-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QT1EkeZruTxsOyPh6uWla1bIu1I43ZIY6r+pK9mt6GyeEZKxvRHgMwPcmjicH6Xw 0WAWf4uW8hAMCgVjJc/NjQ== 0000927356-99-000750.txt : 19990428 0000927356-99-000750.hdr.sgml : 19990428 ACCESSION NUMBER: 0000927356-99-000750 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990130 FILED AS OF DATE: 19990427 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORPORATE EXPRESS INC CENTRAL INDEX KEY: 0000878130 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 840978360 STATE OF INCORPORATION: CO FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-24642 FILM NUMBER: 99601734 BUSINESS ADDRESS: STREET 1: 1 ENVIRONMENTAL WAY CITY: BROOMFIELD STATE: CO ZIP: 80021 BUSINESS PHONE: 3033732800 MAIL ADDRESS: STREET 1: 1 ENVIRONMENTAL WAY CITY: BROOMFIELD STATE: CO ZIP: 80021 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED _________ Commission file number 0-24642 CORPORATE EXPRESS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Colorado 84-0978360 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1 Environmental Way 80021 Broomfield, Colorado (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (303) 664-2000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.0002 per share (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant at April 8, 1999 was approximately $457,114,455. The number of shares outstanding of the registrant's Common Stock as of April 8, 1999 was 104,153,179. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference: Part III - The Registrant's definitive Proxy Statement for its 1999 Annual Meeting of Shareholders, to be filed not later than 120 days after the end of the fiscal year. Corporate Express, Inc. Annual Report on Form 10-K For the year ended January 30, 1999 TABLE OF CONTENTS
ITEM PAGE NUMBER NUMBER - ------ ------ PART I 1. Business ......................................................................................................... 1 2. Properties ....................................................................................................... 8 3. Legal Proceedings ................................................................................................ 9 4. Submission of Matters to a Vote of Security Holders .............................................................. 9 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters ............................................ 10 6. Selected Consolidated Financial Data ............................................................................. 10 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................ 12 7A. Quantitative and Qualitative Disclosure About Market Risk ........................................................ 25 8. Financial Statements and Supplementary Data....................................................................... 26 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............................. 74 PART III 10. Directors and Executive Officers of the Registrant................................................................ 74 11. Executive Compensation .......................................................................................... 74 12. Security Ownership of Certain Beneficial Owners and Management ................................................... 74 13. Certain Relationships and Related Transactions.................................................................... 74 PART IV 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K................................................. 74 15. Signatures........................................................................................................ 77
-i- PART I ------ ITEM 1. BUSINESS OVERVIEW Corporate Express, Inc. ("Corporate Express" or the "Company") is one of the world's leading providers of office products and other non-production goods and related services to corporations and organizations that value innovative procurement solutions. The Company has grown primarily through acquisitions from a regional operation in Colorado to a large, multi-national enterprise with locations throughout the United States and numerous international markets. The Company was incorporated in Colorado in 1985. The Company believes that its business model reflects a unique strategy of non-store retailing. The Corporate Supplier business model focuses on providing a broad array of consumable office and computer products and other non- production goods and related distribution services to customers, while providing a high level of customer sevice and reducing the customer's overall procurement costs. The Company's product offerings currently include: office and computer supplies, office furniture, imaging and computer graphic supplies, desktop computer software, printed custom business forms and pressure-sensitive label products, forms management services, advertising specialties, and janitorial and cleaning supplies. In January 1999, the Company announced a plan to divest all or substantially all of its same-day delivery business. The same-day delivery business is a separate service business acquired by the Company in 1996, and its disposition will not affect delivery of the Company's office and other products to customers. The Company also has announced it is involved in negotiations to sell all or a majority stake in its regional janitorial and cleaning supplies business. There can be no assurance that either of these transactions will be completed on terms favorable to the Company if at all. Corporate Express markets to existing and prospective customers through a direct sales force and delivers its products and services, using nearly 300 worldwide locations, including over 88 distribution facilities and a fleet of approximately 1,000 product delivery vehicles excluding the facilities and vehicles used in its discontinued operations. The delivery of the Company's products will not be affected by the disposition of the Company's same-day delivery business. The Company intends to grow future revenues, primarily through internal sales growth. The Company plans to increase sales to existing customers by cross- selling its multiple product and service offerings and by developing existing customers into multi-regional, national or international accounts. The Company seeks to attract new customers, including national and international accounts, through its marketing efforts and the use of its direct sales force, along with exploring ways to further increase its web-based electronic commerce sales. The Company's target customers are typically large corporations and organizations with over 100 employees and the Company believes that large corporations increasingly seek to reduce their cost of procuring non-production goods and services, including the time and effort spent managing functions that are not considered core to their operations. Corporate Express believes that large corporations seek to reduce their number of suppliers, consolidate their purchasing power, and eliminate the internal costs associated with multiple invoices, multiple deliveries, complex and varied ordering procedures, uneven service levels and inconsistent product availability. Many large corporations operate from multiple locations and can benefit from selecting suppliers who can service them in many of their locations. -1- INDUSTRY OVERVIEW In many of the Company's business sectors, including consumable office and computer products, office furniture and desktop software, competition is fragmented and includes many alternative providers. The Company believes that the desire of large corporations and organizations to reduce their procurement costs by decreasing their number of suppliers to a small group of reliable and cost-effective partners will continue to spur a consolidation of suppliers within many of these product segments. The Company currently operates in four primary product categories: (i) North America office products (which includes office and computer supplies, office furniture, custom business forms and pressure-sensitive labels and forms management, and imaging and computer graphic supplies); (ii) International office products (excludes Canada); (iii) desktop software; and (iv) other products and services (which include advertising specialties and promotional products, janitorial and cleaning supplies and certain call center services). Financial information concerning the Company's reportable segments is contained in Note 16 to the Company's consolidated financial statements appearing elsewhere in this Form 10-K. The office products industry consists primarily of companies that operate in one or more of three broad sales channels: the contract stationer (or contract distribution) channel, the direct marketing channel and the retail channel. Contract distributors typically serve large and medium-sized business customers through the use of a product catalog and a direct sales organization and typically stock certain products in distribution centers and deliver these products to customers the next business day. The major contract stationers carry a significant proportion of their merchandise in-stock, relying only upon wholesaler intermediaries for inventory backup and increased product breadth, while smaller contract distributors carry a much smaller portion of their merchandise in stock. Direct marketers of office products typically target small business customers and home offices. While their procurement and order fulfillment functions are similar to contract stationers, direct marketers rely almost exclusively on catalogs and other direct marketing programs, rather than direct sales forces, to sell their products, and generally use third parties to deliver products. Office product retailers typically serve smaller businesses, home offices and individuals. Over the last decade, this retail channel has undergone significant change, primarily as the result of the emergence of office products superstores. The Company believes that every major metropolitan area in the U.S. is now served by at least one office products superstore. Changes within these broad sales channels have obscured certain lines between them. Several major industry participants operate across these channels. The non-store office products distribution industry in the U.S. has been rapidly consolidating and undergoing other significant changes. As a result of consolidation, the number of independent, midsize office products contract distribution companies (those with annual sales of more than $15 million) has declined significantly. Large companies (including the Company) serving a broad range of customers have acquired many of these smaller businesses. As the office products industry continues to consolidate, the Company believes that many of the remaining smaller office products distribution companies will be unable to compete due, in part, to their inability to purchase products at favorable prices or provide all of the services customers require. The Company expects that these independent businesses will be acquired by larger companies or will cease to operate. In addition to its office and consumable computer products line, the Company's other product lines include desktop software distribution, advertising specialties, promotional products, and janitorial and cleaning supplies. Companies in the desktop software distribution industry provide their corporate customers with a wide array of -2- personal computer and network software titles on a shrink-wrapped and volume license basis. Net revenue includes the sale of shrink-wrapped product and the sale of licenses for the use of software produced by Microsoft and other major software publishers. The Company's other product distribution business lines are also large markets served by many large and small competitors. The office products business in most major international markets is following similar trends to those seen in the U.S. in recent years. The industry in overseas markets is fragmented and is being consolidated by major office products distributors, including Corporate Express. As in the U.S., large contract stationers are establishing customer relationships with medium and large corporations that are seeking to lower the cost of procurement for consumable office supplies. In the case of smaller customers, the direct mail- order marketing segment is developing in global markets, especially in Europe. The retail superstore concept in evidence in the U.S. is not as widely accepted in international markets, due to the high cost of real estate in major global markets, slower development of small offices/home offices and strong ties between small end users and traditional small retail dealers. In addition, there is growing interest, particularly in European markets, in multi-national relationships between large global corporations and the major contract stationers with international operations, such as the Company. The Company's discontinued operations operate in the same-day delivery industry. This industry offers a variety of customized transportation and distribution services for corporate customers with time-sensitive pickup and delivery requirements, such as regularly scheduled replenishment deliveries and door-to-door courier deliveries. PRODUCTS AND REGIONS OF OPERATION The Company's principal product offerings include office and computer supplies, office furniture, imaging and computer graphic supplies, computer desktop software, printed custom business forms and pressure-sensitive label products, forms management services, advertising specialties, and janitorial and cleaning supplies. Name brands offered by the Company include 3M, Microsoft and Hewlett-Packard, as well as the Company's own "EXP" private label. The Company's operations are extensive throughout North America, Europe and the Southern Pacific (Australia and New Zealand). The approximate percentages of the Company's net sales by product category and by geographical segments for the past three years are as follows:
Fiscal Year -------------------- 1998 1997 1996 ---- ---- ---- Operating segments: ------------------ North America Office Products 60.6% 62.8% 63.1% International Office Products 16.2% 14.4% 14.4% Desktop Software Distribution 15.5% 13.8% 12.5% Other Products and Services 7.8% 9.2% 10.3% Intersegment eliminations (0.1)% (0.2)% (0.3)% ----- ----- ----- Total 100.0% 100.0% 100.0% Geographical segments: --------------------- U.S. 75.0% 76.3% 76.8% International 25.0% 23.7% 23.2% ----- ----- ----- Total 100.0% 100.0% 100.0%
-3- MERCHANDISING STRATEGY The Company's domestic merchandising strategy is based primarily on the merchandise offerings featured in the Company's proprietary, full-color Office and Computer Products Catalog, various specialty catalogs, and electronic catalogs. In 1998, the Company expanded the depth and breadth of the selection and variety of the products offered in its primary catalog offering. The primary Office and Computer Products Catalog in both printed and electronic versions provides a comprehensive selection of more than 10,000 items in the core categories of office and computer supplies. The Company maintains a large majority of these items in inventory in its regional warehouses with the remaining items available through its wholesale distribution channel, all for next-day delivery by the Company's fleet of delivery vehicles. This merchandising strategy differs from that of traditional contract stationers which typically provide their customers with wholesaler-produced catalogs and maintain a smaller portion of that product assortment on hand. The Company has introduced its Office and Computer Products Catalog in all of its United States regions and has introduced similar country-specific versions of the Catalog in Canada, Australia and the United Kingdom. An additional selection of specialty computer and imaging supplies, computer software, furniture and other items are featured in various Company specialty catalogs. The Corporate Express catalog contains registered trademarks, service marks and logos of the Company and copyright notices to protect its proprietary nature. The number of office supply items found in the expanded Office and Computer Products Catalog is greater than that found in a typical office products superstore, and the merchandise mix is different. Products are selected for inclusion in the catalog utilizing computerized sales trend analyses to determine the best-selling items and needs of the large corporate customer. For example, the Company increased the number of products included in the 1998 catalog in response to customer requests for an expanded product assortment. The printed version of the Office and Computer Products Catalog is updated and produced annually to account for new sales trends, new product introductions and changes in manufacturers' list prices. The electronic version of the Company's catalogs are updated frequently to reflect new products and prices. The Office and Computer Products Catalog and other specialty catalogs each includes full- color photographs and product descriptions that emphasize the particular benefits and features of the items. In connection with its internet E-Way sales, the Company also offers various electronic versions of its Office and Computer Products Catalog and other product offerings complete with pictures and custom pricing. The Company seeks to continually reduce its merchandise and operating costs, enabling it to offer its customers competitive prices. By purchasing a large majority of its products directly from manufacturers in large volume and limiting the number of manufacturers represented in its Office and Computer Products Catalog and other specialty catalogs, the Company is able to obtain volume discounts and allowances from its vendors. DISTRIBUTION FACILITIES The Company's distribution network consists of warehouses located throughout the United States, Canada and other countries that maintain significant inventory for resale and distribution breakpoints and satellite sales offices which extend the Company's geographic coverage. Pursuant to its restructuring plan announced in December 1998, Corporate Express is accelerating the planned consolidation and elimination of redundant facilities in the United States and abroad that were acquired as part of prior acquisitions, although there can be no assurance that it will be successful in doing so. In its office products business, the Company typically operates from a single regional distribution center which generally supports multiple distribution breakpoints and satellite sales offices. Generally, items stocked in these regional office products' distribution centers consist of the most commonly ordered items for which customers demand next-day delivery through Corporate Express office products division's vehicles. -4- MARKETING The Company markets and sells a broad range of products and services directly to business customers around the world, including a majority of Fortune 500 companies. The Company provides its customers with a single-source solution for purchasing office products and other non-production goods and services. The Company designs and offers customized merchandise and service packages tailored to each customer's specific needs, so customers can order and receive their goods and services when, where and how they want them. The Company's Corporate Supplier strategy is designed to reduce its customers' aggregate costs, including their internal operating costs incurred in managing the procurement of non-production goods and services. The key elements of the Corporate Supplier model are a broad offering of products and services, global coverage for selected products and services, a comprehensive distribution and logistics network, information systems that integrate the complete product and service offering while linking suppliers to customers, and procurement management and consulting for customers. The Company believes that customers value its broad product offerings, as well as its extensive geographic coverage and delivery capabilities. The Company also believes that its customers value the high level of service the Company provides through its account relationship managers, electronic interfaces, customized pricing, broad product assortment and availability, and customized reporting. The Company uses its purchasing power to buy in volume directly from manufacturers, which allows the Company to pass on cost savings to its customers and offer significant discounts from the manufacturer's suggested list prices on many products. Prices for some high volume items are often established by competitive bidding. As is typical within the industry generally, the Company's revenues are derived from a combination of non-contract customers and customers with contracts or informal agreements of varying duration, in certain cases terminable upon short notice. The Company has long standing relationships with many of its major customers and a broad customer base. The Company believes that no single customer accounted for more than one percent of total sales during fiscal 1998. The Company markets and sells its products and services to both contract and non-contract business customers through a network of national account managers and local employee sales representatives. The primary responsibility and priority of the national account managers is to acquire, retain and increase sales of the Company's wide array of products and services to large, multiple location customers. All account managers are supported by a company-wide network of personnel and resources, including information technology resources. The Company's local sales force is generally commission-based and is organized within each of the Company's major product categories. The Company believes that this structure maximizes the productivity as well as the product and service knowledge of its sales force. The Company is focusing on expanding its national account customer base to increase the cross-selling opportunities among the Company's various product lines. Generally each office products customer is assigned an account manager, who maintains regular contact with the customer. Account managers have the primary responsibility for maintaining customer satisfaction, resolving any potential customer issues and increasing the Company's sales to each account. Account managers are also assigned a list of prospective customers for whom the account manager takes responsibility in directing all marketing efforts. Additional responsibilities of the account managers include designing and implementing customized merchandise and service packages for each of their accounts as well as responding to all special service requests. The Company believes its company-wide sales network and related capabilities offers the customers value-added benefits, which include: high quality logistics and distribution support covering all of North America and 10 foreign countries; procurement analysis and process consultation to reduce supply chain management costs; customized ordering tools and techniques; quarterly reviews of contract performance and customer satisfaction; innovative products and services to streamline business operations; information systems that support consistent billing and usage reports throughout North America; and cost saving customer interface and product selection tools, including internet ordering and electronic commerce. -5- COMPUTER SOFTWARE APPLICATIONS Corporate Express continues to make substantial investments in the development and enhancement of its computer software applications. During 1998, the Company continued to add national account customers which utilize its ISIS computer software and expanded the use of the internet version of E-Way, its electronic commerce, ordering and fulfillment system. The Company is exploring ways to further increase its web-based electronic commerce capabilities. The integrated divisional version of the ISIS software continues to be developed and is currently in test mode at a few domestic office product divisions. The Company plans to implement ISIS in two additional locations during 1999 and continue its rollout in North America over the next few years. Key features of the ISIS system are the use of three-tier client server architecture that allows customers and suppliers to better communicate with Corporate Express, object oriented design techniques, and a relational database designed to handle customer inquiry, data warehouse and management information applications. Through the implementation of these enhanced systems, Corporate Express plans to make its products and services available to a broader range of customers through its Corporate Supplier business model and to further customize customer services and account information while lowering the customer's overall procurement cost. The Company expects to continue to make enhancements and modifications to its computer systems on a selective basis. Such modifications may cause disruptions in operations, delay the integration of acquisitions, or cost more to design, implement or operate than expected. Any such disruptions, delays or costs could have a material adverse effect on the Company's operations and financial performance. STRUCTURE AND INTEGRATION OF ACQUISITIONS The Company has historically grown through numerous acquisitions of small office products and service companies which generally have annual sales of less than $30 million. During 1998, the Company focused less on acquisitions and began its transition to an operating company focused primarily on internal growth. The Company generally seeks to increase the sales, profitability and asset productivity of its acquisitions by combining them with the Company's existing operations, implementing the Company's business model and eliminating redundant facilities. Integration of acquisitions is often a complex process which may entail material nonrecurring expenditures, including facility closing costs, warehouse consolidation expenses, asset write-downs and severance payments. Integration of acquisitions generally involves the following elements: Elimination of Redundant Facilities and Services. In cases where acquired companies have facilities, systems and administrative functions in the Company's existing markets, these operations are generally eliminated or consolidated with the Company's existing operations. The Company is expanding its consolidation efforts as part of the restructuring program it began in the last quarter of 1998 fiscal year. Upgrading of Facilities. In addition to eliminating redundant facilities, the Company has undertaken a program to upgrade certain of its existing facilities to enable these facilities to handle higher sales volumes resulting from its internal growth and acquisition activity. These upgrades include modernization of equipment and computer systems, phone system and wide area network standardization and improved material handling including a reconfiguration of inventory within the warehouse. The Company will also, where appropriate, construct or lease new distribution facilities into which existing, outdated facilities will be combined. Consolidation of Purchasing Power. As part of its integration of acquisitions, the Company takes advantage of its volume purchasing power and seeks to negotiate favorable prices and terms from suppliers. Implementation of Computer Software. Acquired product distribution companies are generally incorporated into the Company's computer software environment, including EDI, common master item files, -6- national accounts software and customer ordering, inventory management software, etc. Certain elements of these implementations are expected to coincide with the planned installation of the Company's next generation of computer software. (see "Computer Software Applications"). The consolidation, centralization and integration of widely dispersed businesses using many different systems involve a number of special risks, including adverse effects on the Company's reported operating results, the diversion of management's attention, the dependence on retention, hiring and training key personnel, the amortization of acquired intangible assets and risks associated with unanticipated problems or legal liabilities, some or all of which could have a material adverse effect on the Company's operations and financial performance. INTERNATIONAL ACQUISITIONS During fiscal 1998 and 1997, the Company completed numerous small acquisitions to expand or establish operations, mostly in Canada and certain European countries. The Company may enter additional international markets in the future, although it currently has no specific plans for such expansion. The Company has typically retained existing management and information systems in its international acquisitions. The Company has and will seek to implement appropriate aspects of its business model in its international operations, including creating in-stock catalogs, consolidating warehouses, upgrading information systems, acquiring companies offering complementary products and services, while focusing on larger customers and developing national and international accounts. Portions of the business model have been implemented in Canada, Australia and the United Kingdom. COMPETITION All of the Company's operations face intense competition. The Company's principal competitors in North America for office supplies and computer products include both regional and national contract stationers (including the contract stationer operations of office products superstores), large direct resellers, privately-held companies that generally operate in only one location, and distributors of business software and supplies for personal computers. In certain of its business segments the Company may have various other large and small competitors. The software distribution segment is highly competitive and is vulnerable to margin pressures due in part to the powerful industry position of the major software publishers. In Europe and Australia, the Company's competitors include primarily local and regional contract stationers and, to a limited extent, national and multi-national contract stationers. In the discontinued same day delivery services sector, there are numerous competitors in each market, certain of which have service capabilities which are similar to the Company's and others which provide different types or levels of service. Each of the Company's major product and service categories are a part of fragmented industries which have experienced and continue to experience a trend toward consolidation. Although the Company believes its pricing is competitive, the Company also seeks to differentiate itself from its competitors in each of its major product and service categories through its information technology, product assortment, service offerings and breadth of capabilities. Some of the Company's competitors have greater financial resources than the Company. However, the Company believes that its Corporate Supplier business model differentiates the Company from its competitors by offering, through a single source, a unique selection of products and services for large corporate customers. EMPLOYEES As of January 30, 1999, the Company, had approximately 25,700 full-time employees including approximately 11,100 employees of its same-day delivery services. Excluding employees in the discontinued same-day delivery business, the Company's employees include 3,000 employees primarily employed in management and administration, 6,200 in regional warehouses and distribution operations and 5,400 in sales and marketing, order processing and customer service. Approximately 75% of these non-delivery services' employees are in the U.S., -7- 12% are in Europe, 6% are in Canada and 7% are in the Southern Pacific (Australia and New Zealand). As of January 30, 1999, approximately 800 of the Company's non-delivery services' employees were members of labor unions, and less than 50 delivery services' employees were unionized. ENVIRONMENTAL MATTERS The Company's operating subsidiaries are subject to federal, state and local laws, regulations and ordinances that (i) govern activities or operations that may have adverse environmental effects, such as discharges to air and water as well as handling and disposal practices for solid and hazardous wastes, or (ii) impose liability for the costs of cleaning up, and certain damages resulting from, sites of past spills, disposals or other releases of hazardous substances. The Company's custom forms and pressure-sensitive labels businesses operate printing facilities which may generate, or may have generated in the past, hazardous wastes, and the Company operates a fleet of vehicles, the maintenance or fueling of which may also generate hazardous waste. The Company is not aware of any environmental conditions relating to present or past waste generation at or from these facilities, or any other of the Company's facilities or operations, that would be likely to have a material adverse effect on the financial condition or results of operations of the Company. However, there can be no assurance that environmental liabilities in the future will not have a material adverse effect on the financial condition or results of operations of the Company. OTHER DEVELOPMENTS In February 1999, the Company announced key initiatives designed to enhance shareholder value by focusing on its core operations, strengthening its financial position and enhancing its competitive position. Management of the Company is conducting, together with two investment banking firms, a comprehensive review of the Company's portfolio of businesses and assets, as well as an evaluation of strategic alternatives. The Company cannot predict the timing of completion of its evaluations, or the possible outcomes, or project any actions that may result. Management of the Company has received certain preliminary reports of its financial advisors, including certain analyses regarding a number and variety of strategic options concerning the Company and its businesses. The Company does not intend or undertake to publish any additional information about the status of its evaluations or the process unless and until the Company enters into a definitive agreement relating to any of the strategic options concerning the Company and its businesses or terminates the evaluations. Also, pursuant to the plan to sell all or substantially all of its delivery business, the delivery business is treated as discontinued operations for financial reporting purposes for all fiscal years to reflect such discontinuance. IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS Some of the information presented in this report constitutes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the Company believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results of the Company's operations will not differ materially from its expectations. Factors that could cause actual results or future events to differ include: inability of the Company to successfully identify and execute strategic transaction(s) that create shareholder value; inability to complete divestitures of the delivery business, the cleaning supplies business or other operations on acceptable terms and on the desired timetable, or at all, or to realize the expected operating and financial benefits of the divestitures; inability to achieve the expected cost reductions and other operating benefits relating to the restructuring plan; inability to successfully integrate acquisitions; inability to realize growth from sales initiatives and increase profitability of the core business and to successfully develop and implement the Corporate Supplier plans; and deterioration in general economic conditions and the corresponding impact on revenues; uncertainties related to legislation with respect to independent contract drivers; uncertainties related to the Company's systems and proprietary software; uncertainties related to Year 2000 compliance, particularly with respect to third party readiness; and uncertainties related to competition and to the demand for the products and services offered by the Company. ITEM 2. PROPERTIES As of January 30, 1999 the Company owned 39 facilities and leased 624 facilities. Of the 663 facilities, one was the corporate headquarters in Broomfield, Colorado, 89 were product distribution warehouses and contiguous administrative offices and 573 were separate sales or administrative offices, delivery facilities or breakpoints. The Company's principal properties are summarized as follows: -8-
Sales, Service Distribution & Corporate Total Centers Facilities Facilities ------------ ----------- -------------- United States 47 491 538 Australia 9 19 28 New Zealand 4 1 5 Canada 6 16 22 United Kingdom 5 17 22 France 1 1 2 Italy 3 6 9 Switzerland 1 - 1 Ireland 3 2 5 Germany 9 20 29 Netherlands 1 1 2 -- --- --- Total 89 574 663 == === ===
Included in the United States total of 538 facilities are 274 facilities of Corporate Express Delivery Systems classified as discontinued operations. The Company periodically evaluates the location and efficiency of its facilities to maximize customer satisfaction and increase economies of scale. The Company plans to eliminate redundant facilities such that it typically will operate office and computer supply product distribution from a single regional warehouse with satellite sales offices and distribution breakpoints in each of its regions. The Company also may close, consolidate or relocate regional warehouses, satellite sales offices and distribution breakpoints from time to time. ITEM 3. LEGAL PROCEEDINGS The Company is involved in various legal claims proceedings incidental to the conduct of its business. Management intends to vigorously defend the outstanding claims. The Company believes it has adequately accrued loss contingencies and that, although the ultimate outcome of any claim cannot be predicted, none of these legal proceedings are expected to have a material adverse effect on the financial condition or results of operations of the Company. The Company maintains general liability and business interruption insurance coverage in amounts which it believes to be adequate. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. -9- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the Nasdaq National Market under the symbol "CEXP." The following table, adjusted for prior share dividends, sets forth, for the fiscal quarters indicated, the high and low closing sale prices for the Common Stock, as reported by the Nasdaq National Market:
High Low ---- ---- Fiscal 1997 First Quarter 18.38 8.38 Second Quarter 17.88 12.63 Third Quarter 22.06 14.06 Fourth Quarter (two-month period ending 1/31/98) 16.75 8.00 Fiscal 1998 First Quarter 11.41 8.84 Second Quarter 12.94 10.19 Third Quarter 12.06 9.56 Fourth Quarter 11.06 4.31
As of March 30, 1999, the Company's Common Stock was held by 781 holders of record. The Company has never paid a cash dividend on its Common Stock. The Company does not anticipate paying any cash dividends on its Common Stock in the foreseeable future because it intends to retain its earnings to finance the expansion of its business and for general corporate purposes. Any payment of future dividends will be at the discretion of the Company's Board of Directors and will depend upon, among other things, the Company's earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions with respect to the payment of dividends, and other relevant factors. The Company's $1,000,000,000 Secured Credit Facility (the "Senior Secured Credit Facility") prohibits the distribution of dividends without the prior written consent of the lenders and the Indenture governing the 9 5/8% Senior Notes due 2008 (the "9 5/8% Notes") prohibits the Company from paying a dividend which would cause a default under such Indenture or which would cause the Company to fail to comply with certain financial covenants. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data for fiscal 1998 (twelve months ended January 30, 1999), 1997 (eleven months ended January 31, 1998), 1996 (twelve months ended March 1, 1997), 1995 (twelve months ended March 2, 1996), and 1994 (twelve months ended February 25, 1995) have been derived from the Company's consolidated financial statements which have been audited by independent auditors. The selected consolidated financial data for the twelve months ended January 31, 1998 and the eleven months ended February 1, 1997 is derived from unaudited consolidated financial statements. The unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the -10- financial position and results of operations for these periods. All prior periods have been restated to reflect the Company's same-day delivery business as discontinued operations. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of the Company.
