUNTS IN THOUSANDS) - --------------------------------------------------------------------------------
DECEMBER 31, 1996 1995 ASSETS CURRENT ASSETS: Cash and cash equivalents (Note G) $ 11,151 $ 2,024 Accounts receivable, net of allowances of $311,000 and $458,000 (Note H) 31,459 31,569 Inventories (Note D) 37,979 36,048 Other current assets 898 1,788 ------------ ------------ Total Current Assets 81,487 71,429 PROPERTY, PLANT AND EQUIPMENT, net (Notes E and H) 37,328 37,502 GOODWILL, net of accumulated amortization of $2,689,000 and $2,273,000 9,837 10,248 DEFERRED FINANCING COSTS AND OTHER ASSETS 5,325 6,546 ------------ ------------ $ 133,977 $ 125,725 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued liabilities (Note G) $ 18,566 $ 19,326 Accrued compensation 3,453 3,579 Accrued interest payable 4,072 3,877 Current maturities of long-term obligations (Note H) 934 1,169 Current and deferred income taxes (Note F) 1,017 462 ------------ ------------ Total Current Liabilities 28,042 28,413 POST-RETIREMENT BENEFITS (Note M) 1,881 1,805 LONG-TERM OBLIGATIONS (Note H) 63,965 65,212 DEFERRED INCOME TAXES (Note F) 2,413 2,871 CONTINGENCIES (Notes H, K and L) STOCKHOLDERS' EQUITY: Preferred stock, $0.01 par value; 5,000,000 shares authorized; none issued -- -- Common stock, $0.001 par value; 15,000,000 shares authorized; 9,564,831 and 8,873,016 shares issued; 9,295,224 and 8,603,409 shares outstanding 10 9 Additional paid-in capital 32,020 32,162 Retained earnings (deficit) 5,881 (4,489) Stockholder notes receivable (235) (258) Treasury stock, acquired at no cost, 269,607 shares -- -- ------------ ------------ Total Stockholders' Equity 37,676 27,424 ------------ ------------ $ 133,977 $ 125,725 ============ ============
See notes to consolidated financial statements. F-2 DATA DOCUMENTS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (COLUMNAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) - --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, -------------------------------------------- 1996 1995 1994 NET SALES $ 246,496 $ 242,238 $ 193,626 COST OF GOODS SOLD 181,058 186,011 148,797 ------------ ------------ ------------ Gross Profit 65,438 56,227 44,829 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 38,177 35,334 32,729 STOCK COMPENSATION CHARGE (Note N) -- 156 -- ------------ ------------ ------------ Operating Income 27,261 20,737 12,100 DEBT EXPENSE, Including amortization of $828,000, $1,312,000 and $1,072,000 9,751 13,335 8,735 ------------ ------------ ------------ INCOME BEFORE INCOME TAXES 17,510 7,402 3,365 INCOME TAX EXPENSE (Note F) 7,086 3,127 1,533 ------------ ------------ ------------ INCOME BEFORE EXTRAORDINARY ITEM 10,424 4,275 1,832 EXTRAORDINARY ITEM, net of tax (Note P) (54) (2,921) (2,795) ------------ ------------ ------------ NET INCOME (LOSS) 10,370 1,354 (963) LESS PREFERRED DIVIDENDS -- -- 620 ------------ ------------ ------------ NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK $ 10,370 $ 1,354 $ (1,583) ============ ============ ============ EARNINGS (LOSS) PER COMMON SHARE: Primary: Income before extraordinary item $ 1.05 $ 0.61 $ 0.13 Extraordinary item $ (0.01) $ (0.40) $ (0.30) ------------ ------------ ------------ Net Income (Loss) $ 1.04 $ 0.21 $ (0.17) ============ ============ ============ Fully diluted: Income before extraordinary item $ 1.05 $ 0.61 $ 0.11 Extraordinary item (0.01) (0.40) (0.17) ------------ ------------ ------------ Net Income (Loss) $ 1.04 $ 0.21 $ (0.06) ============ ============ ============ WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING: Primary 9,939,454 7,333,864 9,453,494 ============ ============ ============ Fully Diluted 9,943,754 7,333,864 16,911,580 ============ ============ ============
See notes to consolidated financial statements. F-3 DATA DOCUMENTS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (COLUMNAR AMOUNTS IN THOUSANDS) - --------------------------------------------------------------------------------
ADDITIONAL RETAINED STOCKHOLDER COMMON PAID-IN EARNINGS NOTES STOCK CAPITAL (DEFICIT) RECEIVABLE TOTAL ----------- ----------- ----------- ----------- ----------- BALANCE, January 1, 1994 $ 5 $ 1,276 $ (4,260) $ -- $ (2,979) Acquisition of 710,190 shares of treasury stock in exchange at no cost -- -- -- -- -- Preferred dividends -- -- (620) -- (620) 407,947 shares issued from treasury stock in exchange for notes receivable -- 226 -- (226) -- Redemption of warrants (Note J) -- (581) -- -- (581) Net loss -- -- (963) -- (963) ----------- ----------- ----------- ----------- ----------- BALANCE, December 31, 1994 5 921 (5,843) (226) (5,143) 48,954 shares issued for cash (Note N) -- 142 -- -- 142 32,636 shares issued from treasury stock in exchange for note receivable (Note N) -- 95 -- (55) 40 Warrant reclassification (Note J) -- 3,087 -- -- 3,087 Payment on stockholders' notes -- -- -- 23 23 Issuance of 3,400,000 common shares (Note C) 4 27,917 -- -- 27,921 Net income -- -- 1,354 -- 1,354 ----------- ----------- ----------- ----------- ----------- BALANCE, December 31, 1995 9 32,162 (4,489) (258) 27,424 691,815 shares issued on 61,233 warrants exercised (Note J) 1 -- -- -- 1 Warrant registration costs -- (142) -- -- (142) Payment on stockholders' notes -- -- -- 23 23 Net income -- -- 10,370 -- 10,370 ----------- ----------- ----------- ----------- ----------- BALANCE, December 31, 1996 $ 10 $ 32,020 $ 5,881 $ (235) $ 37,676 =========== =========== =========== =========== ===========
