-----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, DhKV7S6/rWSmQyqgrBJ5gsxLH+sM2zIAubPB4NcpBrxl/OUoA9fPPmQUh1Em6iWL 2Ggf0FQHLLceGY/e6Q0qGg== 0000927356-99-001500.txt : 19990915 0000927356-99-001500.hdr.sgml : 19990915 ACCESSION NUMBER: 0000927356-99-001500 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990731 FILED AS OF DATE: 19990914 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: 99711571 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 FORM 10-Q 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 July 31, 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 September 8, 1999 was 105,072,710.
PART 1 - FINANCIAL INFORMATION Item 1 - Financial Statements CORPORATE EXPRESS, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) ASSETS July 31, January 30, 1999 1999 -------------- ------------- (Unaudited) Current assets: Cash and cash equivalents $ 15,558 $ 14,831 Trade accounts receivable, net of allowance of $11,491 and $11,772, respectively 601,455 601,569 Notes and other receivables 96,859 90,289 Inventories 270,497 285,754 Deferred income taxes 45,819 43,191 Other current assets 66,577 54,759 -------------- ------------- Total current assets 1,096,765 1,090,393 Property and equipment: Land 13,382 14,762 Buildings and leasehold improvements 114,156 120,805 Furniture and equipment 186,610 189,460 -------------- ------------- 314,148 325,027 Less accumulated depreciation (104,125) (100,265) -------------- ------------- 210,023 224,762 Goodwill, net of accumulated amortization of $73,946 and $66,370, respectively 771,903 788,963 Software, net of accumulated amortization of $25,103 and $18,814, respectively 140,520 126,937 Other assets, net 70,325 79,914 Net assets of discontinued operations 82,978 104,621 -------------- ------------- Total assets $2,372,514 $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 July 31, January 30, 1999 1999 --------------- --------------- (Unaudited) Current liabilities: Accounts payable - trade $ 407,849 $ 422,087 Accrued payroll and benefits 52,789 57,039 Accrued purchase costs 4,701 6,417 Accrued restructuring, merger and related costs 28,120 36,160 Other accrued liabilities 75,010 61,811 Current portion of long-term debt and capital leases 387,904 67,811 --------------- --------------- Total current liabilities 956,373 651,325 Capital lease obligations 12,188 7,081 Long-term debt 831,611 1,200,346 Deferred income taxes 78,456 70,570 Minority interest in subsidiary 24,029 20,986 Other non-current liabilities 31,685 20,955 --------------- --------------- Total liabilities 1,934,342 1,971,263 Contingencies (Note 5) 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, 144,352,881 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 867,914 865,820 Retained earnings 16,153 18,597 Accumulated other comprehensive expense (18,642) (12,836) --------------- --------------- 865,454 871,609 Less: Treasury stock, at cost, 39,635,681 shares (427,282) (427,282) --------------- --------------- Total shareholders' equity 438,172 444,327 --------------- --------------- Total liabilities and shareholders' equity $ 2,372,514 $ 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 Six Months Ended ------------------------- --------------------------- July 31, August 1, July 31, August 1, 1999 1998 1999 1998 ---------- --------- ----------- ----------- Net sales $ 973,079 $ 935,056 $ 1,945,137 $ 1,853,528 Cost of sales 751,584 713,663 1,497,018 1,415,309 ---------- --------- ----------- ----------- Gross profit 221,495 221,393 448,119 438,219 Warehouse operating and selling expenses 148,341 144,242 299,709 291,686 Corporate general and administrative expenses 22,914 22,223 46,746 43,447 Amortization of intangibles 8,916 7,875 17,957 15,708 ---------- --------- ----------- ----------- Operating profit 41,324 47,053 83,707 87,378 Interest expense, net 21,389 20,113 43,766 31,834 Other income, net 21,078 158 21,018 209 ---------- --------- ----------- ----------- Income before income taxes 41,013 27,098 60,959 55,753 Income tax expense 9,142 12,332 18,258 25,201 ---------- --------- ----------- ----------- Income before minority interest 31,871 14,766 42,701 30,552 Minority interest (1,306) (761) (2,145) (957) ---------- --------- ----------- ----------- Income from continuing operations 30,565 14,005 40,556 29,595 Discontinued operations, net of tax: Loss from discontinued operations - (1,729) - (1,506) Loss on disposal (43,000) - (43,000) - ---------- --------- ----------- ----------- Loss on discontinued operations (43,000) (1,729) (43,000) (1,506) ---------- --------- ----------- ----------- Income (loss) before extraordinary item (12,435) 12,276 (2,444) 28,089 Extraordinary item, net of tax: Loss on early extinguishment of debt - (4,477) - (5,581) ---------- --------- ----------- ----------- Net income (loss) $ (12,435) $ 7,799 $ (2,444) $ 22,508 ========== ========= =========== =========== Net income (loss) per share - Basic: Continuing operations $ 0.29 $ 0.13 $ 0.39 $ 0.24 Discontinued operations (0.41) (0.02) (0.41) (0.01) Extraordinary item - (0.04) - (0.04) ---------- --------- ----------- ----------- Net income (loss) $ (0.12) $ 0.07 $ (0.02) $ 0.19 ========== ========= =========== =========== Net income (loss) per share - Diluted: Continuing operations $ 0.28 $ 0.13 $ 0.39 $ 0.23 Discontinued operations (0.40) (0.02) (0.41) (0.01) Extraordinary item - (0.04) - (0.04) ---------- --------- ----------- ----------- Net income (loss) $ (0.12) $ 0.07 $ (0.02) $ 0.18 ========== ========= =========== =========== Weighted average common shares outstanding: Basic 104,590 107,869 104,388 121,142 Diluted 107,204 112,863 105,590 125,156
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 Additional Other Total Common Stock 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 loss (2,444) (2,444) Currency translation adjustments (8,137) (8,137) Change in unrealized loss on securities 2,331 2,331 Issuance of common stock 574,563 1 2,094 2,095 ----------- ------ ---------- ------------- -------- --------- ---------- Balance, July 31, 1999 144,352,881 $ 29 $ 867,914 $ (18,642) $ 16,153 $(427,282) $ 438,172 =========== ====== ========== ============= ======== ========= ==========
The accompanying notes are an integral part of the consolidated financial statements. -5- CORPORATE EXPRESS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Six Months Ended ------------------------- July 31, August 1, 1999 1998 -------- --------- Cash flows from operating activities: Net income (loss) $ (2,444) $ 22,508 Adjustments to reconcile net income (loss) to net cash provided by (used in) continuing operating activities: Depreciation 16,371 16,015 Amortization 17,957 15,708 Loss on early extinguishment of debt - 5,581 Minority interest 2,145 957 Loss on disposal 43,000 - Loss from discontinued operations - 1,506 Deferred taxes 2,610 6,104 Loss on marketable securities 6,472 - Gain on sale of businesses (27,481) - Other 3,183 2,085 Changes in assets and liabilities, excluding acquisitions and sale of businesses: (Increase) in accounts and other receivables (34,712) (15,289) (Increase) decrease in inventory 203 (11,798) (Increase) in other current assets (1,522) (13,759) (Increase) in other assets (2,664) (2,078) Increase (decrease) in accounts payable 15,941 (11,515) Increase in accrued liabilities 10,870 6,307 -------- --------- Net cash provided by continuing operating activities 49,929 22,332 -------- --------- Cash flows from investing activities: Capital expenditures (35,004) (42,547) Proceeds from sale of assets 8,738 301 Proceeds on sales of businesses, net 57,256 - Payment for acquisitions, net of cash acquired (5,053) (25,664) Proceeds from sale of marketable securities 1,084 - Short-term financial instruments, net (6,121) (270) Other, net 5,089 (567) -------- --------- Net cash provided by (used in) investing activities 25,989 (68,747) -------- --------- Cash flows from financing activities: Issuance of common stock 2,095 2,412 Repurchase of common stock - (383,980) Debt issuance costs (1,348) (32,188) Proceeds from long-term borrowings - 615,987 Repayments of long-term borrowings (87,974) (19,071) Proceeds from short-term borrowings - 5,392 Repayments of short-term borrowings - (2,032) Net proceeds from line of credit 33,636 (62,085) Cash paid to retire bonds - (93,747) Other 102 (8) -------- --------- Net cash provided by (used in) financing activities (53,489) 30,680 -------- --------- Net cash (used in) provided by discontinued operations (21,357) 3,094 Effect of foreign currency exchange rate changes on cash (345) 124 -------- --------- Increase (decrease) in cash and cash equivalents 727 (12,517) Cash and cash equivalents, beginning of period 14,831 32,812 -------- --------- Cash and cash equivalents, end of period $ 15,558 $ 20,295 ======== =========