Twelve Months Ended Eleven Months Ended ------------------------ ----------------------- January 30, January 31, January 31, February 1, Fiscal Year ------------------------------- 1999 1998 1998 1997 1996 1995 1994 ----------- ---------- ---------- ---------- ---------- ---------- -------- (unaudited) (unaudited) Statements of Operations Data:(1) Net sales $3,752,591 $3,050,947 $2,837,111 $2,224,203 $2,438,039 $1,548,175 $924,886 Cost of sales (2) 2,875,885 2,313,819 2,155,289 1,695,212 1,853,741 1,180,308 704,127 Restructuring and merger related inventory provisions (3) 3,130 -- -- -- -- 5,952 -- ---------- ---------- ---------- ---------- ---------- ---------- -------- Gross profit 873,576 737,128 681,822 528,991 584,298 361,915 220,759 Warehouse operating and selling expenses 599,686 511,694 472,213 376,918 416,399 265,521 163,234 Corporate general and administrative expenses 93,753 75,936 71,325 58,005 62,616 37,005 22,275 Amortization of intangibles 32,626 23,907 22,158 14,520 16,269 7,398 5,439 Restructuring, merger and other nonrecurring charges (4) 54,805 11,337 11,337 8,407 8,407 23,251 -- ---------- ---------- ---------- ---------- ---------- ---------- -------- Operating profit 92,706 114,254 104,789 71,141 80,607 28,740 29,811 Interest expense, net 75,302 36,099 34,014 17,958 20,045 15,243 15,747 Other income (expense) 6,212 757 464 (50) 242 1,346 210 ---------- ---------- ---------- ---------- ---------- ---------- -------- Income before income taxes 23,616 78,912 71,239 53,133 60,804 14,843 14,274 Income tax expense 19,451 34,498 31,509 23,385 26,374 8,746 4,191 ---------- ---------- ---------- ---------- ---------- ---------- -------- Income before minority interest 4,165 44,414 39,730 29,748 34,430 6,097 10,083 Minority interest (income) expense 2,222 (1,862) (1,319) (1,314) (1,860)) 1,436 69 ---------- ---------- ---------- ---------- ---------- ---------- -------- Income from continuing operations 1,943 46,276 41,049 31,062 36,290 4,661 10,014 Discontinued operations, net of tax: (5) Income (loss) from discontinued (17,652) 4,416 3,355 4,645 5,706 890 5,896 operations Loss on disposal (52,000) -- -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- -------- Income (loss) from discontinued (69,652) 4,416 3,355 4,645 5,706 890 5,896 operations ---------- ---------- ---------- ---------- ---------- ---------- -------- Income (loss) before extraordinary item (67,709) 50,692 44,404 35,707 41,996 5,551 15,910 Extraordinary item, net of tax (6) (5,581) -- -- -- -- -- 586 ---------- ---------- ---------- ---------- ---------- ---------- -------- Net income (loss) $ (73,290) $ 50,692 $ 44,404 $ 35,707 $ 41,996 $ 5,551 $ 16,496 ========== ========== ========== ========== ========== ========== ======== Pro forma net income (loss) (7) $ (73,290) $ 50,692 $ 44,404 $ 33,993 $ 40,281 $ 5,140 $ 15,769 ========== ========== ========== ========== ========== ========== ======== Pro forma net income (loss) per share - Basic: (8) Continuing operations $ 0.02 $ 0.35 $ 0.31 $ 0.24 $ 0.28 $ 0.04 $ 0.12 Discontinued operations (0.62) 0.04 0.03 0.04 0.05 0.01 0.08 Extraordinary item (.05) -- -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- -------- Net income (loss) $ (0.65) $ 0.39 $ 0.34 $ 0.28 $ 0.33 $ 0.05 $ 0.20 ========== ========== ========== ========== ========== ========== ======== Pro forma net income (loss) per share - Diluted: (8) Continuing operations $ 0.02 $ 0.34 $ 0.30 $ 0.23 $ 0.27 $ 0.04 $ 0.11 Discontinued operations (0.61) 0.03 0.02 0.03 0.04 0.01 0.08 Extraordinary item (.05) -- -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- -------- Net income (loss) $ (0.64) $ 0.37 $ 0.32 $ 0.26 $ 0.31 $ 0.05 $ 0.19 ========== ========== ========== ========== ========== ========== ======== Balance Sheet Data: (1) Working capital $ 439,068 $ 465,977 $ 465,977 $ 320,605 $ 342,909 $ 239,767 $153,732 Total assets 2,415,590 2,266,991 2,266,991 1,726,799 1,767,061 943,048 598,866 Long-term debt and capital lease obligations 1,207,427 758,014 758,014 601,101 626,451 133,228 172,114 Shareholders' equity and redeemable preferred (9) 444,327 932,433 932,433 667,006 693,607 521,776 259,325 Weighted average common shares outstanding: Basic 113,080 131,040 131,423 121,612 121,901 104,162 75,400 Diluted 115,401 137,691 137,858 129,749 130,029 110,408 79,026
__________ (1) In January 1999, the Company adopted a plan to discontinue the same-day delivery business; accordingly, all periods have been restated to reflect the same-day delivery business as discontinued operations. The Hermann Marketing, Inc. ("HMI") acquisition (effective January 30, 1997), the Sofco-Mead, Inc. ("Sofco") acquisition (effective January 24, 1997), the United TransNet, Inc. ("UT") acquisition (effective November 8, -11- 1996), the Nimsa S.A. ("Nimsa") acquisition (effective October 31, 1996), the U.S. Delivery, Inc. ("Delivery") acquisition (effective March 1, 1996), the Richard Young Journal, Inc. ("Young") acquisition (effective February 27, 1996) and the Lucas Bros., Inc. ("Lucas") acquisition (effective November 30, 1993) were accounted for as poolings of interests and, accordingly, their accounts and results are included for all applicable periods, except that the Delivery and UT results are reflected as part of discontinued operations. (2) Cost of sales includes occupancy and delivery expenses. (3) Reflects the write-down to fair market value of certain inventory which the Company decided to eliminate from its product line as a part of restructuring or upon merger. (4) Restructuring charges in fiscal 1998 primarily reflect planned employee terminations and facility closures and consolidation. Merger and other nonrecurring charges in fiscal 1997 include the acquisition costs incurred by Data Documents Incorporated ("DDI") and certain provisions for reductions in force and facility closures at other locations. Merger and other nonrecurring charges in prior fiscal years relate primarily to the mergers with Sofco, HMI and Nimsa in fiscal 1996, Young in fiscal 1995 and include, among other things, costs to complete the acquisitions, merging and closing redundant facilities, personnel reductions and centralizing certain administrative functions. Merger and other nonrecurring charges related to the Delivery and UT acquisitions are included in discontinued operations. (5) In January 1999, the Company adopted a plan to discontinue its same-day delivery business and in fiscal 1995, Sofco adopted a plan to discontinue Sofco-Eastern, Inc. (6) Reflects extraordinary loss related to a write-off of deferred financing costs associated with its terminated and replaced Senior Credit Facility and the cost of early repayment of the 9 1/8% Senior Subordinated Notes Series B, both in fiscal 1998 and extraordinary gain related to the repurchase by the Company of $10 million principal amount of 9 1/8% Series B Senior Subordinated Notes in fiscal 1994. (7) Pro forma net income reflects the additional taxes that would be incurred to treat a subchapter S acquisition as if the acquired company was a C corporation. (8) Pro forma net income (loss) per share is calculated by dividing pro forma net income (loss), after preferred stock dividend requirements of Young of $432,000 for fiscal 1994 by basic and diluted weighted common shares outstanding, respectively. (9) Reflects the fiscal 1998 repurchase of 39,635,681 treasury shares of common stock for a total cost of $427,282,000. Redeemable preferred shares were converted to common stock in fiscal 1994. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements and related notes thereto appearing elsewhere in this Form 10-K. Some of the information presented in this Form 10-K constitutes forward- looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the Company believes that its expectations are based on reasonable assumptions within the bounds of the Company's knowledge of its business and operations, there can be no assurance that actual results of the Company's operations and acquisition activities and their effect on the Company's results of operations will not differ materially from its expectations. See ITEM 1. "BUSINESS - Important Factors Regarding Forward- Looking Statements." INTRODUCTION In fiscal 1999, the Company announced certain key initiatives designed to enhance shareholder value, strengthen its financial position and improve its competitive position. These initiatives include a business evaluation, the divestiture of certain businesses, an extensive restructuring plan and certain changes to its equity and debt instruments. Business Evaluation. Management of the Company is conducting, together with two investment banking firms, a comprehensive review of the Company's portfolio of businesses and assets, as well as an evaluation of strategic alternatives. The Company cannot predict the timing of completion of its evaluations or the possible outcomes or project any actions that may result. Management of the Company has received certain preliminary reports of its financial advisors, including certain analyses regarding a number and variety of strategic options concerning the Company and its businesses. The Company does not intend or undertake to publish any additional information about the status of its evaluations or the process unless and until the Company enters into a definitive agreement relating to any of the strategic options concerning the Company and its businesses or terminates the evaluations. -12- Divestitures. In January 1999, the Company adopted a formal plan to sell its same-day delivery business and has accounted for this business as a discontinued operation. Accordingly, the Company has recorded an estimated loss on disposal of $52,000,000, net of tax. In addition, the Company is involved in negotiations to sell all or a majority stake in Sofco, its regional cleaning and service supply business. There can be no assurance that either of these transactions will be completed on terms favorable to the Company or at all. Restructuring Plan. In January 1999, the Company approved a global restructuring plan that is designed to create a lower cost structure by reducing the number of employees and accelerating facility consolidations and closures. Accordingly, the Company recorded a net restructuring charge of $57,935,000 which is reflected in the fiscal 1998 operating results. Equity Tender Offer. Pursuant to a Dutch Auction tender offer in April 1998, the Company purchased 35,000,000 shares tendered at a price of $10.75 per share. In addition, pursuant to a share repurchase program, the Company purchased 4,635,681 shares in the open market at an average price of $10.36 per share. The 39,635,681 treasury shares resulting from these transactions are reflected on the balance sheet at cost of $427,282,000 which includes applicable fees and expenses. The Company has terminated its repurchase program. Debt Instruments. In April 1998, to facilitate the Dutch Auction, the Company executed a new $1 billion Senior Secured Credit Facility (the "Senior Secured Credit Facility") consisting of a $250,000,000 seven-year term loan and a $750,000,000 five-year revolving credit facility and terminated the existing $500,000,000 Credit Facility ("Senior Credit Facility'). In January 1999, the Company amended the Senior Secured Credit Facility to clarify that the restructuring charge is excluded from its covenant computations, and to permit the disposal of certain non-core business units including the same-day delivery business. In May 1998, the Company issued $350,000,000 principal amount of 9 5/8% Senior Subordinated Notes due 2008 (the "Senior Notes") to repay substantially all of the $90,000,000 9 1/8% Senior Subordinated Notes due 2004 and to repay outstanding indebtedness under the Senior Secured Credit Facility. Also in fiscal 1998, the Company adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related 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: North America Office Products, International Office Products, Desktop Software Distribution, and Other Products and Services; and two geographic segments: Domestic and International. Accordingly, the Company's Management Discussion and Analysis reflects the new reportable segments for all periods presented. Also refer to Note 16 of the Company's audited consolidated financial statements. During fiscal 1998, the Company initiated its transition from an acquisition-oriented company to an operating company focused on internal growth through continued implementation of the Corporate Supplier business model. The Corporate Supplier business model reflects the Company's plan to reduce the total procurement cost of non-production goods and services for customers. The key elements of the Corporate Supplier model are the broad offering of products and services, global coverage for selected products and services, a comprehensive distribution and logistics network, information systems that integrate the product offering while linking suppliers to customers and providing procurement management and consulting for customers. The Company continues to increase sales to existing customers by cross-selling its expanded product and service offerings and developing existing customers into international, national or multi-regional accounts. -13- Certain products currently offered by the Company, such as computer software, have lower gross profit margins and lower operating and distribution costs than the products traditionally sold by the Company. In addition, the acquisition of companies with break-even or marginal operating results or the costs of consolidating acquired business units with the Company may impact the operating margins and profitability of the Company. The Company's audited consolidated financial statements have been restated to reflect the same-day delivery business as discontinued operations. During fiscal 1997, the Company changed its fiscal year end from February 28 to January 31 to better align its fiscal year with its customers' and competitors' fiscal calendars and to reduce the seasonality between quarters. The 1997 fiscal period refers to the eleven months ended January 31, 1998. The 1996 fiscal year refers to the twelve months ended March 1, 1997. RESULTS OF OPERATIONS The following table sets forth the percentages which the items in the Company's Consolidated Statements of Operations bear to net sales for the periods indicated:
Twelve Months Ended Eleven Months Ended ---------------------------- --------------------------- January 30, January 31, January 31, February 1, Fiscal Year 1999 1998 1998 1997 1996 ----------- ----------- ----------- ----------- ----------- (unaudited) (unaudited) Statements of Operations Data: Net sales 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales 76.6 75.8 76.0 76.2 76.0 Merger related inventory provisions 0.1 -- -- -- -- ----- ----- ----- ----- ----- Gross profit 23.3 24.2 24.0 23.8 24.0 Warehouse operating and selling expenses 16.0 16.8 16.6 16.9 17.1 Corporate general and administrative expenses 2.5 2.5 2.5 2.6 2.6 Amortization of intangibles 0.9 0.8 0.8 0.7 0.7 Restructuring, merger and other nonrecurring charges 1.4 0.4 0.4 0.4 0.3 ----- ----- ----- ----- ----- Operating profit 2.5 3.7 3.7 3.2 3.3 Interest expense, net 2.0 1.2 1.2 0.8 0.8 Other income 0.1 0.0 0.0 0.0 0.0 ----- ----- ----- ----- ----- Income before income taxes 0.6 2.5 2.5 2.4 2.5 Income tax expense 0.5 1.1 1.1 1.1 1.1 ----- ----- ----- ----- ----- Income before minority interest 0.1 1.4 1.4 1.3 1.4 Minority interest (income) expense 0.1 (0.1) (0.1) (0.1) (0.1) ----- ----- ----- ----- ----- Income from continuing operations 0.0 1.5 1.5 1.4 1.5 Discontinued operations, net of tax: Income (loss) from discontinued operations (0.4) 0.2 0.1 0.2 0.2 Loss on disposal (1.4) -- -- -- -- ----- ----- ----- ----- ----- Income (loss) from discontinued operations (1.8) 0.2 0.1 0.2 0.2 ----- ----- ----- ----- ----- Income (loss) before extraordinary item (1.8) 1.7 1.6 1.6 1.7 Loss on early extinguishment of debt 0.2 -- -- -- -- ----- ----- ----- ----- ----- Net income (loss) (2.0) 1.7 1.6 1.6 1.7 ===== ===== ===== ===== ===== Pro forma net income (1) (2.0) 1.7 1.6 1.5 1.7 ===== ===== ===== ===== =====
-14- (1) Pro forma net income reflects the tax impact in fiscal 1996 for a subchapter S acquisition as if the acquired company was a C corporation. TWELVE MONTHS ENDED JANUARY 30, 1999 AND JANUARY 31, 1998 Net Sales from Continuing Operations. Consolidated net sales increased 23.0% to $3,752,591,000 in the year ended January 30, 1999 from $3,050,947,000 in the same twelve-month period last year. Net sales for the Company's North America Office Products ("NAOP") segment increased 18.4% to $2,275,712,000 from $1,921,713,000 in the same twelve-month period last year, primarily reflecting internal growth and the acquisition of Data Documents Inc. ("DDI") that was effective November 26, 1997. Including the DDI revenue for periods prior to acquisition, net NAOP sales increased 7.4% year over year on a pro forma basis. Net sales for the International Office Products segment increased 36.5% to $608,884,000 from $445,970,000 in the same twelve-month period last year primarily reflecting acquisition related revenue. The Company acquired 11 International Office Product companies in fiscal 1998 and ten in fiscal 1997. Net sales for the Company's Desktop Software segment increased 41.0% to $582,121,000 from $412,861,000 in the same twelve-month period last year, primarily reflecting new customers and added software sales to existing customers. Net sales for the Other Products and Services' segment increased 4.4% to $292,597,000 from $280,209,000 in the same twelve-month period last year. International operations accounted for 25.0% of total sales or $939,789,000 in the year ended January 30, 1999 and 23.8% of total sales or $726,962,000 in the same twelve-month period last year. The Company has continued to expand its international operations in Germany, Italy and Canada and entered the Netherlands through an acquisition in the year ended January 30, 1999. The Company currently has no specific plans to significantly expand or enter additional international markets. Gross Profit from Continuing Operations. Cost of sales includes merchandise, occupancy and delivery costs. Consolidated gross profit as a percentage of sales was 23.3% for the year ended January 30, 1999 compared to 24.2% for the same twelve-month period in the prior year. The North America Office Products segment's gross profit percentage slightly increased year over year reflecting the Company's focus on margin improvement including increased discounts and rebates from its suppliers. This gross profit increase was offset by increased software sales (which have lower gross profit margins) in the United States and Europe and lower gross margins in certain countries reflecting competitive pressures and product mix. 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 16.0% in the year ended January 30, 1999 from 16.8% in the same twelve-month period last year. This decrease is primarily attributable to the Company's efforts to leverage and streamline its operations, including the elimination of redundant facilities and positions. Corporate General and Administrative Expenses 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 $93,753,000 in the year ended January 30, 1999 from $75,936,000 in the twelve-month period last year reflecting the Company's expanded operations. As a percentage of net sales, corporate general and administrative expenses remained constant at 2.5%. Amortization of Intangibles from Continuing Operations. Intangibles amortization expense primarily reflects goodwill and capitalized software amortization expense. Amortization expense increased to $32,626,000 in the year -15- ended January 30, 1999 from $23,907,000 in the same twelve-month period last year reflecting amortization of the Company's investment in its computer software applications and its acquisition activity. Restructuring, Merger and Other Nonrecurring Charges from Continuing Operations. During the year ended January 30, 1999, the Company recorded $54,805,000 in restructuring and other nonrecurring charges and $3,130,000 in net restructuring related inventory provisions. The Company's restructuring plan provides for a gross reduction of approximately 1,000 employees and the closure of approximately 70 facilities. The total net charge of $57,935,000 includes $36,370,000 of cash charges and $21,565,000 of non-cash charges. During the twelve-month period ended January 31, 1998, the Company expensed $11,337,000 in net merger and other nonrecurring charges including $4,485,000 of transaction costs incurred by DDI in connection with its merger with the Company and for the planned reduction of 295 employees and the closure of 25 facilities. Refer to Note 4 in the Company's audited consolidated financial statements appearing elsewhere in this Form 10-K. Operating Profit from Continuing Operations. Consolidated operating profit decreased 18.9% to $92,706,000 or 2.5% of net sales for the year ended January 30, 1999 compared to operating profit of $114,254,000 or 3.7% of net sales in the same period last year. Before restructuring, merger and other nonrecurring charges, operating profit increased 20.0% to $150,641,000 in the current period from $125,591,000 in the comparable prior period due largely to internal growth and improved operating efficiencies. Before restructuring and merger charges, operating profit for the Company's North America Office Products segment increased 27.9% to $182,312,000, or 8.0% of related net sales, from $142,582,000, or 7.4% of related net sales in the same twelve-month period last year; primarily reflecting internal growth, the DDI acquisition, enhanced vendor discount and rebate programs and improved operating efficiencies. Before restructuring and merger charges, operating profit for the International Office Products' segment increased to $1,697,000, or 0.3% of related net sales, from an operating loss of $4,244,000, or 1.0% of related net sales in the same twelve-month period last year primarily reflecting acquisition revenue and improved performance in Australia, partially offset by an operating loss in the United Kingdom. The United Kingdom operating loss reflects lost revenue and lower gross profit margins, without a corresponding decrease in operating costs. Included in the fiscal 1998 restructuring charge is an extensive restructuring plan for the United Kingdom. Operating profit for the Company's Desktop Software segment increased 18.9% to $34,222,000, or 5.9% of Desktop Software net sales from $28,784,000, or 7.0% of related net sales, in the same twelve-month period last year reflecting the increased percentage of large volume licensing agreements which typically have lower margins compared to traditional shrink wrap products. The Company expects the Desktop Software segment to continue to experience operating margin pressure primarily due to these lower margin high volume customer agreements and changes in the rebate structure from the major software publishers. Before restructuring and merger charges, operating profit for Other Products and Services' segment decreased 48.0% to $7,136,000, or 2.4% of Other Products and Services' net sales from $13,721,000, or 4.9% of Other Products and Services' net sales in the same twelve-month period last year primarily reflecting an operating loss in the promotional products business. The Company appointed a new divisional president for the promotional products business in September 1998, and has completed a number of restructuring activities including exiting the unprofitable sales promotion business line. Before restructuring and merger charges, international operations accounted for 14.9% of total operating profit in the current fiscal year compared to 10.4% in the same twelve-month period of the prior year. Before restructuring and merger charges, international operating profit increased 71.7% to $22,439,000, or 2.4% of international net sales from $13,068,000, or 1.8% of international net sales in the same twelve-month period last year, primarily reflecting expanded international operations and improved operating performance in Australia and Canada, partially offset by the United Kingdom operating loss. Interest Expense from Continuing Operations. Net interest expense of $75,302,000 in the year ended January 30, 1999 increased from $36,099,000 in the prior twelve-month period. This increase reflects increased -16- borrowings under the Senior Secured Credit Facility which has higher interest rates than the previous Senior Credit Facility, and the sale in May 1998 of the Senior Notes. The proceeds from the sale of the Senior Notes were used to repay substantially all of the $90,000,000 9 1/8% Notes and to repay outstanding indebtedness under the Senior Secured Credit Facility. See "Liquidity and Capital Resources." Other Income. Included in other income in fiscal 1998 is the gain on sale of marketable securities of $6,273,000 and reflects net cash proceeds of $21,110,000 offset by the cost of the marketable securities of $14,837,000. Minority Interest. Minority interest expense of $2,222,000 in the year ended January 30, 1999 compares to income of $1,862,000 in the prior twelve- month period, reflecting a 46.8% minority interest in Corporate Express Australia and a 49.0% minority interest in Corporate Express United Kingdom through June 1997. The Company acquired a majority