See notes to consolidated financial statements. F-4 DATA DOCUMENTS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (COLUMNAR AMOUNTS IN THOUSANDS) - --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, ----------------------------------------- 1996 1995 1994 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 10,370 $ 1,354 $ (963) Adjustments to reconcile net income (loss) to net cash flows from operating activities: Depreciation 4,062 7,552 6,992 Amortization of intangibles 1,490 1,804 1,504 Stock compensation charge -- 156 -- Extraordinary item 37 1,975 2,941 Provision for deferred income taxes (296) (1,375) (1,743) (Gain) loss on sale of property, plant and equipment (65) (4) 46 Changes in operating assets and liabilities: Accounts receivable 110 (2,181) (3,695) Inventories (1,931) (3,468) (1,545) Other current assets 168 144 (265) Accounts payable and accrued liabilities 2,579 (3,513) 3,291 Accrued interest 195 2,744 141 Current taxes on income and other 1,176 131 (445) Other assets 259 (438) 96 ----------- ----------- ----------- Net cash flows from operating activities 18,154 4,881 6,355 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (3,940) (3,955) (6,972) Proceeds from the sale of property, plant and equipment 117 58 193 Investment in Cal Emblem -- (2,403) -- ----------- ----------- ----------- Net cash flows from investing activities (3,823) (6,300) (6,779) ----------- ----------- -----------
See notes to consolidated financial statements. F-5 DATA DOCUMENTS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (COLUMNAR AMOUNTS IN THOUSANDS) - --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, ----------------------------------------- 1996 1995 1994 ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from debt -- -- $ 85,000 Payment of debt $ (1,697) $ (30,227) (56,673) Principal payments of lease finance obligation -- -- (12,608) Change in liability for outstanding checks (3,389) 1,347 512 Dividends paid -- -- (620) Preferred stock redemptions -- -- (6,829) Debt issuance and related costs -- -- (4,651) Payment for stock registration costs - net (141) -- -- Proceeds from sale of common stock -- 27,947 -- Principal receipts on stockholder notes receivable 23 23 -- ----------- ----------- ----------- Net cash flows from financing activities (5,204) (910) 4,131 ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH 9,127 (2,329) 3,707 CASH AND CASH EQUIVALENTS, Beginning of period 2,024 4,353 646 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, End of period $ 11,151 $ 2,024 $ 4,353 =========== =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 9,031 $ 9,639 $ 7,522 =========== =========== =========== Income taxes $ 6,084 $ 2,759 $ 1,941 =========== =========== =========== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Termination agreement (Note H) $ 1,349 =========== Exchange of common stock purchase warrants with exchangeable warrants (Note J) $ 581 =========== Issuance of 32,636 and 407,947 shares of common stock for stockholder notes receivable $ 55 $ 226 =========== =========== Acquisition of treasury stock at no cost in 1994 -- =========== Issuance of promissory notes to the former stockholders of Cal Emblem Labels, Inc. (Note B) $ 2,245 ==========
See notes to consolidated financial statements. F-6 DATA DOCUMENTS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (COLUMNAR DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) - -------------------------------------------------------------------------------- A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS - Data Documents Incorporated (the "Company") was formed for the purpose of acquiring Data Documents, Inc. The Company designs, manufactures, and markets business forms, pressure-sensitive label products and supplies, specialized direct mail products and software-based services. A substantial portion of the Company's forms sales are made in connection with its proprietary forms management system. The principal markets for the business forms are primarily located in the geographic markets of mid-America, the southwest and the northwest. The