-----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, R6EOKjkvP8b7Jevvppxkfj6P5+twQERi8N+221r5Rgz0gnLQ0py6608H0Uv5IDuk Mln0t+XDoblhI92Sy4fDmQ== 0000927356-98-001679.txt : 19981026 0000927356-98-001679.hdr.sgml : 19981026 ACCESSION NUMBER: 0000927356-98-001679 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19981023 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: 10-K/A SEC ACT: SEC FILE NUMBER: 000-24642 FILM NUMBER: 98729984 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 10-K/A 1 FORM 10-K/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A [ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended ____ OR [ X ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from March 2, 1997 to January 31, 1998 Commission file number 0-24642 CORPORATE EXPRESS, INC. (Exact name of registrant as specified in its charter) Colorado 84-0978360 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1 Environmental Way 80021 Broomfield, Colorado (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (303) 664-2000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.0002 per share (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant at April 23, 1998 was $1,039,452,708. The number of shares outstanding of the registrant's Common Stock as of April 23, 1998 was 107,932,725. Documents Incorporated by Reference Portions of the following documents are incorporated by reference: Part III - The Registrant's definitive Proxy Statement for its 1998 Annual Meeting of Shareholders, to be filed not later than 120 days after the end of the fiscal year. Corporate Express, Inc. Annual Report on Form 10-K/A For the transition period from March 2, 1997 to January 31, 1998 Table of Contents Item Page Number Number - ------ ------ PART I 1. Business.............................................................1 2. Properties...........................................................8 3. Legal Proceedings....................................................8 4. Submission of Matters to a Vote of Security Holders..................8 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters..............................................................9 6. Selected Consolidated Financial Data.................................9 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...............................................11 7A. Quantitative and Qualitative Disclosure About Market Risk...........11 8. Financial Statements and Supplementary Data.........................19 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................73 PART III 10. Directors and Executive Officers of the Registrant..................73 11. Executive Compensation.............................................73 12. Security Ownership of Certain Beneficial Owners and Management......73 13. Certain Relationships and Related Transactions......................73 PART IV 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K...73 15. Signatures..........................................................77 i PART I ------ ITEM 1. BUSINESS OVERVIEW Corporate Express, Inc. ("Corporate Express" or the "Company") is a leading global provider of essential goods and services to corporations and organizations which value innovative procurement solutions. Since 1991, the Company has grown internally and through acquisitions from a regional operation in Colorado to a global enterprise with locations throughout the United States and various international markets. The Company believes it has developed a substantially different model of non-store retailing, defining itself as a "Corporate Supplier" capable of providing a broad assortment of non-production goods and services to customers, while reducing their total procurement costs and providing them with a high level of customer service. The Company's current product and service offering includes 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. Corporate Express markets to existing and prospective customers through a direct sales force and delivers its products and services utilizing approximately 700 world-wide locations including 92 distribution centers and a fleet of over 10,000 owned or contracted vehicles. The Company's target customers, which value innovative procurement solutions, are typically large corporations and organizations with over 100 employees. The Company believes that these large corporations increasingly seek to reduce the cost of procuring non-production goods and services while decreasing the time and effort spent managing functions that are not considered their core competencies. To that end, corporations seek to reduce their number of suppliers in order to eliminate the internal costs associated with multiple invoices, multiple deliveries, complex and varied ordering procedures, uneven service levels and inconsistent product availability. Many large corporations operate from multiple locations and can benefit from selecting suppliers who can service them in many of their locations nationally and internationally. THE CORPORATE SUPPLIER STRATEGY The Company's Corporate Supplier strategy is designed to reduce its customers' aggregate costs (especially their internal operating costs) and effort necessary to manage the procurement of essential goods and services. The Company believes that its wide assortment of non-production goods and services, as well as its broad geographic coverage and delivery capabilities, allow the Company to effectively respond to a broad range of customer needs. The Company also believes that its customers value the high level of service the Company provides through its account relationship managers, electronic commerce solutions, same-day delivery, customized pricing, broad product assortment, customized reporting and array of product catalogs. The Company seeks to continually reduce its merchandise and operating costs enabling it to offer its customers competitive prices. By purchasing most of its products directly from manufacturers in large volume and limiting the number of manufacturers represented in its In-Stock Catalog and other specialty catalogs, the Company is able to obtain increasing volume discounts and allowances from its vendors. The Company believes its information systems represent a key strategic advantage differentiating the Company from its competitors while permitting it to achieve cost savings, provide unique capabilities to its customers, and centrally manage its operations. The Company expects to continue making improvements and enhancements to the capabilities of its information systems. Such investments are expected to enable the Company to continue to differentiate its product and service offerings, while increasing its operating margins. -1- The Company intends to continue to grow in the future, primarily through internal growth, coupled with selective strategic acquisitions. The Company plans to increase sales to existing customers by cross-selling its expanded product and service offerings and by developing existing customers into multi- regional, national or international accounts. The Company seeks to attract new customers, including national and international accounts, through its marketing efforts and the use of its direct sales force. The Company continues to expand its product depth while it expands its geographic coverage outside the United States and its sales efforts in all geographic regions. INDUSTRY OVERVIEW In many non-production goods and services business sectors, including office products and same-day local delivery, competition is fragmented and includes many small local or regional providers. The Company believes that the desire of large corporations to reduce their procurement costs by decreasing their number of suppliers to a small group of reliable and cost-effective partners will continue to cause the consolidation of many currently fragmented product segments, as well as consolidation between separate sectors where the key differentiation among suppliers will be their relative ability to fulfill customer needs, rather than their ability to supply an individual product or service. The Company currently operates in two main product sector categories: product distribution (which includes office products, computer supplies, forms production and management, desktop software, promotional products and cleaning and service supplies) and services (primarily same-day delivery), with the majority of its revenue and cash flow attributable to the product distribution business. Product Distribution The office products distribution industry in the U.S. is consolidating rapidly and undergoing other significant changes. As a result of consolidation, the number of independent, midsize office products contract distribution companies (those with annual sales of more than $15 million) has declined significantly. Large companies (including the Company) serving a broad range of customers have acquired many of these smaller businesses. As the office products industry continues to consolidate, the Company believes that many of the remaining smaller office products distribution companies will be unable to compete due, in part, to their inability to purchase products at favorable prices or provide all of the services customers require. The Company expects that these independent businesses will be acquired by larger companies or will close. The office products industry consists primarily of companies that operate in one or more of three broad sales channels: the contract distribution channel, the direct marketing channel and the retail channel. Contract distributors typically serve large and medium-sized business customers through the use of a product catalog and a direct sales organization and typically stock certain products in distribution centers and deliver such products to customers the next business day. The major contract stationers carry a significant proportion of their merchandise in-stock, relying only upon wholesaler intermediaries for inventory backup and increased product breadth, while smaller contract distributors carry a much smaller portion of their merchandise in stock. Direct marketers of office products typically target small business customers and home offices. While their procurement and order fulfillment functions are similar to contract stationers, direct marketers rely almost exclusively on catalogs and other direct marketing programs, rather than direct sales forces, to sell their products, and generally use third parties to deliver such products. Office product retailers typically serve smaller businesses, home office and individuals. Over the last decade, this retail channel has undergone significant change, primarily as the result of the emergence of office products superstores. The Company believes that every major metropolitan area in the U.S. is now served by at least one office products superstore. -2- Also included in the Company's product distribution sector are desktop software, forms production and management, advertising specialties, promotional products and cleaning and service supplies. Companies in the desktop software industry provide its corporate clients with a wide array of personal computer and network software titles on a shrink-wrapped and volume license basis. Net revenue includes the sale of shrink-wrapped product and the sale of licenses for the use of software produced by major software publishers. The Company's other product distribution business lines are also large markets served by many large and small competitors. Services The services segment consists primarily of same-day delivery and logistics services along with certain call center services. The same-day delivery industry offers a variety of customized distribution services for corporate customers with time-sensitive pickup and delivery requirements. Services include regularly scheduled core replenishment deliveries, individual special orders and door-to-door courier deliveries. Through both ground and air divisions, the Company provides same day delivery fulfillment and next flight out services to its corporate clients. PRODUCTS, SERVICES AND REGIONS OF OPERATION The Company provides a broad range of non-production goods and services to large corporations throughout North America as well as Europe and the Southern Pacific. The Company's product and service offerings include office products, computer supplies, forms production and management, desktop software, promotional products, cleaning and service supplies and services (primarily same-day delivery). Name brands offered by the Company include 3M, Microsoft and Hewlett-Packard, as well as the Company's own "EXP" private label. The approximate percentages of the Company's net sales by product and service category and by geographical segments are as follows: Fiscal Year ----------------------------- 1997 1996 1995 1994 ----- ----- ----- ----- Industry segments: Product distribution (1) 79% 76% 82% 81% Delivery services 21% 24% 18% 19% Geographical segments: Domestic (U.S. only) 81% 82% 87% 100% International 19% 18% 13% 0% (1) Includes office, computer and janitorial supplies, desktop software, promotional products, furniture and forms production and management. MERCHANDISING STRATEGY The Company's domestic merchandising strategy is based primarily on the Company's proprietary, full-color In-Stock Catalog. This catalog provides a comprehensive selection and variety of more than 5,000 of the best-selling items in the core categories of office and computer supplies which the Company regularly maintains in inventory in its regional warehouses for next-day delivery. The Company is currently expanding its core assortment of products featured in the In-Stock Catalog to include certain additional products. This merchandising strategy differs from that of traditional contract stationers which typically provide their customers with wholesaler-produced catalogs and maintain only a small portion of that product assortment on hand. The Company has introduced the In-Stock Catalog in all of its United States regions and has introduced similar country-specific versions of the In-Stock -3- Catalog in Canada, Australia and the United Kingdom. Substantially all products featured in the In-Stock Catalog are purchased by the Company directly from the manufacturer, eliminating the wholesaler's mark-up. A broad selection of specialty computer and imaging supplies, computer software, furniture and other items are featured in various Company specialty catalogs. The number of items found in the In-Stock Catalog is comparable to that found in a typical office products superstore, although the merchandise mix differs substantially. Products are selected for the In-Stock Catalog utilizing computerized sales trend analyses which determine the best-selling items and needs of the large corporate customer. The In-Stock Catalog is updated annually to account for new sales trends, new product introductions and changes in manufacturers' list prices. The In-Stock Catalog includes a full-color photograph of each item, a narrative product description that emphasizes the particular benefits and features of each item and a bar code to permit scanning order entry. In addition to the In-Stock Catalog, the Company produces supplementary specialty catalogs for complementary products and services, including additional computer and imaging products, office furniture, promotional products and advertising specialties. The Company also offers various electronic versions of the In-Stock Catalog complete with pictures and custom pricing. DISTRIBUTION FACILITIES The Company's distribution network consists of 92 warehouses that maintain significant inventory for resale and 604 distribution breakpoints and satellite sales offices which extend the Company's geographic coverage. Corporate Express has eliminated, and plans to continue to eliminate, redundant facilities in the United States and abroad. In its office products business, the Company typically operates from a single regional distribution center which generally supports multiple distribution breakpoints and satellite sales offices. Items stocked in these regional office products' distribution centers generally consist of the most commonly ordered items for which customers generally demand next-day delivery through Company vehicles. PROPRIETARY COMPUTER SOFTWARE APPLICATIONS Corporate Express continues to make substantial investments in the development and enhancement of its proprietary computer software applications. During the eleven months ended January 31, 1998 ("fiscal 1997"), the Company completed the development and implementation of its ISIS computer software for its national account customers and successfully launched the internet version of E-Way, its electronic commerce, ordering and fulfillment system. The integrated multi-divisional version of the ISIS software continues to be developed and enhanced and is currently in beta test mode at two operating divisions. Key features of the ISIS system are the use of three-tier client server architecture that allows customers and suppliers to better communicate with Corporate Express, object oriented design techniques and a relational database designed to handle customer inquiry, data warehouse and management information applications. Through the implementation of these enhanced systems, Corporate Express plans to make its products and services available to a broader range of customers through