ownership interest in Corporate Express Australia in May 1995 and a majority ownership interest in Corporate Express United Kingdom in December 1995. In June 1997, the Company acquired the remaining 49.0% ownership interest in Corporate Express United Kingdom. Discontinued Operations. Income from discontinued operations, net of tax, reflects the operating results of the same-day delivery business through January 1999, the date a formal plan to sell this business segment was adopted, and the estimated net loss on disposal of $52,000,000. The operating results reflect a $17,652,000 net loss for fiscal 1998 compared to net income of $4,416,000 in the prior twelve-month period. This loss reflects the disposition of certain businesses, the effect of consolidating or closing facilities including planned restructuring, and the loss or elimination of certain lower margin customers without a corresponding decrease in operating expenses. Extraordinary Item. The extraordinary loss of $5,581,000 (which is net of tax of $3,568,000) in fiscal 1998 represents the premium paid on the early repayment of the 9 1/8% Senior Subordinated Notes Series B due 2004 and the write-off of deferred financing costs related to the early extinguishment of the Company's former Senior Credit Facility. Net Income (Loss). Net loss of $73,290,000 in the year ended January 30, 1999 compares to a net income of $50,692,000 in the prior twelve-month period. This decrease reflects the loss on discontinued operations, the higher restructuring and other nonrecurring charges recorded in the current fiscal period and the lower earnings from continuing operations. The Company experienced an effective tax rate of 82.4% in the fiscal 1998 period compared to 43.7% in the prior twelve-month period. The tax rate for both periods reflects certain non-deductible restructuring and merger costs and certain non-deductible goodwill. Balance Sheet Items. The net accounts receivable balance at January 30, 1999 of $601,569,000 increased $83,473,000 from $518,096,000 at January 31, 1998 primarily as a result of acquired receivables and internal sales growth in existing regions. The allowance for doubtful accounts as a percentage of consolidated accounts receivable was 1.9% and 2.1% at January 30, 1999 and January 31, 1998, respectively. The Company's historical bad debt write-offs have been low due to the high credit quality of its customers, resulting from the Company's focus on large corporations. The inventory balance at January 30, 1999 of $285,754,000 increased $34,646,000 from $251,108,000 at January 31, 1998 primarily as a result of acquired inventories and inventory growth to support increased sales and the expanded catalog offering. Net goodwill at January 30, 1999 of $788,963,000 increased $16,110,000 from $772,853,000 reflecting additions from acquisitions of $43,668,000 offset by current year amortization of $20,985,000, write-offs of $3,067,000 related to the restructuring charge, and reversals of $3,506,000. The accounts payable trade balance at January 30, 1999 of $422,087,000 increased $97,687,000 from $324,400,000 at January 31, 1998 primarily as a result of increased inventory purchases to support sales growth and the expanded catalog offering, certain cash management initiatives and acquired trade payables. -17- Accrued purchase costs at January 30, 1999 of $6,417,000 decreased by $2,961,000 from the January 31, 1998 balance of $9,378,000. This decrease reflects acquisition additions of $4,742,000, payments of $4,197,000, and reversals of $3,506,000 reducing previously recorded goodwill. ELEVEN MONTHS ENDED JANUARY 31, 1998 AND FEBRUARY 1, 1997 Net Sales from Continuing Operations. Consolidated net sales increased 27.6% to $2,837,111,000 in the eleven months ended January 31, 1998 from $2,224,203,000 in the same eleven-month period in the prior year. Net sales for the Company's North America Office Products' segment increased 27.4% to $1,782,078,000 from $1,398,889,000 in the same eleven-month period in the prior year, primarily reflecting internal growth and 15 acquisitions completed in fiscal 1997 including the acquisition of DDI that was effective November 26, 1997. Net sales for the International Office Products segment increased 29.8% to $409,220,000 in the eleven months ended January 31, 1998 from $315,243,000 in the same eleven-month period in the prior year primarily reflecting acquisition revenue. The Company acquired ten International Office Product companies in fiscal 1997. Net sales for the Company's Desktop Software segment increased 38.5% to $392,750,000 in the eleven months ended January 31, 1998 from $283,624,000 in the same eleven-month period in the prior year, primarily reflecting internal growth. Net sales for Other Products and Services' segment increased 12.9% to $261,812,000 in the eleven months ended January 31, 1998 from $231,814,000 in the same eleven-month period in the prior year. International operations accounted for 23.7% of total sales or $671,567,000 in the eleven-month period ended January 31, 1998 and 22.9% of total sales or $509,734,000 in the same eleven-month period in the prior year. The Company has expanded its international operations in Germany, Italy and Canada and entered markets in Ireland and Switzerland in the eleven months ended January 31, 1998. Gross Profit from Continuing Operations. Cost of sales includes merchandise, occupancy and delivery costs. Consolidated gross profit as a percentage of sales was 24.0% for the eleven months ended January 31, 1998 compared to 23.8% for the same period in the prior year. The North America Office Products segment's gross profit percentage increased to 27.1% for the eleven months ended January 31, 1998 from 25.6% for the same period in the prior year reflecting increased vendor rebates as a result of improved programs. This gross profit increase was offset by lower International Office Product gross margins reflecting competitive pressures. 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 16.6% in the eleven months ended January 31, 1998 from 16.9% in the same eleven- month period in the prior year. This decrease is primarily attributable to the Company's efforts to leverage and streamline its operations, including the elimination of redundant facilities and positions. Corporate General and Administrative Expenses from Continuing Operations. Corporate general and administrative expenses include expenses incurred to provide corporate oversight and support for regional operations and depreciation for the corresponding assets. Corporate general and administrative expenses increased to $71,325,000 in the eleven months ended January 31, 1998 from $58,005,000 in the eleven-month period in the prior year reflecting the Company's expanded operations. As a percentage of net sales, corporate general and administrative expenses decreased slightly to 2.5% from 2.6% of net sales. Amortization of Intangibles from Continuing Operations. Intangibles amortization expense primarily reflects goodwill and capitalized software amortization expense. Amortization expense increased to $22,158,000 in the eleven months ended January 31, 1998 from $14,520,000 in the same eleven-month period in the prior year reflecting the Company's investment in its proprietary computer software applications and its acquisition activity. -18- Merger and Other Nonrecurring Charges from Continuing Operations. During the eleven-month period ended January 31, 1998, the Company recorded $11,337,000 in net merger and other nonrecurring charges including $4,485,000 of transaction costs incurred by DDI in connection with its merger with the Company and for the planned reduction of 295 employees and the closure of 25 facilities. During the eleven-month period ended February 1, 1997, the Company recorded $8,407,000 in net merger and other non-recurring charges primarily in conjunction with the acquisitions of NIMSA, Sofco, and HMI. Operating Profit from Continuing Operations. Consolidated operating profit increased 47.2% to $104,789,000 or 3.7% of net sales for the eleven months ended January 31, 1998 compared to operating profit of $71,141,000 or 3.2% of net sales in the same period of the prior year. Before merger and other nonrecurring charges, operating profit increased 46.0% to $116,126,000 in the eleven months ended January 31, 1998 from $79,548,000 in the comparable prior period due largely to internal growth and improved operating efficiencies. Before merger and other nonrecurring charges, operating profit for the Company's North America Office Products segment increased 47.4% to $129,834,000, or 7.3% of related net sales in the eleven months ended January 31, 1998, from $88,072,000, or 6.3% of related net sales in the same eleven-month period in the prior year, primarily reflecting internal growth, acquisitions, enhanced vendor programs and improved operating efficiencies. Before merger and other nonrecurring charges, operating loss for the International Office Products segment increased 21.4% to $3,459,000, or 0.8% of related net sales in the eleven months ended January 31, 1998, from an operating loss of $2,849,000, or 0.9% of related net sales in the same eleven-month period in the prior year primarily reflecting improved performance in Australia, offset by an operating loss in the United Kingdom. Before merger and other nonrecurring charges, operating profit for the Company's Desktop Software segment increased 49.5% to $28,234,000, or 7.2% of Desktop Software net sales for the eleven months ended January 31, 1998 from $18,891,000, or 6.6% of related net sales, in the same eleven-month period in the prior year reflecting internal growth. Before merger and other nonrecurring charges, operating profit for Other Products and Services' segment increased 12.4% to $13,014,000, or 5.0% of Other Products and Services' net sales for the eleven months ended January 31, 1998, from $11,581,000, or 5.0% of Other Products and Services' net sales in the same eleven-month period last year primarily reflecting an acquisition in the second quarter of fiscal 1997. Before merger and nonrecurring charges, international operating profit increased 114.0% to 2.0% of international net sales from 1.2% of international net sales in the same eleven-month period in the prior year primarily reflecting expanded international operations and improved operating performance in Australia and Canada, partially offset by the United Kingdom operational loss. Interest Expense from Continuing Operations. Net interest expense of 34,014,000 in the eleven months ended January 31, 1998 increased from $17,958,000 in the same eleven-month period in the prior year. This increase reflects increased borrowings under the Senior Credit Facility and the sale in June 1996 of $325,000,000 aggregate principal amount of the Company's 4 1/2% Convertible Notes due July 1, 2000 (the "Convertible Notes"). The proceeds from the sale of the Convertible Notes and borrowings under the Senior Credit Facility were used to fund acquisitions and provide additional working capital required as a result of increased business and for general corporate purposes. Minority Interest. Minority interest income of $1,319,000 in the eleven months ended January 31, 1998 compares to income of $1,314,000 in the same eleven-month period in the prior year, reflecting a 47.6% minority interest in Corporate Express Australia and a 49.0% minority interest in Corporate Express United Kingdom through June 1997. The Company acquired a majority ownership interest in Corporate Express Australia in May 1995 and a majority ownership interest in Corporate Express United Kingdom in December 1995. In June 1997, the Company acquired the remaining 49.0% ownership interest in Corporate Express United Kingdom. Discontinued Operations. Income from discontinued operations, net of tax, of $3,355,000 reflects the operating results of the same-day delivery business for the eleven months ended January 31, 1998 and compares to net income of $4,645,000 in the prior eleven-month period. These results reflect poor performance at several -19- delivery locations and expenses related to integration projects partially offset by the cost savings from the elimination of redundant personnel. Net Income. Net income of $44,404,000 in the eleven months ended January 31, 1998 increased 24.4% from net income of $35,707,000 in the same eleven-month period in the prior year. This increase reflects the increased profits from the Company's North America Office Products and Desktop Software operations, the lower merger and other nonrecurring charges recorded in the current eleven-month fiscal period and corporate expense leverage offset in part by higher goodwill amortization. The Company experienced an effective tax rate of 44.2% in the fiscal 1997 period compared to 44.0% in the same eleven-month period in the prior year. The tax rate for both periods reflects certain non-deductible merger costs and certain non-deductible goodwill. LIQUIDITY AND CAPITAL RESOURCES Historically, the Company has financed its operations through internally generated funds and borrowings from commercial banks and has financed its acquisitions through the use of such funds and the issuance of equity and debt securities. In January 1999, the Company approved a global restructuring plan that includes a reduction of approximately 1,000 employees across all business functions, or approximately 7% of the total continuing operations' workforce, and the closure or consolidation of approximately 75 facilities. The Company recorded $54,805,000 in restructuring and other nonrecurring charges and $3,130,000 in net restructuring related inventory provisions. The total net charge of $57,935,000 includes $36,370,000 of cash charges and $21,565,000 of non-cash charges. Additionally, the Company announced the discontinuance of its same-day delivery business and has engaged an investment banking firm to assist in the sale this business. In conjunction with these activities, the Company amended its Senior Secured Credit Facility to clarify that the aforementioned restructuring charge is excluded from its covenant computations, and to permit the disposal of certain non-core business units including the same-day delivery business. 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 tendered 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 the previously announced discussions with a potential financial sponsor for a significant share repurchase or tender offer and has also terminated its stock repurchase program. The Company funded the purchase of such shares and the payment of related fees and expenses through its new $1.0 billion Senior Secured Credit Facility. This Senior Secured Credit Facility consists of a $250,000,000 seven-year term loan and a $750,000,000 five-year revolving credit facility. The Senior Secured Credit Facility is guaranteed by substantially all domestic subsidiaries of the Company and is collateralized by all tangible and intangible property of the guarantors including inventory and receivables. At the borrower's option, interest rates are at a base rate or a Eurodollar rate plus an applicable margin determined by a leverage ratio as defined in the loan agreements. The term loan's interest rate ranges from 0.25% to 0.75% above the revolving loan interest rate. The Company is subject to usual covenants customary for this type of facility including financial covenants. The Company amended the credit agreement to clarify that the restructuring charge is excluded from the computations and to permit the disposal of certain non-core assets. The available funds may be used for general corporate purposes, including permitted acquisitions and permitted share repurchases. As of April 15, 1999, the Company had $482,425,000 outstanding under the Senior Secured Credit Facility and an unused borrowing capacity of $489,713,000 (reflecting the quarterly principal payments on the term loan totaling $1,875,000, which is a permanent reduction to the facility). The Company is in compliance with all debt -20- convenants under the Senior Secured Credit Facility and, although there can be no assurance, the Company expects to remain in compliance with such covenants for fiscal 1999 under its annual business plan for the year. 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 $511,000,000 at January 30, 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 will be 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 Holding, Inc. completed a registered exchange offer pursuant to which the 9 5/8% Notes were exchanged for substantially similar notes. During the year ended January 30, 1999, the Company invested $28,770,000 net cash in its acquisition program. Total liabilities assumed in connection with these acquisitions were $47,583,000. In addition, the Company made payments of approximately $12,103,000 for liabilities related to prior period acquisitions. During the year ended January 30, 1999, the Company had net capital expenditures of $81,535,000 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. The Company continues to make substantial investments in the development and enhancement of its proprietary computer software applications. During fiscal 1997, the Company completed the development and implementation of its ISIS computer software for its national account customers and successfully launched the internet version of E-Way, its electronic commerce, ordering and fulfillment system. The Company began amortizing its ISIS national account software and E- Way in fiscal 1997 over a seven-year and five-year life, respectively, on a straight-line basis. All costs associated with the maintenance and production of its ISIS national account software are being expensed as incurred. The integrated divisional version of the ISIS software continues to be developed and is currently in beta test mode at three operating divisions. The Company estimates that the costs to complete and implement ISIS divisional software will be approximately $35.0 million and the software is scheduled to be implemented at substantially all existing domestic office products distribution centers by the end of fiscal 2002. Significant uses of cash in fiscal 1998 were as follows: repurchase of common stock of $427,282,000, cash paid to retire bonds of $93,792,000, net capital expenditures of $81,535,000, cash paid for acquisitions of $40,873,000, net payments under lines of credit of $16,979,000 and net cash used in discontinued operations of $12,542,000, partially offset by net proceeds of long-term borrowings of $536,974,000, cash provided by operations of $102,711,000, net proceeds from sale of securities of $14,414,000 and other net proceeds of $923,000. During the eleven months ended January 31, 1998, the Company invested $24,572,000 net cash and approximately 14,895,000 shares of common stock in its acquisition program. Total liabilities assumed in -21- connection with these acquisitions were $171,928,000. In addition, the Company made payments of approximately $8,797,000 and issued approximately 252,000 shares of common stock related to acquisitions completed in prior fiscal years. Significant uses of cash in the eleven months ended January 31, 1998 were as follows: net capital expenditures of $52,445,000, cash paid for acquisitions of $32,729,000, net debt repayments of $6,124,000, retirement of DDI bonds of $62,178,000, and net other uses of $3,418,000, partially offset by cash provided by net borrowings on lines of credit of $117,748,000, operating activities of $5,593,000, issuance of common stock of $8,104,000, issuance of subsidiary common stock of $2,434,000 and discontinued operations of $7,705,000. On June 24, 1996, the Company issued $325,000,000 aggregate principal amount of 4 1/2% Convertible Notes. The notes are convertible into the Company's common stock at a conversion price of $33.33 per share, subject to adjustments under certain conditions. A portion of the proceeds from the sale of the Convertible Notes was used to repay the Company's then existing credit facility and an acquisition note payable with the remaining proceeds being used to fund acquisitions and for other general corporate purposes. The Convertible Notes mature on July 1, 2000, which will require the Company to either repay or refinance the indebtedness on or before that date. The Company believes that anticipated borrowing capacity under the Senior Secured Credit Facility, together with cash flow from operations, proceeds of potential asset sales or issuance of additional securities, will be adequate for this purpose, although there can be no assurance that such funds will be available or sufficient to either repay or refinance the Convertible Notes. During fiscal 1996, the Company acquired, for a net cash purchase price of $241,846,000 and 5,542,000 shares of common stock, 77 office products distributors and 23 same-day delivery companies. Included in the net cash purchase price is $17,970,000 that was paid by the discontinued same-day delivery business and is included in the consolidated Statement of Cash Flows in net cash provided from discontinued operations. Of these 100 acquisitions, 86 were accounted for as purchases and 14 were accounted for as immaterial poolings of interest. In addition, the Company acquired UT and NIMSA, which were accounted for as poolings of interests transactions for 6,332,000 and 1,125,000 shares of common stock, respectively. Total liabilities assumed in connection with these acquisitions were $282,777,000 (including accounts payable and assumed debt). In addition, the Company made payments of approximately $13,984,000 related to prior acquisitions. Included in the net cash purchase price of $241,846,000 is the purchase of ASAP, a computer software distribution company, in May 1996 for approximately $98,000,000 in cash offset by cash acquired of approximately $14,000,000. The Company does not enter into financial instrument contracts for trading or speculative purposes. The Company has no financial instrument contracts currently outstanding. The Company believes that the borrowing capacity under the Senior Secured Credit Facility, together with proceeds from future debt and equity financings, 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, 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. -22- SEASONALITY AND QUARTERLY RESULTS The Company's product distribution business is subject to seasonal influences. In particular, net sales and profits in the United States, Canada and Europe are typically lower in the summer months due to lower levels of business activity. Quarterly results may be materially affected by the timing of acquisitions and the timing and magnitude of acquisition integration costs. Therefore, the operating results for any three month period are not necessarily indicative of the results that may be achieved for any subsequent fiscal quarter or for a full fiscal year. Revenues and profit margins from the Company's discontinued local delivery services are subject to seasonal variations. Prolonged inclement weather can have an adverse impact on the Company's business to the extent that transportation and distribution channels are disrupted. ACCOUNTING STANDARDS On March 4, 1998, the Accounting Standards Executive Committee issued Statement of Position (SOP) 98-1 providing guidance on accounting for the costs of computer software developed or obtained for internal use. The effective date of this pronouncement is for fiscal years beginning after December 15, 1998. The Company has reviewed its current policies of accounting for costs associated with internal software development projects and how they may be effected by SOP 98-1. The Company believes its current policies are materially consistent with the SOP, and will not have a significant impact on the Company's future results of operations. -23- IMPACT OF THE YEAR 2000 ISSUE General. The Year 2000 issue is the result of computer programs being written using two digits rather than four to identify the applicable year. Computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. If not corrected, those programs could result in miscalculations or systems problems that disrupt operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar business activities. 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 June 30, 1999. The Company's ISIS computer software was designed with the Year 2000 issue in mind, and the Company believes that it is Year 2000 compliant. However, the Company uses many different systems and software programs to effect, process and summarize business transactions, and the remediation efforts estimated to be required vary depending upon the systems or sites involved. The following chart summarizes the estimated Year 2000 readiness, as of January 30, 1999, of the Company's program:
Percent Estimated Year 2000("Y2K") Initiatives Complete Completion - ----------------------------- ------------------------------ Y2K enterprise awareness and assessment 100% Complete Y2K detailed inventory 100% Complete Impact assessment 100% Complete Conversion strategy 100% Complete Telephones and PBX systems 95% 4/99 Client servers computing environment 85% 6/99 Network environment 95% 4/99 Corporate systems (primarily Human Resources and Financial) 80% 8/99 Operating systems (order and warehouse management) 70% 6/99 Third party readiness 75% 6/99 Non IT systems 60% 6/99 Other (electrical, mechanical, etc.) 60% 6/99 Contingency plans 40% 7/99