principal markets for the labels and direct mail business are nationwide. CONSOLIDATION - The consolidated financial statements of the Company include the accounts of its wholly-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated during consolidation. All operating activities, assets and liabilities are those of the Company's subsidiaries. CASH AND CASH EQUIVALENTS - All highly liquid investments, purchased with a maturity of three months or less are considered cash equivalents. INVENTORIES - Inventories are valued at the lower of cost, determined by the last-in, first-out (LIFO) method, or market. PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful life of the asset, which are as follows: buildings, 30 years; leased facilities and leasehold improvements, life of the lease; machinery and equipment, 3 to 12 years; and furniture and fixtures, 4 to 10 years. GOODWILL - Goodwill represents the excess of costs over the value of net tangible assets acquired in the acquisition of Data Documents, Inc., PBF Washington, Inc., and Cal Emblem Labels, Inc. This cost is being amortized on a straight-line basis over 30 years. Recoverability of this asset is evaluated periodically based on management's estimate of future undiscounted operating income of the businesses acquired. DEFERRED FINANCING COSTS - Deferred financing costs represents the cost of securing debt financing. The cost is being amortized over the estimated periods of outstanding principal amounts of the related obligations. OTHER ASSETS - Subscriber installation costs for the Company's software-based Odyssey Integrated Services program are capitalized and amortized over the initial period of the subscriber agreement, generally 3 years. REVENUE RECOGNITION - Sales and related cost of goods sold are recognized upon shipment of products. F-7 INCOME TAXES - The Company and its wholly-owned subsidiaries file a consolidated income tax return. The Company uses an asset and liability approach for the financial reporting of income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109 - Accounting for Income Taxes. Deferred income taxes arise from temporary differences between financial and tax reporting. OTHER POSTRETIREMENT BENEFITS - The Company accounts for postretirement benefits in accordance with SFAS No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions. The Company has elected to recognize the transition obligation relating to prior service cost in its statement of operations over a 20-year period beginning in 1993. STOCK SPLIT - The Company's Board of Directors declared a 6.52715097-to-1 stock split in August 1995 and the financial statements presented herein reflect the split for all periods presented. EARNINGS PER SHARE - The earnings per share calculation is based upon net income less preferred dividends and the weighted average number of shares of common stock outstanding and warrants and options when dilutive. The calculation on a fully-diluted basis assumes conversion of the convertible preferred stock at the beginning of the period. NEW ACCOUNTING PRONOUNCEMENTS - In June 1996, the Financial Accounting Standards Board issued SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities which established accounting and reporting standards for such transfers. The Company will adopt SFAS No. 125 effective January 1, 1997 as required. The impact on the Company's financial position and results of operations is not expected to be material. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS - Certain reclassifications have been made to the prior year financial statements to conform to the 1996 presentation. B. ACQUISITION On August 25, 1995, the Company acquired all of the outstanding stock of Cal Emblem Labels, Inc. ("Cal Emblem") for $4.5 million, plus replacement of Cal Emblem's bank debt, which was funded through borrowings of approximately $5.9 million under the Company's existing revolving credit facility and the issuance of five-year term promissory notes in the aggregate principal amount of $2.2 million to the former owners. The acquisition was accounted for using the purchase method of accounting. Accordingly, the assets and liabilities and results of operations of Cal Emblem are included in the Company's consolidated financial statements subsequent to the acquisition date. The purchase price has been allocated to the underlying assets and liabilities of Cal Emblem based on their respective fair values at the date of acquisition. The excess cost over the fair market value of net assets acquired of $4,122,000 is being amortized over a 30-year period on a straight-line basis. F-8 The following unaudited pro forma financial information shows the results of operations of the Company as though the acquisition occurred as of January 1, 1994.