The accompanying notes are an integral part of the consolidated financial statements. -6- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 these interim periods 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, 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 including the expedited trucking business which sold in September 1999. In June 1999, the Company sold 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 July 31, 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 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 6,796 10,015 3,357 -- 20,168 (6,476) 13,692 Retirements -- -- -- (296) (296) 187 (109) ------- ------- ------- ------- -------- -------- -------- Balance, July 31, 1999 $94,531 $61,362 $14,973 $(5,243) $165,623 $(25,103) $140,520 ======= ======= ======= ======= ======== ======== ========
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. Comprehensive Income Accumulated 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. Realized gains and losses from transactions are reflected in Other Income and consist of a realized loss in the three months ended July 31, 1999 of $6,472,000 reflecting both a fair value adjustment for marketable securities and a sale of certain securities during the quarter. The unrealized gain on securities during the quarter ended July 31, 1999 of $5,313,000 reflects the reversal of previous adjustments to fair value to reflect unrealized losses, to now reflect the fair value adjustment recorded as realized losses as a result of the sale during the period of certain marketable securities. The initiation of such sales of marketable securities were a result of the requirements of the merger agreement with Buhrmann NV. Refer to Note 9. Total comprehensive income for the three and six-month periods ended July 31, 1999 and August 1, 1998 was as follows (in thousands):
Three Months Ended Six Months Ended --------------------- --------------------- July 31, August 1, July 31, August 1, 1999 1998 1999 1998 --------- ---------- --------- ---------- Net income (loss) $(12,435) $ 7,799 $(2,444) $22,508 Comprehensive income (expense): Unrealized foreign currency translation loss (392) (5,945) (8,137) (3,204) Unrealized gain (loss) on securities 5,313 (254) 3,821 2,144 Income tax (expense) benefit related to items of other comprehensive income (2,072) 99 (1,490) (836) -------- ------- ------- ------- Total comprehensive income (loss) $ (9,586) $ 1,699 $(8,250) $20,612 ======== ======= ======= =======
-8- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 July 31, 1999 primarily represent international consolidation plans. The following table sets forth activity in the Company's accrued purchase costs liability account for the six months ended July 31, 1999 (in thousands):
Disposition Facility Redundant of Assets Total Exit Costs Facilities Severance & Other -------- ----------- ----------- ---------- ------------ Balance, January 30, 1999 $ 6,417 $ 406 $1,838 $3,546 $627 Additions 680 -- 88 373 219 Payments/utilization (1,843) (144) (776) (881) (42) Reversals to goodwill (553) -- (341) (164) (48) ------- ----- ------ ------ ---- Balance, July 31, 1999 $ 4,701 $ 262 $ 809 $2,874 $756 ======= ===== ====== ====== ====
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 six months ended July 31, 1999 (in thousands):
Employee Accrued Severance & Facility Restructuring Other Asset Termination Closure & & Related Costs Write Downs Costs (1) Consolidations (2) Balance & Costs (3) Total ------------ ------------------ ---------------- ------------ -------- Balance, January 30, 1999 $18,096 $12,574 $30,670 $10,636 $41,306 Payments, net of cash received (6,385) (875) (7,260) -- (7,260) Non-cash usage -- -- -- (2,955) (2,955) ------- ------- ------- ------- ------- Balance, July 31, 1999 $11,711 $11,699 $23,410 $ 7,681 $31,091 ======= ======= ======= ======= =======
-9- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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, 580 employees have been terminated. Of this total, 310 employees were terminated during the six months ended July 31, 1999. Approximately 230 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, 41 facilities have been closed. Of this total, 23 facilities were closed during the six months ended July 31, 1999. Approximately 15 facilities will be closed during the remainder of fiscal 1999, and the remaining facilities will be closed in fiscal 2000. Payments for the six months ended July 31, 1999 have been reduced by approximately $1,300,000 in proceeds from the sale of a redundant facility. (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 six months ended July 31, 1999 (in thousands):
Employee Accrued Severance & Facility Merger & Other Asset Termination Closure & Related Costs Write Downs Costs (1) Consolidations (2) Balance & Costs (3) Total -------------- ------------------ -------------- ------------ ------- Balance, January 30, 1999 $3,659 $1,831 $5,490 $797 $6,287 Payments (471) (309) (780) -- (780) Non-cash usage -- -- -- (64) (64) ------ ------ ------ ---- ------ Balance, July 31, 1999 $3,188 $1,522 $4,710 $733 $5,443 ====== ====== ====== ==== ======
(1) The remaining balance of employee severance and termination costs of $3,188,000 reflects remaining balances in the fiscal 1995 charge of $661,000, fiscal 1996 charge of $71,000, and fiscal 1997 charge of $2,456,000. 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 remaining ongoing severance payments associated with the consolidation of the Carolina facilities that has been substantially completed. (2) The remaining balance of $1,522,000 reflects remaining balances in the fiscal 1995 charge of $309,000 and the fiscal 1997 charge of $1,213,000. 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 remaining ongoing lease and exit costs associated with the consolidation of the Carolina facilities that has been substantially completed. (3) The remaining balance of $733,000 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 third quarter of fiscal 1999. -10- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. Dispositions In June 1999, the Company announced the sale of its janitorial and cleaning supplies business, ("Sofco") to U.S. Foodservice, Inc. and the sale of three forms distribution businesses. The annual net sales of Sofco were approximately $161,000,000 in fiscal 1998 and were included in the Other Products and Services Segment. The annual net sales of the forms businesses were approximately $21,000,000 in fiscal 1998 and were included in North American Office Products. The anticipated aggregate net proceeds from the sale of Sofco and other forms businesses are expected to be between $65,000,000 and $70,000,000 including the result of certain final purchase price adjustments. Approximately $57,256,000 of the anticipated proceeds have been received during the quarter. The estimated pre-tax gain on the sale of Sofco and forms businesses is approximately $27,481,000 and is included in Other Income. 5. Contingencies On or about July 20, 1999 and subsequently thereto, Corporate Express and each of the members of its Board of Directors were sued by certain individual shareholders in four separate class action lawsuits which are being consolidated in Colorado State Court, Boulder County. The shareholders have alleged that the Company's merger with Buhrmann is unfair and a breach of fiduciary duty of the Company's Board of Directors, which will result in damages to the shareholders. The Company believes the claims are without merit and is pursuing a prompt settlement which it does not expect to be material. Additionally, the Company is subject to certain legal proceedings in the normal course of business. 