The Company has initiated formal communications with significant suppliers to determine the extent to which the Company is at risk to those third parties' failure to remediate their own Year 2000 issues. In select cases, the Company is involved in the verification of the remediation efforts of those suppliers. The Company believes that because of its large, diverse customer base, potential Year 2000 problems on the part of a customer will not be material to the Company. There can be no guarantee that the systems of other companies on which the Company relies or with which it does business will be timely converted or converted compatibly with the Company or that such deficiencies will not be material to the Company. Costs. The total estimated cost of the Year 2000 project is between $6,000,000 and $8,000,000 and is being funded through operating cash flows. These costs are not expected to be material to the Company's consolidated results of operations. Of the total project cost, approximately $2,000,000 is for the purchase of new software or equipment which will be capitalized. The remaining $4,000,000 to $6,000,000 has been or will be expensed as incurred. In a number of instances, the Company may decide to install new software or upgraded versions of current software programs which are Year 2000 compliant. In these instances, the Company may capitalize certain costs of the new system in accordance with current accounting guidelines. As of January 30, 1999, the Company had spent approximately $4,200,000 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. -24- Risks. The Company presently believes that its Year 2000 issue 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. 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company is primarily exposed to currency exchange-rate risk with respect to its transactions and net assets denominated in Canadian and Australian Dollars, 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 January 30, 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 $4,000,000 of additional interest expense thereby reducing the Company's fiscal 1998 pretax earnings. The Company had no financial instrument contracts outstanding as of January 30, 1999. -25- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Directors of Corporate Express, Inc.: In our opinion, the consolidated financial statements listed in the index under item 14(a)1 on page 75 present fairly, in all material respects, the financial position of Corporate Express, Inc. and its subsidiaries as of January 30, 1999 and January 31, 1998, and the results of their operations and their cash flows for the year ended January 30, 1999, the eleven months ended January 31, 1998, and the year ended March 1, 1997, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule listed in the index under item 14(a)2 on page 75 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Denver, Colorado March 19, 1999 -26- CORPORATE EXPRESS, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts)
ASSETS January 30, January 31, 1999 1998 ----------- ----------- Current assets: Cash and cash equivalents $ 14,831 $ 32,812 Trade accounts receivable, net of allowance of $11,772 and $11,357, respectively 601,569 518,096 Notes and other receivables 90,289 83,464 Inventories 285,754 251,108 Deferred income taxes 43,191 34,036 Other current assets 54,759 38,813 ----------- ---------- Total current assets 1,090,393 958,329 Property and equipment: Land 14,762 15,670 Buildings and leasehold improvements 120,805 113,136 Furniture and equipment 189,460 167,774 ----------- ---------- 325,027 296,580 Less accumulated depreciation (100,265) (71,380) ----------- ---------- 224,762 225,200 Goodwill, net of accumulated amortization of $66,370 and $45,608, respectively 788,963 772,853 Software, net of accumulated amortization of $18,814 and $9,195, respectively 126,937 91,724 Other assets, net 79,914 57,098 Net assets of discontinued operations 104,621 161,787 ----------- ---------- Total assets $ 2,415,590 $2,266,991 =========== ==========
The accompanying notes are an integral part of the consolidated financial statements. -27- CORPORATE EXPRESS, INC. CONSOLIDATED BALANCE SHEETS, CONTINUED (In thousands, except share and per share amounts) LIABILITIES AND SHAREHOLDERS' EQUITY
January 30, January 31, 1999 1998 ------------ ----------- Current liabilities: Accounts payable - trade $ 422,087 $ 324,400 Accounts payable - acquisitions 373 6,106 Accrued payroll and benefits 57,039 46,660 Accrued purchase costs 6,417 9,378 Accrued restructuring, merger and related costs 36,160 10,806 Other accrued liabilities 61,438 59,756 Current portion of long-term debt and capital leases 67,811 35,246 ------------- ------------ Total current liabilities 651,325 492,352 Capital lease obligations 7,081 8,722 Long-term debt 1,200,346 749,292 Deferred income taxes 70,570 51,037 Minority interest in subsidiary 20,986 20,791 Other non-current liabilities 20,955 12,364 ------------- ------------ Total liabilities 1,971,263 1,334,558 Commitments and contingencies (Notes 8 and 9) Shareholders' equity: Preferred stock, $.0001 par value, 25,000,000 shares authorized, none issued or outstanding - - Common stock, $.0002 par value, 300,000,000 shares authorized, 143,778,318 and 142,392,845 shares issued and outstanding, respectively 28 28 Common stock, non-voting, $.0002 par value, 3,000,000 shares authorized, none issued or outstanding - - Additional paid-in capital 865,820 852,507 Retained earnings 18,597 91,887 Accumulated other comprehensive income (12,836) (11,989) ------------- ------------ 871,609 932,433 Less: Treasury stock, at cost, 39,635,681 shares at January 30, 1999 (427,282) - ------------- ------------ Total shareholders' equity 444,327 932,433 ------------- ------------ Total liabilities and shareholders' equity $ 2,415,590 $ 2,266,991 ============= ============
The accompanying notes are an integral part of the consolidated financial statements. -28- CORPORATE EXPRESS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
Eleven Year Ended Months Ended Year Ended January 30, January 31, March 1, 1999 1998 1997 ------------ -------------- ------------ Net sales $ 3,752,591 $ 2,837,111 $ 2,438,039 Cost of sales 2,875,885 2,155,289 1,853,741 Restructuring related inventory provision 3,130 - - ------------ ------------ ------------ Gross profit 873,576 681,822 584,298 Warehouse operating and selling expenses 599,686 472,213 416,399 Corporate general and administrative expenses 93,753 71,325 62,616 Amortization of intangibles 32,626 22,158 16,269 Restructuring, merger and other nonrecurring charges 54,805 11,337 8,407 ------------ ------------ ------------ Operating profit 92,706 104,789 80,607 Interest expense, net 75,302 34,014 20,045 Other income, net 6,212 464 242 ------------ ------------ ------------ Income before income taxes 23,616 71,239 60,804 Income tax expense 19,451 31,509 26,374 ------------ ------------ ------------ Income before minority interest 4,165 39,730 34,430 Minority interest (income) expense 2,222 (1,319) (1,860) ------------ ------------ ------------ Income from continuing operations 1,943 41,049 36,290 ------------ ------------ ------------ Discontinued operations, net of tax: Income (loss) from discontinued operations (17,652) 3,355 5,706 Loss on disposal (52,000) - - ------------ ------------ ------------ Income (loss) from discontinued operations (69,652) 3,355 5,706 ------------ ------------ ------------ Income (loss) before extraordinary item (67,709) 44,404 41,996 Extraordinary item, net of tax: Loss on early extinguishment of debt (5,581) - - ------------ ------------ ------------ Net income (loss) $ (73,290) $ 44,404 $ 41,996 ============ ============ ============ Pro forma net income (loss) (Note 14) $ (73,290) $ 44,404 $ 40,281 ============ ============ ============ Pro forma net income (loss) per share - Basic: Continuing operations $ 0.02 $ 0.31 $ 0.28 Discontinued operations (0.62) 0.03 0.05 Extraordinary item (0.05) - - ------------ ------------ ------------ Net income (loss) $ (0.65) $ 0.34 $ 0.33 ============ ============ ============ Pro forma net income (loss) per share - Diluted: Continuing operations $ 0.02 $ 0.30 $ 0.27 Discontinued operations (0.61) 0.02 0.04 Extraordinary item (0.05) - - ------------ ------------ ------------ Net income (loss) $ (0.64) $ 0.32 $ 0.31 ============ ============ ============ Weighted average common shares outstanding: Basic 113,080 131,423 121,901 Diluted 115,401 137,858 130,029
The accompanying notes are an integral part of the consolidated financial statements. -29- CORPORATE EXPRESS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY for the Year Ended March 1, 1997, the Eleven Months Ended January 31, 1998, and the Year Ended January 30, 1999 (In thousands, except share amounts)
Accumulated Additional Other Common Stock Paid-in Comprehensive ------------ Shares Amount Capital Income (Expense) ------ ------ ------- ---------------- Balance, March 2, 1996 111,954,350 $ 22 $ 513,358 $ 196 Net income Currency translation adjustments (1,372) Comprehensive income Issuance of common stock 14,217,117 3 119,274 Tax benefit on non-qualified stock options exercised 11,161 Adjustment to conform fiscal year ends of certain pooled companies S Corporation dividends and other equity transactions of pooled companies 2,743 ------------ --- --------- --------- Balance, March 1, 1997 126,171,467 25 646,536 (1,176) Net income Currency translation adjustments (10,813) Comprehensive income Issuance of common stock 16,221,378 3 198,095 Tax benefit on non-qualified stock options exercised 4,673 Equity transactions of pooled companies 3,203 ------------ --- --------- --------- Balance, January 31, 1998 142,392,845 28 852,507 (11,989) Net loss Currency translation adjustments 1,484 Change in unrealized loss on securities (2,331) Comprehensive income (expense) Issuance of common stock 1,385,473 - 10,991 Stock option awards 1,479 Tax benefit on non-qualified stock options exercised 843 Repurchase of 39,635,681 shares common stock ------------ ---- --------- --------- Balance, January 30, 1999 143,778,318 $ 28 $ 865,820 $ (12,836) ============ ==== ========= ========= Total Total Retained Treasury Shareholders' Comprehensive Earnings Stock Equity Income -------- ---------- ------ ------ Balance, March 2, 1996 $ 8,200 $ 0 $ 521,776 Net income 41,996 41,996 $ 41,996 Currency translation adjustments (1,372) (1,372) ----------- Comprehensive income $ 40,624 =========== Issuance of common stock 119,277 Tax benefit on non-qualified stock options exercised 11,161 Adjustment to conform fiscal year ends of certain pooled companies (430) (430) S Corporation dividends and other equity transactions of pooled companies (1,544) 1,199 -------- ---------- -------- Balance, March 1, 1997 48,222 0 693,607 Net income 44,404 44,404 $ 44,404 Currency translation adjustments (10,813) (10,813) ----------- Comprehensive income $ 33,591 =========== Issuance of common stock 198,098 Tax benefit on non-qualified stock options exercised 4,673 Equity transactions of pooled companies (739) 2,464 -------- ---------- -------- Balance, January 31, 1998 91,887 0 932,433 Net loss (73,290) (73,290) $ (73,290) Currency translation adjustments 1,484 1,484 Change in unrealized loss on securities (2,331) (2,331) ----------- Comprehensive income $ (74,137) =========== Issuance of common stock 10,991 Stock option awards 1,479 Tax benefit on non-qualified stock options exercised 843 Repurchase of 39,635,681 shares common stock (427,282) (427,282) -------- ---------- -------- Balance, January 30, 1999 $ 18,597 $ (427,282) $ 444,327 ======== ========== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. -30- CORPORATE EXPRESS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Eleven Year Ended Months Ended Year Ended January 30, January 31, March 1, 1999 1998 1997 ----------- ------------ ---------- Cash flows from operating activities: Net income $ (73,290) $ 44,404 $ 41,996 Adjustments to reconcile net income to net cash provided by (used in) continuing operating activities: Depreciation 32,496 23,317 17,241 Amortization 32,626 22,158 16,269 Loss on early extinguishment of debt 5,581 - - Adjustment to conform fiscal years - - (426) Non-cash portion of merger and restructuring charge 22,490 670 1,025 Minority interest (income)/expense 2,222 (1,319) (1,860) Loss (income) from discontinued operations 17,652 (3,355) (5,706) Loss on disposal of discontinued operations 52,000 - - Gain on sale of securities (6,273) - - Deferred taxes (867) 22,991 14,937 Other 5,440 3,435 950 Changes in assets and liabilities, excluding acquisitions: Increase in accounts receivable (52,775) (89,018) (38,555) Increase in inventory (28,386) (23,369) (12,015) Increase in other current assets (12,084) (19,421) (3,399) (Increase) decrease in other assets (11,825) 7,977 (557) Increase in accounts payable 61,156 17,255 6,307 Increase (decrease) in accrued liabilities 56,548 (132) (19,234) ---------- --------- -------- Net cash provided by continuing operating activities 102,711 5,593 16,973 ---------- --------- -------- Cash flows from investing activities: Capital expenditures (96,455) (71,518) (104,248) Proceeds from sale of assets 14,920 19,073 980 Payment for acquisitions, net of cash acquired (40,873) (32,729) (237,860) Proceeds from (investments in) marketable securities 21,110 (9,164) (17,853) Short-term financial instruments, net (6,696) 3,935 2,251 Other, net 789 2,667 (1,846) ---------- --------- -------- Net cash used in investing activities (107,205) (87,736) (358,576) ---------- --------- -------- Cash flows from financing activities: Issuance of common stock 3,829 8,104 12,643 Repurchase of common stock (427,282) - - Issuance of subsidiary common stock - 2,434 2,258 Debt issuance costs (32,637) (1,083) (8,818) Proceeds from long-term borrowings 601,880 10,241 347,336 Repayments of long-term borrowings (32,269) (26,223) (28,458) Proceeds from short-term borrowings 5,546 15,308 772 Repayments of short-term borrowings (10,061) (4,367) (26,945) Net proceeds from (payments on) line of credit (16,979) 117,748 134,913 Cash paid to retire bonds (93,792) (62,178) - Other - (22) (3,928) ---------- --------- -------- Net cash provided by (used in) financing activities (1,765) 59,962 429,773 ---------- --------- -------- Net cash provided (to) from discontinued operations 12,542) 7,705 (65,423) ---------- --------- -------- Effect of foreign currency exchange rate changes on cash 820 (834) (445) ---------- --------- -------- Increase (decrease) in cash and cash equivalents (17,981) (15,310) 22,302 Cash and cash equivalents, beginning of period 32,812 48,122 25,820 ---------- --------- -------- Cash and cash equivalents, end of period $ 14,831 $ 32,812 $ 48,122 ========== ========= ======== Supplemental disclosure of cash flow information from continuing operations: Cash paid during the period for interest, net of amounts capitalized $ 81,971 $ 41,952 $ 30,979 Cash paid (received) during the period for taxes $ 18,369 $ (8,287) $ 21,727
The accompanying notes are an integral part of the consolidated financial statements. -31- CORPORATE EXPRESS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED Supplemental schedule of noncash investing and financing activities: Capital lease obligations (excluding discontinued operations) in the amount of $7,975,000, $5,197,000, and $7,187,000 were incurred during fiscal 1998, 1997 and 1996, respectively. During the year ended January 30, 1999, the Company acquired for a net cash purchase price of $28,770,000, 14 international product distributors. There were no pooling of interests transactions during fiscal 1998. During the eleven months ended January 31, 1998, the Company acquired for a net cash purchase price of $24,572,000 and approximately 14,895,000 shares of common stock, 16 domestic product distributors and 15 international product distributors. Included in the 16 domestic product distributors, is the acquisition of Data Documents, Incorporated ("DDI"), a provider of forms management services, custom business forms and pressure-sensitive labels for large corporate customers, for approximately 10,740,000 shares of common stock. There were no material pooling of interests transactions during fiscal 1997. During fiscal 1996, the Company acquired, for a net cash purchase price of $241,846,000 and 5,542,000 shares of common stock, 77 office products distributors and 23 service companies. Of these 100 acquisitions, 86 were accounted for as purchases and 14 were accounted for as immaterial poolings of interest. In addition, the Company acquired UT and NIMSA, which were accounted for as a poolings of interests transactions, for 6,332,000 shares of common stock and 1,125,000 shares of common stock, respectively. In conjunction with the acquisitions, liabilities were assumed as follows:
Eleven Year Ended Months Ended Year Ended January 30, January 31, March 1, 1999 1998 1997 ------------ ------------- ----------- Fair value of assets acquired $ 76,353 $ 383,840 $ 620,252 Cash paid, net of cash acquired (28,770) (24,572) (241,846) Issuance of notes payable --- --- (4,650) Issuance of stock --- (184,264) (86,922) Purchase price payable, included in current liabilities --- (3,076) (4,057) -------- --------- --------- Liabilities assumed $ 47,583 $ 171,928 $ 282,777 ======== ========= =========
During fiscal 1998, the Company paid $12,103,000 for liabilities related to prior period acquisitions. During the eleven months ended January 31, 1998, the Company paid $8,797,000 and issued 252,000 shares of common stock for liabilities related to prior period acquisitions including its purchase of the remaining 49% interest in Corporate Express United Kingdom. During fiscal 1996, the Company paid $11,695,000 for liabilities related to prior period acquisitions, $2,289,000 to dissenting shareholders of a pooled company, purchased a warehouse facility for 202,250 shares of common stock, and issued 107,207 shares of common stock to retire convertible debt of $1,449,400 previously issued by one of the Company's acquired subsidiaries. Of the total cash paid for acquisitions, $640,000 was paid in fiscal 1997 and $17,970,000 was paid in fiscal 1996 by the same-day delivery business. Accordingly, these cash payments are shown in net cash (to) from discontinued operations. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. -32- 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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, janitorial and cleaning supplies, advertising specialties, custom business forms, pressure-sensitive label products, forms management services, and printing. The Company's target customers are large corporations which operate from multiple locations and can benefit from selecting suppliers who can service them in many of their locations. In January 1999, the Company adopted a plan to discontinue its same-day delivery services and announced it was involved in negotiations to sell all or a majority stake of 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. As more fully described in Note 3, the Company has consummated numerous acquisitions certain of which were accounted for as poolings of interests and, accordingly, the accompanying financial statements have been restated to include the accounts and operations of UT, Nimsa, HMI and Sofco for all applicable periods. Acquisitions accounted for as purchases are included in the accounts and operations as of the effective date of the transaction and immaterial acquisitions accounted for as poolings of interests are included in the accounts and operations as of the beginning of the fiscal quarter in which the transaction is effective. The Company accounts for its investments in less than 50% owned entities using the equity or cost methods. All intercompany balances and transactions have been eliminated. Definition of Fiscal Year As used in these consolidated financial statements and notes to consolidated financial statements, "fiscal 1998" refers to the twelve-month period ended January 30, 1999, "fiscal 1997" refers to the eleven-month period ended January 31, 1998 and "fiscal 1996," refers to the twelve-month period ended March 1, 1997, respectively. In connection with the mergers, Nimsa, UT, HMI and Sofco changed their 1996 fiscal year ends to conform to the fiscal year ends of the Company. Reference to the twelve months ended January 31, 1998 and the eleven months ended February 1, 1997 refer to unaudited periods and are presented for comparative purposes only. Cash and Cash Equivalents All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. All cash equivalents are carried at cost, which approximates fair value. Inventories Inventories primarily consist of finished goods which are valued at the lower of first-in, first-out (FIFO) cost or market. The Company periodically assesses its inventory to determine market value based upon such factors as historical sales and purchases, inclusion in the Company's primary Office and Computer Products Catalog and other factors. Included in cost of sales for fiscal 1998 is a net restructuring related inventory provision of $3,130,000. These provisions reflect the write-down to fair market value of certain inventory which the Company decided to eliminate from its product line. -33- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Property and Equipment Property and equipment are carried at cost. Depreciation is computed using the straight-line method over estimated useful lives which range from three to seven years for furniture and equipment; up to 40 years for buildings; and over the life of the lease for leasehold improvements. Ordinary maintenance and repairs are charged to operations while expenditures which extend the physical or economic life of property and equipment are capitalized. Gains and losses on disposition of property and equipment are recognized in operations in the year of disposition. Concentration of Credit Risk The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents. The Company places its cash and temporary cash investments with high quality credit institutions. At times, such investments may be in excess of the FDIC insurance limit. Concentration of credit risk with respect to trade receivables is limited due to the wide variety of customers and markets into which the Company's products are sold, as well as their dispersion across many geographic areas. As a result, as of January 30, 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. Intangible Assets Goodwill is amortized on a straight-line basis over a period of 40 years. Noncompete agreements, which are included in other assets, are amortized on a straight-line basis over periods of two to ten years. The Company evaluates intangible assets periodically in accordance with Statement of Financial Accounting Standards No. 121 to determine whether they are properly reflected in the financial statements based upon future undiscounted operating cash flows. If an impairment is determined to exist, the impaired asset is written down to fair market value. The net goodwill balance of $788,963,000 at January 30, 1999 reflects fiscal period 1998 additions from acquisitions of $43,668,000, amortization of $20,985,000, write-offs of $3,067,000 related to the restructuring and reversals of $3,506,000. 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: -34- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
External Internal Capitalized Total Net Costs Costs Interest Costs Amortization Asset ----------- ----------- ------------- ------------- ----------------- ------------- Balance, March 2, 1996 $17,109 $ 3,816 $ 717 $ 21,642 $ (1,472) $ 20,170 Additions, net 27,922 7,379 2,105 37,406 (2,181) 35,225 ------- ------- ------- -------- -------- -------- Balance, March 1, 1997 45,031 11,195 2,822 59,048 (3,653) 55,395 Additions, net 18,352 20,271 3,248 41,871 (5,542) 36,329 ------- ------- ------- -------- -------- -------- Balance, January 31, 1998 63,383 31,466 6,070 100,919 (9,195) 91,724 Additions 24,352 19,881 5,546 49,779 (10,046) 39,733 Retirements -- -- -- (4,947) 427 (4,520) ------- ------- ------- -------- -------- -------- Balance, January 30, 1999 $87,735 $51,347 $11,616 $145,751 $(18,814) $126,937 ======= ======= ======= ======== ======== ========
