-----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, VgyHCXGKHUMjXJg5IUERRpUGdxGmrOjU0GIdmox5Zt6eVLMHgLfy63om/KPiJ+qT 21+/6n0DWxNwKuzkcSoMSw== 0000927356-99-001037.txt : 19990616 0000927356-99-001037.hdr.sgml : 19990616 ACCESSION NUMBER: 0000927356-99-001037 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990501 FILED AS OF DATE: 19990615 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-Q SEC ACT: SEC FILE NUMBER: 000-24642 FILM NUMBER: 99646809 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-Q 1 10-Q FOR QUARTER ENDED MAY 1, 1999 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 1, 1999 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO _______ Commission File No. 0-24642 CORPORATE EXPRESS, INC. (Exact name of registrant as specified in its charter) Colorado 84-0978360 ------------------------------- -------------- (State of incorporation or (I.R.S. Employer organization) Identification No.) 1 Environmental Way Broomfield, Colorado 80021 ---------------------------------------- --------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (303) 664-2000 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 ---------- --------- The number of shares of the registrant's common stock, par value $.0002 per share, outstanding as of June 9, 1999 was 104,860,563. PART 1 - FINANCIAL INFORMATION Item 1 - Financial Statements CORPORATE EXPRESS, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) ASSETS May 1, January 30, 1999 1999 ----------- ----------- (Unaudited) Current assets: Cash and cash equivalents $ 18,695 $ 14,831 Trade accounts receivable, net of allowance of $11,308 and $11,772, respectively 612,531 601,569 Notes and other receivables 84,701 90,289 Inventories 289,672 285,754 Deferred income taxes 42,799 43,191 Other current assets 51,613 54,759 ------------ ----------- Total current assets 1,100,011 1,090,393 Property and equipment: Land 14,170 14,762 Buildings and leasehold improvements 121,415 120,805 Furniture and equipment 193,284 189,460 ------------ ----------- 328,869 325,027 Less accumulated depreciation (107,932) (100,265) ------------ ----------- 220,937 224,762 Goodwill, net of accumulated amortization of $68,658 and $63,247, respectively 780,057 788,963 Software, net of accumulated amortization of $22,096 and $18,814, respectively 132,685 126,937 Other assets, net 76,448 79,914 Net assets of discontinued operations 122,770 104,621 ------------ ----------- Total assets $2,432,908 $2,415,590 ============ =========== The accompanying notes are an integral part of the consolidated financial statements. 2 CORPORATE EXPRESS, INC. CONSOLIDATED BALANCE SHEETS, Continued (In thousands, except share and per share amounts) LIABILITIES AND SHAREHOLDERS' EQUITY
May 1, January 30, 1999 1999 ----------- ----------- (Unaudited) Current liabilities: Accounts payable - trade $ 409,653 $ 422,087 Accrued payroll and benefits 48,428 57,039 Accrued purchase costs 5,828 6,417 Accrued restructuring, merger and related costs 30,554 36,160 Other accrued liabilities 75,285 61,811 Current portion of long-term debt and capital leases 69,620 67,811 ---------- ---------- Total current liabilities 639,368 651,325 Capital lease obligations 6,960 7,081 Long-term debt 1,221,998 1,200,346 Deferred income taxes 75,574 70,570 Minority interest in subsidiary 22,942 20,986 Other non-current liabilities 18,901 20,955 ---------- ---------- Total liabilities 1,985,743 1,971,263 Contingencies (Note 4) 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, 144,166,172 and 143,778,318 shares issued and outstanding, respectively 29 28 Common stock, non-voting, $.0002 par value, 3,000,000 shares authorized, none issued or outstanding - - Additional paid-in capital 867,320 865,820 Retained earnings 28,589 18,597 Accumulated other comprehensive expense (21,491) (12,836) ---------- ---------- 874,447 871,609 Less: Treasury stock, at cost, 39,635,681 shares (427,282) (427,282) ---------- ---------- Total shareholders' equity 447,165 444,327 ---------- ---------- Total liabilities and shareholders' equity $2,432,908 $2,415,590 ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. 3 CORPORATE EXPRESS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited) Three Months Ended -------------------------- May 1, 1999 May 2, 1998 ----------- ----------- Net sales $972,059 $918,472 Cost of sales 745,433 701,646 -------- -------- Gross profit 226,626 216,826 Warehouse operating and selling expenses 151,369 147,444 Corporate general and administrative expenses 23,832 21,224 Amortization of intangibles 9,042 7,833 -------- -------- Operating profit 42,383 40,325 Interest expense and other, net 22,437 11,670 -------- -------- Income before income taxes 19,946 28,655 Income tax expense 9,115 12,869 -------- -------- Income before minority interest 10,831 15,786 Minority interest expense 839 196 -------- -------- Income from continuing operations 9,992 15,590 Discontinued operations, net of tax: Income from discontinued operations - 223 -------- -------- Income before extraordinary item 9,992 15,813 Extraordinary item, net of tax: Loss on early extinguishment of debt - (1,104) -------- -------- Net income $ 9,992 $ 14,709 ======== ======== Net income per share - Basic: Continuing operations $ 0.10 $ 0.12 Discontinued operations - 0.00 Extraordinary item - (0.01) --------- -------- Net income $ 0.10 $ 0.11 ========= ======== Net income per share - Diluted: Continuing operations $ 0.10 $ 0.12 Discontinued operations - 0.00 Extraordinary item - (0.01) -------- -------- Net income $ 0.10 $ 0.11 ======== ======== Weighted average common shares outstanding: Basic 104,185 134,410 Diluted 104,640 136,729 The accompanying notes are an integral part of the consolidated financial statements. 4 CORPORATE EXPRESS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands, except share amounts) (Unaudited)
Accumulated Common Stock Additional Other Total -------------------- Paid-in Comprehensive Retained Treasury Shareholders' Shares Amount Capital Expense Earnings Stock Equity ------------ ------ ---------- ---------------- -------- --------- ------------- Balance, January 30, 1999 143,778,318 $28 $ 865,820 $(12,836) $18,597 $(427,282) $444,327 Net income 9,992 9,992 Currency translation adjustments (7,745) (7,745) Change in unrealized loss on securities (910) (910) Issuance of common stock 387,854 1 1,500 1,501 ------------- ----- ---------- ---------- ------- ---------- ---------- Balance, May 1, 1999 144,166,172 $29 $ 867,320 $(21,491) $28,589 $(427,282) $447,165 ============= ===== ========== ========== ======= ========== ===========
The accompanying notes are an integral part of the consolidated financial financial statements. 5 CORPORATE EXPRESS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Three Months Ended ------------------------- May 1, 1999 May 2, 1998 ----------- ----------- Cash flows from operating activities: Net income $ 9,992 $ 14,709 Adjustments to reconcile net income to net cash provided by (used in) continuing operating activities: Depreciation 8,236 7,080 Amortization 9,042 7,833 Loss on early extinguishment of debt - 1,104 Minority interest expense 839 196 Income from discontinued operations - (223) Deferred taxes 6,294 4,776 Other 1,883 847 Changes in assets and liabilities, excluding acquisitions: (Increase) decrease in accounts receivable (11,991) 737 Increase in inventory (5,202) (17,014) (Increase) decrease in other current assets 5,047 (2,495) Increase in other assets (155) (2,926) Increase (decrease) in accounts payable (18,272) 1,541 Increase in accrued liabilities 856 9,654 -------- -------- Net cash provided by continuing operating activities 6,569 25,819 -------- -------- Cash flows from investing activities: Capital expenditures (17,126) (19,695) Proceeds from sale of assets 3,218 112 Payment for acquisitions, net of cash acquired (1,352) (21,047) Short-term financial instruments, net (2,056) (994) Other, net (294) (32) -------- -------- Net cash used in investing activities (17,610) (41,656) -------- -------- Cash flows from financing activities: Issuance of common stock 2 156 Repurchase of common stock - (379,250) Debt issuance costs (1,333) (15,150) Proceeds from long-term borrowings 3,806 252,179 Repayments of long-term borrowings (12,553) (6,640) Proceeds from short-term borrowings 18 1,188 Repayments of short-term borrowings (27) (2,075) Net proceeds from line of credit 44,156 151,971 Other - (73) -------- -------- Net cash provided by financing activities 34,069 2,306 -------- -------- Net cash provided (to) from discontinued operations (18,149) 7,654 Effect of foreign currency exchange rate changes on cash (1,015) (156) -------- -------- Increase (decrease) in cash and cash equivalents 3,864 (6,033) Cash and cash equivalents, beginning of period 14,831 32,812 -------- -------- Cash and cash equivalents, end of period $ 18,695 $ 26,779 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 6 CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 1, 1999 (Unaudited) 1. Basis of Presentation and Significant Accounting Policies These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, such interim statements reflect all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position and the results of operations and cash flows for the interim periods presented. Operating results for the three months ended May 1, 1999 are not necessarily indicative of the results to be expected for the full year. These statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 1999. Nature of Operations Corporate Express, Inc. ("Corporate Express" or the "Company") is a global provider of essential goods and services to large corporations and organizations. The Company's current product and service offering includes office supplies, paper, computing and imaging supplies, computer desktop software, office furniture, cleaning supplies, advertising specialties, custom business forms, pressure-sensitive label products, forms management services, and printing. The Company's target customers are large corporations that operate from multiple locations and can benefit from selecting suppliers who can service them in many of their locations. In January 1999, the Company adopted a plan to discontinue its same-day courier delivery services. In May 1999, the Company entered into an agreement to sell its janitorial and cleaning supplies business. The Company will continue to offer certain cleaning products as part of the Company's office products line. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. Acquisitions accounted for as purchases are included in the accounts and operations as of the effective date of the 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 entities in which it owns less than 50% using the equity or cost methods. All intercompany balances and transactions have been eliminated. 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 May 1, 1999, 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 maintains allowances for potential credit losses and historical losses have been within management's expectations. The Company does not enter into financial instruments for trading or speculative purposes. The Company has no financial instrument contracts currently outstanding. 7 CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 1, 1999 (Unaudited) Software 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 straight-line method and is included in Amortization of Intangibles on the Consolidated Statements of Operations. 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 (in thousands):
External Internal Capitalized Total Accumulated Net Costs Costs Interest Retirements Costs Amortization Asset -------- -------- ----------- ------------ ------------ ------------- --------- Balance, January 30, 1999 $87,735 $51,347 $11,616 $(4,947) $145,751 $(18,814) $126,937 Additions 2,586 4,998 1,465 -- 9,049 (3,285) 5,764 Retirements -- -- -- (19) (19) 3 (16) ------- ------- ------- ------- -------- -------- -------- Balance, May 1, 1999 $90,321 $56,345 $13,081 $(4,966) $154,781 $(22,096) $132,685 ======= ======= ======= ======= ======== ======== ========
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 Company adopted this pronouncement effective fiscal 1999; there was not a significant impact on the Company's results of operations. Other Comprehensive Income Accumulated other comprehensive income consists of net income, foreign currency translation and unrealized loss on securities and is presented in the Consolidated Statement of Shareholders' Equity. Balance sheet accounts of foreign operations are translated using the period-end exchange rate, and income statement accounts are translated on a monthly basis using the average exchange rate for the period. Unrealized gains and losses on translation adjustments and marketable securities are recorded in shareholders' equity as other comprehensive income. There were no realized gains during the periods presented. The Company does not currently hedge foreign currency risk exposure. Total other comprehensive income for the three-month periods ended May 1, 1999 and May 2, 1998 was as follows:
Three Months Ended May 1, 1999 May 2, 1998 ------------ ------------ (in thousands) Net income $ 9,992 $14,709 Other comprehensive income (expense): Unrealized foreign currency translation gain (loss) (7,745) 1,279 Unrealized gain (loss) on securities (1,492) 2,398 Income tax (expense) benefit related to items of other comprehensive income 582 (935) ------- ------- Total other comprehensive income $ 1,337 $17,451 ======= =======
8 CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 1, 1999 (Unaudited) 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 1998 consolidated financial statements to conform to the fiscal 1999 presentation. 2. Accrued Purchase Costs In conjunction with acquisitions accounted for as purchases, the Company accrues certain of the direct external costs associated with closing redundant facilities of acquired companies, and severance and relocation payments for the acquired companies' employees. All consolidation projects are planned to be completed within two years of the acquisition date. Balances as of May 1, 1999 primarily represent international consolidation plans. The following table sets forth activity in the Company's accrued purchase costs liability account for the three months ended May 1, 1999:
Disposition Facility Redundant of Assets Total Exit Costs Facilities Severance & Other -------- ----------- ----------- ---------- ------------ (in thousands) Balance, January 30, 1999 $ 6,417 $ 406 $1,838 $3,546 $627 Additions 680 -- 88 373 219 Payments/utilization (1,056) (107) (309) (639) (1) Reversals to goodwill (213) -- (1) (164) (48) ------- ----- ------ ------ ---- Balance, May 1, 1999 $ 5,828 $ 299 $1,616 $3,116 $797 ======= ===== ====== ====== ====
3. Restructuring, Merger and Other Nonrecurring Costs Fiscal 1998 Restructuring Charge In January 1999, the Company adopted a global restructuring plan designed to lower its fixed operating cost structure by reducing the number of its employees and accelerating facility consolidations and closures. As a result of this restructuring plan, the Company recorded a net pre-tax restructuring charge of $57,935,000 in fiscal 1998. The following table sets forth activity in the fiscal 1998 restructuring charge for the quarter ended May 1, 1999:
Employee Accrued Severance & Facility Restructuring Other Asset Termination Closure & & Related Costs Write Downs Costs (1) Consolidations (2) Balance & Costs (3) Total ------------ ------------------ ---------------- ------------ -------- (in thousands) Balance, January 30, 1999 $18,096 $12,574 $30,670 $10,636 $41,306 Payments (3,681) (1,409) (5,090) -- (5,090) Non-cash usage -- -- -- (1,234) (1,234) ------- ------- ------- ------- ------- Balance, May 1, 1999 $14,415 $11,165 $25,580 $ 9,402 $34,982 ======= ======= ======= ======= =======