its Corporate Supplier business model and to further customize customer services and account information while lowering the customer's overall procurement cost. In addition, the new systems are expected to allow Corporate Express to more effectively integrate acquisitions and streamline operations by providing greater electronic access to information between the Company, its customers and its suppliers. There can be no assurance that these objectives will be attained. The Company anticipates that ongoing enhancements and modifications to its computer systems will continue to be made in the future. Such modifications may cause disruptions in operations, delay the integration of acquisitions, or cost more to design, implement or operate than currently budgeted. Any such disruptions, delays or costs could have a material adverse effect on the Company's operations and financial performance. -4- MARKETING The Company markets its various products and services directly to individual customers by designing and offering customized merchandise and service packages tailored to each customer's specific needs. The Company generally offers discounts from the manufacturer's suggested list prices on many products. Prices for some high volume items are often established by competitive bidding. A substantial portion of the Company's revenues from its service segment are derived from customers who have entered into contracts with the Company. The Company has a broad customer base and believes that no single customer accounted for more than one percent of total sales during fiscal 1997. The Company markets its products and services through a combination of national account sales teams, a local sales force, and account managers. The national account sales teams take primary responsibility for maintaining and increasing sales of the Company's wide array of products and services to multi- location customers. These marketing efforts are supported through proprietary information technology resources dedicated to the national account teams. The Company's local sales force is generally commission-based and is organized within each of the Company's major product and service categories. The Company believes that this structure maximizes the productivity as well as the product and service knowledge of its sales force. Each customer is assigned an account manager, who maintains regular contact with the customer. Account managers share in the responsibility of maintaining customer satisfaction, resolving any potential customer issues and increasing the Company's sales to each account. Account managers are also assigned a list of prospective customers for whom the account manager takes responsibility in directing all marketing efforts. Additional responsibilities of the account managers include designing and implementing customized merchandise and service packages for each of their accounts as well as responding to all special service requests. STRUCTURE AND INTEGRATION OF ACQUISITIONS The Company has historically grown through numerous acquisitions of small office products and service companies who generally have annual sales of less than $30 million. The Company intends to continue to grow in the future through internal growth coupled with selective strategic acquisitions. The Company plans to increase sales to existing customers by cross-selling its expanded product and service offerings and developing existing customers into multi- regional, national or international accounts. The Company seeks to attract new customers, including national and international accounts, through the marketing efforts of its direct sales force. Additionally, the Company generally seeks to increase the sales, profitability and asset productivity of its acquisitions by combining them with the Company's existing operations, implementing the Company's business model and eliminating redundant facilities. Integration of acquisitions is often a complex process which may entail material nonrecurring expenditures, including facility closing costs, warehouse consolidation expenses, asset write downs and severance payments. Integration of acquisitions generally involves the following elements: Elimination of Redundant Facilities and Services. In cases where acquired companies have facilities, systems and administrative functions in the Company's existing markets, these operations are generally eliminated or consolidated with the Company's existing operations. Upgrading of Facilities. In addition to eliminating redundant facilities, the Company has undertaken a program to upgrade certain of its existing facilities to enable these facilities to handle higher sales volumes resulting from its internal growth and acquisition activity. These upgrades include modernization of equipment and computer systems, phone system and wide area network standardization and improved material handling including a reconfiguration of inventory within the warehouse. The Company will also, where appropriate, construct or lease new distribution facilities into which existing, outdated facilities will be combined. -5- Consolidation of Purchasing Power. As part of its integration of acquisitions, the Company takes advantage of its volume purchasing power and seeks to negotiate favorable prices and terms from suppliers. Implementation of Proprietary Computer Software. Acquired product distribution companies are generally incorporated into the Company's proprietary computer software environment, including EDI, common master item files, national accounts software and customer ordering, inventory management software, etc. Certain elements of these implementations will be timed to coincide with introduction of the Company's next generation of computer software (see "Proprietary Computer Software Applications" above). The consolidation, centralization and integration of widely dispersed businesses involve a number of special risks, including adverse short-term effects on the Company's reported operating results, the diversion of management's attention, the dependence on retention, hiring and training key personnel, the amortization of acquired intangible assets and risks associated with unanticipated problems or legal liabilities, some or all of which could have a material adverse effect on the Company's operations and financial performance. INTERNATIONAL ACQUISITIONS The Company has made acquisitions and established operations in Canada, Australia, New Zealand, the United Kingdom, Germany, France, Italy, Ireland and Switzerland, and the Company may enter additional international markets in the future. The Company has typically retained existing management and information systems in its international acquisitions. The Company has and will continue to implement appropriate aspects of the Corporate Supplier business model in its international operations, including creating in-stock catalogs, consolidating warehouses, upgrading information systems, acquiring companies offering complementary products and services, while focusing on larger customers and developing national and international accounts. Portions of the Corporate Supplier business model have been implemented in Canada, Australia and the United Kingdom. EXPANSION OF PRODUCT AND SERVICE OFFERINGS The Company believes that its domestic and international network of centrally-managed distribution centers, computer systems and direct sales force provides the infrastructure to efficiently supply corporate customers with a broad range of non-production goods and services. To capitalize on this competitive advantage, the Company has added through acquisitions the following major product and service categories since 1994: forms printing and management, same-day local delivery services, distribution logistics management, computer and imaging supplies, desktop software, advertising specialties, janitorial and cleaning supplies, business forms and pressure-sensitive labels. The Company may add additional product and service categories through acquisitions or product line expansion. Following the acquisition of a company whose product and service offerings are complementary to the Company's existing offerings, the Company's initial integration efforts are focused on cross selling its products and services and those of the acquired operations to each respective customer base. COMPETITION The Company operates in a highly competitive environment. The Company's principal competitors in North America for office supplies and computer products include both regional and national contract stationers (including the contract stationer operations of office products superstores), large direct resellers, privately-held companies that generally operate in only one location, and distributors of business software and supplies for personal computers. In certain of its business segments the Company may have various other large and small competitors. In Europe and Australia, the Company's competitors include primarily local and regional contract stationers and, to a limited extent, national and multi-national contract stationers. In the delivery services sector the -6- Company has numerous competitors in each market, certain of which have service capabilities which are similar to the Company's and others which provide different types or levels of service. Each of the Company's major product and service categories are a part of fragmented industries which are currently experiencing a trend toward consolidation. Although the Company believes its pricing is competitive with its competitors, the Company also seeks to differentiate itself from its competitors in each of its major product and service categories through its systems, product assortment, service offerings and breadth of capabilities. Certain of the Company's competitors have greater financial resources than the Company. However, the Company believes that its Corporate Supplier business model differentiates the Company from its competitors by offering, through a single source, a unique selection of products and services for large corporate customers. EMPLOYEES As of April 1, 1998, the Company had approximately 27,300 full-time employees, 6,900 of whom were primarily employed in management and administration, 15,000 in regional warehouse, delivery and distribution operations and 5,400 in sales and marketing, order processing and customer service. Approximately 87% of these employees are in the U.S., 6% are in Europe, 3% are in Canada and 4% are in the Southern Pacific. As of April 1, 1998, approximately 391 of the Company's employees were members of labor unions. ENVIRONMENTAL MATTERS The Company is subject to federal, state and local laws, regulations and ordinances that (i) govern activities or operations that may have adverse environmental effects, such as discharges to air and water as well as handling and disposal practices for solid and hazardous wastes, or (ii) impose liability for the costs of cleaning up, and certain damages resulting from, sites of past spills, disposals or other releases of hazardous substances. Certain of the Company's subsidiaries operate printing facilities which may generate, or may have generated in the past, hazardous wastes, and the Company operates a fleet of vehicles, the maintenance or fueling of which may generate hazardous waste. The Company is currently not aware of any environmental conditions relating to present or past waste generation at or from these facilities, or any other of the Company's facilities or operations, that would be likely to have a material adverse effect on the financial condition or results of operations of the Company. However, there can be no assurance that environmental liabilities in the future will not have a material adverse effect on the financial condition or results of operations of the Company. IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS Some of the information presented in this report constitutes forward- looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the Company believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results of the Company's operations will not differ materially from its expectations. Factors which could cause actual results to differ from expectations include, among others, uncertainties related to integrating recent acquisitions, uncertainties relating to operating the Company's new product and service offerings, uncertainties related to legislation with respect to independent contract drivers, uncertainties related to future domestic and international acquisitions, uncertainties related to the Company's systems and proprietary software, uncertainty of whether the Company's activities will continue to be successful, and uncertainties related to competition and to the demand for the products and services offered by the Company. -7- ITEM 2. PROPERTIES As of January 31, 1998, Corporate Express owned 46 facilities and leased 650 facilities. Of the 696 facilities, one was the corporate headquarters in Broomfield, Colorado, 92 were product distribution warehouses and contiguous administrative offices and 603 were separate sales or administrative offices, delivery facilities or breakpoints. The Company's principal properties are summarized as follows: Sales, Service Distribution & Corporate Total Centers Facilities Facilities ------------ ----------- -------------- United States 51 554 605 Australia 8 3 11 New Zealand 6 --- 6 Canada 6 10 16 United Kingdom 5 17 22 France 1 1 2 Italy 3 4 7 Switzerland 2 --- 2 Ireland 1 --- 1 Germany 9 15 24 -- --- --- Total 92 604 696 == === === The Company periodically evaluates the location and efficiency of its facilities to maximize customer satisfaction and increase economies of scale. The Company plans to eliminate redundant facilities such that it typically will operate office and computer supply product distribution from a single regional warehouse with satellite sales offices and distribution breakpoints in each of its regions. The Company also may close, consolidate or relocate regional warehouses, satellite sales offices and distribution breakpoints from time to time. ITEM 3. LEGAL PROCEEDINGS The Company is involved in routine legal proceedings incidental to the conduct of its business. Management believes that none of these legal proceedings will have a material adverse effect on the financial condition or results of operations of the Company. The Company maintains general liability and business interruption insurance coverage in amounts which it believes to be adequate. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Since the Company's initial public offering of its Common Stock in September 1994, the Company's Common Stock has traded on the Nasdaq National Market under the symbol "CEXP." The following table sets -8- forth, for the fiscal quarters indicated, the high and low closing sale prices for the Common Stock, as reported by the Nasdaq National Market, and reflect prior share dividends: High Low ------ ------ Fiscal 1995 First Quarter $13.33 $10.22 Second Quarter 17.17 12.67 Third Quarter 19.92 13.33 Fourth Quarter 21.09 15.42 Fiscal 1996 First Quarter 28.17 19.25 Second Quarter 30.54 21.83 Third Quarter 26.08 18.67 Fourth Quarter 23.75 16.63 Fiscal 1997 First Quarter 18.38 8.38 Second Quarter 17.88 12.63 Third Quarter 22.06 14.06 Fourth Quarter (two-month period ending 1/31/98) 16.75 8.00 As of April 23, 1998 the Company's Common Stock was held by 818 holders of record. The Company has never paid a cash dividend on its Common Stock. The Company does not anticipate paying any cash dividends on its Common Stock in the foreseeable future because it intends to retain its earnings to finance the expansion of its business and for general corporate purposes. Any payment of future dividends will be at the discretion of the Company's Board of Directors and will depend upon, among other things, the Company's earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions with respect to the payment of dividends, and other relevant factors. The Company's $1,000,000,000 Secured Credit Facility (the "Senior Secured Credit Facility") prohibits the distribution of dividends without the prior written consent of the lenders and the Indenture governing the 9 1/8% Senior Subordinated Notes due 2004 (the "Senior Notes") 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. During fiscal 1997, in connection with certain business acquisitions, the Company issued 8,233 shares of Common Stock to former shareholders of the acquired companies in exchange for such shareholders' shares of capital stock. All of the issuances of Common Stock by the Company during fiscal 1997 were made pursuant to exemptions from registration under Section 4(2) of the Securities Act of 1933, as amended. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data for fiscal 1997 (eleven months ended January 31, 1998), 1996 (twelve months ended March 1, 1997), 1995 (twelve months ended March 2, 1996), and 1994 (twelve months ended February 25, 1995) have been derived from the Company's consolidated financial statements which have been audited by independent auditors. The selected consolidated financial data for the eleven months ended February 1, 1997 and fiscal 1993 and 1992 is derived from unaudited consolidated financial statements. The unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations for these periods. -9- The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of the Company.
