<PAGE>
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.
<PAGE>
<TABLE>
<CAPTION>
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)
<S> <C> <C>
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
============== =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-2-
<PAGE>
<TABLE>
<CAPTION>
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)
<S> <C> <C>
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
=============== ===============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-3-
<PAGE>
CORPORATE EXPRESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- ---------------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
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
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
-4-
<PAGE>
CORPORATE EXPRESS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Stock Paid-in Comprehensive Retained Treasury Shareholders'
-------------------
Shares Amount Capital Expense Earnings Stock Equity
----------- ------ ---------- ------------- -------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
=========== ====== ========== ============= ======== ========= ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
-5-
<PAGE>
CORPORATE EXPRESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
-------------------------
July 31, August 1,
1999 1998
-------- ---------
<S> <C> <C>
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
======== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-6-
<PAGE>
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-
<PAGE>
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):
<TABLE>
<CAPTION>
External Internal Capitalized Total Accumulated Net
Costs Costs Interest Retirements Costs Amortization Asset
-------- -------- ----------- ------------ ------------ ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
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
======= ======= ======= ======= ======== ======== ========
</TABLE>
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):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------- ---------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
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
======== ======= ======= =======
</TABLE>
-8-
<PAGE>
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):
<TABLE>
<CAPTION>
Disposition
Facility Redundant of Assets
Total Exit Costs Facilities Severance & Other
-------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
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
======= ===== ====== ====== ====
</TABLE>
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):
<TABLE>
<CAPTION>
Employee Accrued
Severance & Facility Restructuring Other Asset
Termination Closure & & Related Costs Write Downs
Costs (1) Consolidations (2) Balance & Costs (3) Total
------------ ------------------ ---------------- ------------ --------
<S> <C> <C> <C> <C> <C>
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
======= ======= ======= ======= =======
</TABLE>
-9-
<PAGE>
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):
<TABLE>
<CAPTION>
Employee Accrued
Severance & Facility Merger & Other Asset
Termination Closure & Related Costs Write Downs
Costs (1) Consolidations (2) Balance & Costs (3) Total
-------------- ------------------ -------------- ------------ -------
<S> <C> <C> <C> <C> <C>
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
====== ====== ====== ==== ======
</TABLE>
(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-
<PAGE>
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-
<PAGE>
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):
<TABLE>
<CAPTION>
July 31, 1999 January 30, 1999
------------- ----------------
<S> <C> <C>
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
======== ========
</TABLE>
7. Earnings Per Share
Basic and diluted earnings per share are calculated as follows (in
thousands) except per share amounts:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------- ------------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
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
======== ======== ======== ========
</TABLE>
-12-
<PAGE>
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):
<TABLE>
<CAPTION>
Business Segments
N. American International Desktop
Office Office Software Other Reconciling
Products Products Distribution Products Items (a) Consolidated
----------- ------------- -------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
-13-
<PAGE>
CORPORATE EXPRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
(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.
<TABLE>
<CAPTION>
Geographic Segments
Domestic International Reconciling
Operations Operations Items (a) Consolidated
---------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
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
</TABLE>
-14-
<PAGE>
CORPORATE EXPRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C> <C> <C>
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
</TABLE>
(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-
<PAGE>
CORPORATE EXPRESS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
(in thousands)
July 31, 1999
(unaudited)
<TABLE>
<CAPTION>
Subsidiary
Parent Issuer Subsidiary Non
Guarantor of Notes Guarantors Guarantors Eliminations Consolidated
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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
============ ============ ============ ============ ============ ============
</TABLE>
-16-
<PAGE>
CORPORATE EXPRESS, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended July 31, 1999
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Subsidiary
Parent Issuer Subsidiary Non
Guarantor of Notes Guarantors Guarantors Eliminations Consolidated
--------- -------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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)
========= ======== ========== ========== ============ ============
</TABLE>
-17-
<PAGE>
CORPORATE EXPRESS, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended August 1, 1998
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Subsidiary
Parent Issuer Subsidiary Non
Guarantor of Notes Guarantors Guarantors Eliminations Consolidated
--------- -------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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
========= ======== ========== ========== ============ ============
</TABLE>
-18-
<PAGE>
CORPORATE EXPRESS, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Six Months Ended July 31, 1999
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Subsidiary
Parent Issuer Subsidiary Non
Guarantor of Notes Guarantors Guarantors Eliminations Consolidated
--------- -------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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)
========= ======== ========== ========== ============ ============
</TABLE>
-19-
<PAGE>
CORPORATE EXPRESS, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Six Months Ended August 1, 1998
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Subsidiary
Parent Issuer Subsidiary Non
Guarantor of Notes Guarantors Guarantors Eliminations Consolidated
--------- -------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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
========= ======== ========== ========== ============ ============
</TABLE>
-20-
<PAGE>
CORPORATE EXPRESS, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Six Months Ended July 31, 1999
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Subsidiary
Parent Issuer Subsidiary Non
Guarantor of Notes Guarantors Guarantors Consolidated
--------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
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
======== ========= ========== ========== ============
</TABLE>
-21-
<PAGE>
CORPORATE EXPRESS, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Six Months Ended August 1, 1998
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Subsidiary
Parent Issuer Subsidiary Non
Guarantor of Notes Guarantors Guarantors Consolidated
--------- --------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
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
========= ========= ========== ========== ============
</TABLE>
-22-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
<TABLE>
<CAPTION>
Percent Estimated
Year 2000 Initiatives Complete Completion
- --------------------- ----------------------
<S> <C> <C>
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
</TABLE>
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-
<PAGE>
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-
<PAGE>
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 :
<TABLE>
<CAPTION>
Name Votes For Votes Withheld
---- ---------- --------------
<S> <C> <C>
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
</TABLE>
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-
<PAGE>
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-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> JUL-31-1999
<CASH> 15,558
<SECURITIES> 0
<RECEIVABLES> 612,946
<ALLOWANCES> 11,491
<INVENTORY> 270,497
<CURRENT-ASSETS> 1,096,765
<PP&E> 314,148
<DEPRECIATION> 104,125
<TOTAL-ASSETS> 2,372,514
<CURRENT-LIABILITIES> 956,373
<BONDS> 831,611
0
0
<COMMON> 29
<OTHER-SE> 438,143
<TOTAL-LIABILITY-AND-EQUITY> 2,372,514
<SALES> 1,945,137
<TOTAL-REVENUES> 1,945,137
<CGS> 1,497,018
<TOTAL-COSTS> 364,412
<OTHER-EXPENSES> (21,018)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43,766
<INCOME-PRETAX> 60,959
<INCOME-TAX> 18,258
<INCOME-CONTINUING> 40,556
<DISCONTINUED> (43,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,444)
<EPS-BASIC> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