On November 11, 1997, the FASB Emerging Issues Task Force (EITF) issued EITF 97-13 providing guidance on the treatment of business process reengineering costs ("BPR") for companies that have undertaken enterprise software projects. The EITF required all previously capitalized BPR costs be written off through a cumulative catch-up adjustment in the current period. The effect of adopting EITF 97-13 was not material to the Company's consolidated financial results. 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. This pronouncement will be effective beginning fiscal 1999. The Company reviewed its current policies for accounting for costs associated with internal software development projects and how they may be effected by SOP 98-1. The Company believes its current policies are materially consistent with the SOP, and there will not be a significant impact on the Company's future results of operations. Accrued Purchase Costs The Company accrues direct external costs incurred to consummate an acquisition, other external costs and liabilities to close the acquired entity's facilities, and severance and relocation payments to the acquired entity's employees. Accrued Restructuring, Merger and Related Costs Accrued restructuring, merger and related costs include the actual costs of completing acquisitions accounted for as pooling of interests transactions, additional costs associated with integrating the combined companies' operations, including liabilities for severance benefits for employees expected to be terminated, and costs to restructure the Company's existing operations. Revenue Recognition Revenue is recognized upon the shipment of products and completion of service to customers. Cost of Sales Vendor rebates and similar payments are recognized on an accrual basis in the period earned and are recorded as a reduction to cost of sales. Delivery and occupancy costs are included as an increase to cost of sales. -35- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Warehouse Operating and Selling Expenses Warehouse operating and selling expenses include all costs associated with operating regional warehouses and sales offices, including warehouse labor, related warehouse general and administrative expenses (excluding occupancy), selling expenses and commissions related to the Company's direct sales force, and warehouse assimilation costs. Other Comprehensive Income 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 year-end exchange rate, and income statement accounts are translated on a monthly basis using the average exchange rate for the period. Unrealized gains and losses on translation adjustments and marketable securities are recorded in shareholders' equity as other comprehensive income. Realized gains and losses from transactions are reflected in income and consist of a realized gain on marketable securities in fiscal 1998 of $6,273,000 and an aggregate transaction gain of $116,000 in fiscal 1996. The Company does not currently hedge foreign currency risk exposures. Components of other accumulated comprehensive income (expense) consist of the following:
Foreign Unrealized Other Currency Loss on Comprehensive Translation Securities Income (Expense) -------------- -------------- --------------------- (in thousands) March 2, 1996 $ 196 $ --- $ 196 Fiscal 1996 change (1,372) --- (1,372) -------- ---------- -------- March 1, 1997 $ (1,176) $ --- $ (1,176) Fiscal 1997 change (10,813) --- (10,813) -------- ---------- -------- January 31, 1998 $(11,989) --- $(11,989) Fiscal 1998 change 1,484 (2,331) ( 847) -------- ---------- --------- January 30, 1999 $(10,505) $(2,331) $(12,836) ======== ========== =========
The change in unrealized loss on marketable securities during fiscal 1998 is net of a tax benefit of $1,490,000. The currency translation adjustments are not adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries. Income Taxes For all periods presented, income taxes are calculated using the liability method in accordance with the provisions set forth in Statement of Financial Accounting Standards (SFAS) No. 109. Pro Forma Income Taxes In fiscal 1996, the Company acquired an entity in a pooling of interests transaction, which was previously an S Corporation for income tax purposes prior to its acquisition by Corporate Express, and accordingly, any income tax -36- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) liabilities for the periods prior to the acquisition are the responsibility of the previous owner. For purposes of these consolidated financial statements, federal and state income taxes have been provided as a pro forma adjustment as if the acquired entity had filed C Corporation tax returns for the pre- acquisition periods (See Note 14). Pro Forma Net Income Per Share Pro forma earnings per share (EPS) is computed and presented in accordance with SFAS No. 128, "Earnings Per Share." Basic EPS excludes dilution and is computed by dividing income available to common stockholders (net income after giving effect to the pro forma tax adjustment) by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Stock Split and Stock Dividends The Company distributed a 50% share dividend in January 1997; accordingly all share numbers and prices have been adjusted to reflect this dividend. 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 1997 and 1996 consolidated financial statements to conform to the fiscal 1998 presentation. These reclassifications include the discontinuance of the same-day delivery operations and are shown as a separate line item in the financial statements and, except as otherwise noted, have been removed from the related footnotes. These reclassifications had no impact on net income. Segment Disclosures In fiscal 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) 131, Disclosures about Segments of an Enterprise and Related Information. SFAS 131 supersedes SFAS 14, Financial Reporting for Segments of a Business Enterprise, replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS 131 also requires disclosures about products and services, geographic areas, and major customers. The adoption of SFAS 131 did not affect results of operations or financial position but did affect the disclosure of segment information (see Note 16 "Segment Information"). -37- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 2. CHANGE IN YEAR END In January 1998, the Company changed its fiscal year end from the end of February to January 31,1998. The results of operations of the Company for the comparative periods are as follows:
Twelve Months Twelve Months Eleven Months Eleven Months Ended Ended Ended Ended January 30, 1999 January 31, 1998 January 31, 1998 February 1, 1997 ----------------- ----------------- ----------------- ----------------- (unaudited) (unaudited) Net sales $3,752,591 $3,050,947 $2,837,111 $2,224,203 Cost of sales 2,875,885 2,313,819 2,155,289 1,695,212 Restructuring related inventory provision 3,130 -- -- -- ---------- ---------- ---------- ---------- Gross profit 873,576 737,128 681,822 528,991 Warehouse operating and selling expenses 599,686 511,694 472,213 376,918 Corporate general and administrative expenses 93,753 75,936 71,325 58,005 Amortization of intangibles 32,626 23,907 22,158 14,520 Restructuring, merger & other nonrecurring charges 54,805 11,337 11,337 8,407 ---------- ---------- ---------- ---------- Operating profit 92,706 114,254 104,789 71,141 Interest expense, net 75,302 36,099 34,014 17,958 Other income (expense) 6,212 757 464 (50) ---------- ---------- ---------- ---------- Income before income taxes 23,616 78,912 71,239 53,133 Income tax expense 19,451 34,498 31,509 23,385 Minority interest (income) expense 2,222 (1,862) (1,319) (1,314) ---------- ---------- ---------- ---------- Income from continuing operations 1,943 46,276 41,049 31,062 Discontinued operations, net of tax: Income (loss) from discontinued operations (17,652) 4,416 3,355 4,645 Loss on disposal (52,000) -- -- -- ---------- ---------- ---------- ---------- Income (loss) from discontinued operations (69,652) 4,416 3,355 4,645 ---------- ---------- ---------- ---------- Income (loss) before extraordinary item (67,709) 50,692 44,404 35,707 Loss on early extinguishment of debt 5,581 -- -- -- ---------- ---------- ---------- ---------- Net income (loss) $ (73,290) $ 50,692 $ 44,404 $ 35,707 ========== ========== ========== ========== Pro forma net income (loss) (1) $ (73,290) $ 50,692 $ 44,404 $ 33,993 ========== ========== ========== ========== Pro forma net income (loss) per share - Basic: Continuing operations $ 0.02 $ 0.35 $ 0.31 $ 0.24 Discontinued operations (0.62) 0.04 0.03 0.04 Extraordinary item (0.05) -- -- -- ---------- ---------- ---------- ---------- Net income (loss) $ (0.65) $ 0.39 $ 0.34 $ 0.28 ========== ========== ========== ========== Pro forma net income (loss) per share - Diluted: Continuing operations $ 0.02 $ 0.34 $ 0.30 $ 0.23 Discontinued operations (0.61) 0.03 0.02 0.03 Extraordinary item (0.05) -- -- -- ---------- ---------- ---------- ---------- Net income (loss) $ (0.64) $ 0.37 $ 0.32 $ 0.26 ========== ========== ========== ==========
(1) Pro forma net income for the eleven months ended February 1, 1997 reflects the tax impact for a subchapter S acquisition as if the acquired company was a C corporation. -38- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 3. POOLING OF INTERESTS Fiscal 1998 There were no pooling of interest transactions during fiscal 1998. Fiscal 1997 The Company completed 6 acquisitions which were accounted for as immaterial poolings of interests for approximately 2,208,000 shares of common stock. The financial statements for these immaterial acquisitions for periods prior to the acquisition have not been restated. There were no material pooling of interests transactions in fiscal 1997. Fiscal 1996 Effective January 30, 1997, the Company issued approximately 4,650,000 shares of common stock in exchange for all of the outstanding stock of HMI, the largest privately-held supplier of promotional products to large corporations. Effective January 24, 1997, the Company issued approximately 2,550,000 shares of common stock in exchange for all of the outstanding stock of Sofco, one of the largest suppliers of janitorial and cleaning supplies in the United States. Effective November 8, 1996, the Company issued approximately 6,332,000 shares of common stock in exchange for all of the outstanding stock of UT, the second largest same-day delivery service provider in the United States. The UT operations were discontinued for financial reporting purposes in fiscal 1998. Effective October 31, 1996, the Company issued approximately 1,125,000 shares of common stock and paid approximately $2,289,000 to the consenting and dissenting shareholders, respectively, of Nimsa, a computer software reseller located in Paris, France, in exchange for all of Nimsa's outstanding stock. In addition to the above acquisitions, the Company completed 14 other acquisitions which were accounted for as immaterial poolings of interests for approximately 1,942,000 shares of common stock during fiscal 1996. The financial statements for these immaterial acquisitions for periods prior to the acquisition have not been restated. -39- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Results of Pooled Companies Prior to Merger Separate results of operations for Corporate Express and the pooled operations for the periods prior to the mergers are as follows:
Year Ended March 1, 1997 ------------- (In thousands) Net sales (from continuing operations): Corporate Express $2,153,967 HMI 92,080 Sofco 139,734 Nimsa 52,258 ---------- Combined $2,438,039 ========== Net income (1): Corporate Express $ 31,710 HMI 4,182 Sofco 3,529 UT 1,369 Nimsa 1,206 ---------- Combined $ 41,996 ========== Other changes in shareholders' equity: Corporate Express $ 106,299 HMI (3,761) Sofco 1,538 UT 26,135 Nimsa (376) ---------- Combined $ 129,835 ==========
Certain reclassifications and adjustments have been made to the prior financial statements of the pooled companies to conform to the Corporate Express financial presentation and policies which adjustments had an immaterial effect on net income. All intercompany transactions have been eliminated. (1) Consolidated net income for fiscal 1996 includes the income and expenses of Corporate Express, HMI, Sofco and Nimsa, and the discontinued operations net income from UT for the twelve months ended March 1, 1997. At the time of acquisition in fiscal 1996, HMI had a year end of December 31, and Nimsa had a year end of June 30. In order to conform the HMI and Nimsa year ends to Corporate Express' fiscal year end, Nimsa net income for the March 1996 to June 1996 period was included in both fiscal 1995 and 1996, and HMI net income for the January 1996 to February 1996 period was excluded from fiscal 1995. Accordingly, an adjustment has been made in fiscal 1996 to debit retained earnings directly for the March 1996 to June 1996 Nimsa net income of $630,000 and to credit retained earnings directly for the January 1996 to February 1996 HMI net income of $200,000. -40- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The results of operations for the adjustment periods are as follows:
Period Net Sales Net Income --------- --------- ---------- (in thousands) Nimsa 3/96-6/96 $25,986 $630 HMI 1/96-2/96 15,415 200
4. 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. The restructuring plan provides for a planned gross reduction of approximately 1,000 employees (including management, warehouse and administrative employees) and the closure or consolidation of approximately 70 warehouse, sales and administrative offices. As a result of the restructuring, the Company recorded a net pre-tax restructuring charge of $57,935,000, of which $54,805,000 (net of a prior period merger charge revision of $1,122,000) is recorded in operating expenses and $3,130,000 (net of revisions of $590,000) is recorded in cost of sales in the accompanying consolidated statements of operations. The restructuring charge affects North America Office Products ($18,945,000), International Office Products ($13,261,000), Other Products and Services ($5,827,000), as well as Corporate Headquarters ($19,902,000). The total charge of $59,647,000 reflects $36,449,000 in cash payments and $23,198,000 in non-cash payments. The following table summarizes the fiscal 1998 restructuring charge and its related usage:
Employee Accrued Severance & Facility Restructuring Other Asset Termination Closure & & Related Costs Write Downs Costs (1) Consolidations (2) Balance & Costs (3) Total ------------ ------------------ ---------------- ------------ --------- (in thousands) Fiscal 1998 charge $23,263 $13,186 $36,449 $ 23,198 $ 59,647 Payments (5,167) (612) (5,779) --- (5,779) Non-cash usage --- --- --- (12,562) (12,562) ------- ------- ------- -------- -------- Balance, January 30, 1999 $18,096 $12,574 $30,670 $ 10,636 $ 41,306 ======= ======= ======= ======== ========
(1) Employee severance and terminations costs are related to the elimination of certain management positions, facility closures and consolidations. Of the 1,000 employees planned to be terminated, 270 employees have been terminated in fiscal 1998. Approximately 580 additional employees will be terminated in 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 70 facilities planned to be closed, 18 facilities were closed in fiscal 1998. Approximately 37 additional facilities will be closed in fiscal 1999 and the remaining facilities will be closed in fiscal 2000. (3) Other asset write-downs and costs of $23,198,000 are recorded as contra assets and include $16,411,000 of warehouse and office equipment, leasehold improvements, and other assets being abandoned or written off, $3,067,000 of intangible assets that have been impaired, and $3,720,000 of inventory which the Company has decided to eliminate from its product line as a result of the exit plans. All amounts are shown at estimated net realizable value; depreciation expense will continue through the asset disposition date. After non-cash usage of $12,562,000, the remaining balance of $10,636,000 -41- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) primarily reflects the assets to be disposed of in conjunction with the facility closures and will be utilized accordingly. Merger and Other Nonrecurring Charges: During the fourth quarter of fiscal 1997, the Company recorded a net merger and other nonrecurring charge of $11,337,000. This net charge is comprised of $13,962,000 in merger and other nonrecurring charges in connection with the Company's acquisition of DDI, several acquisitions accounted for as immaterial poolings of interests and certain provisions for reductions in force and facility closures at other locations. The gross charge is offset by $2,625,000 in revisions to the merger and other nonrecurring charges established in previous periods to reflect the final transaction and exit costs incurred. These revisions reflect the finalization of employee contract buyouts and delays in closing certain facilities and disposition of related assets. The 1997 fiscal period charge included the planned closure of 25 facilities and the reduction of 295 employees. As of January 30, 1999, 14 facilities have been closed or consolidated, three regional warehouses will be downsized and converted into breakpoints and four regional sales offices will no longer be closed. Of the four remaining facility closures, one closure began in March 1999 and the remaining three will be closed in 1999. Of the three warehouses to be converted to breakpoints, one is in process and the other two will be completed in 1999. Approximately 150 employees remain to be terminated in conjunction with the remaining facility closures and the downsizing of the reginal warehouses. Also included in the remaining balance are contracts with periodic payments that will continue into 1999. During the last half of fiscal 1996, the Company recorded a net merger and other nonrecurring charge of $8,480,000. This net charge is comprised of $13,537,000 in merger and other nonrecurring charges primarily in conjunction with the acquisitions of Nimsa, HMI and Sofco, offset by $5,057,000 in revisions to the merger and other nonrecurring charge established in the fourth quarter of fiscal 1995. In connection with the fiscal 1996 exit plans, the Company evaluated its facility and personnel requirements and identified duplicate facilities consistent with the new plan. As a result of this new plan, the closure of five distribution facilities, incorporated in the original 1995 plan, was superceded. Included in the distribution facilities that were to be retained, was the South Carolina facility which was expected to be merged into the Atlanta and North Carolina facilities. Due to significant new business in the Atlanta area and several unexpected acquisitions, the Atlanta facility is at full capacity and this closure plan was terminated. Additionally, several subsequent acquisitions in fiscal 1995 were completed in the Carolinas and surrounding markets, which eliminated the opportunity to close the South Carolina facility and maintain a high level of customer service. The fiscal 1996 charges include the actual costs of completing the acquisitions, closing other redundant facilities, and severance for employee terminations. The original charge included the closure of nine facilities and the reduction of 77 employees. To date, eight facilities have been closed or consolidated, 21 employees have been terminated, and 33 employees will no longer be terminated as the result of revised exit plans. -42- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The following table summarizes the accrued merger and other nonrecurring charges and their related usage:
Employee Accrued Merger Severance & Facility Merger & Other Asset Transaction Termination Closure & Related Costs Write Downs Costs (1) Costs(2) Consolidations (3) Balance & Costs (4) Total ----------- -------------- ------------------ ------------- ------------ ------------ (in thousands) Balance, March 2, 1996 $ 6,144 $ 6,418 $ 4,280 $ 16,842 $ 2,311 $ 19,153 Additions, net of reversals 9,980 440 (2,013) 8,407 73 8,480 Payments (14,560) (1,633) (150) (16,343) --- (16,343) Non-cash usage --- --- --- --- ( 732) (732) -------- ------- ------- -------- ------- -------- Balance, March 1, 1997 1,564 5,225 2,117 8,906 1,652 10,558 Additions, net of reversals 5,282 4,326 1,483 11,091 246 11,337 Payments (6,472) (2,266) (453) (9,191) --- (9,191) Non-cash usage --- --- --- --- (579) (579) -------- ------- ------- -------- ------- -------- Balance, January 31, 1998 374 7,285 3,147 10,806 1,319 12,125 Additions, net of reversals (209) (544) (312) (1,065) (57) (1,122) Payments (165) (3,082) (1,004) (4,251) (465) (4,716) -------- ------- ------- -------- ------- -------- Balance, January 30, 1999 $ -0- $ 3,659 $ 1,831 $ 5,490 $ 797 $ 6,287 ======== ======= ======= ======== ======= ========
(1) Merger transaction costs included the direct costs from the pooling transactions and those direct costs incurred by DDI, and include legal, accounting, investment banking, printing, contract buy-outs and other related costs. (2) The remaining balance of $3,659,000 reflects remaining balances in the fiscal 1995 charge of $768,000, fiscal 1996 charge of $71,000, and fiscal 1997 charge of $2,820,000. 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 in the fiscal 1997 charge primarily reflects the consolidation of the Carolina facilities which is expected to be substantially complete by the end of the second quarter of fiscal 1999. The remaining balance reflects the planned terminations of approximately 200 employees. (3) The remaining balance of $1,831,000 reflects remaining balances in the fiscal 1995 charge of $320,000 and the fiscal 1997 charge of $1,511,000. The fiscal 1995 charge reflects the post closing costs related to the centralization of certain shared services. The remaining balance in the fiscal 1997 charge primarily reflects the consolidation of the Carolina facilities which is expected to be substantially complete by the end of the second quarter of fiscal 1999. (4) The remaining balance of $797,000 primarily reflects the assets that will be disposed of in conjunction with the facility closures which are expected to be substantially complete by the end of the second quarter of fiscal 1999. 5. PURCHASES Fiscal 1998 The Company acquired for a net cash purchase price of $28,770,000, 14 international product distributors. The excess of the purchase price over the fair market value of net tangible assets acquired was allocated to goodwill and is being amortized over 40 years. Fiscal 1997 The Company acquired for a net cash purchase price of $24,572,000 and approximately 12,687,000 shares of common stock, 10 domestic product distributors, and 15 international product distributors. The excess of the -43- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) purchase price over the fair market value of the net tangible assets acquired was allocated to goodwill and is being amortized over 40 years. Additionally, the Company completed six acquisitions which were accounted for as immaterial poolings of interest for approximately 2,208,000 shares of common stock. Included in the 10 domestic product distributors, is the acquisition of DDI, a provider of forms management services, custom business forms and pressure- sensitive labels for large corporate customers, purchased for approximately 10,740,000 shares of common stock. The net purchase price for DDI was allocated as follows:
(in thousands) Current assets, excluding cash acquired $ 75,365 Property, plant and equipment, net 52,487 Other assets 20,591 Goodwill 130,438 Liabilities assumed (112,938) --------- Purchase price, net of cash acquired $ 165,943 =========
Total DDI goodwill, included in the fair value of assets acquired, of $130,438,000 includes transaction and other direct costs of such acquisition of $1,672,000 and purchase accounting adjustments (primarily relating to recording assets and liabilities at their fair market values) of $8,659,000 net of related deferred taxes. In June 1997, the Company purchased the remaining 49% interest in Corporate Express United Kingdom by issuance of shares of Corporate Express common stock. Fiscal 1996 The Company acquired for a net cash purchase price of $241,846,000 and approximately 3,600,000 shares of common stock, 46 domestic product distributors, 29 international office product distributors and 11 delivery service companies. The excess of the purchase price over the fair market value of the net tangible assets acquired was allocated to goodwill and is being amortized over 40 years. Included in the 46 domestic product acquisitions is the acquisition of ASAP Software Express, Inc. ("ASAP"), a distributor of software to large corporations. The ASAP purchase price was $97,611,000 offset by cash acquired of $13,792,000. Included in the 29 international product acquisitions is Boulevard Produits De Bureau, Inc. ("Boulevard"), a seller of office supplies, furniture and equipment, for a net cash purchase price of $16,102,000. The Company also repaid $9,498,000 of Boulevard promissory notes with cash of $731,900 and 356,832 shares of the Company's common stock. In January 1997, Corporate Express Australia ("CEA") shareholders approved a one for five non-renounceable common stock rights offer at a price of A$.85 (US$.65) per share. Pursuant to the rights offer, on February 27, 1997, CEA issued 8,216,721 shares to Corporate Express and 3,553,370 shares to institutional investors. As of March 1, 1997, Corporate Express interest in CEA was 54.6%. On March 10, 1997, an additional 3,750,000 shares were issued to institutional investors which changed the Corporate Express interest in CEA to 52.4%. As of January 30, 1999 Corporate Express interest in CEA was 53.2%. Pro Forma Results of Acquired Companies (unaudited) The operating results of all of the above acquisitions, which were accounted for as purchases, are included in the Company's consolidated statements of operations from the dates of acquisition. The following pro forma financial information assumes the acquisitions occurred at the beginning of the earliest period presented. These results have been prepared for comparative purposes only and do not purport to be indicative of what would have -44- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) occurred had the acquisitions been made at the beginning of the year, or of results which may occur in the future. The pro forma results listed below are unaudited and reflect the impact of purchase price adjustments.