Eleven Months Ended --------------------------- January 31, February 1, Fiscal Year --------------------------------------------------- 1998 1997 1996 1995 1994 1993 ------------ ------------ ----------- ----------- ---------- ---------- (in thousands, except per share data) Statements of Operations Data:(1) Net sales $3,573,311 $2,911,189 $3,196,056 $1,890,639 $1,145,151 $520,956 Cost of sales (2) 2,733,308 2,205,359 2,417,746 1,417,366 855,361 402,142 Merger related inventory provisions (3) --- - --- 5,952 --- 1,146 ---------- ---------- ---------- ---------- ---------- -------- Gross profit 840,003 705,830 778,310 467,321 289,790 117,668 Warehouse operating and selling expenses 605,243 508,676 562,879 342,581 219,213 97,054 Corporate general and administrative expenses 105,055 87,793 95,101 49,742 29,624 13,063 Merger and other nonrecurring charges (4) 14,890 19,841 19,840 36,838 --- 1,928 ---------- ---------- ---------- ---------- ---------- -------- Operating profit 114,815 89,520 100,490 38,160 40,953 5,623 Interest expense, net 38,115 24,550 26,949 17,968 16,915 5,014 Other income (expense) 842 152 244 1,786 562 (104) ---------- ---------- ---------- ---------- ---------- -------- Income (loss) before income taxes 77,542 65,122 73,785 21,978 24,600 505 Income tax expense 34,457 30,728 33,649 13,766 8,294 2,316 ---------- ---------- ---------- ---------- ---------- -------- Income (loss) before minority interest 43,085 34,394 40,136 8,212 16,306 (1,811) Minority interest (income) expense (1,319) (1,314) (1,860) 1,436 69 152 ---------- ---------- ---------- ---------- ---------- -------- Income (loss) from continuing operations 44,404 35,708 41,996 6,776 16,237 (1,963) Loss from discontinued operations (5) --- --- --- 1,225 327 712 ---------- ---------- ---------- ---------- ---------- -------- Income (loss) before extraordinary item 44,404 35,708 41,996 5,551 15,910 (2,675) Extraordinary item (6) --- --- --- --- 586 (1,169) ---------- ---------- ---------- ---------- ---------- -------- Net income (loss) $ 44,404 $ 35,708 $ 41,996 $ 5,551 $ 16,496 $ (3,844) ========== ========== ========== ========== ========== ======== Pro forma net income (loss) (7) $ 44,404 $ 33,993 $ 40,281 $ 5,140 $ 15,769 $ (5,124) ========== ========== ========== ========== ========== ======== Pro forma net income (loss) per share Basic: (8) Continuing operations $0.34 $0.28 $0.33 $ 0.06 $ 0.20 $ (0.10) Discontinued operations -- -- -- (0.01) 0.00 (0.02) Extraordinary item -- -- -- -- 0.00 (0.02) ---------- ---------- ---------- ---------- ---------- -------- Net income (loss) $0.34 $0.28 $0.33 $ 0.05 $ 0.20 $ (0.14) ========== ========== ========== ========== ========== ======== Pro forma net income (loss) per share Diluted: (8) Continuing operations $0.32 $0.26 $0.31 $ 0.06 $ 0.19 $ (0.10) Discontinued operations -- -- -- (0.01) 0.00 (0.02) Extraordinary item -- -- -- -- 0.00 (0.02) ---------- ---------- ---------- ---------- ---------- -------- Net income (loss) $0.32 $0.26 $0.31 $ 0.05 $ 0.19 $ (0.14) ========== ========== ========== ========== ========== ======== Balance Sheet Data: (1) Working capital $ 517,476 $ 360,619 $ 393,653 $ 253,693 $ 166,421 $ 96,880 Total assets 2,349,659 1,816,434 1,843,977 1,023,365 645,309 446,189 Long-term debt and capital lease 763,243 608,680 633,250 163,399 188,340 177,523 obligations Shareholders' equity and redeemable 932,433 667,006 693,607 521,776 259,325 116,363 preferred (9) Weighted average common shares outstanding: Basic 121,612 121,612 121,901 104,162 75,400 47,740 Diluted 137,858 129,749 130,029 110,408 79,026 47,740 1992 -------- Statements of Operations Data:(1) Net sales $420,030 Cost of sales (2) 323,922 Merger related inventory provisions (3) --- -------- Gross profit 96,108 Warehouse operating and selling expenses 76,056 Corporate general and administrative expenses 12,408 Merger and other nonrecurring charges (4) 2,592 -------- Operating profit 5,052 Interest expense, net 4,972 Other income (expense) (993) -------- Income (loss) before income taxes (913) Income tax expense 1,567 -------- Income (loss) before minority interest (2,480) Minority interest (income) expense --- -------- Income (loss) from continuing operations (2,480) Loss from discontinued operations (5) 4,571 -------- Income (loss) before extraordinary item (7,051) Extraordinary item (6) --- -------- Net income (loss) $ (7,051) ======== Pro forma net income (loss) (7) $ (7,390) ======== Pro forma net income (loss) per share Basic: (8) Continuing operations Discontinued operations Extraordinary item Net income (loss) Pro forma net income (loss) per share Diluted: (8) Continuing operations Discontinued operations Extraordinary item Net income (loss) Balance Sheet Data: (1) Working capital $ 50,771 Total assets 160,510 Long-term debt and capital lease 52,375 obligations Shareholders' equity and redeemable 39,584 preferred (9) Weighted average common shares outstanding: Basic Diluted
__________ (1) The Hermann Marketing, Inc. ("HMI") acquisition (effective January 30, 1997), the Sofco-Mead, Inc. ("Sofco") acquisition (effective January 24, 1997), the United TransNet, Inc. ("UT") acquisition (effective November 8, 1996), the Nimsa S.A. ("Nimsa") acquisition (effective October 31, 1996), the U.S. Delivery, Inc. ("Delivery") acquisition (effective March 1, 1996), the Richard Young Journal, Inc. ("Young") acquisition (effective February 27, 1996) and the Lucas Bros., Inc. ("Lucas") acquisition (effective November 30, 1993) were accounted for as poolings of interests and, accordingly, the HMI, Sofco, UT, Nimsa, Delivery, Young and Lucas accounts and results are included for all applicable periods. (2) Cost of sales includes occupancy and delivery expenses. (3) Reflects the write-down to fair market value of certain inventory which the Company decided to eliminate from its product line. -10- (4) Merger and other nonrecurring charges in fiscal 1997 include the acquisition costs incurred by Data Documents Incorporated ("DDI"), the continued integration of delivery services and certain provisions for reductions in force and facility closures at other locations. Merger and other nonrecurring charges in prior fiscal years relate primarily to the mergers with Sofco, HMI, Nimsa and UT in fiscal 1996, Delivery and Young in fiscal 1995 and Lucas in fiscal 1993 and include, among other things, costs to complete the acquisitions, merging and closing redundant facilities, personnel reductions and centralizing certain administrative functions. (5) In fiscal 1995, Sofco adopted a plan to discontinue Sofco-Eastern, Inc.; and in February 1993, Lucas adopted a plan to discontinue its retail operations. (6) Reflects extraordinary loss related to a write-off of an unamortized discount on debt in fiscal 1993 and extraordinary gain related to the repurchase by the Company of $10 million principal amount of Notes in fiscal 1994. (7) Pro forma net income reflects the additional taxes that would be incurred to treat a subchapter S acquisition as if the acquired company was a C corporation. (8) Pro forma net income (loss) per share is calculated by dividing pro forma net loss, after preferred stock dividend requirements of Young of $432,000 and $1,500,000 for fiscal 1994 and fiscal 1993, respectively, by basic and diluted weighted common shares outstanding, respectively. Fiscal 1993 basic and diluted pro forma net loss per share includes preferred shares as if they had been converted as of the beginning of the year. These shares converted automatically upon the completion of the Company's initial public offering in fiscal 1994. (9) Redeemable preferred shares were converted to common stock in fiscal 1994. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements and related notes thereto appearing elsewhere in this Form 10-K. Some of the information presented in this Form 10-K constitutes forward- looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the Company believes that its expectations are based on reasonable assumptions within the bounds of the Company's knowledge of its business and operations, there can be no assurance that actual results of the Company's operations and acquisition activities and their effect on the Company's results of operations will not differ materially from its expectations. See ITEM 1. "BUSINESS - Important Factors Regarding Forward- Looking Statements." GENERAL Corporate Express has grown primarily through a series of acquisitions including the acquisition of HMI on January 30, 1997, Sofco on January 24, 1997, UT on November 8, 1996, Nimsa on October 31, 1996, Delivery on March 1, 1996, and Young on February 27, 1996, all of which were accounted for as poolings of interest. Accordingly, the Consolidated Financial Statements have been restated to include the accounts and operations of Sofco, HMI, Nimsa, Delivery and Young for all periods prior to the mergers. 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. Reference to fiscal 1997 refers to the eleven-month period ended January 31, 1998 for Corporate Express. Reference to fiscal 1996 refers to the year ended March 1, 1997 for Corporate Express and all pooled companies. Reference to fiscal 1995 refers to the year ended March 2, 1996 for Corporate Express, Delivery, Young, and Sofco, to the year ended December 31, 1995 for HMI, and to the year ended June 30, 1996 for Nimsa. Reference to the fiscal year 1994 and prior fiscal years refers to the February year end for Corporate Express, to the December 31 year end for Delivery and HMI, to the May 31 year end for Sofco, and to the September 30 year end for Young. During fiscal 1997, the Company changed its fiscal year end from February 28 -11- to January 31 in order to better align its fiscal year with its customers' and competitors' fiscal calendars and to reduce the seasonality between quarters. The 1997 fiscal period refers to the eleven months ended January 31, 1998. During fiscal 1997, the Company continued to increase the scope of its operations throughout the United States, Canada, Germany, and Italy, and entered new markets with acquisitions in Ireland and Switzerland. Substantial emphasis was placed in fiscal 1997 on expanding and improving international operations and improving operations in the services segment. The Company continued to execute its Corporate Supplier strategy and expanded the depth and breadth of its product offerings as well as its geographic presence through 31 acquisitions during fiscal 1997. During fiscal 1998, the Company will place emphasis on internal growth through continued implementation of the Corporate Supplier business model. The Corporate Supplier business model reflects the Company's plan to reduce the total procurement cost of non-production goods and services for customers. The key elements of the Corporate Supplier model are the broad offering of products and services, global coverage for selected products and services, a comprehensive distribution and logistics network, information systems that integrate the complete product and service offering while linking suppliers to customers and procurement management and consulting for customers. The Company also plans to increase sales to existing customers by cross-selling its expanded product and service offerings and developing existing customers into international, national or multi-regional accounts. International markets historically have higher gross profit margins and higher operating costs than the Company experiences domestically. Certain products now offered by the Company, such as computer software, have lower gross profit margins and lower operating costs than the products traditionally sold by the Company. In addition, the acquisition of companies with break-even or marginal operating results or the costs of consolidating acquired business units with the Company may impact the operating margins and profitability of the Company. RESULTS OF OPERATIONS The following table sets forth the percentages which the items in the Company's Consolidated Statements of Operations bear to net sales for the periods indicated:
Eleven Months Ended --------------------------- Fiscal Year January 31, February 1, ------------------------ 1998 1997 1996 1995 1994 ------------ ------------ ------ ------ ------ Statements of Operations Data: (unaudited) Net sales 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales 76.5 75.8 75.6 75.0 74.7 Merger related inventory provisions -- -- -- 0.3 -- ----- ----- ----- ----- ----- Gross profit 23.5 24.2 24.4 24.7 25.3 Warehouse operating and selling 17.0 17.5 17.6 18.1 19.1 expenses Corporate general and administrative 2.9 3.0 3.0 2.6 2.6 expenses Merger and other nonrecurring charges 0.4 0.7 0.6 1.9 -- ----- ----- ----- ----- ----- Operating profit 3.2 3.0 3.2 2.1 3.6 Interest expense, net 1.0 0.8 0.8 1.0 1.5 Other income 0.0 0.0 0.0 0.1 0.0 ----- ----- ----- ----- ----- Income before income taxes 2.2 2.2 2.4 1.2 2.1 Income tax expense 1.0 1.1 1.1 0.7 0.7 ----- ----- ----- ----- ----- Income before minority interest 1.2 1.1 1.3 0.5 1.4 Minority interest (income) expense (0.0) (0.1) (0.0) 0.1 0.0 ----- ----- ----- ----- ----- Income from continuing operations 1.2 1.2 1.3 0.4 1.4 Loss from discontinued operations -- -- -- 0.1 0.0 ----- ----- ----- ----- ----- Income before extraordinary item 1.2 1.2 1.3 0.3 1.4 Extraordinary gain -- -- -- -- 0.0 ----- ----- ----- ----- ----- Net income 1.2% 1.2% 1.3% 0.3% 1.4% ===== ===== ===== ===== ===== Pro forma net income (1) 1.2% 1.2% 1.3% 0.3% 1.4% ===== ===== ===== ===== =====