9 CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 1, 1999 (Unaudited) (1) Employee severance and terminations costs are related to the elimination of certain management positions, facility closures and consolidations. Of the approximately 1,000 employees planned to be terminated, 420 employees have been terminated. Of this total, 150 employees were terminated during the three months ended May 1, 1999. Approximately 430 employees will be terminated during the remainder of fiscal 1999, and the remaining employees will be terminated in fiscal 2000. (2) Facility closure and consolidation costs are the estimated costs to close redundant facilities, lease costs and other costs associated with closed facilities. Of the approximately 70 facilities planned to be closed, 30 facilities have been closed. Of this total, 12 facilities were closed during the three months ended May 1, 1999. Approximately 25 facilities will be closed during the remainder of fiscal 1999, and the remaining facilities will be closed in fiscal 2000. (3) Other asset write-downs and costs are recorded as contra assets and include the expected loss on sale of assets and leasehold improvements and equipment being abandoned or written off as a result of the exit plans. The remaining balance primarily represents assets that will be disposed of in conjunction with facility consolidations and closures, which are expected to occur throughout fiscal 1999 and fiscal 2000. Merger and Other Nonrecurring Charges: The Company accrues, among other things, costs to complete pooling of interests transactions, costs of merging and closing redundant facilities, and costs associated with personnel reductions and centralizing certain administrative functions. The following table sets forth activity in the Company's accrued merger and other nonrecurring charges liability account for the three months ended May 1, 1999:
Employee Accrued Severance & Facility Merger & Other Asset Termination Closure & Related Costs Write Downs Costs(1) Consolidations (2) Balance & Costs (3) Total -------------- ------------------ -------------- ------------ ------- (in thousands) Balance, January 30, 1999 $3,659 $1,831 $5,490 $797 $6,287 Payments/utilization (296) (220) (516) (44) (560) ------ ------ ------ ---- ------ Balance, May 1, 1999 $3,363 $1,611 $4,974 $753 $5,727 ====== ====== ====== ==== ======
(1) The remaining balance of employee severance and termination costs of $3,363,000 reflects remaining balances in the fiscal 1995 charge of $721,000, fiscal 1996 charge of $71,000, and fiscal 1997 charge of $2,571,000. The fiscal 1995 charge reflects the remaining severance associated with the centralization of certain shared services which began in the second quarter of fiscal 1997 and will be substantially completed by the end of fiscal 1999. The phased consolidation of these services reflects the Company's objective to maintain a high level of service to its customers and vendors, while reducing its internal cost structure. The remaining balance of the fiscal 1997 charge primarily reflects the consolidation of the Carolina facilities which is expected to be substantially complete by the end of the third quarter of fiscal 1999. Approximately 20 employees were terminated during the three-month period ended May 1, 1999. The remaining balance reflects the planned terminations of approximately 180 employees, which are expected to occur during the remainder of fiscal 1999. (2) The remaining balance of $1,611,000 reflects remaining balances in the fiscal 1995 charge of $320,000 and the fiscal 1997 charge of $1,291,000. The fiscal 1995 charge reflects the post closing costs related to the centralization of certain shared services. The remaining balance in the fiscal 1997 charge primarily reflects the consolidation of the Carolina facilities which is expected to be substantially complete by the end of the second quarter of fiscal 1999. Three facilities were closed during the three-month period ended May 1, 1999. The remaining balance reflects the planned closure/consolidation of three facilities, which are expected to occur during the remainder of fiscal 1999. 10 CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 1, 1999 (Unaudited) (3) The remaining balance of $753,000 primarily reflects the assets that will be disposed of in conjunction with the facility closures which are expected to be substantially complete by the end of the second quarter of fiscal 1999. 4. 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. 5. Discontinued Operations In January 1999, the Company adopted a plan to discontinue its same-day courier delivery business. This business is accounted for as discontinued operations and, accordingly, its operations are segregated in the accompanying financial statements. The Company has retained an investment banking firm to assist in the sale of the same-day courier delivery business and expects to complete this sale by the end of fiscal 1999. The provision for estimated loss on disposal is based on management's best estimates of the amounts expected to be realized on the sale of the same-day courier delivery business, as well as the estimated results of discontinued operations from the measurement date to the anticipated date of disposal. The amounts the Company will ultimately realize, if any, could differ from the amounts assumed in arriving at the loss anticipated on disposal of the discontinued operations. Net sales for the discontinued delivery business for the three months ended May 1, 1999 were $168,236,000 compared to net sales of $189,589,000 for the three months ended May 2, 1998. Net loss from discontinued operations for the three months ended May 1, 1999 of $8,132,000 includes a tax benefit of $4,901,000, and net income from discontinued operations for the three months ended May 2, 1998 of $223,000 includes a tax related expense of $175,000. The results of discontinued operations include allocations of interest expense based on the ratio of net assets of discontinued operations to the sum of total net assets of the Company. The Delivery total interest, including allocated interest for the three months ended May 1, 1999 and May 2, 1998, was $1,999,000 and $1,375,000, respectively. During the three months ended May 1, 1999, the Company incurred costs of approximately $176,000 in connection with the discontinuance. The results of the discontinued operations do not include any allocation of corporate overhead from the Company during the periods presented. At May 1, 1999, the Net Assets of Discontinued Operations as presented in the accompanying Consolidated Balance Sheet are as follows:
May 1, 1999 January 30, 1999 ----------- ---------------- (in thousands) Current assets $126,801 $121,085 Property, plant and equipment, net 23,967 28,915 Other long-term assets 79,111 78,234 -------- -------- Total assets 229,879 228,234 Current liabilities 58,623 66,614 Long-term liabilities 4,794 4,999 -------- -------- Total liabilities 63,417 71,613 -------- -------- 166,462 156,621 Loss on disposal 43,692 52,000 -------- -------- Net assets of discontinued operations $122,770 $104,621 ======== ========
11 CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 1, 1999 (Unaudited) 6. Earnings Per Share Basic and diluted earnings per share are calculated as follows (in thousands) except per share amounts:
Three Months Three Months Ended Ended May 1, 1999 May 2, 1998 ------------ ------------- Numerator for basic and diluted EPS: Income from continuing operations available to common shareholders $ 9,992 $ 15,590 Discontinued operations -- 223 Extraordinary item -- (1,104) -------- -------- Net income $ 9,992 $ 14,709 ======== ======== Basic EPS Calculation: Denominator: Basic shares (1) 104,185 134,410 ======== ======== Earnings per common share: Continuing operations $ 0.10 $ 0.12 Discontinued operations -- 0.00 Extraordinary item -- (0.01) -------- -------- Net income $ 0.10 $ 0.11 ======== ======== Diluted EPS Calculation: Denominator (2): Basic shares 104,185 134,410 Dilutive stock options and warrants 455 2,319 -------- -------- Diluted shares 104,640 136,729 ======== ======== Earnings per common share: Continuing operations $ 0.10 $ 0.12 Discontinued operations -- 0.00 Extraordinary item -- (0.01) -------- -------- Net income $ 0.10 $ 0.11 ======== ========