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. 6. 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 for all periods presented. 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. Accordingly, the Company recorded a provision for estimated losses in fiscal 1998 of $52,000,000 net of applicable income tax benefits. In the three-month period ended July 31, 1999, the Company revised its initial estimates and provided for an additional loss estimate of $43,000,000 net of applicable income tax benefits of $4,000,000. This additional loss reflects a revised estimate of sales proceeds based on lower than expected operating performance and the acceleration of the sale dates as required by the Buhrmann NV merger agreement. 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. See Note 10 Subsequent Events. Net sales for the discontinued delivery business for the three and six- month periods ended July 31, 1999 were $160,357,000 and $328,593,000 compared to net sales of $183,106,000 and $372,695,000 for the three and six-month periods ended August 1, 1998. Net loss from discontinued operations for the three and six-month periods ended July 31, 1999 of $13,283,000 and $21,415,000 are net of tax benefits of $8,182,000 and $13,084,000, respectively. Net loss from discontinued operations for the three and six-month periods ended August 1, 1998 of $1,729,000 and $1,506,000 are net of tax benefits of $1,708,000 and $1,533,000, respectively. 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-month periods ended July 31, 1999 and August 1, 1998 was $2,068,000 and $2,262,000, respectively and $4,066,000 and $3,637,000 for the related six-month periods. During the three- and six month periods ended July 31, 1999, the Company incurred expenses of approximately $263,000 and $439,000 to facilitate the disposition. The results of the discontinued operations do not include any allocation of corporate overhead from the Company during the periods presented. -11- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Net Assets of Discontinued Operations as presented in the accompanying Consolidated Balance Sheet are as follows (in thousands):
July 31, 1999 January 30, 1999 ------------- ---------------- Current assets $107,619 $121,085 Property, plant and equipment, net 21,512 28,915 Other long-term assets 77,750 78,234 -------- -------- Total assets 206,881 228,234 Current liabilities 46,697 66,614 Long-term liabilities 4,060 4,999 -------- -------- Total liabilities 50,757 71,613 -------- -------- 156,124 156,621 Loss on disposal 73,146 52,000 -------- -------- Net assets of discontinued operations $ 82,978 $104,621 ======== ========
7. Earnings Per Share Basic and diluted earnings per share are calculated as follows (in thousands) except per share amounts:
Three Months Ended Six Months Ended --------------------------- ------------------------ July 31, August 1, July 31, August 1, 1999 1998 1999 1998 --------- --------- --------- --------- Numerator for basic and diluted EPS: Income from continuing operations available to common shareholders $ 30,565 $ 14,005 $ 40,556 $ 29,595 Discontinued operations (43,000) (1,729) (43,000) (1,506) Extraordinary item -- (4,477) -- (5,581) -------- -------- -------- -------- Net income $(12,435) $ 7,799 $ (2,444) $ 22,508 ======== ======== ======== ======== Basic EPS Calculation: Denominator: Basic shares (1) 104,590 107,869 104,388 121,142 Earnings per common share: Continuing operations $ 0.29 $ 0.13 $ 0.39 $ 0.24 Discontinued operations (0.41) (0.02) (0.41) (0.01) Extraordinary item -- (0.04) -- (0.04) -------- -------- -------- -------- Net income $ (0.12) $ 0.07 $ (0.02) $ 0.19 ======== ======== ======== ======== Diluted EPS Calculation: Denominator (2): Basic shares 104,590 107,869 104,388 121,142 Dilutive stock options and warrants 2,614 4,994 1,202 4,014 -------- -------- -------- -------- Diluted shares 107,204 112,863 105,590 125,156 ======== ======== ======== ======== Earnings per common share: Continuing operations $ 0.28 $ 0.13 $ 0.39 $ 0.23 Discontinued operations (0.40) (0.02) (0.41) (0.01) Extraordinary item -- (0.04) -- (0.04) -------- -------- -------- -------- Net income $ (0.12) $ 0.07 $ (0.02) $ 0.18 ======== ======== ======== ========
-12- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) The period ended August 1, 1998 reflects 35,430,000 shares repurchased and the period ended July 31, 1999 reflects 39,635,681 shares repurchased. (2) Antidilutive stock options omitted from the denominator were 6,335,000 and 5,278,000 for the quarters ended July 31, 1999 and August 1, 1998, respectively and 13,197,000 and 5,964,000 for the corresponding six-month periods. 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. 8. 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 American Office Products (including Canada), (2) International Office Products (excluding Canada), (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. Included in the North American 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 software 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 4). Included in the international geographic 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. American International Desktop Office Office Software Other Reconciling Products Products Distribution Products Items (a) Consolidated ----------- ------------- -------------- ---------- ------------ ------------ Three months ended July 31, 1999: Net sales $558,143 $173,319 $180,887 $60,809 $ (79) $973,079 Depreciation and amortization 8,946 2,905 1,096 1,002 3,101 17,050 EBITDA before minority interest (b) 56,254 5,177 9,614 2,003 (14,605) 58,443 Operating profit 47,074 2,340 8,528 1,002 (17,620) 41,324 Interest expense, net (21,389) Other income, net 21,078 -------- Income before income taxes and minority interest $ 41,013 ======== Capital expenditures 6,115 1,526 559 1,948 7,730 17,878
-13- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Three months ended August 1, 1998: Net sales $ 562,912 $149,384 $151,940 $ 72,344 (1,524) $ 935,056 Depreciation and amortization 9,230 2,779 954 824 3,023 16,810 EBITDA before minority interest (b) 58,879 3,570 12,994 2,809 (14,821) 63,431 Operating profit 50,110 803 12,000 2,001 (17,861) 47,053 Interest expense, net (20,113) Other income, net 158 ---------- Income before income taxes and minority interest $ 27,098 ========== Capital expenditures 6,202 1,917 779 1,350 12,604 22,852 Six months ended July 31, 1999: Net sales $1,134,603 $344,513 $336,580 $130,619 $ (1,178) $1,945,137 Depreciation and amortization 17,877 6,023 2,180 1,906 6,342 34,328 EBITDA before minority interest (b) 117,056 10,413 17,405 3,914 (30,744) 118,044 Operating profit 99,049 4,462 15,224 1,983 (37,011) 83,707 Interest expense, net (43,766) Other income, net 21,018 ---------- Income before income taxes and minority interest $ 60,959 ========== Property, equipment and software, net 126,246 25,329 7,822 16,567 174,579 350,543 Capital expenditures 10,046 3,910 1,531 4,850 14,667 35,004 Six months ended August 1, 1998: Net sales $1,145,003 $294,238 $275,757 $142,665 $ (4,135) $1,853,528 Depreciation and amortization 17,044 5,184 1,890 1,578 6,027 31,723 EBITDA before minority interest (b) 113,329 7,210 20,808 5,951 (28,580) 118,718 Operating profit 96,786 1,970 18,882 4,391 (34,651) 87,378 Interest expense, net (31,834) Other income, net 209 ---------- Income before income taxes and minority interest $ 55,753 ========== Property, equipment and software, net 131,259 26,642 6,423 $17,853 158,360 340,537 Capital expenditures 12,277 3,048 1,232 2,525 23,465 42,547
(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. (b) EBITDA for reporting purposes excludes restructuring and other non-recurring charges and other one time gains or losses.