-12- (1) Pro forma net income reflects the tax impact for a subchapter S acquisition as if the acquired company was a C corporation. ELEVEN MONTHS ENDED JANUARY 31, 1998 AND FEBRUARY 1, 1997 Net Sales. Consolidated net sales increased 22.7% to $3,573,311,000 in the eleven months ended January 31, 1998 from $2,911,189,000 in the same eleven- month period last year. Net sales for the Company's product distribution segment increased 26.6% to $2,816,244,000 in the current eleven-month fiscal period from $2,224,203,000 in the same eleven-month period last year while net sales for its service segment increased 10.2% to $757,067,000 from $686,986,000 in the same periods. These increases were primarily attributable to 31 acquisitions in the eleven months ended January 31, 1998, the full year impact of 100 acquisitions completed in fiscal 1996, and strong internal growth reflecting increased market penetration in the Company's products distribution business. This growth was partially offset by the elimination of low margin customers, the effect of closing or consolidating facilities, and the disposition of certain non-strategic businesses. International operations accounted for 18.8% of total sales or $671,567,000 in the eleven months ended January 31, 1998 and 17.5% of total sales or $509,734,000 in the same eleven-month period last year. The Company expanded its international operations in Germany, Italy and Canada in the eleven months ended January 31, 1998 and entered markets in Ireland and Switzerland. Gross Profit. Cost of sales includes merchandise, occupancy and delivery costs. Consolidated gross profit as a percentage of sales was 23.5% for the eleven months ended January 31, 1998 compared to 24.2% for the same period in the prior year. The decrease in the gross profit percentage is attributable to the services segment, which experienced reduced gross profit margins as a result of consolidation costs, increases in driver and vehicle related costs and pricing, partially offset by better product distribution margin. Also affecting gross profit were lower international gross margins primarily as a result of increased competitive pressures and increased computer software sales (with lower gross margins), all of which were partially offset by increased vendor rebates as a result of improved programs. The gross profit percentage of sales for the product distribution segment was 23.9% in the eleven months ended January 31, 1998 and 23.8% in the same eleven- month period last year. The gross profit percentage in the services segment was 21.9% in the eleven months ended January 31, 1998 compared to 25.7% in the same eleven-month period last year. The decrease in the gross profit percentage in the services segment is attributable to consolidation costs, increases in driver and vehicle related costs, and pricing concessions. Warehouse Operating and Selling Expenses. Warehouse operating and selling expenses primarily include labor and administrative costs associated with operating regional warehouses and sales offices, selling expenses including commissions related to the Company's direct sales force, and warehouse consolidation and relocation costs and expenses. Warehouse operating and selling expenses decreased as a percentage of sales to 17.0% in the eleven months ended January 31, 1998 from 17.5% in the same eleven-month period last year. This decrease is primarily attributable to the Company's efforts to leverage and streamline its operations, including the elimination of redundant facilities and positions. Corporate General and Administrative Expenses. Corporate general and administrative expenses include the central expense incurred to provide corporate oversight and support for regional operations, goodwill amortization and depreciation. Corporate general and administrative expenses increased to $105,055,000 in the eleven months ended January 31, 1998 from $87,793,000 in the same eleven-month period last year reflecting the Company's expanded operations. As a percentage of net sales, corporate general and administrative expenses decreased to 2.9% in the current period from 3.0% in the prior period. This decrease reflects the Company's efforts to leverage these expenses over expanded operations, partially offset by increased goodwill amortization. -13- Merger and Other Nonrecurring Charges. During the eleven months ended January 31, 1998, the Company recorded $14,890,000 in net merger and other nonrecurring charges. The charge includes $4,485,000 of transaction costs incurred by DDI in connection with its merger with the Company, costs related to the continued integration of the delivery service business and certain provisions for reductions in the workforce and facility closures at other locations including the planned closure of 34 facilities and reduction of 722 employees. These exit plans are expected to be completed by the end of fiscal 1998. Operating Profit. Consolidated operating profit increased 28.3% to $114,815,000 or 3.2% of net sales for the eleven months ended January 31, 1998 compared to operating profit of $89,520,000 or 3.0% of net sales in the same period last year. Before merger related and other nonrecurring charges, operating profit increased to $129,705,000 in the current period from $109,361,000 in the prior period due largely to internal growth and improved operating efficiencies. Before merger related and other nonrecurring charges, operating profit for the product distribution segment increased 42.0% to $112,961,000 or 4.0% of net product distribution sales in the current fiscal period from $79,549,000 or 3.6% of net sales in the same period last year. Operating profit before nonrecurring charges for the services segment decreased to $16,744,000 or 2.2% of net service sales in the current fiscal period from $29,812,000 or 4.3% of net service sales in the prior fiscal period. The decrease in operating profit for the services segment reflects poor performance at several delivery locations and expenses related to integration projects, partially offset by the cost savings from the elimination of redundant personnel. Operating profit before nonrecurring charges for international operations increased 114.0% to 2.0% of net international sales in the current eleven-month fiscal period from 1.2% of net international sales in the prior eleven-month fiscal period reflecting improved performance in Australia and Canada, partially offset by decreased operating profits in the United Kingdom. International operating profit before nonrecurring charges accounted for 11.7% of total product distribution operating profit in the current fiscal period and 7.8% in the prior fiscal period. Interest Expense. Net interest expense of $38,115,000 in the eleven months ended January 31, 1998 increased from $24,550,000 in the prior eleven-month fiscal period. This increase reflects increased borrowings under the Senior Credit Facility, interest on acquired debt, and the sale in June 1996 of $325,000,000 aggregate principal amount of the Company's 4 1/2% Convertible Notes due July 1, 2000 (the "Convertible Notes"). The proceeds from the sale of the Convertible Notes and borrowings under the Senior Credit facility were used to fund acquisitions and provide the additional working capital required as a result of increased business and for general corporate purposes. See "Liquidity and Capital Resources." Minority Interest. Minority interest income of $1,319,000 in the eleven months ended January 31, 1998 compares to income of $1,314,000 in the prior eleven-month fiscal period, reflecting a 47.6% minority interest in Corporate Express Australia and a 49.0% minority interest in Corporate Express United Kingdom through June 1997. The Company acquired a majority ownership interest in Corporate Express Australia in May 1995 and a majority ownership interest in Corporate Express United Kingdom in December 1995. In June 1997, the Company acquired the remaining 49.0% ownership interest in Corporate Express United Kingdom. Net Income. Net income of $44,404,000 in the eleven months ended January 31, 1998 increased 24.4% from net income of $35,708,000 in the prior eleven-month fiscal period. This increase reflects the increased profits from the Company's mature product distribution operations, the lower merger and other nonrecurring charges recorded in the current eleven-month fiscal period and corporate expense leverage offset in part by higher goodwill amortization. The Company experienced an effective tax rate of 44.4% in the fiscal 1997 period compared to 47.2% in the fiscal 1996 period. The tax rate for both periods reflects certain non-deductible merger costs and certain non-deductible goodwill. Other. The net accounts receivable balance at January 31, 1998 of $616,574,000 increased $122,375,000 from $494,199,000 at March 1, 1997 primarily as a result of acquired receivables and internal sales growth in existing regions. The allowance for doubtful accounts as a percentage of consolidated accounts receivable was 2.4% and 2.6% at the end of the fiscal 1997 and fiscal 1996 periods, respectively. The Company's historical bad debt -14- write-offs have been very low due to the high credit quality of its customers, resulting from the Company's focus on large corporations, and the fact that in certain acquisitions the seller guarantees acquired receivables. The inventory balance at January 31, 1998 of $251,108,000 increased $63,550,000 from $187,558,000 at March 1, 1997 primarily as a result of acquired inventories and inventory growth to support increased sales. Goodwill at January 31, 1998 of $847,544,000 increased $175,577,000 from $671,967,000 reflecting additions from acquisitions of $197,250,000 (primarily attributable to the DDI acquisition) offset by current year amortization of $21,087,000 and reversals of $586,000. The accounts payable trade balance at January 31, 1998 of $354,915,000 increased $62,874,000 from $292,041,000 at March 1, 1997 primarily as a result of acquired trade payables and increased inventory purchases to support sales growth. Accrued purchase costs at January 31, 1998 of $9,378,000 decreased by $3,510,000 from the March 1, 1997 balance of $12,888,000. This decrease reflects acquisition additions of $6,365,000, payments of $9,289,000, and reversals of $586,000 reducing previously recorded goodwill. FISCAL YEARS 1996 AND 1995 Net Sales. Consolidated net sales increased 69.0% to $3,196,056,000 in fiscal 1996 from $1,890,639,000 in fiscal 1995. Net sales for the Company's product distribution segment increased 57.4% to $2,436,296,000 in fiscal 1996 from $1,548,175,000 in fiscal 1995 while net sales for its service segment increased 121.9% to $759,760,000 from $342,464,000 in the same periods. These increases were primarily attributable to 100 acquisitions in fiscal 1996 of which 77 were product based companies (48 domestic and 29 international) and 23 were service based companies (21 domestic and two international) and the acquisition of UT, which was accounted for as a pooling of interests with operations from March 3, 1996 (prior year results were immaterial). Also contributing to the sales increase was strong internal growth reflecting increased market penetration in product distribution. International operations accounted for 17.7% of total sales or $565,126,000 in fiscal 1996 and 12.6% of total sales or $238,201,000 in fiscal 1995. The Company expanded its international operations in fiscal 1996 to include operations in New Zealand, Germany, France, and Italy. Gross Profit. Cost of sales includes merchandise, occupancy and delivery costs. Consolidated gross profit as a percentage of sales was 24.4% for fiscal 1996 compared to 24.7% for fiscal 1995. Included in cost of sales in fiscal 1995 is a merger related inventory provision of $5,952,000, representing 0.3% of sales. In fiscal 1995, the Company made the decision to expand to new product categories, while discontinuing certain low-end products, to standardize core product lines and to eliminate certain inventory historically maintained for specific customers and wrote certain inventory down to its fair market value. Impacting the declining gross profit percentage in fiscal 1996 was the addition of a desktop software line of products which has substantially lower gross profit margins, and decreased gross margins in the delivery business. The gross profit percentage of sales for the product distribution segment was 24.0% in fiscal 1996 and 23.8% in fiscal 1995 (excluding the merger related inventory provision). The increase reflects gross margin improvement in all of the domestic office product distribution operations which was partially offset by lower margin sales from an acquired desktop software distributor. The improvement in domestic office product distribution gross profit is due, in part, to the expanded usage of the Company's In-Stock Catalog resulting in fewer wholesaler purchases and increased vendor rebates. The gross profit percentage in the services segment was 25.5% in fiscal 1996 compared to 30.8% in fiscal 1995. The decrease in the gross profit percentage in the service segment is primarily attributable to the acquisition of UT which had lower gross profit margins than other delivery services operations. -15- Warehouse Operating and Selling Expenses. Warehouse operating and selling expenses primarily include labor and administrative costs associated with operating regional warehouses and sales offices, selling expenses and commissions related to the Company's direct sales force, and warehouse assimilation costs. Warehouse operating and selling expenses decreased