Eleven Months Year Ended Ended January 30, 1999 January 31, 1998 ----------------- ---------------- (In thousands, except per share amounts) Net sales $3,795,114 $3,249,876 Income from continuing operations 2,454 50,431 Income (loss) from discontinued operations (69,652) 3,355 Net income (loss) before extraordinary item (67,198) 53,786 Net income (loss) (72,779) 53,786 Net income (loss) per share - Basic: Continuing operations $ 0.02 $ 0.35 Discontinued operations (0.62) 0.03 Extraordinary item (0.05) -- ---------- ---------- Net income (loss) $ (0.65) $ 0.38 ========== ========== Net income per share - Diluted: Continuing operations $ 0.02 $ 0.34 Discontinued operations (0.61) 0.02 Extraordinary item (0.05) -- ---------- ---------- Net income (loss) $ (0.64) $ 0.36 ========== ==========
6. ACCRUED PURCHASE COSTS In conjunction with purchase acquisitions, the Company accrues certain direct external costs associated with closing redundant facilities of acquired companies, and severance and relocation payments to the acquired company's employees. The following tables set forth activity in the Company's accrued purchase liabilities:
Disposition Facility Redundant of Assets Total Exit Costs Facilities Severance & Other -------- ----------- ----------- ---------- ------------ (In thousands) Balance, March 1, 1997 12,888 1,845 3,269 6,149 1,625 Additions 6,365 807 1,477 3,788 293 Payments (9,289) (2,188) (1,379) (5,256) (466) Reversals to goodwill (586) -- (239) (281) (66) ------- ------- ------- ------- ------ Balance, January 31, 1998 9,378 464 3,128 4,400 1,386 Additions 4,742 393 748 2,975 626 Payments (4,197) (332) (1,065) (2,011) (789) Reversals to goodwill (3,506) (119) (973) (1,818) (596) ------- ------- ------- ------- ------ Balance, January 30, 1999 (1) $ 6,417 $ 406 $ 1,838 $ 3,546 $ 627 ======= ======= ======= ======= ======
-45- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (1) Accrued purchase costs primarily relate to consolidating acquired operations into existing Company facilities. All consolidation projects are planned to be completed within two years of the acquisition date. Remaining balances primarily represent international consolidation plans. 7. DISCONTINUED OPERATIONS In January 1999, the Company adopted a plan to discontinue its same-day delivery business. This business is accounted for as discontinued operations and, accordingly, their operations are segregated in the accompanying financial statements. The Company has retained an investment banking firm to assist in the sale of the same-day delivery business and expects to complete this sale by the end of fiscal 1999. This business was primarily acquired in March 1996 through the acquisition of Delivery and in November 1996 through the acquisition of UT. These acquisitions were accounted for as poolings of interests and, accordingly, their accounts and results are included as discontinued operations for all periods presented. In connection with the sale, including the results of operations between the measurement date (January 28, 1999) and the expected disposal date, of the same-day delivery business, the Company recorded a provision for estimated losses to be incurred on the sale of $52,000,000, net of applicable income tax benefits of $6,000,000 in the fiscal 1998 results. The effective income tax benefit rate for the estimated loss on disposal differs from the U.S. statutory tax rate primarily as a result of insufficient capital gains to record the tax benefit of an anticipated capital loss. The provision for estimated losses is based on management's best estimates of the amounts expected to be realized on the sale of the same-day delivery business. The amounts the Company will ultimately realize, if any, could differ from the amounts assumed in arriving at the loss anticipated on disposal of the discontinued operations. Net sales for the discontinued delivery business for fiscal 1998 were $721,696,000 compared to net sales of $807,230,000 for the twelve months ended January 31, 1998. Net sales for the eleven months ended January 31, 1998 (fiscal 1997) were $736,195,000 compared to net sales of $686,986,000 for the eleven months ended February 1, 1997. Net sales for fiscal 1996 were $758,021,000. Net loss from discontinued operations in fiscal 1998 of $17,652,000 includes a tax benefit of $9,934,000, net income from discontinued operations in fiscal 1997 of $3,355,000 includes related tax expense of $2,949,000, and the net income from discontinued operations in fiscal 1996 of $5,706,000 includes related tax expense of $7,275,000. The results of discontinued operations include allocations of interest expense based on the ratio of net assets of discontinued operations to the sum of total net assets of the Company. The total interest, including allocated interest, for fiscal 1998, 1997 and 1996 was $8,616,000, $4,293,000 and $6,903,000, respectively. The estimated allocated interest from the measurement date to the estimated disposal date was $6,200,000 and was used in estimating the Loss on Disposal. The results of the discontinued operations do not include any allocation of corporate overhead from the Company during the periods presented. -46- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) At January 30, 1999, the Net Assets of Discontinued Operations as presented in the accompanying Consolidated Balance Sheet are as follows:
(In thousands) -------------- Current assets $121,085 Property, plant and equipment, net 28,915 Other long-term assets 78,234 -------- Total assets 228,234 -------- Current liabilities 66,614 Long-term liabilities 4,999 -------- Total liabilities 71,613 -------- 156,621 Loss on disposal 52,000 -------- Net assets of discontinued operations $104,621 ========
8. DEBT Debt from continuing operations consisted of the following:
January 30, January 31, 1999 1998 ----------------- ----------------- Domestic: (in thousands) 9 5/8% Senior Subordinated Notes, due June 1, 2008, unsecured, subordinated to senior debt, guaranteed by all material domestic subsidiaries of the Company, interest payable semi-annually, commencing December 1, 1998. $350,000 $ -- 4 1/2% Convertible Notes (the "Convertible Notes"), due July 1, 2000, unsecured, interest payable semi-annually commencing on January 1, 1997, convertible into shares of the Company's common stock at a conversion price of $33.33 per share. 325,000 325,000 Senior Secured Credit Facility consisting of $750,000,000 revolving line of credit and a $250,000,000 term note. Collateralized by all tangible and intangible property of the domestic subsidiaries including inventory and receivables. Interest rates are at a base rate or a Eurodollar rate plus an applicable margin. Term note rates are from 0.25% to 0.75% above the revolving line of credit rate. The revolving line of credit is due April 25, 2003. The term note provides for quarterly payments of $625,000 through April 25, 2003 and quarterly payments of $29,687,500 thereafter until April 2005. At January 30, 1999 the revolving interest rate was 6.44%, and 472,825 -- the term loan rate was 6.69%. The commitment fee on the unused portion of the revolving line of credit is .35% as of January 30, 1999. $500,000,000 unsecured multi-currency revolving line of credit (Senior Credit Facility). Interest rates at LIBOR plus .75%,
-47- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (8.5% at january 31, 1998), with principal due on March 31, 2000. This debt was paid in full on April 22, 1998. -- 254,037 9 1/8% Series B Senior Subordinated Notes ("9 1/8% Notes"), unsecured, subordinated to existing debt, guaranteed by certain operating subsidiaries of the Company. Due March 15, 2004, interest payable semi-annually. Redeemable by the Company from March 1999 to March 2001. A significant portion of these notes were redeemed in 1998. 1,205 90,000 Senior secured notes collateralized by the assets of DDI. Notes are redeemable on or after July 15, 1999, at the option of the Company at redemption prices of 104.2% in 1999 decreasing to 100% in 2001. Interest is due semi-annually beginning in January. These notes were defeased in FY 1998 and the collateral released. 5,558 7,397
-48- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
January 30, January 31, 1999 1998 ----------------- ----------------- (in thousands) Bank term loans, collateralized by equipment, with interest floating at LIBOR plus 1.75% to 2%, principal and interest payable monthly, maturities range from 48 months to 60 months. 13,344 9,939 City of Aurora, Colorado Industrial Development Bonds, Series 1984, collateralized by land and building, interest at a floating rate, as defined, ranging from 5.5% at January 31, 1998 to 5.0% at January 30, 1999, payable semi-annually and principal installments of varying amounts ($150,000 in 1998 and $100,000 in 1997) payable annually through November 2009. 4,130 4,280 Various revolving lines of credit, collateralized by certain assets of the Company, variable interest rate of 9.25% at January 31, 1998. -- 2,455 Other term loans, a portion collaterized by certain assets, interest from 4.8% to 16%. 15,128 15,942 International: Term loan facility collateralized by the assets of Corporate Express Canada. Floating interest rate, as defined, is 6.9% at January 30, 1999. Minimum principal payments of Canadian $750,000 quarterly. 3,838 9,275 Notes payable due December 2006, variable interest rates (7.25% on January 30, 1999 and 6.5% on January 31, 1998), collateralized by cash deposits. 5,153 3,099 Various revolving lines of credit, collateralized by certain assets of the Company, variable interest rates ranging from 4.0% to 9.0% at January 30, 1999. 58,094 46,496 Other term loans, a portion collateralized by certain assets, interest from 3.2% to 9.0%. 9,113 11,691 ---------- -------- Total debt 1,263,388 779,611 Less current portion of debt 63,042 30,319 ---------- -------- Long-term portion of debt $1,200,346 $749,292 ========== ========
-49- The annual maturities of debt for succeeding years are as follows:
Fiscal Year (In thousands) ---------------- -------------- 1999 $ 63,042 2000 353,116 2001 7,261 2002 7,956 2003 315,843 Thereafter 516,170 ---------- Total $1,263,388 ==========
In addition to the above amounts, the Company had $4,619,000 of outstanding debt at January 30, 1999 related to its discontinued same-day delivery business. Annual maturities are $3,443,000, $1,015,000, and $161,000 for fiscal years 1999, 2000, and the periods thereafter, respectively. This debt will be either assumed by the purchaser or paid in full from the sale proceeds. This debt is included in Net Assets of Discontinued Operations on the Consolidated Balance Sheets. Certain of the debt agreements contain provisions which require maintenance of certain financial ratios, including debt to cash flow and fixed charge coverage. The Company's Senior Secured Credit Facility prohibits the distribution of dividends without the prior written consent of the lenders. On April 10, 1998, the Company closed the Dutch Auction tender offer it commenced on February 5, 1998, and purchased 35,000,000 shares tendered at a price of $10.75 per share. The Company funded the purchase of such shares and the payment of related fees and expenses through its new $1.0 billion Senior Secured Credit Facility. This Senior Secured Credit Facility consists of a $250,000,000 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 Company'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. In January 1999, the Company amended these covenants to clarify that the restructuring charge is excluded from the computations and to permit the disposal of certain non-core assets. The available funds may be used for general corporate purposes including permitted acquisitions and permitted share repurchases. The Company is in compliance with all debt covenants under the Senior Secured Credit Facility. 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 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 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 $511,000,000 at January 30, 1999. On or after June 1, 2003 through maturity, the notes may be redeemed at the option of the Company, in whole or in part, at redemption rates ranging from 104.813% to 100%. At any time on or before June 1, 2001, the Company may redeem up to 35% of the notes with the net cash proceeds of one or more public equity offerings at a redemption price equal to 109.625% of the principal amount thereof, subject to certain restrictions. Semi-annual interest payments are due on June 1 and December 1 which began on December 1, 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 -50- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) the settlement of the contract was $7,271,000 and will be amortized over the ten-year term of the 9 5/8% Notes, bringing the effective interest rate of the debt instrument to 9.96%. On November 6, 1998, CEX Holding, Inc. commenced an exchange offer pursuant to which the 9 5/8% Notes were exchanged for substantially similar notes which have been registered under the federal securities laws. A portion of the proceeds from the sale of these notes was used to repay prior to maturity substantially all of the $90,000,000 9 1/8% 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. On June 24, 1996, the Company issued $325,000,000 aggregate principal amount of Convertible Notes. The notes are convertible into the Company's common stock at a conversion price of $33.33 per share, subject to adjustments under certain conditions. A portion of the proceeds from the sale of the Convertible Notes was used to repay the Company's then existing credit facility and an acquisition note payable with the remaining proceeds being used to fund acquisitions and for other general corporate purposes. In conjunction with the purchase price allocation for the acquisition of DDI, the Company recorded DDI's 13.5% Senior Secured Notes, due in 2002, at their fair market value, then repurchased $54,068,000 of the Notes at a redemption price of 115%. On or after July 15, 1999 the Notes are redeemable, at the option of the Company, in whole or in part at redemption prices of 104.2% in 1999 decreasing to 100% in 2001. Interest on the notes is due semi-annually on January 15 and July 15. The notes were collateralized by a first priority security interest in substantially all assets of DDI other than accounts receivable. In accordance with the terms of the indenture, the remaining notes were defeased in 1998 and all collateral released, by depositing $5,578,000 in U.S. Government securities with the trustee. The Company capitalized $5,725,000, $3,239,000 and $3,887,000 of interest expense in the fiscal 1998, 1997 and 1996 periods, respectively, primarily related to software developed for internal use and the construction of corporate facilities. 9. COMMITMENTS AND CONTINGENCIES Operating Leases The Company has various noncancellable operating leases, primarily for warehouse buildings, delivery trucks, and computer equipment. Lease expense, net of sublease rentals of $1,148,000, $1,350,000, and $952,000 for the year ended January 30, 1999, the eleven months ended January 31, 1998, and the year ended March 1, 1997 was $59,323,000, $37,858,000 and $31,000,000, respectively. Future minimum lease payments are as follows:
Fiscal Year (In thousands) ----------- -------------- 1999 $ 53,253 2000 43,466 2001 32,653 2002 23,365 2003 17,641 Thereafter 63,573 -------- Total 233,951 Less subleases 670 -------- Net obligation $233,281 ========
-51- CORPORATE EXPRESS,INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) The leases generally are for periods of three to ten years and provide for renewals of one month to five years at the Company's option. In addition to the above amounts, future minimum lease payments for the discontinued same-day delivery business are approximately $27,236,000 in fiscal 1999, and $55,761,000 for periods thereafter. The Company has entered into agreements for the sale and leaseback of certain buildings and has accounted for such transactions as operating leases in accordance with SFAS No. 98 "Accounting for Leases." As of January 30, 1999 and January 31, 1998, facilities with book values totaling $14,329,000 and $17,096,000, respectively have been removed from the balance sheet, and gains realized on the sale transactions totaling $93,000 and $2,569,000, respectively have been deferred and are being amortized to income as rent expense adjustments over the lease terms. The average annual net lease payments, over the lives of the leases which expire between 2013 and 2014, are $1,573,000. The Company has purchase and lease renewal options at projected future fair market values under the agreements. Capital Leases The Company is the lessee of certain furniture and equipment under capital leases expiring in various years through 2009. Included in furniture and equipment at January 30, 1999 is $22,678,000 of assets under capital leases and related accumulated depreciation of $9,793,000. Future minimum lease payments required under these capital leases are as follows:
Fiscal Year (In thousands) ----------- -------------- 1999 5,547 2000 3,777 2001 2,674 2002 1,069 2003 38 Thereafter -- ------- Total minimum lease payments 13,105 Less amount representing interest 1,255 ------- Present value of minimum lease payments 11,850 Less current portion of capital lease obligations 4,769 ------- Non-current portion of capital lease obligations $ 7,081 =======
Contingencies In the normal course of business, the Company is subject to certain legal proceedings. In the opinion of management, the outcome of such litigation will not have a material adverse effect on the Company's financial position or operating results. The Company resolved the dispute with a former shareholder of a company acquired by the Company in fiscal 1996. -52- CORPORATE EXPRESS, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) 10. INCOME TAXES Federal, state and foreign income taxes from continuing operations consisted of the following:
Year Ended Eleven Months Year Ended January 30, Ended March 1, 1999 January 31, 1998 1997 ----------- ----------------- ------------ (In thousands) Current: Federal $10,496 $ 2,583 $ 79 State 1,147 77 283 Foreign 7,833 3,571 1,943 Deferred: Federal 4,640 20,197 11,161 State 560 2,664 4,569 Foreign (6,067) 130 (793) Utilization of net operating losses --- (2,386) --- Change in tax status --- --- (2,029) Allocated to contributed capital 842 4,673 11,161 ------- ------- ------- Total income tax expense $19,451 $31,509 $26,374 ======= ======= =======
The amounts "allocated to contributed capital" relate to deductions recognizable only for tax purposes from the exercise of non-qualified stock options and the disqualifying dispositions of stock purchased under the Company's incentive stock option plan. The benefit recognized in fiscal 1996 for a change in tax status relates to establishing deferred tax assets for an acquired S corporation. The United States and foreign components of income (loss) before income taxes from continuing operations are as follows:
Year Ended Eleven Months Year Ended January 30, Ended March 1, 1999 January 31, 1998 1997 ----------- ---------------- ---------- (In thousands) United States $27,709 $67,991 $61,363 Foreign (4,093) 3,248 (559) ------- ------- ------- Total $23,616 $71,239 $60,804 ======= ======= =======
At January 30, 1999, unremitted earnings of subsidiaries outside the United States were deemed to be permanently invested. No deferred tax liability has been recognized with regard to the remittance of such earnings. It is not practicable to estimate the income tax liability that might be incurred if such earnings were remitted to the United States. -53- CORPORATE EXPRESS, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) The components of the net deferred tax assets and liabilities as of January 30, 1999 and January 31, 1998 are as follows:
January 30, January 31, 1999 1998 ---------- ------------ (In thousands) Deferred tax assets: Accrued merger and other costs $ 1,857 $ 5,568 Accrued purchase costs 463 2,784 Allowance accounts 3,683 4,626 Insurance reserves 3,134 343 Inventory 8,554 8,138 Net operating loss carryforwards 20,946 12,238 Restructuring costs accrued 11,898 --- Tax credits 4,032 3,075 Vacation and benefits accrual 7,112 6,056 Valuation allowance (2,255) (2,255) Other 3,944 2,748 -------- -------- Total deferred tax assets 63,368 43,321 -------- -------- Deferred tax liabilities: Accounting methods 1,573 3,479 Intangible assets 55,755 36,891 Property, plant and equipment 15,293 14,002 Other non-current --- 790 -------- -------- Total deferred tax liability 72,621 55,162 -------- -------- Net deferred tax liability $ (9,253) $(11,841) ======== ======== Financial Statements Current deferred tax assets 43,191 34,036 Non-current deferred tax assets 18,126 5,160 Non-current deferred tax liabilities (70,570) (51,037) -------- -------- Net deferred tax liability $ (9,253) $(11,841) ======== ========
At January 30, 1999 the Company had $49,305,000 of net operating loss carryforwards of which $6,191,000 and $43,114,000 are for United States and foreign tax purposes, respectively. The U.S. losses begin to expire in 2007, while the foreign losses are generally not subject to expiration dates. Included in the net operating loss carryforwards are losses from acquired subsidiaries. The utilization of these carryforwards may be affected by limitations under the Internal Revenue Code, and therefore, the benefit of these pre-acquisition net operating loss carryforwards may be limited. The net change in the valuation allowance for deferred taxes in the year ended January 30, 1999 and January 31, 1998 is no change and a decrease of $3,794,000, respectively. The valuation allowance as of January 30, 1999 and January 31, 1998 is related to acquired entities for which any subsequently recognized tax benefits would be allocated to reduce goodwill. The Company reviewed the need for a valuation allowance related to deferred tax assets in each year and determined that no adjustment was required. It was determined that it was more likely than not that a portion of the deferred tax assets, comprised primarily of operating loss carryforwards of acquired companies, may not be realized. -54- CORPORATE EXPRESS, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) The reconciliation of the differences between the Company's expense (benefit) for income taxes and taxes at the statutory rate, based on income from continuing operations, is as follows:
Eleven Months Year Ended Ended Year Ended January 30, 1999 January 31, 1998 March 1, 1997 ---------------- ----------------- ------------- (In thousands) Statutory federal income tax expense (benefit) $ 8,265 $24,934 $21,282 Adjustments: State income taxes, net of federal effect 1,799 3,052 2,907 Foreign income taxes 3,198 1,469 (123) Restructuring charges 1,021 --- --- Merger costs --- 1,779 3,947 Amortization of non-deductible goodwill 3,455 3,147 3,272 Untaxed S Corporation earnings and change in tax status --- --- (3,514) Other non-deductible items 663 480 369 Valuation allowance on tax loss carryforward --- (2,386) (47) Other 1,050 (966) (1,719) ------- ------- ------- Income tax expense $19,451 $31,509 $26,374 ======= ======= =======
11. EMPLOYEE BENEFIT PLANS Effective September 1, 1992, the Company implemented a retirement plan which allows employee contributions in accordance with Section 401(k) of the Internal Revenue Code. The Company matches a portion of the employees salary and all full-time employees are eligible to participate in the plan. New employees are eligible to enroll at the beginning of each calendar quarter. For the twelve months ended January 30, 1999, the eleven months ended January 31, 1998, and the twelve months ended March 1, 1997, the Company's matching contribution expense was $5,286,000, $3,297,000 and $2,204,000, respectively. CEA, the Company's majority-owned Australian subsidiary since May 1995, sponsors superannuation funds for its employees (similar to 401(k) plans in the United States). Total contributions by the Company for the period ended January 30, 1999, the eleven months ended January 31, 1998 and the year ended March 1, 1997 were approximately $1,575,000, $1,606,000, and $1,912,000, respectively. On August 29, 1994, the Company's shareholders approved the adoption of the 1994 Employee Stock Purchase Plan. A maximum of 1,125,000 shares of Common Stock may be purchased by eligible employees under the 1994 Employee Stock Purchase Plan ("ESPP"). All full-time employees with 30 days service at the start of the annual offering period are eligible to participate at contribution levels ranging from 1% to 15% of compensation. Contributions are applied to purchase common stock at a price equal to the lower of the beginning of the offering periods or end of the offering periods fair market value, less a discount of 10%. Contributions to this plan during the twelve months ended January 30, 1999, the eleven months ended January 31, 1998, and the year ended March 1, 1997 totaled approximately $2,697,000, $3,358,000 and $2,066,000, respectively and purchases under the plan totaled 168,463, 277,571 and 115,488 shares, respectively. Sofco has an Employee Stock Ownership Plan ("the ESOP") covering substantially all full-time employees. The ESOP invested in the common stock of Sofco which was converted to Corporate Express common stock upon -55- CORPORATE EXPRESS, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) consummation of the acquisition. As of March 1, 1997, the ESOP owned 1,512,164 shares of Corporate Express common stock or equivalents. Employer contributions were $436,000 for fiscal 1996. The ESOP was merged into the Corporate Express, Inc. 401(k) Retirement Plan on September 3, 1997. A total of 1,494,152 shares were transferred and allocated to the participants. A total of 16 other qualified plans were merged into the Corporate Express, Inc. 401(k) Retirement Plan during fiscal 1997. The total amount of assets transferred into the Plan were $9,482,000. 12. COMMON STOCK As of January 30, 1999 and January 31, 1998 there were 104,142,637 and 142,392,845 common shares outstanding, respectively (after giving effect to the repurchases of common stock in fiscal year 1998 and the three-for-two stock split effected in the form of a stock dividend in January 1997). Pursuant to the Dutch Auction tender offer, the Company purchased 35,000,000 shares at a price of $10.75 per share. Subsequent share repurchases made in the open market totaled 4,635,681 shares at an average price of $10.36 per share. The 39,635,681 treasury shares resulting from these transactions are reflected on the balance sheet at cost of $427,282,000 including applicable fees and expenses. The Company has terminated its share repurchase program. On January 31, 1997, a 50% share dividend of approximately 39,979,000 shares of common stock was distributed to shareholders of record as of January 24, 1997. On January 14, 1998, the Board of Directors of the Company adopted a Shareholder Rights Plan, pursuant to which the Company distributed a dividend consisting of one right for each share of Common Stock to holders of record on January 30, 1998. The rights, which are to purchase newly created Series A Junior Participating Preferred Stock, become exercisable only in the event, with certain exceptions which include a permitted waiver by the Board of Directors, that a party accumulates 15% or more of the Company's Common Stock. The rights expire ten years from the issuance date. In addition, upon the occurrence of certain events, holders of the rights are entitled to purchase either the Company's Common Stock or stock in an "acquiring entity" at half the market value. The Company is entitled to redeem the rights at $0.01 per right at any time until a certain time following the acquisition of a 15% position in its voting stock. The Company has authorized 3,000,000 shares of Non-Voting Common Stock, par value $.0002 per share. No shares of the Non-Voting Common Stock are issued or outstanding at January 30, 1999, January 31, 1998 or March 1, 1997. In addition, the Company has authorized 25,000,000 shares of Preferred Stock, par value $.0001 per share. No shares of Preferred Stock are issued or outstanding at January 30, 1999, January 31, 1998 or March 1, 1997. STOCK-BASED COMPENSATION PLANS: Stock Options 1992 Stock Option Plan. In February 1992, the Company adopted the Corporate Express, Inc. 1992 Stock Option Plan (the "1992 Stock Option Plan"). The 1992 Stock Option Plan was approved by the Company's shareholders in May 1992 and amended in January 1994. Options were granted under the 1992 Stock Option Plan at the fair market value at the time of grant as determined by the Board of Directors or the Compensation Committee, based on recent stock transactions. Options granted under the 1992 Stock Option Plan typically vest in equal monthly installments over a five-year period, beginning on the month after the first anniversary of the grant date. The options generally expire on the seventh anniversary of the grant date. Executive Plan. In June 1994, the Board of Directors adopted the 1994 Executive Stock Option Plan (the "Executive Plan") which permits the grant of stock options to the Company's executive officers. The Compensation -56- CORPORATE EXPRESS, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) Committee administers the plan and establishes the terms of the options granted, including the number of shares, the exercise price, vesting schedule and termination provisions. The particular terms of each grant are set forth in separate stock option agreements entered into between the Company and the executive officer. The maximum aggregate number of shares of common stock for which options may be granted under this plan originally was 3,375,000 and was increased to 5,625,000 in August 1995, which increase was approved by shareholders in August 1996, and no single executive officer may be granted options covering more than 1,000,000 shares of common stock in any calendar year. Vesting accelerates upon occurrence of certain conditions, including increases in the Company's stock price and changes in control of the Company. The options generally expire ten years from the date of grant. 1994 Stock Option Plan. The 1994 Stock Option and Incentive Plan (the "1994 Stock Option Plan") was adopted by the Board of Directors and approved by shareholders in August 1994. This plan replaced, for future grants, the 1992 Stock Option Plan. The 1994 Stock Option Plan permits the Company to grant incentive stock options and nonqualified stock options. The maximum aggregate number of shares of common stock which may be issued under the 1994 Stock Option Plan was 2,812,500, was increased to 9,562,500 in March 1996 and approved by the shareholders in August 1996 and increased to 13,562,500 and approved by the shareholders in July 1997. Options granted under the 1994 Stock Option Plan vest as specified in individual stock option agreements, which typically provide vesting in equal monthly installments over a period of five years, beginning in the month after the first anniversary of the grant date. The options generally expire on the seventh anniversary of the grant date. Options and awards that expire, terminate or are cancelled or forfeited will again be available for grant or award under the plan. Delivery Plan. Delivery had a stock option plan which was approved by its shareholders in January 1994. On March 1, 1996, effective with the merger with Corporate Express, all Delivery options became vested and were exercisable into shares of common stock, as adjusted to reflect the exchange ratio as defined in the merger agreement. UT Plan. UT had stock option plans which, effective with the merger with Corporate Express on November 8, 1996, became vested and were exercisable into shares of common stock, as adjusted to reflect the exchange ratio as defined in the merger agreement. Directors Plan. The 1996 Stock Option Plan for Outside Directors (the "Directors Plan") was adopted by the Board of Directors and approved by shareholders in August 1996. The maximum aggregate number of shares of common stock for which options may be granted under this plan is 375,000. Initial options granted under the Directors Plan vest at 40% on the first anniversary of the date of grant, 40% on the second anniversary and the remaining 20% on the third anniversary. All other stock options shall become exercisable at 50% on the first anniversary of the date of grant and the remaining 50% on the second anniversary of the date of grant. Each eligible director who first becomes a member of the Board shall automatically be granted stock options to purchase 37,500 shares on the date of his or her selection or election to the Board. Each eligible director shall also automatically be granted stock options to purchase 15,000 shares on each anniversary of the date of such initial grant (beginning on the second such anniversary). Supplemental Plan. The 1996 Supplemental Stock Option Plan (the "Supplemental Plan") was adopted by the Board of Directors in December 1996. The maximum aggregate number of shares of common stock for which options may be granted under this plan is 10,000,000. Option grants under the Supplemental Plan and the terms of the grants are identical to the 1994 Stock Option Plan. Other Plans. Distribution Resources Company, Computer Software and DDI had stock option plans which, effective with the mergers with Corporate Express in fiscal 1997, became vested and were exercisable into shares of common stock, as adjusted to reflect the exchange ratio as defined in the merger agreements. -57- CORPORATE EXPRESS, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) During fiscal 1998 the Company twice offered employees the opportunity to cancel existing stock options in exchange for fewer replacement stock options priced at market value on the date of the new grant (in February and December). Approximately 15,252,000 total stock options were canceled, and new grants totaling approximately 10,237,000 stock options were issued for replacement stock options. The summary of the status of the Company's fixed stock option plans, including merged plans, as of January 30, 1999, January 31, 1998, and March 1, 1997, and changes during the years ending on those dates is presented below :
January 30, 1999 January 31, 1998 March 1, 1997 --------------------- ---------------------- ------------------------- Weighted- Weighted- Weighted- Average Average Average Shares Exercise Shares Exercise Shares Exercise (000s) Price (000s) Price (000s) Price ------- --------- ------- --------- -------- --------- Outstanding at beginning of year 23,621 $11.78 16,833 $13.59 15,216 $10.90 Granted 14,418 9.80 11,797 10.15 4,405 21.15 Exercised (650) 5.56 (1,501) 5.83 (1,686) 5.98 Forfeited (18,943) 12.96 (3,508) 17.46 (1,102) 18.46 -------- ------- ------- Outstanding at end of year 18,446 8.09 23,621 11.78 16,833 13.59 ======== ======= ======= Options vested and exercisable at year end 5,382 6,365 5,407 Weighted-average fair value of options granted during the year $ 3.76 $ 3.85 $ 7.61 Weighted-average fair value of ESPP awards during the year $ 2.84 $ 4.49 $ 4.47
The following table summarizes information about fixed stock options outstanding as of January 30, 1999:
Options Outstanding Options Exercisable ------------------------------------------------------------------------------ --------------------------------- Number Weighted-Average Number Outstanding Remaining Exercisable Range of at 1/30/99 Option Term Weighted-Average at 1/30/99 Weighted-Average Exercise Prices (000s) (in Years) Exercise Price (000s) Exercise Price --------------- ------------ ---------------- ---------------- ----------- ---------------- $ .10 to 3.55 845 2.2 $ 3.38 747 $ 3.47 3.56 to 7.10 10,637 6.4 6.14 2,227 5.25 7.11 to 11.11 4,441 5.33 9.27 965 9.00 11.12 to 14.66 1,498 6.95 12.96 1,029 13.25 14.67 to 19.83 209 5.45 16.99 83 17.01 19.84 to 38.70 816 4.59 22.20 331 22.20 ------ ----- 18,446 5.92 8.09 5,382 8.43 ====== =====
The Company applies APB Opinion 25 and related interpretations in accounting for the above plans. Accordingly, no compensation cost has been recognized for its fixed stock-based plans with the exception of certain awards which were modified during fiscal 1998 resulting in a charge of approximately $1,479,000. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions for 1998, 1997 and 1996: risk-free interest rates ranging from 4.5% to 6.75% expected life of four years; volatility of 40%, 35% and 35% for 1998, 1997 and 1996, respectively; and dividend yield of 0%. The -58- CORPORATE EXPRESS, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) fair value of ESPP awards was estimated on the date of grant using the Black- Scholes option-pricing model with the following assumptions for 1998, 1997, and 1996: risk-free rates ranging from 4.5% to 6.75%; expected life of 1/2 year, one year, and one year for 1998, 1997 and 1996, respectively; and volatility of 45%. Had compensation cost been determined based on the fair value at the grant dates for stock option grants under those plans consistent with the method of FASB Statement 123, the Company's net income and net income per common share would have been reduced to the pro forma amounts indicated below. Pro forma disclosures include the effects of the 1994 Employee Stock Purchase Plan and employee and non-employee director stock options granted during the year ended March 1, 1997, the eleven months ended January 31, 1998 and the year ended January 30, 1999.