Geographic Segments Domestic International Reconciling Operations Operations Items (a) Consolidated ---------- ------------- ------------ ------------ Three months ended July 31, 1999: Net sales $ 716,576 $ 256,503 -- $ 973,079 Three months ended August 1, 1998: Net sales $ 713,332 $ 221,724 -- $ 935,056
-14- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Six months ended July 31, 1999: Net sales $1,435,867 $509,270 $ -- $1,945,137 Property, equipment and software, net 141,546 34,418 174,579 350,543 Six months ended August 1, 1998: Net sales $1,409,877 $443,651 $ -- $1,853,528 Property, equipment and software, net 143,425 38,752 158,360 340,537
(a) Includes unallocated corporate headquarter assets. There are no intersegment revenues. 9. Merger Agreement On July 13, 1999, the Company announced a merger agreement with Buhrmann NV, an international Dutch based business services and distribution company. Buhrmann is the parent company of the US-based BT Office Products company. The merger agreement provides for Buhrmann to pay $9.70 per share in cash for Corporate Express common stock, subject to certain conditions and possible adjustments. On August 12, 1999, the Company announced that the pre-merger Notification Office of the Federal Trade Commission granted early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. On September 10, 1999, the European Commission indicated that it had no objections to the proposed merger. The completion of the transaction depends on several remaining conditions, including the sale of Corporate Express Delivery Systems and approval by the Corporate Express shareholders. The Company anticipates that this merger transaction will close at the end of October 1999. 10. Subsequent Events On September 2, 1999, the Company announced the closing of the sale of Corporate Express Delivery Systems - Expedited, Inc. ("Expedited") to WorldPoint Logistics. Expedited was a subsidiary of Corporate Express Delivery Systems which was discontinued in fiscal 1998. On September 8, 1999, a definitive merger agreement was signed to sell the remaining discontinued operations of Corporate Express Delivery Systems, Inc. to United Shipping & Technology, Inc. The anticipated consideration for these sales transactions has been reflected in determining the additional loss on discontinued operations recorded during the quarter ended July 31, 1999. The Company anticipates that this transaction will close in the third quarter of fiscal 1999. As a result of the regulatory approvals set forth in Note 9 above (Merger Agreement) and the sale discussed in the paragraph above, substantially all of the material conditions to closing the Buhrmann merger agreement will be satisfied upon completion of the Delivery sale other than the required shareholder approval. The Company does not anticipate a downward adjustment to Buhrmann's cash offer price of $9.70 per share for Corporate Express common stock. However, there can be no assurance that the merger transactions will close or that $9.70 will be the actual cash price received. 11. 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 $350,000,000 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 July 31, 1999 and condensed consolidating statements of operations for the three and six-month periods ended July 31, 1999 and August 1, 1998, respectively and cash flows for the six-month periods ended July 31, 1999 and August 1, 1998. 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. -15- CORPORATE EXPRESS, INC. CONDENSED CONSOLIDATING BALANCE SHEET (in thousands) July 31, 1999 (unaudited)
Subsidiary Parent Issuer Subsidiary Non Guarantor of Notes Guarantors Guarantors Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ - $ 105 $ 9,763 $ 5,690 $ - $ 15,558 Trade accounts receivable, net - - 403,545 197,910 - 601,455 Notes and other receivables - 500 74,539 21,820 - 96,859 Inventories - - 193,275 77,222 - 270,497 Deferred income taxes - - 45,539 280 - 45,819 Other current assets - - 50,799 15,778 66,577 ------------ ------------ ------------ ------------ ------------ ------------ Total current assets - 605 777,460 318,700 - 1,096,765 Property and Equipment: Land - - 12,434 948 - 13,382 Buildings and leasehold improvements 102,181 11,975 114,156 Property and equipment - - 151,543 35,067 - 186,610 ------------ ------------ ------------ ------------ ------------ ------------ - - 266,158 47,990 - 314,148 Less accumulated depreciation - - (85,398) (18,727) - (104,125) ------------ ------------ ------------ ------------ ------------ ------------ Net property and equipment - - 180,760 29,263 - 210,023 Goodwill, net - - 570,358 201,545 - 771,903 Net investment in and advances to subsidiaries 774,049 1,624,578 - (123,690) (2,274,937) - Capitalized software, net 135,365 5,155 140,520 Other assets, net 1,777 33,803 9,498 25,247 - 70,325 Net assets from discontinued operations - (73,146) 156,124 - - 82,978 ------------ ------------ ------------ ------------ ------------ ------------ Total assets $ 775,826 $ 1,585,840 $ 1,829,565 $ 456,220 $ (2,274,937) $ 2,372,514 ============ ============ ============ ============ ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable - trade $ - $ - $ 273,695 $ 134,154 $ - $ 407,849 Accrued payroll and benefits - - 42,165 10,624 - 52,789 Accrued purchase costs - - 580 4,121 - 4,701 Accrued restructuring, merger and related costs - - 19,932 8,188 - 28,120 Other accrued liabilities 12,654 6,356 28,489 27,511 - 75,010 Current portion of long-term debt and capital leases 325,000 2,500 9,347 51,057 - 387,904 ------------ ------------ ------------ ------------ ------------ ------------ Total current liabilities 337,654 8,856 374,208 235,655 - 956,373 Capital lease obligations - - 10,208 1,980 - 12,188 Long-term debt - 802,935 13,646 15,030 - 831,611 Deferred income taxes - 77,919 537 - 78,456 Minority interest in subsidiaries - - 137 23,892 - 24,029 Other non-current liabilities - - 24,115 7,570 - 31,685 ------------ ------------ ------------ ------------ ------------ ------------ Total liabilities 337,654 811,791 500,233 284,664 - 1,934,342 Total shareholders' equity 438,172 774,049 1,329,332 171,556 (2,274,937) 438,172 ------------ ------------ ------------ ------------ ------------ ------------ Total liabilities and shareholders' equity $ 775,826 $ 1,585,840 $ 1,829,565 $ 456,220 $ (2,274,937) $ 2,372,514 ============ ============ ============ ============ ============ ============
-16- CORPORATE EXPRESS, INC. CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS Three Months Ended July 31, 1999 (in thousands) (unaudited)
Subsidiary Parent Issuer Subsidiary Non Guarantor of Notes Guarantors Guarantors Eliminations Consolidated --------- -------- ---------- ---------- ------------ ------------ Net sales $ - $ - $ 716,577 $ 256,502 $ - $ 973,079 Cost of sales - - 547,946 203,638 - 751,584 Equity in subsidiary earnings (8,564) 33,097 - - (24,533) - --------- -------- ---------- ---------- ------------ ------------ Gross profit (8,564) 33,097 168,631 52,864 (24,533) 221,495 Warehouse operating and selling expenses - - 110,747 37,594 - 148,341 Corporate general and administrative expenses - - 17,054 5,860 - 22,914 Amortization of intangibles - - 6,951 1,965 - 8,916 --------- -------- ---------- ---------- ------------ ------------ Operating profit (loss) (8,564) 33,097 33,879 7,445 (24,533) 41,324 Interest (income) expense, net 4,194 15,712 (594) 2,077 - 21,389 Other (income) expense, net - (21,009) (147) 78 - (21,078) --------- -------- ---------- ---------- ------------ ------------ Income (loss) before income taxes (12,758) 38,394 34,620 5,290 (24,533) 41,013 Income tax expense (benefit) (323) 3,958 2,628 2,879 - 9,142 --------- -------- ---------- ---------- ------------ ------------ Income (loss) before minority interest (12,435) 34,436 31,992 2,411 (24,533) 31,871 Minority interest - - - (1,306) - (1,306) --------- -------- ---------- ---------- ------------ ------------ Income (loss) from continuing operations (12,435) 34,436 31,992 1,105 (24,533) 30,565 Discontinued operations, net of tax: Loss on disposal - (43,000) - - - (43,000) --------- -------- ---------- ---------- ------------ ------------ Loss from discontinued operations - (43,000) - - - (43,000) --------- -------- ---------- ---------- ------------ ------------ Net income (loss) $ (12,435) $ (8,564) $ 31,992 $ 1,105 $ (24,533) $ (12,435) ========= ======== ========== ========== ============ ============