(1) The period ended May 2, 1998 reflects the 35,000,000 shares repurchased on April 10, 1998 and the period ended May 1, 1999 reflects 39,635,681 shares repurchased. (2) Antidilutive stock options omitted from the denominator were 14,417,000 and 11,294,000 for the quarters ended May 1, 1999 and May 2, 1998, respectively. 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. 7. Industry and Geographic Area Segment Information The Company is organized primarily on the basis of business segments and geographic locations. The Company operates in four reportable business segments, excluding discontinued operations (1) North America Office Products, (2) International Office Products, (3) Desktop Software Distribution, and (4) Other Products & Services; and two geographic segments (1) U.S. and (2) International. The Company does not allocate its corporate headquarters' expenses to its segments. 12 CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 1, 1999 (Unaudited) Included in the North America Office Products' segment are general office supplies, office furniture, computer and imaging supplies, and manufactured forms and labels. The International Office Products' segment primarily includes general office supplies, office furniture, and computer supplies. The Desktop Software Distribution segment primarily includes the sale of shrink-wrapped product and the sale of licenses for the use of software produced by major software publishers. The Other category primarily includes advertising specialties, promotional products, and cleaning and service supplies (see Note 8). Included in the geographic segment are International segment are operations throughout Canada, Europe and the Southern Pacific. The following tables set forth information as to the Company's reportable segments (in thousands):
Business Segments N. America International Desktop Office Office Software Reconciling Products Products Distribution Other Items (a) Consolidated ---------- ------------- ------------ ------- ----------- ------------ Three months ended May 1, 1999: Net Sales $576,460 $171,194 $155,693 $69,810 $ (1,098) $972,059 Depreciation and amortization 8,931 3,118 1,084 904 3,241 17,278 EBITDA 60,802 4,397 7,794 1,911 (16,142) 58,762 Operating profit 51,975 2,122 6,696 981 (19,391) 42,383 Interest expense and other, net (22,437) -------- Income before income taxes and minority interest $ 19,946 ======== Property, equipment and software, net 126,468 25,887 7,678 23,813 169,776 353,622 Capital expenditures 3,931 2,384 972 2,902 6,937 17,126 Three months ended May 2, 1998: Net sales $582,091 $144,854 $123,817 $70,321 $ (2,611) $918,472 Depreciation and amortization 7,814 2,405 936 754 3,004 14,913 EBITDA 54,450 3,448 7,814 3,142 (13,762) 55,092 Operating profit 46,676 1,167 6,882 2,390 (16,790) 40,325 Interest expense and other, net (11,670) -------- Income before income taxes and minority interest $ 28,655 ======== Property, equipment and software, net 130,954 27,099 5,921 17,338 148,512 329,824 Capital expenditures 6,075 1,131 453 1,175 10,861 19,695
(a) Includes unallocated corporate headquarter expenses and assets, as well as elimination of intersegment revenue. Intersegment sales are generally made at cost plus a nominal handling fee. 13 CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 1, 1999 (Unaudited)
Geographic Segments Domestic International Reconciling Operations Operations Items (a) Consolidated ---------- ------------- ------------ ------------ Three months ended May 1, 1999: Net sales $719,290 $252,769 $ -- $972,059 Property, equipment and software, net 144,984 38,862 169,776 353,622 Three months ended May 2, 1998: Net sales $696,545 $221,927 $ -- $918,472 Property, equipment and software, net 141,598 39,714 148,512 329,824
(a) Includes unallocated corporate headquarter assets. There are no intersegment revenues. 8. Subsequent Events In June 1999, the Company announced that it signed a definitive agreement to sell its janitorial and cleaning supplies business and three forms distribution businesses. The combined annual revenue of these businesses totaled approximately $180 million in fiscal 1998. The agreements are expected to close in the second quarter of fiscal 1999. 9. 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 5/8% Senior Subordinated Notes due 2008 (the "Notes"). The Notes are fully and unconditionally guaranteed on a joint and several basis by the Registrant (the "Parent Guarantor") and certain of the Registrant's subsidiaries. Substantially all of the Issuer's income and cash flow is generated by its subsidiaries. As a result, funds necessary to meet the Issuer's debt service obligations are provided in large part by distributions or advances from its subsidiaries. Under certain circumstances, contractual and legal restrictions, as well as the financial condition and operating requirements of the Issuer's subsidiaries, could limit the Issuer's ability to obtain cash from its subsidiaries for the purpose of meeting its debt service obligations, including the payment of principal and interest on the Notes. The following information sets forth the condensed consolidating balance sheet of the Registrant as of May 1, 1999 and condensed consolidating statements of operations and cash flows for the three months ended May 1, 1999 and May 2, 1998, respectively. 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. 14 CORPORATE EXPRESS, INC. CONDENSED CONSOLIDATING BALANCE SHEET May 1, 1999 (unaudited)
Subsidiary Parent Issuer Subsidiary Non Guarantor of Notes Guarantors Guarantors Eliminations Consolidated ---------- ------------ ----------- ---------- ------------- ------------ ASSETS Current assets: Cash and cash equivalents $ - $ 61 $ 14,156 $ 4,478 $ - $ 18,695 Trade accounts receivable, net - - 419,412 193,119 - 612,531 Notes and other receivables - 613 58,615 25,473 - 84,701 Inventories - - 218,584 71,088 - 289,672 Deferred income taxes - - 42,523 276 - 42,799 Other current assets 3,255 - 38,839 9,519 51,613 ---------- ------------ ----------- ---------- ------------- ------------ Total current assets 3,255 674 792,129 303,953 - 1,100,011 Property and Equipment: Land - - 12,800 1,370 - 14,170 Buildings and leasehold improvements - - 106,309 15,106 - 121,415 Furniture and equipment - - 156,676 36,608 - 193,284 ---------- ------------ ----------- ---------- ------------- ------------ - - 275,785 53,084 - 328,869 Less accumulated depreciation - - (88,789) (19,143) - (107,932) ---------- ------------ ----------- ---------- ------------- ------------ Net property and equipment - - 186,996 33,941 - 220,937 Goodwill, net - - 578,040 202,017 - 780,057 Software, net - - 127,765 4,920 132,685 Net investment in and advances to subsidiaries 771,533 1,645,962 - (112,626) (2,304,869) - Other assets, net 2,244 43,665 8,665 21,874 - 76,448 Net assets from discontinued operations - (43,692) 166,462 - - 122,770 ---------- ------------ ----------- ---------- ------------- ------------ Total assets $777,032 $1,646,609 $1,860,057 $ 454,079 $ (2,304,869) $ 2,432,908 ========== ============ =========== ========== ============= ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable - trade $ - $ - $ 291,735 $ 117,918 $ - $ 409,653 Accrued payroll and benefits - - 38,875 9,553 - 48,428 Accrued purchase costs - - 958 4,870 - 5,828 Accrued restructuring, merger and related costs - - 21,844 8,710 - 30,554 Other accrued liabilities 4,867 14,992 23,011 32,415 - 75,285 Current portion of long-term debt and capital leases - 7,779 11,268 50,573 - 69,620 ---------- ------------ ----------- ---------- ------------- ------------ Total current liabilities 4,867 22,771 387,691 224,039 - 639,368 Capital lease obligations - - 4,723 2,237 - 6,960 Long-term debt 325,000 852,305 18,236 26,457 - 1,221,998 Deferred income taxes - 75,033 541 - 75,574 Minority interest in subsidiaries - - - 22,942 - 22,942 Other non-current liabilities - - 11,452 7,449 - 18,901 ---------- ------------ ----------- ---------- ------------- ------------ Total liabilities 329,867 875,076 497,135 283,665 - 1,985,743 Total shareholders' equity 447,165 771,533 1,362,922 170,414 (2,304,869) 447,165 ---------- ------------ ----------- ---------- ------------- ------------ Total liabilities and shareholders' equity $777,032 $1,646,609 $1,860,057 $ 454,079 $ (2,304,869) $ 2,432,908 ========== ============ =========== ========== ============= ============