YEARS ENDED DECEMBER 31, ------------------------- 1995 1994 (UNAUDITED) Net sales $ 256,030 $ 216,244 Income from continuing operations 4,174 2,026 Net income (loss) available for common stock 1,253 (1,389) Earnings per common share before extraordinary item: Primary $ 0.60 $ 0.15 Fully diluted 0.60 0.12
C. INITIAL PUBLIC OFFERING In October 1995, the Company completed an initial public offering (the "Offering") of 3,400,000 shares of common stock of the Company at an offering price of $9.00 per share. The net proceeds of the offering were used to redeem approximately $24,000,000 in aggregate principal amount of Data Documents, Inc.'s 13 1/2% Senior Notes. D. INVENTORIES Inventories consisted of:
DECEMBER 31, -------------------------- 1996 1995 Finished goods $ 28,739 $ 26,888 Work in process 1,264 1,287 Raw materials 7,032 6,860 Supplies and spare parts 944 1,013 ----------- ----------- $ 37,979 $ 36,048 =========== ===========
Substantially all inventories were valued using the LIFO method. If the FIFO method of inventory accounting had been used, inventories at December 31, 1996 and 1995 would have been lower than reported by $3,500,000, and $712,000, respectively. On a FIFO basis, operating income would have been higher (lower) by $(2,788,000), $2,057,000, and $390,000, respectively, for fiscal years 1996, 1995, 1994. The FIFO cost of inventories approximates replacement cost. F-9 E. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of:
DECEMBER 31, ----------------------- 1996 1995 Land $ 5,336 $ 5,336 Buildings 18,835 18,517 Leasehold improvements 1,205 1,146 Machinery and equipment 57,790 57,531 Furniture and fixtures 1,608 1,572 ----------- ----------- 84,774 84,102 Less accumulated depreciation and amortization 47,446 46,600 ----------- ----------- $ 37,328 $ 37,502 =========== ===========
F. INCOME TAXES The provision for income taxes on income from continuing operations consists of:
YEARS ENDED DECEMBER 31, ----------------------------------------- 1996 1995 1994 Current provision: Federal $ 6,330 $ 3,792 $ 2,265 State 1,052 710 399 Deferred (296) (1,375) (1,131) ----------- ----------- ----------- $ 7,086 $ 3,127 $ 1,533 =========== =========== ===========
The following represents a reconciliation between the actual income tax expense and income taxes computed by applying the statutory Federal income tax rate to income before income taxes from continuing operations:
YEARS ENDED DECEMBER 31, ----------------------------------------- 1996 1995 1994 Statutory rate 35.0% 34.0% 34.0% State income tax effect 3.8 4.0 5.0 Amortization of excess of purchase price over net assets acquired 0.9 1.6 3.2 Other 0.8 1.5 3.3 Expense of change in estimate of deferred income tax liabilities - 1.1 - ---- ---- ---- 40.5% 42.2% 45.5% ==== ==== ====
F-10 Deferred income tax assets (liabilities) are comprised of the following at:
DECEMBER 31, ---------------------- 1996 1995 Deferred income tax assets: Acquired net operating loss of Cal Emblem $ 506 $ 653 Non-deductible accrued liabilities 747 498 Non-deductible bad debt reserve 121 179 Other -- 167 --------- --------- 1,374 1,497 --------- --------- Valuation allowance (506) (653) --------- --------- Deferred income tax liabilities: Basis of property and equipment (2,534) (2,647) Basis of inventory (1,108) (1,143) Accrual for pension costs (129) (387) Other (73) -- --------- --------- (3,844) (4,177) --------- --------- Net deferred income tax liability ($ 2,976) ($ 3,333) ========= =========
In connection with the Company's acquisition of Cal Emblem, the Company acquired a net operating loss carryforward. At December 31, 1996, the loss carryforward was $1,307,000 and expires through the year 2009. A valuation allowance has been established for the deferred tax asset related to the loss carryforward. If realized, the loss carryforward will result in a decrease in goodwill. G. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES A cash management system is utilized under which deposits are made to cover only those checks presented to the bank for payment. Checks not yet presented to the bank for payment in the amounts of $3,946,000, and $7,336,000 at December 31, 1996 and 1995, respectively, are included in accounts payable and accrued liabilities. F-11 H. LONG-TERM OBLIGATIONS Long-term obligations consisted of:
DECEMBER 31, ---------- ---------- 1996 1995 Senior Secured Notes, 13 1/2%, due 2002, less unamortized discount of $1,128,000 and $1,343,000 $ 59,372 $ 59,657 Mortgage note, 10.5%, (due in monthly installments with balloon payment in 2002) 2,414 2,469 Promissory notes, 10%, to former Cal Emblem stockholders due in annual installments through August 2000 1,684 2,245 Obligation under termination agreement payable in monthly installments through December 1, 2002, less unamortized discount of $661,000 and $848,000 1,205 1,288 Note payable, 10.125%, Pierce County, Washington (due in varying amounts through 1997) 170 570 Other 54 152 ---------- ---------- 64,899 66,381 Less current maturities of debt 934 1,169 ---------- ---------- $ 63,965 $ 65,212 ========== ==========
In November 1994, the Company issued 85,000 units, each consisting of $1,000 aggregate principal amount of 13 1/2% senior secured notes of Data Documents, Inc. due 2002 (the "Senior Notes") and common stock purchase warrants to purchase common stock of Data Documents Incorporated. Interest is due semi-annually on January 15 and July 15. The Senior Notes are guaranteed by the Company and its subsidiaries. On or after July 15, 1999, the Senior Notes are redeemable, at the option of the Company, in whole or in part at the redemption prices of 104.2% in 1999 decreasing to 100% in 2001. Upon the change of control, the Company is required to offer to repurchase all outstanding Senior Notes at 101% of the principal amount plus accrued interest to the date of redemption. The restrictions on redemption do not limit the ability of the Company to purchase Senior Notes on the open market. In November 1995, the net proceeds of the Offering were used to redeem $24 million of the Company's Senior Notes at a redemption price of 111.4%. In June 1996, the Company repurchased from the open market $500,000 of the Senior Notes at a price of 110%. The Senior Notes are collateralized by a first priority security interest in substantially all assets other than accounts receivable. The Senior Notes contain certain restrictive covenants which limit, subject to certain exceptions; the incurrence of additional debt, the payment of dividends on and redemption of stock of the Company, asset sales, consolidations, mergers or transfers of all or substantially all of the Company's assets, certain transactions with affiliates including intercompany dividends, and liens, among other things. F-12 A surety agreement for the benefit of the holders of the Pierce County, Washington debt obligation was allowed to expire in 1995 and payment of $2,030,000 principal was made. The remaining principal of $170,000 will be paid under scheduled maturities without the benefit of a surety agreement. In November 1994, the Company terminated an agreement for management, advisory and consulting services. The termination agreement is payable in monthly installments of $21,667 (increasing each January 1 by 4%) to December 1, 2002. The obligation has been recorded at its present value using a 15% discount rate over the seven year term. The Company has a revolving credit facility with a maximum credit line of the lesser of $20,000,000 or 80% of eligible accounts receivables, which are pledged as collateral. No amounts under this credit facility were outstanding at December 31, 1996 or 1995. On February 5, 1997, the Company replaced the previous revolving credit facility with a new revolving facility which expires in July, 1999. Debt covenants under this revolving credit facility require maintenance of minimum amounts of net worth. Interest under the revolving facility is paid monthly at .75% above prime and .25% per annum on the unused line available. At December 31, 1996, a contingent liability to a financial institution exists for outstanding letters of credit in the amount of $358,000. FAIR VALUE - The fair value of the Company's long-term debt is based on quoted market prices or on the current rates offered to the Company for debt of similar maturities. At December 31, 1996, the carrying amount of the Company's debt was $64,899,000 and the estimated fair value was $73,590,000. At December 31, 1995, the carrying value was $66,381,000 and estimated fair value was $71,871,000. Aggregate maturities of long-term obligations in each of the next five years are as follows: 1997 $ 934 1998 786 1999 808 2000 296 2001 352