-17- CORPORATE EXPRESS, INC. CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS Three Months Ended August 1, 1998 (in thousands) (unaudited)
Subsidiary Parent Issuer Subsidiary Non Guarantor of Notes Guarantors Guarantors Eliminations Consolidated --------- -------- ---------- ---------- ------------ ------------ Net sales $ - $ - $ 713,332 $ 221,724 $ - $ 935,056 Cost of sales - - 538,817 174,846 - 713,663 Equity in subsidiary earnings 10,083 22,472 - - (32,555) - --------- -------- ---------- ---------- ------------ ------------ Gross profit 10,083 22,472 174,515 46,878 (32,555) 221,393 Warehouse operating and selling expenses - - 108,255 35,987 - 144,242 Corporate general and administrative expenses - - 18,491 3,732 - 22,223 Amortization of intangibles - - 6,124 1,751 - 7,875 --------- -------- ---------- ---------- ------------ ------------ Operating profit (loss) 10,083 22,472 41,645 5,408 (32,555) 47,053 Interest expense and other, net 4,113 14,201 (1,444) 3,085 - 19,955 --------- -------- ---------- ---------- ------------ ------------ Income (loss) before income taxes 5,970 8,271 43,089 2,323 (32,555) 27,098 Income tax expense (benefit) (1,829) (6,289) 19,304 1,146 - 12,332 --------- -------- ---------- ---------- ------------ ------------ Income (loss) before minority interest 7,799 14,560 23,785 1,177 (32,555) 14,766 Minority interest - - - (761) - (761) --------- -------- ---------- ---------- ------------ ------------ Income (loss) from continuing operations 7,799 14,560 23,785 416 (32,555) 14,005 Discontinued operations, net of tax: Loss from discontinued operations - - (1,729) - - (1,729) --------- -------- ---------- ---------- ------------ ------------ Income (loss) before extraordinary item 7,799 14,560 22,056 416 (32,555) 12,276 Extraordinary item: Loss on early extinguishment of debt - (4,477) - - - (4,477) --------- -------- ---------- ---------- ------------ ------------ Net income (loss) $ 7,799 $ 10,083 $ 22,056 $ 416 $ (32,555) $ 7,799 ========= ======== ========== ========== ============ ============
-18- CORPORATE EXPRESS, INC. CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS Six Months Ended July 31, 1999 (in thousands) (unaudited)
Subsidiary Parent Issuer Subsidiary Non Guarantor of Notes Guarantors Guarantors Eliminations Consolidated --------- -------- ---------- ---------- ------------ ------------ Net sales $ - $ - $1,435,866 $ 509,271 $ - $ 1,945,137 Cost of sales - - 1,093,185 403,833 - 1,497,018 Equity in subsidiary earnings 3,832 54,600 - - (58,432) - --------- -------- ---------- ---------- ------------ ------------ Gross profit 3,832 54,600 342,681 105,438 (58,432) 448,119 Warehouse operating and selling expenses - - 224,561 75,148 - 299,709 Corporate general and administrative expenses - - 35,819 10,927 - 46,746 Amortization of intangibles - - 13,969 3,988 - 17,957 --------- -------- ---------- ---------- ------------ ------------ Operating profit (loss) 3,832 54,600 68,332 15,375 (58,432) 83,707 Interest (income) expense, net 8,308 31,292 (385) 4,551 43,766 Other (income) expense - (21,009) (73) 64 - (21,018) --------- -------- ---------- ---------- ------------ ------------ Income (loss) before income taxes (4,476) 44,317 68,790 10,760 (58,432) 60,959 Income tax expense (benefit) (2,032) (2,515) 16,827 5,978 - 18,258 --------- -------- ---------- ---------- ------------ ------------ Income (loss) before minority interest (2,444) 46,832 51,963 4,782 (58,432) 42,701 Minority interest - - - (2,145) - (2,145) --------- -------- ---------- ---------- ------------ ------------ Income (loss) from continuing operations (2,444) 46,832 51,963 2,637 (58,432) 40,556 Discontinued operations, net of tax: Loss on disposal - (43,000) - - - (43,000) --------- -------- ---------- ---------- ------------ ------------ Loss from discontinued operations - (43,000) - - - (43,000) --------- -------- ---------- ---------- ------------ ------------ Net income (loss) $ (2,444) $ 3,832 $ 51,963 $ 2,637 $ (58,432) $ (2,444) ========= ======== ========== ========== ============ ============
-19- CORPORATE EXPRESS, INC. CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS Six Months Ended August 1, 1998 (in thousands) (unaudited)
Subsidiary Parent Issuer Subsidiary Non Guarantor of Notes Guarantors Guarantors Eliminations Consolidated --------- -------- ---------- ---------- ------------ ------------ Net sales $ - $ - $1,409,877 $ 443,651 $ - $ 1,853,528 Cost of sales - - 1,065,205 350,104 - 1,415,309 Equity in subsidiary earnings 27,107 43,491 - - (70,598) - --------- -------- ---------- ---------- ------------ ------------ Gross profit 27,107 43,491 344,672 93,547 (70,598) 438,219 Warehouse operating and selling expenses - - 220,187 71,499 - 291,686 Corporate general and administrative expenses - - 35,962 7,485 - 43,447 Amortization of intangibles - - 12,250 3,458 - 15,708 --------- -------- ---------- ---------- ------------ ------------ Operating profit (loss) 27,107 43,491 76,273 11,105 (70,598) 87,378 Interest expense and other, net 8,246 19,361 (1,734) 5,752 - 31,625 --------- -------- ---------- ---------- ------------ ------------ Income (loss) before income taxes 18,861 24,130 78,007 5,353 (70,598) 55,753 Income tax expense (benefit) (3,647) (8,558) 34,652 2,754 - 25,201 --------- -------- ---------- ---------- ------------ ------------ Income (loss) before minority interest 22,508 32,688 43,355 2,599 (70,598) 30,552 Minority interest - - - (957) - (957) --------- -------- ---------- ---------- ------------ ------------ Income (loss) from continuing operations 22,508 32,688 43,355 1,642 (70,598) 29,595 Discontinued operations, net of tax: Loss from discontinued operations - - (1,506) - - (1,506) --------- -------- ---------- ---------- ------------ ------------ Income (loss) before extraordinary item 22,508 32,688 41,849 1,642 (70,598) 28,089 Extraordinary item: Loss on early extinguishment of debt - (5,581) - - - (5,581) --------- -------- ---------- ---------- ------------ ------------ Net income (loss) $ 22,508 $ 27,107 $ 41,849 $ 1,642 $ (70,598) $ 22,508 ========= ======== ========== ========== ============ ============
-20- CORPORATE EXPRESS, INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS Six Months Ended July 31, 1999 (in thousands) (unaudited)
Subsidiary Parent Issuer Subsidiary Non Guarantor of Notes Guarantors Guarantors Consolidated --------- ---------- ---------- ---------- ------------ Net cash provided by (used in) operating activities $(2,261) $(35,452) $ 81,908 $ 5,734 $ 49,929 --------- ---------- ---------- ---------- ------------ Cash flows from investing activities: Capital expenditures - - (29,708) (5,296) (35,004) Proceeds from sale of assets - - 4,639 4,099 8,738 Proceeds on sales of business units, net - 57,256 - - 57,256 Payment for acquisitions, net of cash acquired - - (70) (4,983) (5,053) Proceeds from marketable securities - 1,084 - - 1,084 Short-term financial instruments, net - - - (6,121) (6,121) Other, net - 5,402 (313) - 5,089 --------- ---------- ---------- ---------- ------------ Net cash provided by (used in) investing activities - 63,742 (25,452) (12,301) 25,989 --------- ---------- ---------- ---------- ------------ Cash flows from financing activities: Issuance of common stock 2,099 - - - 2,099 Repurchase of common stock - - - - - Debt issuance costs - (1,348) - - (1,348) Repayments of long-term borrowings - (67,295) (10,448) (10,231) (87,974) Net proceeds from (payments on) line of credit - 43,686 (7,363) (2,687) 33,636 Other - - - 98 98 Net activity in investment in and advances (to) from subsidiaries 162 (4,695) (15,520) 20,053 - -------- --------- ---------- ---------- ------------ Net cash provided from (used in) financing activities 2,261 (29,652) (33,331) 7,233 (53,489) -------- --------- ---------- ---------- ------------ Net cash used in discontinued operations - - (21,357) - (21,357) Effect of foreign currency exchange rates changes on cash - - (232) (113) (345) --------- ---------- ---------- ---------- ----------- Increase (decrease) in cash and cash equivalents - (1,362) 1,536 553 727 Cash and cash equivalents, beginning of period - 1,467 8,226 5,138 14,831 -------- --------- ---------- ---------- ------------ Cash and cash equivalents, end of period $ - $ 105 $ 9,762 $ 5,691 $ 15,558 ======== ========= ========== ========== ============