15 CORPORATE EXPRESS, INC. CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS Three Months Ended May 1, 1999 (unaudited)
Subsidiary Parent Issuer Subsidiary Non Guarantor of Notes Guarantors Guarantors Eliminations Consolidated --------- --------- ----------- ----------- ------------ ------------ Net sales $ - $ - $ 719,290 $ 252,769 $ - $ 972,059 Cost of sales - - 545,238 200,195 - 745,433 Equity in subsidiary earnings 12,397 21,503 - - (33,900) - --------- --------- ----------- ----------- ------------ ------------ Gross profit 12,397 21,503 174,052 52,574 (33,900) 226,626 Warehouse operating and selling expenses - - 113,815 37,554 - 151,369 Corporate general and administrative expenses - - 18,765 5,067 - 23,832 Amortization of intangibles - - 7,019 2,023 - 9,042 --------- --------- ----------- ----------- ------------ ------------ Operating profit 12,397 21,503 34,453 7,930 (33,900) 42,383 Interest expense and other, net 4,114 15,579 284 2,460 - 22,437 --------- --------- ----------- ----------- ------------ ------------ Income before income taxes 8,283 5,924 34,169 5,470 (33,900) 19,946 Income tax expense (benefit) (1,709) (6,473) 14,198 3,099 - 9,115 --------- --------- ----------- ----------- ------------ ------------ Income before minority interest 9,992 12,397 19,971 2,371 (33,900) 10,831 Minority interest expense - - - 839 - 839 --------- --------- ----------- ----------- ------------ ------------ Net income $ 9,992 $12,397 $ 19,971 $ 1,532 $ (33,900) $ 9,992 ========= ========= =========== =========== ============ ============
16 CORPORATE EXPRESS, INC. CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS Three Months Ended May 2, 1998 (unaudited)
Subsidiary Parent Issuer Subsidiary Non Guarantor of Notes Guarantors Guarantors Eliminations Consolidated --------- --------- ---------- ---------- ------------ ------------ Net sales $ - $ - $696,545 $221,927 $ - $918,472 Cost of sales - - 526,388 175,258 - 701,646 Equity in subsidiary earnings 17,026 21,022 - - (38,048) - ------- ------- -------- -------- -------- -------- Gross profit 17,026 21,022 170,157 46,669 (38,048) 216,826 Warehouse operating and selling expenses - - 111,932 35,512 - 147,444 Corporate general and administrative expenses - - 17,470 3,754 - 21,224 Amortization of intangibles - - 6,126 1,707 - 7,833 ------- ------- -------- -------- -------- -------- Operating profit 17,026 21,022 34,629 5,696 (38,048) 40,325 Interest expense and other, net 4,134 5,160 (289) 2,665 - 11,670 ------- ------- -------- -------- -------- -------- Income before income taxes 12,892 15,862 34,918 3,031 (38,048) 28,655 Income tax expense (benefit) (1,817) (2,268) 15,346 1,608 - 12,869 ------- ------- -------- -------- -------- -------- Income before minority interest 14,709 18,130 19,572 1,423 (38,048) 15,786 Minority interest expense - - 196 - 196 ------- ------- -------- -------- -------- -------- Income from continuing operations 14,709 18,130 19,572 1,227 (38,048) 15,590 Discontinued operations, net of tax: Income from discontinued operations - - 223 - - 223 ------- ------- -------- -------- -------- -------- Income before extraordinary item 14,709 18,130 19,795 1,227 (38,048) 15,813 Extraordinary item: Loss on early extinguishment of debt - (1,104) - - - (1,104) ------- ------- -------- -------- -------- -------- Net income $14,709 $17,026 $ 19,795 $ 1,227 $(38,048) $ 14,709 ======= ======= ======== ======== ======== ========
17 CORPORATE EXPRESS, INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS Three Months Ended May 1, 1999 (unaudited)
Subsidiary Parent Issuer Subsidiary Non Guarantor of Notes Guarantors Guarantors Consolidated --------- --------- ---------- ---------- ------------ Net cash provided by (used in) operating activities $ - $ (8,694) $14,040 $ 1,223 $ 6,569 --------- --------- ---------- ---------- ------------ Cash flows from investing activities: Capital expenditures - - (13,925) (3,201) (17,126) Proceeds from sale of assets - - 3,132 86 3,218 Payment for acquisitions, net of cash acquired - - (233) (1,119) (1,352) Short-term financial instruments, net - - - (2,056) (2,056) Other, net - - (1,449) 1,155 (294) --------- --------- ---------- ---------- ------------ Net cash provided by (used in) investing activities - - (12,475) (5,135) (17,610) --------- --------- ---------- ---------- ------------ Cash flows from financing activities: Issuance of common stock 2 - - - 2 Debt issuance costs - (1,351) 18 - (1,333) Proceeds from long-term borrowings - - - 3,806 3,806 Repayments of long-term borrowings - (625) (6,503) (5,425) (12,553) Proceeds from short-term borrowings - - - 18 18 Repayments of short-term borrowings - - - (27) (27) Net proceeds from (payments on) line of credit - 31,400 14,709 (1,953) 44,156 Net activity in investment in and advances (to) from subsidiaries (2) (22,136) 14,362 7,776 - --------- --------- ---------- ---------- ------------ Net cash provided by (used in) financing activities - 7,288 22,586 4,195 34,069 --------- --------- ---------- ---------- ------------ Net cash provided to discontinued operations - - (18,149) - (18,149) Effect of foreign currency exchange rates changes on cash - - (72) (943) (1,015) --------- --------- ---------- ---------- ------------ Increase (decrease) in cash and cash equivalents - (1,406) 5,930 (660) 3,864 Cash and cash equivalents, beginning of period - 1,467 8,226 5,138 14,831 --------- --------- ---------- ---------- ------------ Cash and cash equivalents, end of period $ - $ 61 $14,156 $ 4,478 $ 18,695 ========= ========= ========== ========== ============
18 CORPORATE EXPRESS, INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS Three Months Ended May 2, 1998 (unaudited)
Subsidiary Parent Issuer Subsidiary Non Guarantor of Notes Guarantors Guarantors Consolidated ---------- ---------- ----------- ----------- -------------- Net cash provided by (used in) operating activities $ (18,956) $ (19,430) $ 81,809 $ (17,604) $ 25,819 ---------- ---------- ----------- ----------- -------------- Cash flows from investing activities: Capital expenditures - - (17,758) (1,937) (19,695) Proceeds from sale of assets - - 6 106 112 Payment for acquisitions, net of cash acquired - - (1,687) (19,360) (21,047) Short-term financial instruments, net - - (994) (994) Other, net - - (32) - (32) ---------- ---------- ----------- ----------- -------------- Net cash used in investing activities - - (19,471) (22,185) (41,656) ---------- ---------- ----------- ----------- -------------- Cash flows from financing activities: Issuance of common stock 156 - - - 156 Repurchase of common stock (379,250) - - - (379,250) Debt issuance costs (15,150) - - (15,150) Proceeds from long-term borrowings - 250,000 695 1,484 252,179 Repayments of long-term borrowings - - (5,431) (1,209) (6,640) Proceeds from short-term borrowings - - - 1,188 1,188 Repayments of short-term borrowings - - (4) (2,071) (2,075) Net proceeds from (payments on) line of credit - 139,068 (12,524) 25,427 151,971 Net activity in investment in and advances (to) from subsidiaries 398,050 (351,691) (58,136) 11,777 - Other - - (73) - (73) ---------- ---------- ----------- ----------- -------------- Net cash provided from (used in) financing activities 18,956 22,227 (75,473) 36,596 2,306 ---------- ---------- ----------- ----------- -------------- Net cash provided by discontinued operations - - 7,654 - 7,654 Effect of foreign currency exchange rates changes on cash - - (9) (147) (156) ---------- ---------- ----------- ----------- -------------- Increase (decrease) in cash and cash equivalents - 2,797 (5,490) (3,340) (6,033) Cash and cash equivalents, beginning of period - 372 22,293 10,147 32,812 ---------- ---------- ----------- ----------- -------------- Cash and cash equivalents, end of period $ - $ 3,169 $ 16,803 $ 6,807 $ 26,779 ========== ========== =========== =========== ==============