I. PREFERRED STOCK On September 7, 1995, the Company amended its articles of incorporation to authorize issuance of 5,000,000 shares of preferred stock having a par value of $0.01 per share. None of the shares of the authorized preferred stock have been issued. The Board of Directors, without further action by the holders of common stock, may issue shares of preferred stock and may fix or alter the voting rights, redemption provisions, dividend rights, dividend rates, liquidation preferences, conversion rights and the designation of and number of shares constituting any wholly-unissued series of preferred stock. F-13 Prior to November 23, 1994, the two classes of preferred stock of the Company were entitled to quarterly dividends at the rate of $10 per annum. Dividends were cumulative, if not declared. In November 1994, all of the outstanding preferred stock was repurchased at face value. J. WARRANTS In connection with the 1994 issuance of the Senior Notes, the Company issued warrants to purchase its common stock (the "Warrants"). Each Warrant, when exercised, entitles the holder thereof to receive the number of shares of common stock as set forth on the Warrant at $.002 per share. Prior to the completion of the Offering, the Warrants were exercisable at any time on or after November 28, 1995 and unless exercised, automatically expire on July 15, 2002. The Warrants entitle the holders to purchase in the aggregate 960,344 shares of common stock, or approximately 10% of the outstanding common stock on a fully-diluted basis. During 1996, 61,233 Warrants were exercised for 691,815 shares of common stock. Also in 1994, upon the issuance of the Senior Notes, the Company canceled all previously existing common stock purchase warrants outstanding at that date and replaced them with additional Warrants to purchase in the aggregate 320,111 shares of common stock or approximately 3% of the outstanding common stock on a fully-diluted basis and which are exchangeable under the same terms as described above. All these warrants remain outstanding at December 31, 1996. Under specified conditions the warrants were redeemable for cash or Senior Notes. In 1995, the warrants became solely exchangeable for shares of common stock, and the warrants were reclassified to additional paid in capital. K. CONTINGENCIES The Company is subject to lawsuits and claims which arise out of the normal course of its business. In the opinion of management, the disposition of such claims will not have a material adverse effect on the Company's financial position or results of operations. L. LEASES Sales offices, certain manufacturing facilities, certain transportation and other equipment are leased under long-term noncancellable leases. Substantially all of the leases are net leases which require payment of property taxes, insurance and maintenance costs in addition to rental payments. At December 31, 1996, the future minimum lease payments under noncancellable operating leases with rental terms of more than one year amount to: 1997 $ 2,223 1998 1,790 1999 877 2000 380 2001 218 Later Years 812 ------- Total minimum obligation $ 6,300 =======
F-14 Rent expenses relating to all operating leases were $2,692,000, $2,537,000, and $2,328,000 for the years ended December 31, 1996, 1995 and 1994, respectively. M. EMPLOYEE BENEFIT PLANS Pension Plans -- The Company and its subsidiaries have defined benefit retirement plans for eligible salaried and hourly employees. Benefits are based on years of credited service and average compensation for each year of service. For 1996, 1995 and 1994, the Company's funding policy is to contribute the minimum amount deductible for federal income tax purposes. Plan assets are invested in common trust funds administered by a corporate trustee. Net periodic pension cost of the defined benefit plans includes the following components:
YEARS ENDED DECEMBER 31, ----------------------------- 1996 1995 1994 Service cost $ 690 $ 571 $ 632 Interest cost on projected benefit obligation 1,015 881 800 Return on plan assets (1,906) (1,911) 180 Net amortization and deferral 866 892 (1,206) ------- ------- ------- Net periodic pension cost $ 665 $ 433 $ 406 ======= ======= =======
The following table sets forth the plan's funded status and the amount recognized in the Company's balance sheet:
DECEMBER 31, -------------------------- 1996 1995 Actuarial present value of benefit obligations: Vested benefit obligation $ 12,592 $ 11,494 Nonvested benefit obligation 363 360 ----------- ----------- Accumulated benefit obligation $ 12,955 $ 11,854 =========== =========== Projected benefit obligation for services rendered to date $ 15,069 $ 13,690 Plan assets at fair value 14,170 11,734 ----------- ----------- Plan assets less than projected benefit obligation (899) (1,956) Unrecognized net loss 1,276 2,191 Unrecognized prior service cost (48) (74) ----------- ----------- Prepaid pension cost $ 329 $ 161 =========== ===========