-21- CORPORATE EXPRESS, INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS Six Months Ended August 1, 1998 (in thousands) (unaudited)
Subsidiary Parent Issuer Subsidiary Non Guarantor of Notes Guarantors Guarantors Consolidated --------- --------- ---------- ---------- ------------ Net cash provided by (used in) operating activities $ (11,385) $ (7,351) $ 53,132 $(12,064) $ 22,332 --------- --------- ---------- ---------- ------------ Cash flows from investing activities: Capital expenditures - - (38,252) (4,295) (42,547) Proceeds from sale of assets - - 99 202 301 Payment for acquisitions, net of cash acquired - - (3,207) (22,457) (25,664) Investment in marketable securities - (270) - - (270) Other, net - - (695) 128 (567) --------- --------- ---------- ---------- ------------ Net cash used in investing activities - (270) (42,055) (26,422) (68,747) --------- --------- ---------- ---------- ------------ Cash flows from financing activities: Issuance of common stock 2,412 - - - 2,412 Repurchase of common stock (383,980) - - - (383,980) Debt issuance costs - (32,171) (17) - (32,188) Proceeds from long-term borrowings - 600,000 772 15,215 615,987 Repayments of long-term borrowings - (625) (9,315) (9,131) (19,071) Proceeds from short-term borrowings - - - 5,392 5,392 Repayments of short-term borrowings - - (5) (2,027) (2,032) Net proceeds from (payments on) line of credit - (57,331) 10,636 (15,390) (62,085) Cash paid to retire bonds - (93,747) - - (93,747) Net activity in investment in and advances (to) from subsidiaries 392,953 (406,682) (25,223) 38,952 - Other - - (8) - (8) --------- --------- ---------- ---------- ------------ Net cash provided by (used in) financing activities 11,385 9,444 (23,160) 33,011 30,680 --------- --------- ---------- ---------- ------------ Net cash provided by discontinued operations - - 3,094 - 3,094 Effect of foreign currency exchange rates changes on cash - - (420) 544 124 --------- --------- ---------- ---------- ------------ Increase (decrease) in cash and cash equivalents - 1,823 (9,409) (4,931) (12,517) Cash and cash equivalents, beginning of period - 372 22,292 10,148 32,812 --------- --------- ---------- ---------- ------------ Cash and cash equivalents, end of period $ - $ 2,195 $ 12,883 $ 5,217 $ 20,295 ========= ========= ========== ========== ============
-22- 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 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 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. Merger Agreement On July 13, 1999, the Company announced a merger agreement with Buhrmann NV, an international Dutch based business services and distribution company. Buhrmann is the parent company of the US-based BT Office Products company. The merger agreement provides for Buhrmann to pay $9.70 per share in cash for Corporate Express common stock, subject to certain conditions and possible adjustments. On August 12, 1999, the Company announced that the pre-merger Notification Office of the Federal Trade Commission granted early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. On September 10, 1999, the European Commission indicated that it had no objections to the proposed merger. The completion of the transaction depends on several remaining conditions, including the sale of Corporate Express Delivery Systems and approval by the Corporate Express shareholders. The Company anticipates that this merger transaction will close at the end of October 1999. Results of Operations Net Sales from Continuing Operations. Consolidated net sales increased 4.1% to $973,079,000 in the quarter ended July 31, 1999 from $935,056,000 in the same three-month period ended August 1, 1998 and increased 4.9% to $1,945,137,000 from $1,853,528,000 for the respective six-month periods. Net sales for the Company's North American Office Products ("NAOP") segment slightly decreased to $558,143,000 from $562,912,000 during the same three-month period ended August 1, 1998 and decreased to $1,134,603,000 from $1,145,003,000 for the respective six-month periods. These decreases reflect only modest revenue growth coupled with certain minor restructuring related business closings, sale of certain forms businesses, consolidation activities and paper price decreases. Net sales for the International Office Products segment (excluding Canada) increased 16.0% to $173,319,000 from $149,384,000 in the same three-month period ended August 1, 1998 and increased 17.1% to $344,513,000 from $294,238,000 for the respective six-month periods. These increases primarily reflect acquisition related revenue and sales growth, primarily in Australia. The Company acquired 5 International Office Product companies from August 1, 1998. Net sales for the Company's Desktop Software segment increased 19.1% to $180,887,000 from $151,940,000 in the same three-month period ended August 1, 1998 and increased 22.1% to $336,580,000 from $275,757,000 for the respective six-month periods. This increase is primarily the result of enterprise agreements with new and existing customers and added software sales to existing customers. Net sales for the Other Products and Services' segment decreased 15.9% to $60,809,000 from $72,344,000 in the same three-month period ended August 1, 1998 and decreased 8.4% to $130,619,000 from $142,665,000 for the respective six-month periods. This decrease is a result of the sale of Sofco in July 1999. -23- International operations (including Canada) accounted for 26.4% of consolidated net sales or $256,503,000 in the quarter ended July 31, 1999 and 23.7% of consolidated net sales or $221,724,000 in the same three-month period last year and 26.2% of consolidated net sales or $509,270,000 for the six months ended July 31, 1999 compared to 23.9% of consolidated net sales or $443,651,000 for the six months ended August 1, 1998. This increase primarily reflects strong internal growth in Australia and acquisition revenue. Since August 1, 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 22.8% and 23.7% for the quarters ended July 31, 1999 and August 1, 1998, respectively, and 23.0% and 23.6% for the respective six-month periods. The lower gross margins primarily reflect increased software sales (which have lower gross profit margins) in the United States and Europe and lower gross margins in certain International Office Products businesses reflecting competitive pressures as well as costs associated with consolidation efforts in Italy. 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 15.2% during the quarter ended July 31, 1999 from 15.4% during the same three- month period ended August 1, 1998 and decreased to 15.4% from 15.7% for the respective six-month periods. 