19 Item 2 -- Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 1999 and the consolidated financial statements and related notes thereto appearing elsewhere in this Form 10-Q. Some of the statements contained in this Management's Discussion and Analysis of this Form 10-Q constitute 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 will not materially differ from the Company's expectations. Factors that could cause actual results or future events to differ include: inability of the Company to successfully identify and execute strategic transactions that create shareholder value; inability to complete divestitures of the delivery business, the cleaning supplies business or other operations on acceptable terms and on the desired timetable, or at all, or to realize the expected operating and financial benefits of the divestitures; inability to achieve the expected cost reductions and other operating benefits relating to the restructuring plan; inability to successfully integrate acquisitions; inability to realize growth from sales initiatives and increase profitability of the core business and to successfully develop and implement the Corporate Supplier plans; and deterioration in general economic conditions and the corresponding impact on revenues; uncertainties related to legislation with respect to independent contract drivers; uncertainties related to the Company's systems and proprietary software; uncertainties related to Year 2000 compliance, particularly with respect to third party readiness; and uncertainties related to competition and to the demand for the products and services offered by the Company. Results of Operations Net Sales from Continuing Operations. Consolidated net sales increased 5.8% to $972,059,000 in the quarter ended May 1, 1999 compared to $918,472,000 in the same three-month period ended May 2, 1998. Net sales for the Company's North America Office Products ("NAOP") segment slightly decreased to $576,460,000 from $582,091,000 during the same three-month period ended May 2, 1998, primarily reflecting certain minor restructuring related business closings and paper price decreases. Net sales for the International Office Products segment increased 18.2% to $171,194,000 from $144,854,000 in the same three-month period ended May 2, 1998 primarily reflecting acquisition related revenue and sales growth, primarily in Australia. The Company acquired 11 International Office Product companies over the course of fiscal 1998. Net sales for the Company's Desktop Software segment increased 25.7% to $155,693,000 from $123,817,000 in the same three-month period ended May 2, 1998 primarily reflecting enterprise agreements with new customers and added software sales to existing customers. Net sales for the Other Products and Services' segment decreased slightly to $69,810,000 from $70,321,000 in the same three-month period ended May 2, 1998. International operations accounted for 26.0% of total sales or $252,769,000 in the quarter ended May 1, 1999 and 24.1% of total sales or $221,927,000 in the same three-month period last year, primarily reflecting strong internal growth in Australia and acquisition revenue. Since May 2, 1998, the Company has expanded its international operations in Canada, Germany, Ireland, the Netherlands and the United Kingdom. The Company currently has no specific plans to significantly expand or enter additional international markets. Gross Profit from Continuing Operations. Cost of sales includes merchandise, occupancy and delivery costs. Consolidated gross profit as a percentage of sales was 23.3% for the quarter ended May 1, 1999 compared to 23.6% for the three-month period ended May 2, 1998. The North America Office Products segment's gross profit percentage increased for the three months ended May 1, 1999 compared to the three months ended May 2, 1998, primarily reflecting enhanced supplier programs. This gross profit increase was offset by increased software sales (which have lower gross profit margins) in the United States and Europe and lower gross margins in Other Products and Services' segment reflecting competitive pressures. 20 Warehouse Operating and Selling Expenses from Continuing Operations. 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 15.6% during the quarter ended May 1, 1999 from 16.1% during the same three- month period ended May 2, 1998. 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 from Continuing Operations. Corporate general and administrative expenses include expenses incurred to provide corporate oversight and support for regional operations and depreciation of the related assets. Corporate general and administrative expenses increased to $23,832,000 in the quarter ended May 1, 1999 from $21,224,000 in the three months ended May 2, 1998. This increase primarily reflects the Company's expanded operations and infrastructure. As a percentage of net sales, corporate general and administrative expenses increased to 2.5% during the three months ended May 1, 1999 from 2.3% during the three months ended May 2, 1998. Amortization of Intangibles from Continuing Operations. Intangible amortization expense primarily reflects goodwill and capitalized software amortization expense. Amortization expense increased to $9,042,000 during the quarter ended May 1, 1999 from $7,833,000 during the same three months ended May 2, 1998, reflecting amortization of the Company's investment in its computer software applications. Operating Profit from Continuing Operations. Consolidated operating profit increased 5.1% to $42,383,000 or 4.4% of net sales for the quarter ended May 1, 1999 compared to operating profit of $40,325,000 or 4.4% of net sales during the same three-month period of last year. The increase in operating profit is due largely to increased revenue for the three months ended May 1, 1999 compared to the three months ended May 2, 1998. Operating profit for the Company's North America Office Products segment increased 11.4% to $51,975,000, or 9.0% of related net sales, from $46,676,000, or 8.0% of related net sales in the same three-month period of last year, primarily reflecting enhanced vendor rebate programs and improved operating efficiencies as a result of the Company's fiscal 1998 restructuring plan. Operating profit for the International Office Products' segment increased to $2,122,000, or 1.2% of related net sales, from $1,167,000, or 0.8% of related net sales in the same three-month period ended May 2, 1998, primarily reflecting acquisition revenue and improved performance in Australia, partially offset by an operating loss in Italy. The Italy operating loss reflects business disruptions from consolidation efforts and system implementations. Operating profit for the Company's Desktop Software segment decreased 2.7% to $6,696,000, or 4.3% of Desktop Software net sales, from $6,882,000, or 5.6% of related net sales, in the three-month period last year reflecting the increased percentage of large volume licensing agreements which typically have lower margins compared to traditional shrink wrap products. The Company expects the Desktop Software segment to continue to experience operating margin pressure primarily due to these lower margin, high volume customer agreements and changes in the rebate structure from the major software publishers. Operating profit for Other Products and Services' segment decreased 59.0% to $981,000, or 1.4% of Other Products and Services' net sales, from $2,390,000, or 3.4% of Other Products and Services' net sales in the same three-month period last year, primarily reflecting lower profits in the Company's cleaning and service supply subsidiary. The Company announced on June 1, 1999 that it signed a definitive agreement to sell this subsidiary. International operations accounted for 18.7% of total operating profit in the current fiscal year compared to 14.1% in the same three-month period of the prior year. International operating profit increased 39.2% to $7,930,000, or 3.1% of international net sales from $5,698,000, or 2.6% of international net sales in the same three-month period last year, primarily reflecting expanded international operations and improved operating performance in Australia and Canada, partially offset by the operating loss in Italy. 