Eleven Year Ended Months Ended Year Ended January 30, January 31, March 1, 1999 1998 1997 (1) ---------- ------------- ---------- Net income As reported $(73,290) $44,404 $40,281 Pro forma (88,043) 33,673 32,062 Net income per common share - Basic As reported (0.65) $ 0.34 $ 0.33 Pro forma (0.78) 0.26 0.26 Net income per common share - Diluted As reported (0.64) $ 0.32 $ 0.31 Pro forma (0.76) 0.24 0.25
(1) Net income and net income per common share as reported represent pro forma net income and pro forma net income per common share as adjusted for the effects of pro forma S Corporation taxes as more fully described in Note 14. Warrants As of January 30, 1999, warrants to purchase 562,500 shares of common stock were outstanding with an exercise price of $4.89 per share. The warrants expire on January 31, 2002. The exercise price assigned to the 562,500 of warrants was based on the fair market value of the Company's common stock at the dates of issuance of such warrants, which occurred in late fiscal 1993. The estimated fair market value for the Company's common stock was determined by the board of directors, which then included independent sophisticated investors, based upon recent cash sales of the Company' equity to third parties. Warrants were assumed by the Company in connection with the DDI and Delivery mergers and were converted to warrants for Corporate Express, Inc. common stock based upon the exchange ratio applicable to the respective mergers. As of January 30, 1999, outstanding warrants to purchase Delivery common stock are vested and exercisable into 19,500 shares of Corporate Express common stock at a price of $9.44 per share and outstanding warrants to purchase DDI common stock were vested and exercisable into 123,101 shares of Corporate Express stock. 13. FAIR VALUE OF FINANCIAL INSTRUMENTS Pursuant to SFAS No. 107, "Disclosure About Fair Value of Financial Instruments," the Company has estimated the fair value of its financial instruments using the following methods and assumptions: . The carrying amount of accounts receivable, notes and other receivables, accounts payable and accrued liabilities approximate their fair values; -59- CORPORATE EXPRESS, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) . The fair value of the Senior Subordinated Notes based on quoted market prices was approximately $322,000,000 at January 30, 1999. . The fair value of the Convertible Notes is based on quoted market prices and was approximately $282,750,000 at January 30, 1999; . The fair value of the Series B Notes is based on quoted market prices and was approximately $1,221,000 at January 30, 1999; . The carrying amounts of the Company's debt, other than the Convertible Notes and the Series B Notes, approximates fair value since a substantial amount of such debt bears variable rates of interest, estimated by discounted cash flow analyses based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. 14. PRO FORMA NET INCOME The pro forma net income and pro forma net income per share reflects the tax adjustment for a fiscal 1996 acquisition accounted for as a pooling of interests that was previously an S corporation for income tax purposes, as if the acquired company had filed a C corporation tax return for all periods presented. The effect is as follows: Year Ended March 1, 1997 -------------- (In thousands) Net income before pro forma adjustments, per consolidated statements of operations $41,996 Pro forma provision for income taxes 1,715 ------- Pro forma net income $40,281 ======= 15. EARNINGS PER SHARE Basic and diluted earnings per share are calculated as follows:
Eleven Year Ended Months Ended Year Ended January 30, January 31, March 1, 1999 1998 1997 ---- ---- ---- Numerator for basic and diluted EPS: Income from continuing operations $ 1,943 $ 41,049 $ 36,290 Pro forma taxes (Note 14) --- --- (1,715) -------- -------- -------- Income available to common shareholders 1,943 41,049 34,575 Discontinued operations (69,652) 3,355 5,706 Extraordinary item (5,581) --- --- -------- -------- -------- Net income (loss) $(73,290) $ 44,404 $ 40,281 ======== ======== ======== Basic EPS Calculation: Denominator: Basic shares (1) 113,080 131,423 121,901 ======== ======== ========
-60- CORPORATE EXPRESS, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) Earnings per common share: Continuing operations $ 0.02 $ 0.31 $ 0.28 Discontinued operations (0.62) 0.03 0.05 Extraordinary item (0.05) --- --- -------- -------- -------- Net income (loss) $ (0.65) $ 0.34 $ 0.33 ======== ======== ======== Diluted EPS Calculation: Denominator (2): Basic shares 113,080 131,423 121,901 Dilutive stock options and warrants 2,321 6,435 8,128 -------- -------- -------- Diluted shares 115,401 137,858 130,029 ======== ======== ======== Earnings per common share: Continuing operations $ 0.02 $ 0.30 $ 0.27 Discontinued operations (0.61) 0.02 0.04 Extraordinary item (0.05) --- --- -------- -------- -------- Net income (loss) $ (0.64) $ 0.32 $ 0.31 ======== ======== ========
(1) Reflects the 39,635,681 treasury shares acquired during fiscal 1998. (2) Antidilutive stock options omitted from the denominator were 13,371,000, 5,992,528,and 425,077 for the year ended January 30, 1999, eleven months ended January 31, 1998 and year ended March 1, 1997, respectively. Also excluded from the calculation are the Convertible Notes with an exercise price of $33.33 per share which is greater than the average market price of the common shares. 16. INDUSTRY AND GEOGRAPHIC AREA SEGMENT INFORMATION In fiscal 1998, the Company adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." Adoption of this Statement required the Company to change the disclosure of product information but did not require significant changes in the way segments were disclosed. The Company is organized primarily on the basis of business segments and geographic locations. The Company operates in four reportable business segments, excluding discontinued operations - (1) North America Office Products, (2) International Office Products, (3) Desktop Software Distribution, and (4) Other Products & Services; and two geographic segments - (1) U.S. and (2) International. The Company's reportable segments are strategic business units that offer different products. They are managed separately based on the fundamental differences in their operations. The accounting policies of the segments are the same as those described in Note 1 - Operations and Summary of Significant Accounting Policies. Segment data includes intersegment revenues. The Company does not allocate its corporate headquarters' expenses to its segments. Included in the North America Office Products' segment are general office supplies, office furniture, computer and imaging supplies, manufactured forms and labels. The International Office Products' segment primarily includes general office supplies, office furniture, and computer supplies. The Desktop Software Distribution segment primarily includes the sale of shrink-wrapped product and the sale of licenses for the use of software produced by major software publishers. The Other category primarily includes advertising specialties, promotional products, and cleaning and service supplies. Included in the International segment are operations throughout Canada, Europe and the Southern Pacific. -61- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following tables set forth information as to the Company's reportable segments: BUSINESS SEGMENTS
N. America International Desktop Office Office Software Reconciling Products (a) Products Distribution Other Items (a) Consolidated ------------ ------------ ------------ -------- ------------ ------------ Year ended January 30, 1999: Net sales (b) $2,275,712 $608,884 $582,121 $292,597 $ (6,723) $3,752,591 Restructuring & other nonrecurring charges (c) 18,945 13,261 -- 5,827 19,902 57,935 Depreciation and amortization 34,263 10,965 3,838 3,454 12,602 65,122 EBITDA (d) 216,541 10,315 38,071 10,597 (55,770) 219,754 Operating profit 163,367 (11,564) 34,222 1,309 (94,628) 92,706 Interest expense, net 75,302 Other income (e) 6,212 ---------- Income before income taxes & minority interest $ 23,616 ========== Property, equipment and software, net 131,041 26,024 7,231 22,016 165,387 351,699 Capital expenditures 26,843 7,689 2,608 8,628 50,687 96,455 ELEVEN MONTHS ENDED JANUARY 31, 1998: Net sales (b) $1,782,078 $409,220 $392,750 $261,812 $ (8,749) $2,837,111 Merger and other nonrecurring charges 4,927 1,369 -- 568 4,473 11,337 Depreciation and amortization 21,809 7,741 3,303 3,079 9,543 45,475 EBITDA (d) 151,826 5,614 31,569 16,263 (41,889) 163,383 Operating profit 124,907 (4,828) 28,234 12,446 (55,970) 104,789 Interest expense, net 34,014 Other income 464 ---------- Income before income taxes & minority interest $ 71,239 ========== Property, equipment and software, net 128,480 26,116 5,684 16,871 139,773 316,924 Capital expenditures 16,055 9,040 971 5,218 40,234 71,518 YEAR ENDED MARCH 1, 1997: Net sales (b) $1,538,525 $351,993 $303,735 $250,211 $ (6,425) $2,438,039 Merger and other nonrecurring charges (241) -- 1,329 6,390 929 8,407 Depreciation and amortization 18,577 5,262 2,996 1,474 5,201 33,510 EBITDA (d) 119,612 3,517 22,510 13,772 (34,795) 124,616 Operating profit 101,060 (3,634) 18,112 5,899 (40,830) 80,607 Interest expense, net 20,045 Other income 242 ---------- Income before income taxes & minority interest $ 60,804 ========== Property, equipment and software, net 70,939 19,693 5,746 7,618 116,706 220,702 Capital expenditures 8,860 9,455 884 4,038 81,011 104,248
(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) The North America Office Products Net sales are shown net of intrasegment sales of $37,654,000, $18,030,000 and $8,811,000 for fiscal 1998, eleven- months ended January 31, 1998 and fiscal 1997, respectively. There are no intrasegment sales within the other business segments. (c) Includes restructuring related inventory provisions of $1,919,000 in North America Office Products and $1,211,000 in the Other Segment. (d) EBITDA for segment reporting purposes excludes restructuring and other non- recurring charges. (e) Includes a gain on the sale of marketable securities of $6,273,000. -62- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GEOGRAPHIC SEGMENTS Domestic International Reconciling Operations Operations Items (a) Consolidated ---------- ---------- ----- ------------ Year ended January 30, 1999: Net sales $2,812,802 $939,789 $ -- $3,752,591 Property, equipment, and software, net 147,920 38,392 165,387 351,699 ELEVEN MONTHS ENDED JANUARY 31, 1998: Net sales $2,165,544 $671,567 $ -- $2,837,111 Property, equipment, and software, net 138,994 38,157 139,773 316,924 YEAR ENDED MARCH 1, 1997: Net sales $1,872,913 $565,126 $ -- $2,438,039 Property, equipment, and software, net 67,191 36,805 116,706 220,702
(a) Includes unallocated corporate headquarter assets. There are no intersegment revenues. 17. QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth Quarter Quarter Quarter Quarter Ended Ended Ended Ended May 2, August 1, October 31, January 30, 1998 1998 1998 1999 ------ -------- ---------- ---------- (In thousands, except per share data) YEAR ENDED JANUARY 30, 1999: Net sales $918,472 $935,056 $935,752 $ 963,311 Gross profit 216,826 221,393 222,641 212,716 (a) Income (loss) from continuing operations 15,590 14,005 14,006 (41,658) (a) Income (loss) from discontinued operations 223 (1,729) (904) (67,242) Loss on extraordinary item (1,104) (4,477) -- -- -------- -------- -------- --------- Net income (loss) 14,709 7,799 13,102 (108,900) ======== ======== ======== --------- Net income (loss) per share - Basic: Continuing operations 0.12 0.13 0.13 (0.40) Discontinued operations -- (0.02) (0.01) (0.65) Extraordinary item (0.01) (0.04) -- -- -------- -------- -------- --------- Net income (loss) 0.11 0.07 0.12 (1.05) ======== ======== ======== ========= Net income (loss) per share - Diluted: Continuing operations 0.12 0.13 0.13 (0.40) Discontinued operations -- (0.02) (0.01) (0.65) Extraordinary item (0.01) (0.04) -- -- -------- -------- -------- --------- Net income (loss) 0.11 0.07 0.12 (1.05) ======== ======== ======== =========
-63- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
First Second Third Fourth Quarter Quarter Quarter Quarter Ended Ended Ended Ended May 31, August 30, November 29, January 31, 1997 1997 1997 1998 (b) -------- ---------- ------------- ------------ (In thousands, except per share data) ELEVEN MONTHS ENDED JANUARY 31, 1998: Net sales $706,134 $738,324 $798,142 $594,511 Gross profit 167,213 177,433 198,064 139,112 Net income from continuing operations 7,395 12,028 14,839 (a) 6,787 Income (loss) from discontinued operations 2,627 2,539 (316) (1,495) -------- -------- -------- -------- Net income 10,022 14,567 14,523 5,292 ======== ======== ======== ======== Net income per share - Basic: Continuing operations 0.06 0.09 0.11 0.05 Discontinued operations 0.02 0.02 0.00 (0.01) -------- -------- -------- -------- Net income 0.08 0.11 0.11 0.04 ======== ======== ======== ======== Net income (loss) per share - Diluted: Continuing operations 0.06 0.09 0.10 0.05 Discontinued operations 0.02 0.02 0.00 (0.01) -------- -------- -------- -------- Net income 0.08 0.11 0.10 0.04 ======== ======== ======== ========
During fiscal 1997, the Company changed its fiscal year end from February 28 to January 31. Quarterly results restated for the twelve months ended January 31, 1998 are as follows:
First Second Third Fourth Quarter Quarter Quarter Quarter Ended Ended Ended Ended May 3, August 2, November 1, January 31, 1997 1997 1997 1998 -------- --------- ------------ ------------ (In thousands, except per share data) TWELVE MONTHS ENDED JANUARY 31, 1998: Net sales $706,690 $724,468 $777,785 $842,004 Gross profit 170,685 172,334 184,831 209,278 Income from continuing operations 10,502 9,661 15,416 (a) 10,697 Income (loss) from discontinued operations 1,909 2,600 2,067 (2,160) -------- -------- -------- -------- Net income 12,411 12,261 17,483 8,537 ======== ======== ======== ======== Net income (loss)per share - Basic Continuing operations 0.08 0.08 0.12 0.07 Discontinued operations 0.02 0.02 .01 (0.01) -------- -------- -------- -------- Net income 0.10 0.10 0.13 0.06 ======== ======== ======== ======== Net income (loss) per share - Diluted: Continuing operations 0.08 0.07 0.11 0.07 Discontinued operations 0.01 0.02 0.01 (0.01) -------- -------- -------- -------- Net income 0.09 0.09 0.12 0.06 ======== ======== ======== ========
-64- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (a) In the fourth quarter of fiscal 1998, the Company recognized pre-tax charges of $57,935,000 (which includes $3,130,000 of a restructuring related inventory provision) related to restructuring expenses. In the third quarter of fiscal 1997, the Company recognized pre-tax charges of $11,337,000, primarily related to the DDI acquisition and certain provisions for reductions in force and facility closures at other locations. (b) Fourth Quarter Ended January 31, 1998 reflects results for the two months ended January 31, 1998. Quarterly financials data by business segment (unaudited):
N. America International Desktop Office Office Software Reconciling Products Products Distribution Other Items (a) Consolidated -------- -------- ------------ ----- --------- ------------ Quarter ended January 30, 1999: Net sales $548,124 $164,235 $177,767 $74,326 $ (1,141) $963,311 Restructuring, merger and other nonrecurring charges (b) 19,535 13,261 --- 5,827 19,902 58,525 Operating profit (loss) 15,066 (13,083) 8,770 (5,424) (41,498) (36,169) QUARTER ENDED OCTOBER 31, 1998: Net sales 582,585 150,411 128,597 75,606 (1,447) 935,752 Operating profit (loss) 51,516 (452) 6,571 2,343 (18,481) 41,497 QUARTER ENDED AUGUST 1, 1998: Net sales 562,912 149,384 151,940 72,344 (1,524) 935,056 Restructuring, merger and other nonrecurring charges (c) (590) --- --- --- --- (590) Operating profit (loss) 50,110 803 12,000 2,001 (17,861) 47,053 QUARTER ENDED MAY 2, 1998: Net sales 582,091 144,854 123,817 70,321 (2,611) 918,472 Operating profit (loss) 46,676 1,167 6,882 2,390 (16,790) 40,325
(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) Includes restructuring related inventory provisions of $2,509,000 in N. American Office Products and $1,211,000 in the Other segment. (c) Reflects the reversal of a fiscal 1995 merger related inventory provision that was not fully utilized. Quarterly financial data by geographic segment (unaudited):
Domestic International Reconciling Operations Operations Items (a) Consolidated ---------- ---------- -------- ------------ QUARTER ENDED JANUARY 30, 1999: Net sales $691,894 $271,417 $ --- $963,311 Restructuring, merger and other nonrecurring charges (b) 24,560 14,063 19,902 58,525 Operating profit (loss) 12,964 (7,635) (41,498) (36,169) QUARTER ENDED OCTOBER 31, 1998: Net sales 711,032 224,720 --- 935,752 Operating profit (loss) 55,074 4,904 (18,481) 41,497 QUARTER ENDED AUGUST 1, 1998: Net sales 713,332 221,724 --- 935,056 Restructuring, merger and other nonrecurring charges (c) (590) --- --- (590) Operating profit (loss) 59,506 5,408 (17,861) 47,053 QUARTER ENDED MAY 2, 1998: Net sales 696,545 221,927 --- 918,472 Operating profit (loss) 51,417 5,698 (16,790) 40,325
-65- CORPORATE EXPRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (a) Includes unallocated corporate headquarter expenses. (b) Includes restructuring related inventory provisions of $2,509,000 in Domestic Operations and $1,211,000 in International Operations. (c) Reflects the reversal of a fiscal 1995 merger related inventory provision that was not fully utilized. 18. SUPPLEMENTAL GUARANTOR INFORMATION On May 29, 1998, CEX Holdings, Inc. ("CEX Holdings" or the "Issuer"), a wholly-owned subsidiary of the Registrant, completed a private placement of $350 million principal amount of 9 5/8% Senior Subordinated Notes due 2008 (the "Notes"). The Notes are fully and unconditionally guaranteed on a joint and several basis by the Registrant (the "Parent Guarantor") and certain of the Registrant's subsidiaries. Substantially all of the Issuer's income and cash flow is generated by its subsidiaries. As a result, funds necessary to meet the Issuer's debt service obligations are provided in large part by distributions or advances from its subsidiaries. Under certain circumstances, contractual and legal restrictions, as well as the financial condition and operating requirements of the Issuer's subsidiaries, could limit the Issuer's ability to obtain cash from its subsidiaries for the purpose of meeting its debt service obligations, including the payment of principal and interest on the Notes. The following information sets forth the condensed consolidating balance sheet of the Registrant as of January 30, 1999 and January 31, 1998, and condensed consolidating statements of operations and cash flows for the year ended January 30, 1999, the eleven months ended January 31, 1998 and the year ended March 1, 1997. Investments in subsidiaries are accounted for on the equity method; accordingly, entries necessary to consolidate the Parent Guarantor, CEX Holdings, Inc., and all of its 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. -66- CORPORATE EXPRESS, INC. CONDENSED CONSOLIDATING BALANCE SHEET January 30, 1999
Subsidiary Parent Issuer Subsidiary Non Guarantor of Notes Guarantors Guarantors Eliminations Consolidated ----------- ----------- ----------- ---------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ - $ 1,467 $ 8,226 $ 5,138 $ - $ 14,831 Trade accounts receivable, net - - 397,888 203,681 - 601,569 Notes and other receivables - 540 61,903 27,846 - 90,289 Inventories - - 221,737 64,017 - 285,754 Deferred income taxes - - 42,368 823 - 43,191 Other current assets 4,947 - 40,018 9,794 54,759 ----------- ----------- ----------- --------- ------------ ----------- Total current assets 4,947 2,007 772,140 311,299 - 1,090,393 Property and Equipment: Land - - 13,427 1,335 - 14,762 Buildings and leasehold improvements - - 106,362 14,443 - 120,805 Furniture and equipment - - 154,488 34,972 - 189,460 ----------- ----------- ----------- --------- ------------ ----------- - - 274,277 50,750 - 325,027 Less accumulated depreciation - - (82,985) (17,280) - (100,265) ----------- ----------- ----------- --------- ------------ ----------- Net property and equipment - - 191,292 33,470 - 224,762 Goodwill, net - - 582,136 206,827 - 788,963 Software, net - - 122,015 4,922 126,937 Net investment in and advances to subsidiaries 762,893 1,604,115 - (105,662) (2,261,346) - Other assets, net 2,712 44,654 9,684 22,864 - 79,914 Net assets from discontinued operations - (52,000) 156,621 - 104,621 ----------- ----------- ----------- --------- ------------ ----------- Total assets $ 770,552 $ 1,598,776 $ 1,833,888 $ 473,720 $ (2,261,346) $ 2,415,590 =========== =========== =========== ========= ============ =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable - trade $ - $ - $ 290,235 $ 131,852 $ - $ 422,087 Accounts payable - acquisition - - - 373 - 373 Accrued payroll and benefits - - 47,860 9,179 - 57,039 Accrued purchase costs - - 1,236 5,181 - 6,417 Accrued merger and related costs - - 26,202 9,958 - 36,160 Other accrued liabilities 1,225 6,295 21,868 32,050 - 61,438 Current portion of long-term debt and capital leases 2,500 13,352 51,959 67,811 ----------- ----------- ----------- --------- ------------ ----------- Total current liabilities 1,225 8,795 400,753 240,552 - 651,325 Capital lease obligations - - 4,572 2,509 - 7,081 Long-term debt 325,000 827,088 22,510 25,748 - 1,200,346 Deferred income taxes - - 70,274 296 - 70,570 Minority interest in subsidiaries - - - 20,986 - 20,986 Other non-current liabilities - - 11,688 9,267 - 20,955 ----------- ----------- ----------- --------- ------------ ----------- Total liabilities 326,225 835,883 509,797 299,358 - 1,971,263 Total shareholders' equity 444,327 762,893 1,324,091 174,362 (2,261,346) 444,327 ----------- ----------- ----------- --------- ------------ ----------- Total liabilities and shareholders' equity $ 770,552 $ 1,598,776 $ 1,833,888 $ 473,720 $ (2,261,346) $ 2,415,590 =========== =========== =========== ========= ============ ===========