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 $22,914,000 in the quarter ended July 31, 1999 from $22,223,000 in the quarter ended August 1, 1998 and increased to $46,746,000 from $43,447,000 for the respective six-month periods. These increases primarily reflect the Company's expanded operations and infrastructure and continuing centralization of certain administrative functions. As a percentage of net sales, corporate general and administrative expenses remained constant at 2.4% during the three months ended July 31, 1999 and August 1, 1998 and increased slightly to 2.4% from 2.3% for the respective six-month periods. Amortization of Intangibles from Continuing Operations. Intangible amortization expense primarily reflects goodwill and capitalized software amortization expense. Amortization expense increased to $8,916,000 during the quarter ended July 31, 1999 from $7,875,000 during the same three months ended August 1, 1998 and increased to $17,957,000 from $15,708,000 for the respective six-month periods. This increase reflects amortization of the Company's investment in its computer software applications during the current fiscal year. Operating Profit from Continuing Operations. Consolidated operating profit decreased 12.2% to $41,324,000, or 4.2% of net sales, for the quarter ended July 31, 1999 compared to operating profit of $47,053,000, or 5.0% of net sales, during the same three-month period of last year and decreased 4.2% to $83,707,000, or 4.3% of net sales, from $87,378,000, or 4.7% of net sales, for the respective six-month periods. This decrease in operating profit and corresponding margin decline was largely related to the Desktop Software segment, which had unusually strong prior period results, and has experienced gross margin pressure from large volume license agreements, as well as to the North American Office Products segment which was impacted by restructuring and consolidation activity. The Company expects the Desktop Software segment to increase the amount of its operating profit despite continuing to experience operating margin rate pressure primarily due to certain lower margin, high volume customer agreements and changes in the rebate structure from certain large software publishers. Operating profit for the Company's North American Office Products segment decreased 6.1% to $47,074,000, or 8.4% of related net sales, from $50,110,000, or 8.9% of related net sales, in the same three-month period of last year and increased 2.3% to $99,049,000, or 8.7% of related net sales, from $96,786,000, or 8.5% of related net sales, for the respective six-month periods. The decrease in operating profit for the three-month period reflects modest revenue growth coupled with lower merchandise margins, both of which were impacted by restructuring and -24- consolidation activity, including the sale of the forms' businesses. The increase in operating profit for the six-month period primarily reflects slightly increased margins. Operating profit for the International Office Products' segment which excludes Canada increased to $2,340,000, or 1.4% of related net sales, from $803,000, or 0.5% of related net sales, in the same three-month period ended August 1, 1998 and increased to $4,462,000, or 1.3% of related net sales, from $1,970,000, or 0.7% of related net sales, in the respective six-month periods. These increases reflect 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 28.9% to $8,528,000, or 4.7% of Desktop Software net sales, from $12,000,000, or 7.9% of related net sales, in the three-month period last year and decreased 19.4% to $15,224,000, or 4.5% of net sales from $18,882,000, or 6.8% of related net sales, for the respective six-month periods. These decreases reflect unusually strong prior period results, the increased percentage of large volume licensing agreements which typically have lower margins compared to traditional shrink wrap products and the costs of expanding the sales force to target mid-market customers. The Company expects the Desktop Software segment to increase its operating profit despite continuing to experience operating margin rate pressure primarily due to these lower margin, high volume customer agreements and changes in the rebate structure from certain large software publishers. Operating profit for the Other Products and Services segment decreased to $1,002,000, or 1.6% of Other Products and Services' net sales, from $2,001,000, or 2.8% of Other Products and Services' net sales in the same three-month period last year and decreased to $1,982,000, or 1.5% of related net sales from $4,391,000, or 3.1% of related net sales in the respective six-month periods. Excluding the cleaning and service supply subsidiary (Sofco), which was sold at the beginning of July 1999, Other Products and Services recorded operating losses of $603,000 and $142,000 for the three months ended July 31, 1999 and August 1, 1998, respectively, and $1,314,000 and $40,000 for the respective six-month periods. These increased operating losses primarily reflect losses in the current periods for DRC, the Company's software development company, partially offset by an increase in operating profit in Promotional Products. International operations (including Canada) accounted for 18.0% of total operating profit compared to 11.5% in the same three-month period of the prior year and 18.4% compared to 12.7% for the respective six-month periods. International operating profit increased 37.7% to $7,445,000, or 2.9% of international net sales, from $5,408,000, or 2.4% of international net sales, in the same three-month period last year and increased 38.4% to $15,374,000, or 3.0% of international net sales, from $11,106,000, or 2.5% net sales, for the respective six-month periods. These increases reflect expanded international operations and improved operating performance in Australia and Canada, partially offset by the operating loss in Italy. Net Interest Expense from Continuing Operations. Net interest expense of $21,389,000 in the quarter ended July 31, 1999 compares to $20,113,000 in the quarter ended August 1, 1998 and increased to $43,766,000 from $31,834,000 for the respective six-month periods. The increase in the six-month period primarily reflects increased borrowings under the Senior Secured Credit Facility and the 9 5/8% Senior Notes issued in May 1998 to fund the April 1998 share repurchase. Other Income. Other income of $21,078,000 in the quarter ended July 31, 1999 reflects the gain on the sale of Sofco and three forms businesses, partially offset by a loss on the fair value adjustment and sale of marketable securities. Minority Interest. Minority interest expense of $1,306,000 in the quarter compares to $761,000 in the three months ended August 1, 1998 and expense of $2,145,000 compares to expense of $957,000 for the respective six-month periods. These increases reflect higher earnings at Corporate Express Australia. The Company owned a 52.27% majority ownership interest in Corporate Express Australia at July 31, 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 were $1,729,000 and $1,506,000 during the three -25- and six months ended August 1, 1998, respectively. During the quarter ended July 31, 1999, the Company increased by $43,000,000 (net of tax of $4,000,000), the estimated net loss on disposal of the same-day delivery business, reflecting a revised estimate of sale proceeds based on lower than expected operating performance and the acceleration of the sale dates as required by the Buhrmann NV merger agreement. Refer to Notes 9 and 10. Extraordinary Item. The extraordinary loss of $4,477,000 (which is net of tax of $2,862,000) in the three months ended August 1, 1998 represents the cost of early repayment of the 9 1/8% Senior Subordinated Notes Series B due 2004. The extraordinary loss of $5,581,000 in the six months ended August 1, 1998 also includes $1,104,000 (which is net of tax of $706,000) reflecting the write-off of deferred finance costs related to the early extinguishment of the Company's former Senior Credit Facility. Net Income (Loss). Net loss of $12,435,000 in the quarter ended July 31, 1999 compared to net income of $7,799,000 in the quarter ended August 1, 1998. This net loss is primarily a result of the additional $43,000,000 loss on disposal recorded in connection with the sale of the Company's same-day delivery services. The effective tax rate for the three months ended July 31, 1999 was 22.3% compared