21 Net Interest Expense and Other from Continuing Operations. Net interest expense and other of $22,437,000 in the quarter ended May 1, 1999 increased from $11,670,000 in the quarter ended May 2, 1998. This increase reflects increased borrowings under the Senior Secured Credit Facility, which has higher interest rates than the previous Senior Credit Facility, and the sale in May 1998 of the 9-5/8% Senior Subordinated Notes due 2008. The increasing borrowings include the effect of the share repurchases. Minority Interest. Minority interest expense of $839,000 in the quarter compares to $196,000 in the three months ended May 2, 1998, reflecting higher earnings at Corporate Express Australia. The Company owned a 52.9% majority ownership interest in Corporate Express Australia at May 1, 1999. Discontinued Operations. In January 1999, the Company adopted a formal plan to sell its same-day courier delivery business. Accordingly, the net operating results of this business prior to the decision to discontinue are shown as income from discontinued operations, net of tax and was $223,000 during the three months ended May 2, 1998. No adjustments were made to the estimated loss on disposal during the three months ended May 1, 1999. Extraordinary Item. The extraordinary loss of $1,104,000 (which is net of tax of $706,000) in the three months ended May 2, 1998 represents the write-off of deferred financing costs related to the early extinguishment of the Company's former Senior Credit Facility. Net Income. Net income of $9,992,000 in the quarter ended May 1, 1999 compares to a net income of $14,709,000 in the quarter ended May 2, 1998. This decrease reflects higher interest expense as a result of increased borrowings under the Senior Secured Credit Facility and the 9 5/8% Senior Notes issued in May 1998. Balance Sheet Items. The net accounts receivable balance at May 1, 1999 of $612,531,000 increased $10,962,000 from $601,569,000 at January 30, 1999 primarily as a result of internal sales growth throughout the Company. The allowance for doubtful accounts as a percentage of consolidated accounts receivable was 1.8% and 1.9% at May 1, 1999 and January 30, 1999, respectively. This slight decrease reflects the write-off of a large account that was fully reserved at year end. The Company's historical bad debt write-offs have been low due to the high credit quality of its customers, resulting from the Company's focus on large corporations. The inventory balance at May 1, 1999 of $289,672,000 slightly increased by $3,918,000 from $285,754,000 at January 30, 1999. Net goodwill at May 1, 1999 of $780,057,000 decreased from $788,963,000 at January 30, 1999 reflecting current quarter amortization and the impact of foreign currency translation. The accounts payable trade balance at May 1, 1999 of $409,653,000 decreased $12,434,000 from $422,087,000 at January 30, 1999 primarily as a result of the timing of cash payments to suppliers. Accrued purchase costs at May 1, 1999 of $5,828,000 decreased by $589,000 from the January 30, 1999 balance of $6,417,000 reflecting acquisition additions of $680,000 usage of $1,056,000 and reversals of $213,000, reducing previously recorded goodwill. The accrued restructuring, merger and related costs balance at May 1, 1999 of $30,554,000 decreased by $5,606,000 from the January 30, 1999 balance of $36,160,000 reflecting current period usage. Liquidity and Capital Resources The Company has financed its operations through internally generated funds and borrowings from commercial banks and has financed its share repurchases and acquisitions through the use of such funds and the issuance of equity and debt securities. On April 22, 1998, the Company's previous Senior Credit Facility was replaced and paid in full with proceeds from the new Senior Secured Credit Facility. Approximately $1,810,000 of deferred financing costs related to the 22 previous Senior Credit Facility were expensed in the first quarter of fiscal 1998 and are shown as an extraordinary item of $1,104,000, net of tax of $706,000. On April 10, 1998, the Company concluded the Dutch Auction tender offer it commenced on February 5, 1998, pursuant to which it purchased 35,000,000 shares at a price of $10.75 per share. Subsequently, pursuant to a stock repurchase program, the Company acquired an additional 4,635,681 shares in fiscal 1998. The Company has terminated its stock repurchase program. The Company funded the purchase of such shares and the payment of related fees and expenses through its $1.0 billion Senior Secured Credit Facility described below. The Senior Secured Credit Facility consists of a $250,000,000 seven-year term loan and a $750,000,000 five-year revolving credit facility. The Senior Secured Credit Facility is guaranteed by substantially all domestic subsidiaries of the Company and is collateralized by all tangible and intangible property of the guarantors including inventory and receivables. At the borrower's option, interest rates are at a base rate or a Eurodollar rate plus an applicable margin determined by a leverage ratio as defined in the loan agreements. The term loan's interest rate ranges from 0.25% to 0.75% above the revolving loan interest rate. The Company is subject to usual covenants customary for this type of facility including financial covenants. The Company amended the credit agreement to clarify that the restructuring charge is excluded from the computations and to permit the disposal of certain non-core assets. The available funds may be used for general corporate purposes, including permitted acquisitions and permitted share repurchases. As of June 9, 1999, the Company had $505,000,000 outstanding under the Senior Secured Credit Facility and an unused borrowing capacity of $493,125,000 (reflecting the quarterly principal payments on the term loan totaling $1,875,000, which is a permanent reduction to the facility). The Company is in compliance with all debt convenants under the Senior Secured Credit Facility, and the Company expects to remain in compliance with such covenants for fiscal 1999 under its annual business plan for the year, although there can be no assurance to that effect. On May 29, 1998, CEX Holdings, Inc., a wholly-owned subsidiary of the Company, issued at par $350,000,000 principal amount of unsecured 9 5/8% Senior Subordinated Notes due 2008 (the "9 5/8% Notes"). The 9 5/8% Notes are guaranteed by all material domestic subsidiaries of the Company and are subordinated in right of payment to all senior debt which totaled approximately $535,400,000 at May 1, 1999. On or after June 1, 2003 through maturity, the 9 5/8% Notes may be redeemed at the option of the Company, in whole or in part, at redemption rates ranging from 104.813% to 100%. At any time on or before June 1, 2001, the Company may redeem up to 35% of the 9 5/8% Notes with the net cash proceeds of one or more public equity offerings at a redemption price equal to 109.625% of the principal amount thereof, subject to certain restrictions. Semi- annual interest payments are due on June 1 and December 1 and began on December 1, 1998. A portion of the proceeds from the sale of the 9 5/8% Notes was used to repay prior to maturity substantially all of the $90,000,000 9 1/8% Notes and to repay $245,000,000 on the Senior Secured Credit Facility. As a result of the early extinguishment of the 9 1/8% Notes, the Company recorded an extraordinary loss of $4,477,000, net of tax of $2,862,000, in the second quarter of fiscal 1998. In May 1998, the Company settled an interest rate hedging contract based on $300,000,000 of U.S. Treasury notes related to the completed offering of the 9 5/8% Notes. The cost of the settlement of the contract was $7,271,000 and is amortized over the ten-year term of the 9 5/8% Notes, bringing the effective interest rate of the debt instrument to 9.96%. In December 1998, CEX Holdings, Inc. completed a registered exchange offer pursuant to which the 9 5/8% Notes were exchanged for substantially similar notes. During the quarter ended May 1, 1999, the Company had net capital expenditures of $13,908,000 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. The Company expects net capital expenditures for fiscal 1999 of approximately $50,000,000 comprised of approximately $39,000,000 to be used for upgrading and enhancing its information systems and telecommunications equipment and approximately $11,000,000 for warehouse reconfiguration and equipment. Actual capital expenditures for fiscal 1999 may be greater or less than budgeted amounts. Significant cash activity in the three months ended May 1, 1999 was as follows: net capital expenditures of $13,908,000, net payments of long-term borrowings of $8,747,000, net cash provided to discontinued operations of 23 $18,149,000 and other uses of $6,057,000, offset by net proceeds under lines of credit of $44,156,000 and cash provided by operations of $6,569,000. The Company does not enter into financial instrument contracts for trading or speculative purposes. The Company has no financial instrument contracts currently outstanding. The Company believes that the borrowing capacity under the Senior Secured Credit Facility, together with proceeds from future debt and equity financings and proceeds from the sale of certain assets, 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 activities for the next twelve months. However, actual capital needs may change, and there can be no assurance that the Company will continue to be able to obtain capital on favorable terms in the future, particularly in connection with acquisitions which the Company may complete in the future. 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. Impact of the Year 2000 Issue Readiness. The Company is engaged in an enterprise-wide Year 2000 compliance program, with the objective of completing the process for all critical business systems by August 31, 1999. The Company's ISIS computer software was designed with the Year 2000 issue in mind, and the Company believes that it is Year 2000 compliant. However, the Company uses many different systems and software programs to effect, process and summarize business transactions, and the remediation efforts estimated to be required vary depending upon the systems or sites involved. The following chart summarizes the estimated Year 2000 readiness, as of May 1, 1999, of the Company's programs:
Percent Estimated Year 2000 Initiatives Complete Completion - --------------------- ---------------------------- Y2K enterprise awareness and assessment 100% Complete Y2K detailed inventory 100% Complete Impact assessment 100% Complete Conversion strategy 100% Complete Telephones and PBX systems 95% 6/99 Client servers computing environment 90% 6/99 Network environment 95% 6/99 Corporate systems (primarily Human Resources and Financial) 85% 8/99 Operating systems (order and warehouse management) 80% 6/99 Third party readiness 80% 6/99 Non-IT systems 75% 6/99 Other (electrical, mechanical, etc.) 75% 6/99 Contingency plans 50% 7/99
24 The Company has initiated formal communications with significant suppliers to determine the extent to which the Company is at risk to those third parties' failure to remediate their own Year 2000 issues. In select cases, the Company is involved in the verification of the remediation efforts of those suppliers. The Company believes that because of its large, diverse customer base, potential Year 2000 problems on the part of a customer will not be material to the Company. There can be no guarantee that the systems of other companies on which the Company relies or with which it does business will be timely converted or converted compatibly with the Company or that such deficiencies will not be material to the Company. Costs. The total estimated cost of the Company's Year 2000 project is between $6,000,000 and $8,000,000 and is being funded through operating cash flow. As of May 1, 1999, the Company had spent approximately $5,400,000 on its Year 2000 remedial efforts. The Company has used internal and external resources in its Year 2000 program, although the Company expects to rely primarily on internal resources to complete its program initiatives. Risks. The Company presently believes that its Year 2000 issues can be mitigated through modifications to existing software and conversions to new software for those sites which it believes may be affected. If internal modifications and conversions are not made correctly, or are not made in time, or if there are large scale Year 2000 problems with the ability of the Company's customers to order or its suppliers to provide products, then the Year 2000 issue could have a material adverse impact on the operations of the Company. Contingency Plans. The Company is evaluating, and plans to develop as necessary, contingency plans to handle unresolved Year 2000 issues. For example, the Company believes that it currently has alternative sources for most of its suppliers. In addition, the Company believes that it could revert to manual systems to process many of the transactions that it normally handles by computerized processes although at a substantially reduced volume because of the added time and order prioritizing that would be required. Management's estimates regarding total project costs and completion dates are based on numerous assumptions of future events including the availability of certain resources, third party modification plans and other factors. There can be no assurance that these estimates will be achieved, and specific factors that could cause actual results to differ materially from those plans include the continued availability of trained personnel in this area, the ability to locate and correct all relevant computer codes and similar uncertainties. Item 3 - 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, English Pounds Sterling, Swiss Francs and Euros. 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 May 1, 1999, a hypothetical 10% increase in the Company's weighted average interest rate would have an immaterial effect on the fair value of the Company's fixed-rate financial instruments and would add approximately $1,000,000 of additional interest expense thereby reducing the Company's pre-tax earnings for the three months ended May 1, 1999. The Company had no financial instrument contracts outstanding as of May 1, 1999. 25 PART II -- OTHER INFORMATION Item 1. Legal Proceedings Not applicable. Item 2. Changes in Securities Not applicable. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27.1 Financial Data Schedule (b) Reports on Form 8-K Form 8-K filed on February 12, 1999 26 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CORPORATE EXPRESS, INC. By: /s/ Gary M. Jacobs --------------------- Gary M. Jacobs Executive Vice President, Secretary and Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer) Date: June 15, 1999 27 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CORPORATE EXPRESS CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JAN-29-2000 FEB-01-1999 MAY-01-1999 18,695 0 623,839 11,308 289,672 1,100,011 328,869 107,932 2,432,908 639,368 1,221,998 0 0 29 447,136 2,432,908 972,059 972,059 745,433 184,243 0 0 22,437 19,946 9,115 9,992 0 0 0 9,992 .10 .10
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