The projected benefit obligation is determined using a weighted average discount rate of 7.5% for 1996 and 1995, and a 3.5% rate of increase in future compensation levels for 1996 and 1995. The Company and its subsidiaries are also participants in multi-employer pension plans covering union employees. Costs associated with these plans aggregate approximately $68,000, $66,000 and $62,000 for 1996, 1995 and 1994, respectively. F-15 SAVINGS PLAN - The Company has a Salary Deferral Savings Plan which permits employees to make salary reduction contributions from 1% to 18%. The Plan is a defined contribution pension plan which became effective July 1, 1988. The administrative expenses related to the Plan are paid by the Company. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS - The Company accounts for postretirement benefits in accordance with SFAS No. 106. The Company accrues the estimated cost of retiree benefit payments during the years the employee provides services. The Company has elected to recognize the initial obligation of approximately $1,637,000 over a period of twenty years. Certain medical and dental benefits are provided to qualifying employees. The following table sets forth the medical and dental plans' funded status: Accumulated postretirement benefits obligation:
DECEMBER 31, -------------------------- 1996 1995 Retirees $ 605 $ 741 Fully eligible plan participants 1,011 983 ----------- ----------- Accumulated postretirement benefit obligations in excess of plan assets (1,616) (1,724) Unrecognized transition obligation (included in other assets) 1,310 1,391 Unrecognized net gain (265) (81) ----------- ----------- Accrued postretirement benefit cost $ (571) $ (414) =========== ===========
Net postretirement benefit cost consisted of the following components:
YEARS ENDED DECEMBER 31, --------------------------------- 1996 1995 1994 Service cost of benefits earned $ 127 $ 87 $ 115 Interest cost on accumulated postretirement benefit obligation 129 131 116 Amortization of transition obligation 81 82 81 --------- --------- --------- Net postretirement benefit cost $ 337 $ 300 $ 312 ========= ========= =========
The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation as of January 1, 1993 was 12% for 1993, decreasing gradually to a 6% annual growth rate after 12 years and remaining at a 6% annual rate thereafter. A one-percentage point increase in the assumed health care cost trend rate would increase the accumulated postretirement benefit obligation by approximately $218,000 as of December 31, 1996 and would increase net postretirement health care cost by $10,000 for the year ended December 31, 1996. The assumed discount rate used in determining the accumulated postretirement benefit obligation was 7.5% for the years ended December 31, 1996 and 1995. F-16 N. STOCK COMPENSATION PLANS The Company accounts for its stock-based compensation under the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, which utilizes the intrinsic value method. Compensation cost related to stock-based compensation was $0 and $156,000 for the years ended December 31, 1996 and 1995, respectively. The Board of Directors of the Company adopted the 1995 Employee Stock Incentive Plan (the "Plan") pursuant to which the Board may award options to purchase, in aggregate, 500,000 shares of common stock. Options vest and become exercisable over a one to three year period after date of grant and generally expire no later than ten years from the date of grant. The exercise price per share is no less than the fair market value on the date each option is granted. In connection with the Company's acquisition of Cal Emblem in August, 1995, the Company granted options for 195,815 shares to a former stockholder of Cal Emblem at the initial public offering price of $9.00. During the second quarter of 1995, the Company recorded a noncash expense of $156,000 relating to the sale of common shares to a director and an employee. The amount represents the excess of the estimated fair value of the common shares over consideration received. Such shares have been considered outstanding for all periods presented in the computation of earnings per share. If compensation cost for the Company's stock-based compensation plan had been determined based on the fair value at the grant dates for awards under the plan consistent with the method of SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net income (loss) and earnings (loss) per share would have been reduced to the pro forma amounts indicated below:
1996 1995 1994 ---- ---- ---- Net Income (loss) As reported $ 10,370 $ 1,354 $ (963) Pro forma $ 10,190 $ 833 $ (963) Primary earnings (loss) per share As reported $ 1.04 $ 0.21 $ (0.17) Pro forma $ 1.02 $ 0.14 $ (0.17) Fully Diluted earnings (loss) per share As reported $ 1.04 $ 0.21 $ (0.06) Pro forma $ 1.02 $ 0.14 $ (0.06)
The fair market value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996 and 1995: dividend yield of 0.0 percent, expected volatility of 39.9 percent, risk-free interest rates of 6.3 percent and expected lives of 5 years for all the years presented. F-17 A summary of the status of the Company's stock option plans as of December 31, 1996 and 1995 and changes during the years ending on those dates is presented below:
1996 1995 --------------------------------- --------------------------------- Weighted-Average Weighted-Average Fixed Options Shares Exercise Price Shares Exercise Price ------------- ------ -------------- ------ -------------- Outstanding at beginning of year 324,615 $ 9.03 0 N/A Granted 187,650 $ 10.44 324,615 $ 9.03 Exercised 0 N/A 0 N/A Forfeited (5,000) $ 10.43 0 N/A ------- ------- Outstanding at end-of-year 507,265 $ 9.54 324,615 $ 9.03 ======= ======= Options exerciseable at year-end 258,082 195,815 ======= ======= Weighted-average fair value of options granted during the year $ 4.68 $ 4.05
The following table summarizes information about stock options outstanding at December 31, 1996:
Options Outstanding Options Exerciseable -------------------------------------------------------------- --------------------------------------- Range of Number Weighted-Average Number Exercise Outstanding at Remaining Weighted-Average Exerciseable at Weighted-Average Prices 12/31/96 Contractual Life Exercise Price 12/31/96 Exercise Price ------------------- -------- ---------------- -------------- -------- -------------- $ 9.00 - $ 9.99 332,615 6.8 years $ 9.06 258,082 $ 9.01 $ 10.00 - $ 10.99 100,000 9.8 years $ 10.00 0 N/A $ 11.00 - $ 11.99 74,650 9.7 years $ 11.07 0 N/A ------- ------- $ 9.00 - $ 11.99 507,265 7.8 years $ 9.54 258,082 $ 9.01 ======= =======
F-18 O. RELATED PARTY TRANSACTIONS In February 1988, the Company entered into an agreement for management, advisory and consulting services through 1998 with Raebarn Corporation whose principals are common stockholders and/or directors of the Company. The agreement provided in the event that the Company, at any time during the term of the agreement, engaged in certain transactions, Raebarn Corporation had the right to act as the Company's financial advisors. Payments to Raebarn totaled $250,000 in 1994. In November 1994, the Company terminated its agreement with Raebarn in exchange for monthly payments to Raebarn through December 2002 the present value of which has been accrued (See Note H). P. EXTRAORDINARY ITEMS In June 1996, the Company incurred an extraordinary charge of $54,000, net of income tax benefit of $34,000, for the write-off of unamortized deferred financing costs, unamortized original issue discount, and certain premium on reacquisition associated with the purchase and retirement of $500,000 of Senior Notes. In November 1995, the Company incurred an extraordinary charge of $2,921,000 net of income tax benefit of $1,790,000, for the write-off of unamortized deferred financing costs, unamortized original issue discount and prepayment fees associated with the prepayment of $24,000,000 of Senior Notes. In November 1994, the Company incurred an extraordinary charge of $2,795,000, net of income tax benefit of $1,787,000, for the write-off of unamortized deferred financing costs, unamortized original issue discount and certain termination fees and costs associated with the early termination of debt. Q. SUMMARIZED FINANCIAL INFORMATION Following is the summarized financial information of Data Documents, Inc. and subsidiaries:
DECEMBER 31, --------------------- 1996 1995 Current assets $81,487 $71,429 Noncurrent assets $52,490 $54,296 Current liabilities $28,042 $28,413 Noncurrent liabilities $68,259 $69,888
YEARS ENDED DECEMBER 31, ------------------------------------- 1996 1995 1994 Net sales $246,496 $242,238 $193,626 Gross profit $ 65,438 $ 56,227 $ 44,829 Net income (loss) $ 10,370 $ 1,354 $ (963)
Following is the summarized combined financial information of PBF Washington, Inc. and Cal Emblem Labels, Inc. (wholly-owned subsidiaries of Data Documents, Inc.), guarantors of the Senior Notes. The information presented for Cal Emblem Labels, Inc. is as of December 31, 1996 and 1995 and for the year ended December 31, 1996 and from August 25, 1995 (date of acquisition) through December 31, 1995: F-19
December 31, ---------------------------- 1996 1995 Current assets $ 6,849 $ 7,948 Noncurrent assets $ 8,813 $ 10,581 Current liabilities $ 7,474 $ 11,301 Noncurrent liabilities $ 883 $ 1,140
Years Ended December 31, ------------------------------------ 1996 1995 1994 Net sales $ 33,438 $ 23,455 $ 14,486 Gross profit $ 6,854 $ 4,204 $ 2,394 Net income $ 1,075 $ 608 $ 217
F-20 CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. CORPORATE EXPRESS, INC. (Registrant) Date: July 23, 1998 /s/ Sam R. Leno ----------------------------------- By: Sam R. Leno Title: Chief Financial Officer and Executive Vice President -----END PRIVACY-ENHANCED MESSAGE-----