to 45.5% for the comparable period last year. The effective tax rate for the six months ended July 31, 1999 was 30.0% compared to 45.2% in the comparable period. This lower rate occurs because no income taxes are being provided for on the capital gain portion of the taxable gain on the sale of Sofco and the forms businesses. No tax has been provided since these gains, net of capital loss on sale of securities, are expected to be offset by anticipated capital losses on the sale of discontinued courier delivery operations. Balance Sheet Items. The net accounts receivable balance at July 31, 1999 of $601,455,000 compares to $601,569,000 at January 30, 1999 primarily reflecting sales growth in International Operations and Desktop Software offset by the reduction of receivables as a result of the sale of Sofco and forms businesses. The allowance for doubtful accounts as a percentage of consolidated accounts receivable remained consistent at 1.9% as of July 31, 1999 and January 30, 1999, respectively. The inventory balance at July 31, 1999 of $270,497,000 decreased $15,257,000 from $285,754,000 at January 30, 1999, primarily reflecting the reduction of inventory as a result of the sale of Sofco and forms businesses. Net goodwill at July 31, 1999 of $771,903,000 decreased from $788,963,000 at January 30, 1999 primarily reflecting current year amortization and the sale of Sofco and the forms businesses' goodwill. The accounts payable trade balance at July 31, 1999 of $407,849,000 decreased $14,238,000 from $422,087,000 at January 30, 1999 primarily as a result of the sale of Sofco and forms businesses, partially offset by the timing of cash payments to suppliers. Accrued purchase costs at July 31, 1999 of $4,701,000 decreased by $1,716,000 from the January 30, 1999 balance of $6,417,000 reflecting acquisition additions of $680,000 usage of $1,843,000 and reductions of $553,000, to previously recorded goodwill reflecting final exit costs. The accrued restructuring, merger and related costs balance at July 31, 1999 of $28,120,000 (which amount excludes certain restructuring related asset writedowns) decreased by $8,040,000 from the January 30, 1999 balance of $36,160,000 reflecting current period payments for employee severance and termination costs and facility closure and consolidations. 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 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 -26- related fees and expenses through its $1.0 billion Senior Secured Credit Facility. 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 financial covenant computations, to permit the disposal of certain non-core assets and to permanently reduce the term loan with the net proceeds from the permitted dispositions. The available funds may be used for general corporate purposes, including permitted acquisitions. As of September 8, 1999, the Company had $430,074,000 outstanding under the Senior Secured Credit Facility and an unused borrowing capacity of $476,659,000 (reflecting permanent reductions to the facility for permitted dispositions and the quarterly principal payments on the term loan). 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 $474,252,000 at July 31, 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 six-month period ended July 31, 1999, the Company had capital expenditures of $35,004,000 offset by cash proceeds from sale and leaseback of assets of $8,738,000, 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 six months ended July 31, 1999 includes cash from operations of $49,929,000, capital expenditures of $35,004,000 offset by proceeds from sale and leaseback of assets of $8,738,000, and payments of long-term borrowings of $87,974,000 offset by net proceeds from lines of credit of $33,636,000. Net proceeds received during the quarter were $57,256,000 from the sale of Sofco and the forms businesses and $1,084,000 from the sale of marketable securities. Net cash provided to discontinued operations was $18,149,000 in the first quarter and increased by $3,208,000 in the second quarter. Payments for acquisitions primarily completed in prior periods, net of cash acquired, were $5,053,000 primarily reflecting earn-out provisions. Other cash uses totaled $528,000. The Company does not enter into financial instrument contracts for trading or speculative purposes. The Company has no financial instrument contracts currently outstanding. -27- 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 October 31, 1999. The Company's ISIS computer software is Year 2000 compliant. The following chart summarizes the estimated Year 2000 readiness, as of July 31, 1999, of the Company's programs: -28-
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% 9/99 Client servers computing environment 100% Complete Network environment 95% 9/99 Corporate systems (primarily Human Resources and Financial) 100% Complete Operating systems (order and warehouse management) 95% 9/99 Third party readiness 90% 10/99 Non-IT systems 95% 9/99 Other (electrical, mechanical, etc.) 95% 9/99 Contingency plans 75% 9/99
The Company has initiated formal communications with significant suppliers to determine the extent to which the Company is at risk for 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 expected to be approximately $7,000,000 and is being funded through operating cash flow. As of July 31, 1999, the Company had spent approximately $6,200,000 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 -29- 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 July 31, 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 $2,500,000 of additional interest expense thereby reducing the Company's pre-tax earnings for the three months ended July 31, 1999. The Company had no financial instrument contracts outstanding as of July 31, 1999. -30- PART II -- OTHER INFORMATION Item 1. Legal Proceedings On or about July 20, 1999 and subsequently thereto, Corporate Express and each of the members of its Board of Directors were sued by certain individual shareholders in four separate class action lawsuits which are being consolidated in Colorado State Court, Boulder County. The shareholders have alleged that the Company's merger with Buhrmann is unfair and a breach of fiduciary duty of the Company's Board of Directors, which will result in damages to the shareholders. The Company is pursuing a prompt settlement which it does not expect to be material. 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 The annual meeting of the shareholders of the Company was held on July 15, 1999. Of the 104,551,371 shares of the Company's common stock issued and outstanding and entitled to vote at the meeting, there were present, in person or by proxy, the holders of 91,827,456 shares, or 87.8% of those shares eligible to vote, such percentage representing a quorum. The matter voted upon at the annual meeting was the election of directors of the Company to serve until the next meeting of shareholders or until their successors are duly elected and qualified. The votes cast for and withheld were as follows :
Name Votes For Votes Withheld ---- ---------- -------------- Robert L. King 91,300,065 527,391 Jirka Rysavy 90,220,214 1,607,242 Janet A. Hickey 88,993,240 2,834,216 Mo Siegel 91,240,040 587,416 James P. Argyropoulos 91,235,340 592,116 Jeffrey J. Steiner 91,455,091 372,365 Martin E. Franklin 91,034,779 792,677
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 July 13, 1999 -31- Form 8-K filed on July 15, 1999 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 Date: September 14, 1999 (Principal Financial Officer and Duly Authorized Officer) -32- EX-27.1 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 6-MOS JAN-29-2000 JAN-31-1999 JUL-31-1999 15,558 0 612,946 11,491 270,497 1,096,765 314,148 104,125 2,372,514 956,373 831,611 0 0 29 438,143 2,372,514 1,945,137 1,945,137 1,497,018 364,412 (21,018) 0 43,766 60,959 18,258 40,556 (43,000) 0 0 (2,444) (0.02) (0.02)
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