as a percentage of sales to 17.6% in fiscal 1996 from 18.1% in fiscal 1995. This decrease is primarily attributable to the Company's efforts to leverage and streamline its operations and to the software distribution operation and UT, both of which have lower operating expenses as a percentage of sales. Corporate General and Administrative Expenses Corporate general and administrative expenses increased to $95,101,000 in fiscal 1996 from $49,742,000 in fiscal 1995, reflecting the Company's expanded operations. As a percentage of net sales, corporate general and administrative expenses increased to 3.0% in fiscal 1996 from 2.6% in fiscal 1995. This increase reflects increased goodwill amortization resulting from purchase acquisitions in fiscal 1995 and fiscal 1996 and costs associated with developing a larger corporate staff to support acquisition efforts and expanded operations, including an expanded information system staff. Merger and Other Nonrecurring Charges. During fiscal 1996, the Company recorded $19,840,000 in net merger and other non-recurring charges primarily in conjunction with the acquisitions of Nimsa, UT, Sofco and HMI. Of the total charge, a net $12,366,000 was recorded in the third quarter and $7,474,000 was recorded in the fourth quarter of fiscal 1996. The third quarter charge is comprised of merger and other nonrecurring charges primarily in conjunction with the acquisitions of UT and Nimsa, offset by $7,571,000 in adjustments 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. The third quarter fiscal 1996 charge includes the planned closure of 115 facilities and reduction of approximately 485 employees. The fourth quarter fiscal 1996 charge primarily reflects the actual costs of completing the acquisitions of Sofco and HMI. (See Note 4 to the Consolidated Financial Statements). Operating Profit. Consolidated operating profit was $100,490,000, or 3.2% of net sales, in fiscal 1996, compared to operating profit of $38,160,000, or 2.1% of net sales, in fiscal 1995. Before merger related and other nonrecurring charges, operating profit increased 48.6% to $120,330,000 in fiscal 1996 from $80,950,000 in fiscal 1995, reflecting increased acquisitions, internal growth, and improved operating efficiencies. Before merger related and other nonrecurring charges, operating profit for the product distribution segment increased 52.1% to $88,802,000, or 3.6% of net sales, in fiscal 1996 from fiscal 1995 operating profit of $58,394,000 or 3.8% of net sales. Operating profit before nonrecurring charges for the service segment increased 39.8% to $31,528,000, or 4.1% of net sales, in fiscal 1996 from $22,556,000, or 6.6% of net sales, in fiscal 1995. The decrease in operating profit for the service segment as a percentage of sales reflects the results of UT which had lower operating margins, poor performance at several delivery locations and expenses related to consolidation projects. Operating profit before nonrecurring charges for international operations decreased to 1.1% of net international sales in fiscal 1996 from 3.9% of net international sales in fiscal 1995 reflecting operating losses in Australia related to warehouse consolidation projects and expansion to new European markets, partially offset by increased operating profits in Canada. International operating profit before nonrecurring charges accounted for 6.8% of total office products operating profit in fiscal 1996 and 15.8% of total office products operating profit in fiscal 1995. Interest Expense. Net interest expense of $26,949,000 in fiscal 1996 increased from $17,968,000 in fiscal 1995. This increase reflects increased borrowings under the Senior Credit Facility and the sale of $325,000,000 aggregate principal amount of the Convertible Notes. The proceeds from the sale of the Notes were used to fund acquisitions and provide the additional working capital required as a result of increased business and general corporate purposes. See "Liquidity and Capital Resources." -16- Minority Interest. Minority interest income of $1,860,000 in fiscal 1996 compares to an expense of $1,436,000 in fiscal 1995, reflecting a 47.6% minority interest in the operating losses at Corporate Express Australia partially offset by a 49.0% minority interest in operating profits in Corporate Express United Kingdom. Net Income. Net income of $41,996,000 in fiscal 1996 compares to net income of $5,551,000 in fiscal 1995. This increase reflects the increased profits from the Company's more mature operations, the lower merger and other nonrecurring charges recorded in fiscal 1996 and the purchase acquisitions. The Company experienced an effective tax rate of 45.6% in fiscal 1996 compared to 62.6% in fiscal 1995. The fiscal 1995 tax rate reflects certain non-deductible merger costs, the utilization of certain net operating losses ("NOLs"), and certain non-deductible goodwill. The fiscal 1996 tax rate reflects certain non- deductible merger costs and certain non-deductible goodwill. The principle reason the 1995 effective tax rate exceeds the 1996 rate is the higher level of non-deductible merger costs in fiscal 1995. FISCAL YEARS 1995 AND 1994 Net Sales. Net sales increased 65.1% to $1,890,639,000 in fiscal 1995 from $1,145,151,000 in fiscal 1994. Net sales in the product distribution segment increased 67.4% to $1,548,175,000 in fiscal 1995 from $924,886,000 in fiscal 1994, while the service segment increased 55.5% to $342,464,000 from $220,265,000 in the same periods. These increases were primarily attributable to 51 acquisitions, of which 28 were product based companies (17 domestic and 11 international), seven were repurchases of computer product franchises by Young, and 16 were service based companies principally in the delivery services business (all domestic). Also contributing to the sales increase was the inclusion of the results of operations of acquisitions accounted for as purchases during fiscal 1995 and internal growth. Gross Profit. Consolidated gross profit as a percentage of sales was 24.7% for fiscal 1995 compared to 25.3% for fiscal 1994. Included in cost of sales for fiscal 1995 is a merger related inventory provision of $5,952,000. The gross profit percentage, excluding the merger related inventory provision was 25.0% in fiscal 1995. The gross profit percentage in product distribution, excluding the merger related inventory provision was 23.8% in fiscal 1995 compared to 23.9% in fiscal 1994 and services segment gross profit percentage was 30.8% in fiscal 1995 compared to 31.3% in fiscal 1994. Decreases in services are primarily attributable to increased delivery costs resulting from unusually severe weather in the Northeast. Warehouse Operating and Selling Expenses. Warehouse operating and selling expenses decreased as a percentage of sales to 18.1% in fiscal 1995 from 19.1% in fiscal 1994. This decrease reflects cost savings as a result of the implementation of the Corporate Express business model at certain regional warehouses, which includes centralizing certain administrative functions. Also contributing to this decrease is a reduction of approximately $3,100,000 in Delivery compensation expense which was eliminated in fiscal 1995 pursuant to agreements made in connection with companies acquired in poolings of interest acquisitions. Corporate General and Administrative Expenses. As a percentage of net sales, corporate general and administrative expenses were 2.6% in both fiscal 1995 and fiscal 1994. Expenses increased to $49,742,000 in fiscal 1995 from $29,624,000 in fiscal 1994, reflecting the Company's expanded operations. Merger and Other Nonrecurring Charges. During the fourth quarter of fiscal 1995, the Company recorded $36,838,000 in merger and other nonrecurring charges (in addition to $5,952,000 in merger related inventory provisions) primarily in conjunction with the acquisitions of Delivery and Young. The charges include the actual costs of completing the acquisitions and additional costs associated with a plan to integrate the combined companies' operations. The major activities associated with the plan include merging various Delivery and Young facilities into Company locations, closing duplicate facilities and centralizing certain administrative functions. These merger and other nonrecurring charges include merger transaction related costs of $13,273,000; severance -17- 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. Operating Profit. Operating profit of $38,160,000 in fiscal 1995 compares to operating profit of $40,953,000 in fiscal 1994. Operating profit before nonrecurring charges for product distribution increased to $58,394,000 in fiscal 1995 from $29,811,000 in fiscal 1994. This increase reflects the contribution of acquired companies and increased regional operating profits at the Company's other regional operations. Operating profit before nonrecurring charges for services increased to $22,556,000, or 6.6% of net sales, in fiscal 1995 from $11,142,000, or 5.1% of net sales, in fiscal 1994. Interest Expense. Net interest expense increased to $17,968,000 in fiscal 1995 from $16,915,000 in fiscal 1994. Increases due to the elimination of the 0.5% per annum additional illiquidity payment of the Senior Notes effective upon completion of a registered exchange offer in March 1995 and principal reductions on the line of credit using funds from the public offerings of Common Stock completed in March 1995 and September 1995 were offset by higher levels of Delivery, Young and HMI debt outstanding as a result of their increased borrowings to fund acquisitions and to provide the additional working capital required as a result of increased business. On February 27, 1996, the Company borrowed on its line of credit and repaid in full, as required under its terms, the Young revolving line of credit balance of $10,809,000 which bore interest at prime plus 1.25%, the Young subordinated debt of $11,930,000 which bore interest at 17.5% and debt payable to the selling shareholders of $10,834,000 which bore interest at 9.75%. The Delivery bank credit facility became due as of the acquisition date due to a change of control provision. This facility was amended to expire on May 31, 1996 to provide time for the Company to renegotiate its primary bank revolver, which has been completed and the Delivery credit facility has been repaid. See "Liquidity and Capital Resources." Extraordinary Item. The extraordinary gain of $586,000, net of tax, in the second quarter of fiscal 1994 related to the repurchase of $10,000,000 principal amount of the Senior Notes. Net Income. Net income of $5,551,000 in fiscal 1995 decreased compared to a net income of $16,496,000 in fiscal 1994. This decrease reflects the merger and other nonrecurring charges recorded in fiscal 1995 offset by contributions from purchase acquisitions and increased profits from the Company's more mature operations. The pre-tax profitability is reduced by an increase in the effective tax rate to 62.6% in fiscal 1995 from 33.7% in fiscal 1994. The fiscal 1995 tax rate reflects certain non-deductible merger costs, international tax rates, the utilization of certain NOLs, and certain non-deductible goodwill. The fiscal 1994 tax rate included the utilization of certain NOLs and certain non-deductible goodwill. The principle reason the 1995 effective tax rate exceeds the 1994 effective tax rate is the non-deductibility of certain merger costs. The fiscal 1994 period included in net income an extraordinary gain of $586,000, net of tax, related to the repurchase of $10,000,000 principal amount of the Senior Notes. LIQUIDITY AND CAPITAL RESOURCES Historically, the Company has financed its operations through internally generated funds and borrowings from commercial banks and has financed its acquisitions through the use of such funds and the issuance of equity and debt securities. On February 5, 1998 the Company announced 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 the Company 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 -18- not purchased because of proration were returned at the Company's expense. The Company funded the purchase of such shares and the payment of related fees and expenses through its new $1.0 billion Senior Secured Credit Facility. 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 accounts 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 interest rate. The Company is subject to usual covenants customary for this type of facility including financial covenants. The available funds may be used for general corporate purposes including permitted acquisitions and permitted share repurchase. As of April 22, 1998, the Company had $632,606,000 outstanding under the Senior Secured Credit Facility and an unused borrowing capacity of $367,394,000. Effective December 15, 1997 the prior $500,000,000 Senior Credit Facility, due March 31, 2000, was amended to permit the Company's subsidiaries to guarantee up to $500,000,000 of debt, permit the repurchase of up to $100,000,000 of Company stock, and permit the early repayment of the Company's 9 1/8% Senior Subordinated Notes due 2004. This Senior Credit Facility was replaced and paid in full with proceeds from the new Senior Secured Credit facility on April 22, 1998. Approximately $1,960,000 of deferred financing costs related to the replaced Senior Credit facility will be expensed in the first quarter of fiscal 1998. On June 24, 1996, the Company issued $325,000,000 aggregate principal amount of Convertible Notes. The 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 Convertible Notes was used to repay the Company's Senior Credit Facility and an acquisition note payable with the remaining proceeds being used to fund acquisitions and for other general corporate purposes. During 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 expects to complete in the second quarter of fiscal 1998. Any gain or loss from the settlement of the contract will be included in deferred financing costs and will be amortized over the term of the new debt agreement as an adjustment to the effective interest rate of the debt agreement. As of April 27, 1998, the deferred unrealized loss on the contract was $4,700,000 and the amortization of the settlement gain or loss is anticipated to be immaterial to the Company's future earnings. The Company had no other financial instrument contracts outstanding as of January 31, 1998. The Company does not enter into financial instrument contracts for trading or speculative purposes. The counterparts to all contracts outstanding are major financial institutions and the Company does not have significant exposure to any one counterparty. During the eleven months ended January 31, 1998, the Company invested $24,572,000 net cash and approximately 14,895,000 shares of common stock in its acquisition program. Total liabilities assumed in connection with these acquisitions were $171,928,000. In addition, the Company made payments of approximately $8,797,000 and issued approximately 252,000 shares of common stock related to acquisitions completed in prior fiscal years. During the eleven months ended January 31, 1998, the Company had capital expenditures of $82,959,000 for computer systems and software, warehouse reconfigurations, telecommunications equipment, delivery vehicles, leasehold improvements and investments in facilities. The Company continues to invest in advanced facilities, the development of its proprietary computer software, and the upgrade of its computer systems. Significant uses of cash in the eleven months ended January 31, 1997 were as follows: capital expenditures of $82,959,000, cash paid for acquisitions of $33,369,000, net debt repayments of $10,393,000, -19- retirement of DDI bonds of $62,178,000, and net other uses of $2,168,000, partially offset by cash provided by net borrowings on lines of credit of $122,376,000, operating activities of $26,916,000, proceeds from the sale of assets of $21,100,000, issuance of common stock of $8,104,000, and issuance of subsidiary common stock of $2,434,000. The Company expects net capital expenditures for fiscal 1998 of approximately $80,000,000 comprised of approximately $59,000,000 to be used for upgrading and enhancing its information systems and telecommunications equipment and approximately $21,000,000 for warehouse reconfiguration and equipment. Actual capital expenditures for fiscal 1998 may be greater or less than budgeted amounts. The Company continues to make substantial investments in the development and enhancement of its proprietary computer software applications. During fiscal 1997, the Company completed the development and implementation of its ISIS computer software for its national account customers and successfully launched the internet version of E-Way, its electronic commerce, ordering and fulfillment system. The Company began amortizing its ISIS national account software and E-Way in fiscal 1997 over a seven-year and five-year life, respectively, on a straight-line basis. All costs associated with the maintenance and production of its ISIS national account software are being expensed as incurred. The integrated divisional version of the ISIS software continues to be developed and is currently in beta test mode at two operating divisions. The Company estimates that the costs to complete and implement ISIS divisional software will be approximately $40 million and the software will be implemented at all existing domestic office products distribution centers by the end of fiscal 2002. 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. Total liabilities assumed in connection with these acquisitions were $282,777,000 (including accounts payable and assumed debt). In addition, the Company made payments of approximately $13,984,000 related to prior acquisitions. Included in the net cash purchase price of $241,846,000 is the purchase of ASAP, a computer software distribution company, in May 1996 for approximately $98,000,000 in cash offset by cash acquired of approximately $14,000,000. Cash and cash equivalents increased by $24,686,000 in fiscal 1996. This increase reflects proceeds of $325,000,000 from issuance of the convertible debt, net borrowings on lines of credit of $104,382,000 and cash from operations of $25,753,000, offset by capital expenditures of $119,639,000, payments for acquisitions of $255,830,000, repayment of debt of $64,893,000 and net other additions of $9,913,000. Net cash provided by operating activities of $25,753,000 reflects cash generated by net income plus non-cash expenses, primarily depreciation and amortization, offset by an increase in accounts receivable, inventories, and accrued liabilities reflecting increased sales. The repayment of debt is primarily debt of acquired operations. During fiscal 1995, the Company purchased 45 companies for a net cash purchase price of $96,971,000 and newly issued securities representing a 52.5% interest in Corporate Express Australia for a net cash outlay of $98,000 ($16,785,000 purchase price less cash acquired of $16,687,000). The Company also repurchased seven computer product franchises for $21,187,000. Total liabilities assumed in connection with these acquisitions were $118,447,000 (including accounts payable and assumed debt). In addition, the Company made payments of approximately $6,044,000 related to acquisitions completed in fiscal 1994. During fiscal 1995, the Company sold its high-end furniture business for $4,362,000, which was acquired as part of the acquisition of Joyce International, Inc.'s office products division ("Joyce"). The sale was contemplated at the time of the Joyce acquisition and was reflected in the financial statements accordingly. Cash and cash equivalents increased by $14,314,000 in fiscal 1995. This increase reflects net proceeds from the sale of common stock of $449,288,000 (primarily from the March and September 1995 public offerings) offset by the purchase of common stock held by OfficeMax, Inc. for $195,831,000, net payments on the line of credit of $18,871,000, payments for capital expenditures during fiscal 1995 of $53,124,000, cash paid for acquisitions of $124,300,000, cash used in operating activities and repayment of debt of $99,838,000 and net other additions of $56,990,000. Net cash used in operating activities of $16,433,000 reflects cash generated by net income plus non-cash expenses offset by an increased investment in accounts receivable and inventories reflecting increased sales and the introduction of the In-Stock Catalog into acquired operations. The repayment of debt includes the repayment of debt of acquired companies. The Company believes that the borrowing capacity under the Senior Secured Credit Facility, together with proceeds from future debt and equity financings, in addition to the Company's cash on hand, capital resources and cash flows, will be sufficient to fund the Company's ongoing operations, anticipated capital expenditures and acquisition activity for the next twelve months. However, actual capital needs may change, particularly in connection with acquisitions which the Company may complete in the future. -20- INFLATION Certain of the Company's product offerings, particularly paper products, have been and are expected to continue to be subject to significant price fluctuations due to inflationary and other market conditions. The Company generally is able to pass such increased costs on to its customers through price increases, although it may not be able to adjust its prices immediately. Significant increases in paper, fuel and other costs in the future could materially affect the Company's profitability if these costs cannot be passed on to customers. In general, the Company does not believe that inflation has had a material effect on its results of operations in recent years. However, there can be no assurance that the Company's business will not be affected by inflation in the future. SEASONALITY AND QUARTERLY RESULTS The Company's product distribution business is subject to seasonal influences. In particular, net sales and profits in the United States, Canada and Europe are typically lower in the summer months due to lower levels of business activity. Because cost of sales includes delivery and occupancy expenses, gross profit as a percentage of net sales may be impacted by seasonal fluctuations in net sales, higher delivery costs during inclement weather, and the acquisition of less efficient operations. Quarterly results may be materially affected by the timing of acquisitions and the timing and magnitude of acquisition integration costs. Therefore, the operating results for any three month period are not necessarily indicative of the results that may be achieved for any subsequent fiscal quarter or for a full fiscal year. Revenues and profit margins from the Company's local delivery services are subject to seasonal variations. Prolonged inclement weather can have an adverse impact on the Company's business to the extent that transportation and distribution channels are disrupted. ACCOUNTING STANDARDS The Company is required to adopt SFAS No. 130, "Reporting Comprehensive Income," in the first quarter of fiscal 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. 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 supersede 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. 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 -21- is in the process of reviewing its current policies of 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. IMPACT OF THE YEAR 2000 ISSUE The Year 2000 issue is a result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system/job failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar business activities. The Company's ISIS computer software has been designed with the Year 2000 issue in mind, and the Company believes it is Year 2000 compliant; however, Corporate Express utilizes many different systems and software programs to process and summarize business transactions. The Company is continuing the evaluation of its various operating systems and determining the additional remediation efforts required to ensure its computer systems will properly utilize dates beyond December 31, 1999. Preliminary results of this assessment have revealed that remediation efforts required will vary from system to system. For example, it appears some systems will not require any additional programming efforts, while others may require significant programming changes. The Company has initiated formal communications with all of its significant suppliers and large customers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 issue. However, there can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company. For those systems identified as non-compliant, the Company has begun and, in certain cases, completed remediation efforts. The Company will utilize both internal and external resources to reprogram, or replace, and test the software for Year 2000 modifications. The Company plans to complete the Year 2000 project before January 31, 1999. The total estimated cost of the Year 2000 project is estimated to be between $6,000,000 and $8,000,000 and is being funded through operating cash flows. These costs are not expected to be material to the Company's consolidated results of operations. Of the total project cost, approximately $2,000,000 is attributable to the purchase of new software or equipment which will be capitalized. The remaining $4,000,000 to $6,000,000 will be expensed as incurred. In a number of instances, the Company may decide to install new software or upgraded versions of current software programs which are Year 2000 compliant. In these instances, the Company may capitalize certain costs of the new system in accordance with current accounting guidelines. The Company presently believes that with modifications to existing software and conversions to new software for those sites which it believes may be effected, the Year 2000 issue can be mitigated. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 issue could have a material adverse impact on the operations of the Company. The costs of the project and the date on which the Company plans to complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those plans. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. -22- 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company is primarily exposed to currency exchange-rate risk with respect to its transactions and net assets denominated in Canadian and Australian Dollars, U.K. Pound Sterling, French Francs, German Marks, Irish Pounds, Swiss Francs and Italian Lira. Business activities in various currencies expose the Company to the risk that the eventual net dollar cash inflows resulting from transactions with foreign customers and suppliers denominated in foreign currencies may be adversely affected by changes in currency exchange rates. Based on debt balances at January 31, 1998, a hypothetical 10% change in the Company's weighted average interest rate would have an immaterial effect on the Company's fiscal 1998 pretax earnings and on the fair value of the Company's fixed-rate financial instruments. During 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 expects to complete in the second quarter of fiscal 1998. Any gain or loss from the settlement of the contract will be included in deferred financing costs and will be amortized over the term of the new debt agreement as an adjustment to the effective interest rate of the debt agreement. As of April 27, 1998, the deferred unrealized loss on the contract is $4,700,000 and the amortization of the settlement gain or loss is anticipated to be immaterial to the Company's future earnings. The Company had no other financial instrument contracts outstanding as of January 31, 1998. -23- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders of Corporate Express, Inc.: We have audited the accompanying consolidated financial statements and the consolidated financial statement schedule 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 listed in the index in Item 14. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule 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. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. /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 September 24, 1998 -24- 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. -25- 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. -26- CORPORATE EXPRESS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Eleven Years Ended Months 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. -27- 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) Foreign Preferred Stock Common Stock Additional Currency ----------------- ------------------ Paid-in Translation Retained Shares Amount Shares Amount Capital Adjustment Earnings ------ ------ ------ ------ ------- ---------- -------- Balance, February 28, 1994 26,980,000 $ 7,502 38,378,246 $ 8 $115,805 $ 9 $(6,963) Issuance of common stock 31,602,150 6 138,300 Conversion of common stock 100,000 (112,500) - Conversion of preferred stock (19,580,000) (2) 22,027,500 4 (2) Redemption of preferred stock (7,500,000) (7,500) 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 - - 91,895,396 18 254,220 59 5,025 Issuance of common stock 20,058,954 4 245,573 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 - - 111,954,350 22 513,358 196 8,200 Issuance of common stock 14,217,117 3 119,274 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 - - 126,171,467 $25 $646,536 $ (1,176) $48,222 Issuance of common stock 16,221,378 $ 3 198,095 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 - $ - 142,392,845 $28 $852,507 $(11,989) $91,887 ============== ======== =========== ======= ========= =========== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. -28-
CORPORATE EXPRESS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) Eleven Years Ended Months 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 (12) 61 (222) (600) operations -------- --------- --------- --------- Effect of foreign currency exchange rate changes (834) (445) (1,159) 25 on cash -------- --------- --------- --------- 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. -29- 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 Years Ended Months 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, -30- 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. -31- CORPORATE EXPRESS, INC. NOTES TO COONSOLIDATED 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. -32- 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 acquisition and development 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 staight-line method. Capitalized costs include, primarily, payments to outside firms for purchased software and for direct services related to the development of proprietary software (external costs), salaries and wages of individuals dedicated to the development of software (internal costs), and capitalized interest. The following table summarizes the periodic changes to capitalized software costs:
External Internal Capitalized Total Net Costs Costs Interest Costs Amortization Asset ---------------------------------------------------------------------------------------------- (in thousands) Balance February 25, 1995 $ 2,654 $ - $ - $ 2,654 $ (1,150) $ 1,504 Additions 12,975 3,816 717 17,508 (1,097) 16,411 ---------------------------------------------------------------------------------------------- Balance March 2, 1996 15,629 3,816 717 20,162 (2,247) 17,915 Additions 27,197 7,379 2,105 36,681 (2,427) 34,254 ---------------------------------------------------------------------------------------------- Balance March 1, 1997 42,826 11,195 2,822 56,843 (4,674) 52,169 Additions 19,643 15,948 3,248 38,839 (5,656) 33,183 ---------------------------------------------------------------------------------------------- Balance January 31, 1998 $ 62,469 $ 27,143 $ 6,070 $ 95,682 $ (10,330) $ 85,352 =========== ========== ======== ========== ========= ===========
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. -33- 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. -34- 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 -35- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) income, as reported in the Consolidated Statement of Operations, plus the net changes in the foreign currency translation component of stockholders' equity. 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 ========== ==========
-36- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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. 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. -37- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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:
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 ========== ========== ==========
-38- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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 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 -39- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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 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: -40- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 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 -41- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) pressure-sensitive labels for large corporate customers, purchased for approximately 10,740,000 shares of common stock. The net purchase price for DDI was allocated as follows: (in thousands) -------------- Current assets, excluding cash acquired................. $ 75,365 Property, plant and equipment, net...................... 52,487 Other assets............................................ 20,591 Goodwill................................................ 130,438 Liabilities assumed..................................... (112,938) -------------- Purchase price, net of cash acquired.................... $ 165,943 ============== Total DDI goodwill, included in the fair value of assets acquired, of $130,438,000 includes transaction and other direct costs of such acquisition of $1,672,000 and purchase accounting adjustments (primarily relating to recording assets and liabilities at their fair market values) of $8,659,000 net of related deferred taxes. 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 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%. -42- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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 companies' 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:
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. -43- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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. 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 ---
-44- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) $500,000,000 unsecured multi-currency revolving line of credit (Senior Credit Facility). Interest rates at LIBOR plus .75%, (8.5% at January 31, 1998), 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 -- -- 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 ======== ======== ========
-45- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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. 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 -46- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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. Future minimum lease payments required under these capital leases are as follows: -47- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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:
Years Ended Eleven Months ------------------------------------------ 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. -48- 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. -49- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The reconciliation of the differences between the Company's expense (benefit) for income taxes and taxes at the statutory rate is as follows:
Years Ended Eleven Months ------------------------------------- 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 ("ESPP"). 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 -50- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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") 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 -51- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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. 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. -52- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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 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 Weighted-average fair value of ESPP awards during the year $ 4.49 $ 4.47 $ 7.68
-53- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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 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 and the 1994 ESPP described in Note 11. Accordingly, no compensation cost has been recognized for its fixed stock-based option 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 and ESPP awards 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 Year Ended Months 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 -54- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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. The exercise price assigned to the 675,000 of warrants was based on the fair market value of the Company's common stock at the dates of issuance of such warrants, which occurred late in fiscal 1992 and late fiscal 1993. The estimated fair market value for the Company's common stock was determined by the board of directors, which then included independent sophisticated investors, based upon recent cash sales of the Company's equity to third parties. Warrants were assumed by the Company in connection with the DDI and Delivery mergers and were converted to warrants for Corporate Express, Inc. common stock based upon the exchange ratio applicable to the respective mergers. As of January 31, 1998, outstanding warrants to purchase Delivery common stock are vested and exercisable into 36,000 shares of Corporate Express common stock at a price of $9.44 per share and outstanding warrants to purchase DDI common stock were vested and exercisable into 135,411 shares of Corporate Express stock. 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 ======= ====== =======
-55- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 15. EARNINGS PER SHARE Basic and diluted earnings per share are calculated as follows:
Eleven Years Ended Months 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. -56- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (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. 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 -57- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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
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
-58- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 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: -59- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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. (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. -60- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 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
Subsidiary Parent Issuer Subsidiary Non Guarantor of Notes Guarantors Guarantors Eliminations Consolidated ---------- ---------- ----------- ------------ ------------ -------------- ASSETS Current assets: Cash and cash equivalents $ - $ 372 $ 33,843 $ 10,147 $ - $ 44,362 Trade accounts receivable, net - - 472,115 144,459 - 616,574 Notes and other receivables - - 72,059 14,628 - 86,687 Inventories - - 200,583 50,525 - 251,108 Deferred income taxes - - 33,421 7,308 - 40,729 Other current assets - - 33,323 8,390 - 41,713 ---------- ---------- ----------- ------------ ------------ -------------- Total current assets - 372 845,344 235,457 - 1,081,173 Property and Equipment: Land - - 16,151 1,389 - 17,540 Buildings and leasehold improvements - - 112,940 13,066 - 126,006 Property and equipment - - 302,875 36,702 - 339,577 ---------- ---------- ----------- ------------ ------------ -------------- - - 431,966 51,157 - 483,123 Less accumulated depreciation - - (118,757) (12,999) - (131,756) ---------- ---------- ----------- ------------ ------------ -------------- Net property and equipment - - 313,209 38,158 - 351,367 Goodwill, net - - 668,711 178,833 - 847,544 Net investment in and advances to subsidiaries 1,317,540 1,634,064 (65,246) (99,595) (2,786,763) - Other assets, net 4,583 31,384 23,977 9,631 - 69,575 ---------- ---------- ----------- ------------ ------------ -------------- Total assets $1,322,123 $1,665,820 $ 1,785,995 $ 362,484 $ (2,786,763) $ 2,349,659 ========== ========== =========== ============ ============ ============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable-trade 59,121 - 190,581 105,213 - 354,915 Accounts payable-acquisition - - 1,440 4,666 - 6,106 Accrued payroll and benefits - - 53,529 7,779 - 61,308 Accrued purchase costs - - 4,226 5,152 - 9,378 Accrued merger and related costs - - 14,545 967 - 15,512 Other accrued liabilities 5,569 4,243 48,835 21,567 - 80,214 Current portion of long-term debt and capital leases - - 12,253 24,011 - 36,264 ---------- ---------- ----------- ------------ ------------ -------------- Total current liabilities 64,690 4,243 325,409 169,355 - 563,697 Capital lease obligations - - 5,996 3,418 - 9,414 Long-term debt 325,000 344,037 36,271 48,521 - 753,829 Deferred income taxes - - 52,012 503 - 52,515 Minority interest - - - 20,791 - 20,791 Other non-current liabilities - - 8,840 8,140 - 16,980 ---------- ---------- ----------- ------------ ------------ -------------- Total liabilities 389,690 348,280 428,528 250,728 - 1,417,226 Total shareholders' equity 932,433 1,317,540 1,357,467 111,756 (2,786,763) 932,433 ---------- ---------- ----------- ------------ ------------ -------------- Total liabilities and shareholders' equity $1,322,123 $1,665,820 $ 1,785,995 $ 362,484 $ (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 Consolidated --------- --------- ----------- ---------- ------------ ------------- Net sales $ - $ - $ 2,901,744 $ 671,567 $ - $ 3,573,311 Cost of sales - - 2,211,538 521,770 - 2,733,308 Equity in subsidiary earnings 53,291 59,553 - - (112,844) - --------- --------- ----------- --------- --------- ------------- Gross profit 53,291 59,553 690,206 149,797 (112,844) 840,003 Warehouse operating and selling expenses - - 486,803 118,440 - 605,243 Corporate general and administrative expenses - - 86,919 18,136 - 105,055 Merger and other nonrecurring charges - - 13,285 1,605 - 14,890 --------- --------- ----------- --------- --------- ------------- Operating profit 53,291 59,553 103,199 11,616 (112,844) 114,815 Interest expense and other, net 15,164 10,686 3,043 8,380 - 37,273 --------- --------- ----------- --------- --------- ------------- Income before income taxes 38,127 48,867 100,156 3,236 (112,844) 77,542 Income tax expense (benefit) (6,277) (4,424) 41,457 3,701 - 34,457 --------- --------- ----------- --------- --------- ------------- Income before minority interest 44,404 53,291 58,699 (465) (112,844) 43,085 Minority interest (income) expense - - - (1,319) - (1,319) --------- --------- ----------- --------- --------- ------------- Net income $ 44,404 $ 53,291 $ 58,699 $ 854 $(112,844) $ 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) $ 49,050 $ (15,554) $ 26,916 ---------- --------- ----------- ----------- ------------- Cash flows from investing activities: Proceeds from sale of assets - - 15,112 5,988 21,100 Capital expenditures - - (71,921) (11,038) (82,959) Payment for acquisitions, net of cash acquired - - (17,151) (16,218) (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) (69,199) (17,082) (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 - - 2,000 8,241 10,241 Repayments of long-term borrowings - - (14,384) (17,191) (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) 77,182 31,760 - Other - (22) (22) ---------- --------- ----------- ----------- ------------- Net cash provided by financing activities 49 16,067 8,269 34,853 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 (11,892) 1,383 (10,137) Cash and cash equivalents, beginning of period - - 45,735 8,764 54,499 ---------- --------- ----------- ----------- ------------- Cash and cash equivalents, end of period $ - $ 372 $ 33,843 $ 10,147 $ 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 ================ ================ ================ =================
CORPORATE EXPRESS, INC. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No change of accountants or disagreements on any matter of accounting principles or financial statement disclosures have occurred within the last two years. PART III The information called for by Item 10, Directors and Executive Officers of the Registrant; Item 11, Executive Compensation; Item 12, Security Ownership of Certain Beneficial Owners and Management; and Item 13, Certain Relationships and Related Transactions, is incorporated herein by reference to the Registrants definitive Proxy Statement for its Annual Meeting of Shareholders, presently scheduled to be held on July 14, 1998, which will be filed with the Securities and Exchange Commission within 120 days from the end of the Registrants fiscal year. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements of the Company and its Consolidated Subsidiaries Report of Independent Accountants Consolidated Balance Sheets as of January 31, 1998, March 1, 1997 and March 2, 1996 Consolidated Statements of Operations for the eleven-month period ended January 31, 1998 and the fiscal years ended March 1, 1997, March 2, 1996, and February 25, 1995 Consolidated Statements of Shareholders Equity for the eleven-month period ended January 31, 1998 and the fiscal years ended March 1, 1997, March 2, 1996, and February 25, 1995 Consolidated Statements of Cash Flows for the eleven-month period ended January 31, 1998 and the fiscal years ended March 1, 1997, March 2, 1996, and February 25, 1995 Notes to Consolidated Financial Statements 2. Financial Statement Schedules II. Valuation and Qualifying Accounts 3. Exhibits The following exhibits are incorporated in this report by reference or included and submitted with this report, as indicated. Except as otherwise noted, the exhibit has previously been filed as an exhibit to the Company's Registration Statement on Form S-1, File No. 33-81924 (the "Registration Statement"), and is incorporated herein by reference. CORPORATE EXPRESS, INC. Exhibit Number Description - ------ ----------- 3.1 Articles of Amendment and Restatement of the Articles of Incorporation of Corporate Express, Inc., a Colorado corporation (the "Company"), filed on September 30, 1994. 3.2 Articles of Amendment and Restatement of the Company, filed on August 22, 1996. 3.3 Amended and Restated By-Laws of the Company. 4.1 Specimen Common Stock Certificate of the Company. 4.2 Form of Warrant Agreement. 4.3 Indenture dated as of February 28, 1994 by and among the Company, and the Guarantors named therein and First Trust National Association for the $100,000,000 9 1/8% Senior Subordinated Notes. 4.4 Note Purchase Agreement dated February 22, 1994 by and among the Company, McQuiddy Holdings Inc., McQuiddy Office Designers, Inc., New Jersey Office Supply Inc., Ross-Martin Company Inc., Scott Rice Company Inc., Schwabacher/Frey, Inc., Bayless Stationers, Inc., Donaldson, Lufkin & Jenrette Securities Corporation and Alex Brown & Sons Incorporated. 4.5 Recapitalization Agreement dated December 3, 1991, by and between the Company, J.P. Morgan Investment Corporation ("J.P. Morgan") and Shareholders. 4.6 Recapitalization Agreement dated August 29, 1992 by and among the Company, J.P. Morgan and certain shareholders. 4.7 Indenture dated as of June 24, 1996 by and among the Company and Bankers Trust Company, as trustee, for the 4 1/2% Convertible Notes due July 1, 2000 (including Form of Notes) (incorporated by reference to the Company's Registration Statement on Form S-3, File No. 333- 12451). 4.8 First Supplemental Indenture dated as of October 15, 1996 relating to the Company's 4 1/2% Convertible Notes (incorporated by reference to the Company's Registration Statement on Form S-3, File No. 333-12451). 4.9 Rights Agreement dated as of January 29, 1998 between the Company and Chasemellon Shareholder Services, L.L.C. as Rights Agent (Incorporated by reference to the Company's Form 8-A dated January 30, 1998) 4.10 Form of 4 1/2% Convertible Note (incorporated by reference to the Company's Registration Statement on Form S-3, File No. 333-12451). 10.1 Employment Agreement dated as of August 25, 1993, by and between the Company and Robert King, as amended effective July 15, 1994. 10.2 Amended and Restated 1992 Stock Option Plan, Form of Non-qualified Stock Option Agreement and Form of Incentive Stock Option Agreement. 10.3 1994 Executive Stock Option Plan. Exhibit Number Description - ------ ----------- 10.4 Form of Indemnification Agreement between the Company and its officers and directors. 10.5 1994 Stock Option and Incentive Plan. 10.6 1994 Employee Stock Purchase Plan. 10.7 Employment Agreement dated as of July 31, 1995 by and between the Company and Sam Leno (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 33-95902). 10.8 Agreement among the Company, Synergom, Inc. and OfficeMax, Inc. dated as of August 25, 1995 (incorporated by reference to the Company's Registration Statement on Form S-1, File No. 33-95902). 10.9 Agreement and Plan of Merger dated as of January 6, 1996 among the Company, Delivery Systems, Inc. and DSU Acquisition Corp., as amended (incorporated by reference to the Company's Registration Statement on Form S-4, File No. 333-288). 10.10 Agreement and Plan of Merger dated as of February 8, 1996 by and among the Company, CEX Acquisition Corp., Young, Richard Young, HCC Investments, Inc., Juliet Challenger, Inc. and Wilmington Securities, Inc. (incorporated by reference to the Company's Registration Statement on Form S-4, File No. 333-288). 10.11 Stock Purchase Agreement dated April 22, 1996 by and among the Company, ASAP Software Express, Inc. and the shareholders of ASAP Software Express, Inc. (incorporated by reference to the Company's Form 8-K dated May 15, 1996). 10.12 Corporate Express, Inc. Supplemental Stock Option Plan. 10.13 Amended and Restated Credit Agreement, dated as of November 26, 1996 by and among CEX Holdings, Inc., as borrower, the Company, as a guarantor, the lenders named therein and The First National Bank of Chicago, as agent (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended November 30, 1996). 10.14 Agreement and Plan of Merger dated as of September 10, 1996 among the Company, United TransNet, Inc. and Bevo Acquisition Corp., Inc. (incorporated by reference to the Company's Registration Statement on Form S-4, File No. 333-13217). 10.15 Agreement and Plan of Merger dated as of September 10, 1997 by and among the Company, IDD Acquisition Corp. and Data Documents Incorporated (Incorporated by reference to the Company's Report on Form 8-K dated September 10, 1997) *10.16 Credit Agreement dated as of April 17, 1998 among the Company, CEX Holdings, Inc., Various Banks, The First National Bank of Chicago, as Syndication Agent, the Bank of New York, as Co-Documentation Agent, DLJ Capital Funding, Inc., as Co-Documentation Agent and Bankers Trust Company as Administrative Agent. *21.1 List of Subsidiaries. Exhibit Number Description - ------ ----------- *23.1 Consent of Independent Accountants. *27.1 Financial Data Schedule. (b) Reports on Form 8-K None. - ------------------ *Filed herewith. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CORPORATE EXPRESS, INC. (Registrant) By: /s/ Sam R. Leno Date: October__, 1998 --------------- SAM R. LENO Executive Vice President and Chief Financial Officer SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Year Ended February 25, 1995, and the Periods Ended March 2, 1996, March 1, 1997 and January 31, 1998 (a) (In thousands)
Balance at Charged to Charged to Balance beginning costs and other at end of period expenses accounts Deductions of period --------- -------- -------- ---------- --------- Allowance for Doubtful Accounts: Year ended February 25, 1995 $ 4,090 $ 2,460 $ 1,050 (b) $(1,610) $ 5,990 Period ended March 2, 1996 5,990 4,226 1,633 (4,885) 6,964 Period ended March 1, 1997 6,964 6,152 5,324 (5,436) 13,004 Period ended January 31, 1998 13,004 5,823 1,731 (6,035) 14,523 Inventory Reserve: Year ended February 25, 1995 $ 5,145 $ 2,564 $ 330 (c) $ (850) $ 7,189 Period ended March 2, 1996 7,189 1,212 - (259) 8,142 Period ended March 1, 1997 8,142 4,306 - (3,546) 8,902 Period ended January 31, 1998 8,902 3,871 - (4,752) 8,021 Discontinued Operations Reserve: Year ended February 25, 1995 $ 1,138 $ - $ - $ (697) $ 441 Period ended March 2, 1996 441 - - (222) 219 Period ended March 1, 1997 219 - - (183) 36 Period ended January 31, 1998 36 - - (11) 25 Valuation Allowance for Deferred Tax Assets: Year ended February 25, 1995 $ 5,145 $(2,636) $ 2,345 $ - $ 4,854 Period ended March 2, 1996 4,854 (2,247) (174) - 2,433 Period ended March 1, 1997 2,433 (47) 3,663 (b) - 6,049 Period ended January 31, 1998 6,049 (2,386) (1,408) - 2,255 (a) The period ended January 31, 1998 represents the eleven-month transition period for the Company. The period ended March 1, 1997 includes the twelve months ended March 1, 1997 for Corporate Express, Inc., and fourteen months ended March 1, 1997 for Hermann Marketing, Inc. as each company had different fiscal year ends. The period ended March 2, 1996 includes the twelve months ended March 2, 1996 for Corporate Express, Inc., the fourteen months ended March 2, 1996 for Delivery, the seventeen months ended March 2, 1996 for Young, and the nine months ended March 2, 1996 for Sofco, as each company had different fiscal year ends. (b) Represents additional allowances as a result of the purchase acquisitions and UT, which was accounted for as a pooling of interests effective March 3, 1996. (c) Represents inventory reserve for Lucas pooling.
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