-67- CORPORATE EXPRESS, INC. CONDENSED CONSOLIDATING BALANCE SHEET January 31, 1998
Subsidiary Parent Issuer Subsidiary Non Guarantor of Notes Guarantors Guarantors Eliminations --------- -------- ---------- ---------- ------------ ASSETS Current assets: Cash and cash equivalents $ - $ 372 $ 22,293 $ 10,147 $ - Trade accounts receivable, net - - 373,637 144,459 - Notes and other receivables - - 68,836 14,628 - Inventories - - 200,583 50,525 - Deferred income taxes - - 26,728 7,308 - Other current assets - - 30,423 8,390 - ---------- ---------- ---------- -------- ----------- Total current assets - 372 722,500 235,457 - Property and Equipment: Land - - 14,281 1,389 - Buildings and leasehold improvements - - 100,070 13,066 - Furniture and equipment - - 135,755 32,019 - ---------- ---------- ---------- -------- ----------- - - 250,106 46,474 - Less accumulated depreciation - - (60,203) (11,177) - ---------- ---------- ---------- -------- ----------- Net property and equipment - - 189,903 35,297 - Goodwill, net - - 594,020 178,833 - Software, net - - 88,863 2,861 - Net investment in and advances to subsidiaries 1,317,540 1,634,064 (65,246) (99,595) (2,786,763) Other assets, net 4,583 31,384 11,500 9,631 - - 161,787 - Net assets from discontinued operations ---------- ---------- ---------- -------- ----------- Total assets $1,322,123 $1,665,820 $1,703,327 $362,484 $(2,786,763) ========== ========== ========== ======== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable - trade $ 59,121 $ - $ 160,066 $105,213 $ - Accounts payable - acquisition - - 1,440 4,666 - Accrued payroll and benefits - - 38,881 7,779 - Accrued purchase costs - - 4,226 5,152 - Accrued merger and related costs - - 9,839 967 - Other accrued liabilities 5,569 4,243 28,377 21,567 - Current portion of long-term debt and capital leases - - 11,235 24,011 - ---------- ---------- ---------- -------- ----------- Total current liabilities 64,690 4,243 254,064 169,355 - Capital lease obligations - - 5,304 3,418 - Long-term debt 325,000 344,037 31,734 48,521 - Deferred income taxes - 50,534 503 - Minority interest in subsidiaries - - - 20,791 - Other non-current liabilities - - 4,224 8,140 - ---------- ---------- ---------- -------- ----------- Total liabilities 389,690 348,280 345,860 250,728 - Total shareholders' equity 932,433 1,317,540 1,357,467 111,756 (2,786,763) ---------- ---------- ---------- -------- ----------- Total liabilities and shareholders' equity $1,322,123 $1,665,820 $1,703,327 $362,484 $(2,786,763) ========== ========== ========== ======== =========== Consolidated ------------ ASSETS Current assets: Cash and cash equivalents $ 32,812 Trade accounts receivable, net 518,096 Notes and other receivables 83,464 Inventories 251,108 Deferred income taxes 34,036 Other current assets 38,813 ----------- Total current assets 958,329 Property and Equipment: Land 15,670 Buildings and leasehold improvements 113,136 Furniture and equipment 167,774 ----------- 296,580 Less accumulated depreciation (71,380) ----------- Net property and equipment 225,200 Goodwill, net 772,853 Software, net 91,724 Net investment in and advances to subsidiaries - Other assets, net 57,098 Net assets from discontinued operations 161,787 ----------- Total assets $ 2,266,991 =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable - trade $ 324,400 Accounts payable - acquisition 6,106 Accrued payroll and benefits 46,660 Accrued purchase costs 9,378 Accrued merger and related costs 10,806 Other accrued liabilities 59,756 Current portion of long-term debt and capital leases 35,246 ----------- Total current liabilities 492,352 Capital lease obligations 8,722 Long-term debt 749,292 Deferred income taxes 51,037 Minority interest in subsidiaries 20,791 Other non-current liabilities 12,364 ----------- Total liabilities 1,334,558 Total shareholders' equity 932,433 ----------- Total liabilities and shareholders' equity $ 2,266,991 ===========
-68- CORPORATE EXPRESS, INC. CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS Year Ended January 30, 1999
Subsidiary Parent Issuer Subsidiary Non Guarantor of Notes Guarantors Guarantors Eliminations -------- -------- ---------- ---------- ------------ Net sales $ - $ - $2,812,802 $ 939,789 $ - Cost of sales - - 2,127,917 747,968 - Restructuring related inventory provision 3,057 73 Equity in subsidiary earnings (67,340) 5,579 - - 61,761 -------- -------- ---------- ---------- ----------- Gross profit (67,340) 5,579 681,828 191,748 61,761 Warehouse operating and selling expenses - - 453,431 146,255 - Corporate general and administrative expenses - - 77,492 16,261 - Amortization of intangibles - - 25,759 6,867 - Restructuring and other nonrecurring charges - - 40,815 13,990 - -------- -------- ---------- ---------- ----------- Operating profit (loss) (67,340) 5,579 84,331 8,375 61,761 Interest expense and other, net 16,436 42,369 (2,184) 12,469 - -------- -------- ---------- ---------- ----------- Income (loss) before income taxes (83,776) (36,790) 86,515 (4,094) 61,761 Income tax expense (benefit) (10,486) (27,031) 55,203 1,765 - -------- -------- ---------- ---------- ----------- Income (loss) before minority interest (73,290) (9,759) 31,312 (5,859) 61,761 Minority interest (income) expenses - - 2,222 - -------- -------- ---------- ---------- ----------- Income (loss) from continuing operations (73,290) (9,759) 31,312 (8,081) 61,761 Discontinued operations, net of tax: Loss from discontinued operations - - (17,652) - - Loss on disposal - (52,000) - - - -------- -------- ---------- ---------- ----------- Loss from discontinued operations - (52,000) (17,652) - - -------- -------- ---------- ---------- ----------- Income (loss) before extraordinary item (73,290) (61,759) 13,660 (8,081) 61,761 Extraordinary item: Loss on early extinguishment of debt (5,581) - - -------- -------- ---------- ---------- ----------- Net income (loss) $(73,290) $(67,340) $ 13,660 $ (8,081) $ 61,761 ======== ======== ========== ========== =========== Consolidated ------------ Net sales $ 3,752,591 Cost of sales 2,875,885 Restructuring related inventory provision 3,130 Equity in subsidiary earnings - ----------- Gross profit 873,576 Warehouse operating and selling expenses 599,686 Corporate general and administrative expenses 93,753 Amortization of intangibles 32,626 Restructuring and other nonrecurring charges 54,805 ----------- Operating profit (loss) 92,706 Interest expense and other, net 69,090 ----------- Income (loss) before income taxes 23,616 Income tax expense (benefit) 19,451 ----------- Income (loss) before minority interest 4,165 Minority interest (income) expenses 2,222 ----------- Income (loss) from continuing operations 1,943 Discontinued operations, net of tax: Loss from discontinued operations (17,652) Loss on disposal (52,000) ----------- Loss from discontinued operations (69,652) ----------- Income (loss) before extraordinary item (67,709) Extraordinary item: Loss on early extinguishment of debt (5,581) ----------- Net income (loss) $ (73,290) ===========
-69- CORPORATE EXPRESS, INC. CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS Eleven Months Ended January 31, 1998
Subsidiary Parent Issuer Subsidiary Non Guarantor of Notes Guarantors Guarantors Eliminations --------- -------- ---------- ---------- ------------ Net sales $ - $ - $2,165,544 $ 671,567 $ - Cost of sales - - 1,633,519 521,770 - Equity in subsidiary earnings 53,291 59,553 - - (112,844) -------- ------- ---------- ---------- ----------- Gross profit 53,291 59,553 532,025 149,797 (112,844) Warehouse operating and selling expenses - - 353,773 118,440 - Corporate general and administrative expenses - - 58,144 13,181 - Amortization of intangibles - - 17,203 4,955 - Merger and other nonrecurring charges - - 9,732 1,605 - -------- ------- ---------- ---------- ----------- Operating profit 53,291 59,553 93,173 11,616 (112,844) Interest expense and other, net 15,164 10,686 (680) 8,380 - -------- ------- ---------- ---------- ----------- Income before income taxes 38,127 48,867 93,853 3,236 (112,844) Income tax expense (benefit) (6,277) (4,424) 38,509 3,701 - -------- ------- ---------- ---------- ----------- Income (loss) before minority interest 44,404 53,291 55,344 (465) (112,844) Minority interest income - - - (1,319) - -------- ------- ---------- ---------- ----------- Income (loss) from continuing operations 44,404 53,291 55,344 854 (112,844) Discontinued operations, net of tax: Income from discontinued operations - - 3,355 - - -------- ------- ---------- ---------- ----------- Income from discontinued operations - - 3,355 - - -------- ------- ---------- ---------- ----------- Net income $ 44,404 $53,291 $ 58,699 $ 854 $ (112,844) ======== ======= ========== ========== ========== Consolidated ------------ Net sales $ 2,837,111 Cost of sales 2,155,289 Equity in subsidiary earnings - ---------- Gross profit 681,822 Warehouse operating and selling expenses 472,213 Corporate general and administrative expenses 71,325 Amortization of intangibles 22,158 Merger and other nonrecurring charges 11,337 ---------- Operating profit 104,789 Interest expense and other, net 33,550 ---------- Income before income taxes 71,239 Income tax expense (benefit) 31,509 ---------- Income (loss) before minority interest 39,730 Minority interest income (1,319) ---------- Income (loss) from continuing operations 41,049 Discontinued operations, net of tax: Income from discontinued operations 3,355 ---------- Income from discontinued operations 3,355 ---------- Net income $ 44,404 ==========
-70- CORPORATE EXPRESS, INC. CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS Year Ended March 1, 1997
Subsidiary Parent Issuer Subsidiary Non Guarantor of Notes Guarantors Guarantors Eliminations Consolidated ------------ ---------- ------------ ------------- -------------- ------------ Net sales $ - $ - $ 1,872,913 $ 565,126 $ - $2,438,039 Cost of sales - - 1,423,710 430,031 - 1,853,741 Equity in subsidiary earnings 48,339 51,262 - - (99,601) - ------------ ---------- ------------ ------------- -------------- ----------- Gross profit 48,339 51,262 449,203 135,095 (99,601) 584,298 Warehouse operating and selling expenses - - 304,593 111,806 - 416,399 Corporate general and administrative expenses - - 48,998 13,618 - 62,616 Amortization of intangibles - - 12,629 3,640 - 16,269 Merger and other nonrecurring charges - - 7,078 1,329 - 8,407 ------------ ---------- ------------ ------------- -------------- ----------- Operating profit 48,339 51,262 75,905 4,702 (99,601) 80,607 Interest expense and other, net 11,270 5,193 (1,931) 5,271 - 19,803 ------------ ---------- ------------ ------------- -------------- ----------- Income before income taxes 37,069 46,069 77,836 (569) (99,601) 60,804 Income tax expense (benefit) (4,927) (2,270) 32,424 1,147 - 26,374 ------------ ---------- ------------ ------------- -------------- ----------- Income (loss) before minority interest 41,996 48,339 45,412 (1,716) (99,601) 34,430 Minortiy interest income - - - (1,860) - (1,860) ------------ ---------- ------------ ------------- -------------- ----------- Income (loss) from continuing operations 41,996 48,339 45,412 144 (99,601) 36,290 Discontinued operations, net of tax: Income from discontinued operations - - 5,706 - - 5,706 ------------ ---------- ------------ ------------- -------------- ----------- Income from discontinued operations - - 5,706 - - 5,706 ------------ ---------- ------------ ------------- -------------- ----------- Net income $ 41,996 $48,339 $ 51,118 $ 144 $ (99,601) $ 41,996 ============ ========== ============ ============= ============= ===========
-71- CORPORATE EXPRESS, INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS Year Ended January 30, 1999
Subsidiary Parent Issuer Subsidiary Non Guarantor of Notes Guarantors Guarantors Consolidated ------------ ----------- ------------ ----------- ------------- Net cash provided by (used in) operating activities $ (13,374) $ (16,068) $ 149,713 $ (17,560) $ 102,711 ------------ ----------- ----------- ----------- ------------ Cash flows from investing activities: Capital expenditures - - (86,135) (10,320) (96,455) Proceeds from sale of assets - - 14,598 322 14,920 Payment for acquisitions, net of cash acquired - - (3,918) (36,955) (40,873) Proceeds from (investments in) marketable securities - 21,110 - - 21,110 Short-term financial instruments, net - (5,594) - (1,102) (6,696) Other, net - 177 (8,545) 9,157 789 ------------ ---------- ----------- ----------- ----------- Net cash provided by (used in) investing activities - 15,693 (84,000) (38,898) (107,205) ------------ ---------- ----------- ----------- ----------- Cash flows from financing activities: Issuance of common stock 3,829 - - - 3,829 Repurchase of common stock (427,282) - - - (427,282) Debt issuance costs - (32,618) (19) - (32,637) Proceeds from long-term borrowings - 600,000 1,344 536 601,880 Repayments of long-term borrowings - (1,875) (16,355) (14,039) (32,269) Proceeds from short-term borrowings - - - 5,546 5,546 Repayments of short-term borrowings - - - (10,061) (10,061) Net proceeds from (payments on) line of credit - (29,337) 10,058 2,300 (16,979) Cash paid to retire bonds - (93,792) - - (93,792) Net activity in investment in and advances (to) from subsidiaries 436,827 (440,908) (61,598) 65,679 - ------------ ---------- ----------- ----------- ----------- Net cash provided by (used in) financing activities 13,374 1,470 (66,570) 49,961 (1,765) ------------ ---------- ----------- ----------- ----------- Net cash provided to discontinued operations - - (12,542) - (12,542) Effect of foreign currency exchange rates changes on cash - - (668) 1,488 820 ------------ ---------- ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents - 1,095 (14,067) (5,009) (17,981) Cash and cash equivalents, beginning of period - 372 22,293 10,147 32,812 ------------ ---------- ----------- ----------- ----------- Cash and cash equivalents, end of period $ - $ 1,467 $ 8,226 $ 5,138 $ 14,831 ============ ========== =========== =========== ===========
-72- CORPORATE EXPRESS, INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS Eleven Months Ended January 31, 1998
Subsidiary Parent Issuer Subsidiary Non Guarantor of Notes Guarantors Guarantors Consolidated ----------- ---------- ------------ ------------ -------------- Net cash provided by (used in) operating activities $ (49) $ (6,531) $ 27,727 $ (15,554) $ 5,593 ----------- ---------- ------------ ------------ -------------- Cash flows from investing activities: Capital expenditures - - (60,480) (11,038) (71,518) Proceeds from sale of assets - - 13,085 5,988 19,073 Payment for acquisitions, net of cash acquired - - (16,511) (16,218) (32,729) Proceeds from (investments in) marketable securities - (9,164) - - (9,164) Short-term financial instruments, net - - - 3,935 3,935 Other, net - - 2,416 251 2,667 ----------- ---------- ------------ ------------ ------------- Net cash used in investing activities - (9,164) (61,490) (17,082) (87,736) ----------- ---------- ------------ ------------ ------------- Cash flows from financing activities: Issuance of common stock 8,104 - - - 8,104 Issuance of subsidiary common stock - - - 2,434 2,434 Debt issuance costs (139) (944) - - (1,083) Proceeds from long-term borrowings - - 2,000 8,241 10,241 Repayments of long-term borrowings - - (9,032) (17,191) (26,223) Proceeds from short-term borrowings - - 15 15,293 15,308 Repayments of short-term borrowings - - (3,774) (593) (4,367) Net proceeds from (payments on) line of credit - 118,037 4,802 (5,091) 117,748 Cash paid to retire bonds - - (62,178) - (62,178) Net activity in investment in and advances (to) from subsidiaries (7,916) (101,026) 77,182 31,760 - Other - - (22) - (22) ----------- ---------- ------------ ------------ ------------- Net cash provided by financing activities 49 16,067 8,993 34,853 59,962 ----------- ---------- ------------ ------------ ------------- Net cash provided from discontinued operations - - 7,705 - 7,705 Effect of foreign currency exchange rates changes on cash - - - (834) (834) ----------- ---------- ------------ ------------ ------------- Increase (decrease) in cash and cash equivalents - 372 (17,065) 1,383 (15,310) Cash and cash equivalents, beginning of period - - 39,358 8,764 48,122 ----------- ---------- ------------ ------------ ------------- Cash and cash equivalents, end of period $ - $ 372 $ 22,293 $ 10,147 $ 32,812 =========== ========== ============ ============ =============
-73- CORPORATE EXPRESS, INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS Year Ended March 1, 1997
Subsidiary Parent Issuer Subsidiary Non Guarantor of Notes Guarantors Guarantors Consolidated ------------ ----------- -------------- ------------ ------------- Net cash provided by (used in) operating activities $ 29,251 $ (11,824) $ 24,702 $ (25,156) $ 16,973 ------------ ---------- ------------- ------------ ------------- Cash flows from investing activities: Capital expenditures - - (93,264) (10,984) (104,248) Proceeds from sale of assets - - 628 352 980 Payment for acquisitions, net of cash acquired - - (155,470) (82,390) (237,860) Proceeds from (investments in) marketable securities - (17,853) - - (17,853) Short-term financial instruments, net - - - 2,251 2,251 Other, net - - (4,138) 2,292 (1,846) ------------ ----------- -------------- ------------ ----------- Net cash provided by investing activities - (17,853) (252,244) (88,479) (358,576) ------------ ----------- -------------- ------------ ----------- Cash flows from financing activities: Issuance of common stock 12,643 - - - 12,643 Issuance of subsidiary common stock - - - 2,258 2,258 Debt issuance costs (7,374) (1,444) - - (8,818) Proceeds from long-term borrowings 325,000 - - 22,336 347,336 Repayments of long-term borrowings - - 463 (28,921) (28,458) Proceeds from short-term borrowings - - 272 500 772 Repayments of short-term borrowings - - (25,628) (1,317) (26,945) Net proceeds from (payments on) line of credit - 128,000 (11,747) 18,660 134,913 Net activity in investment in and advances (to) from subsidiaries (359,520) (96,879) 353,856 102,543 - Other - - (3,986) 58 (3,928) ------------ ----------- -------------- ------------ ------------ Net cash provided by (used in) financing activities (29,251) 29,677 313,230 116,117 429,773 ------------ ----------- -------------- ------------ ------------ Net cash provided to discontinued operations - - (65,423) - (65,423) Effect of foreign currency exchange rates changes on cash - - - (445) (445) ------------ ----------- -------------- ------------ ------------ Increase in cash and cash equivalents - - 20,265 2,037 22,302 Cash and cash equivalents, beginning of period - - 19,093 6,727 25,820 ------------ ----------- -------------- ------------ ------------ Cash and cash equivalents, end of period $ - $ - $ 39,358 $ 8,764 $ 48,122 ============ =========== ============== ============ ============
-74- CORPORATE EXPRESS, INC. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No change of accountants or disagreements on any matter of accounting principles or financial statement disclosures have occurred within the last two years. PART III The information called for by Item 10, Directors and Executive Officers of the Registrant; Item 11, Executive Compensation; Item 12, Security Ownership of Certain Beneficial Owners and Management; and Item 13, Certain Relationships and Related Transactions, is incorporated herein by reference to the Registrants definitive Proxy Statement for its Annual Meeting of Shareholders, presently scheduled to be held on July 15, 1999 which will be filed with the Securities and Exchange Commission within 120 days from the end of the Registrants fiscal year. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements of the Company and its Consolidated Subsidiaries Report of Independent Accountants Consolidated Balance Sheets as of January 30, 1999 and January 31, 1998 Consolidated Statements of Operations for the year ended January 30, 1999, the eleven-month period ended January 31, 1998 and the year ended March 1, 1997. Consolidated Statements of Shareholders Equity for the year ended January 30, 1999, the eleven-month period ended January 31, 1998 and the year ended March 1, 1997. Consolidated Statements of Cash Flows for the year ended January 30, 1999, the eleven-month period ended January 31, 1998 and the year ended March 1, 1997 Notes to Consolidated Financial Statements 2. Financial Statement Schedules II. Valuation and Qualifying Accounts 3. Exhibits The following exhibits are incorporated in this report by reference or included and submitted with this report, as indicated. Except as otherwise noted, the exhibit has previously been filed as an exhibit to the Company's Registration Statement on Form S-1, File No. 33-81924 (the "Registration Statement"), and is incorporated herein by reference. Exhibit Number Description - ------ ----------- 3.1 Articles of Amendment and Restatement of the Articles of Incorporation of Corporate Express, Inc., a Colorado corporation (the "Company"), filed on September 30, 1994. -75- CORPORATE EXPRESS, INC. Exhibit Number Description - ------ ----------- 3.2 Articles of Amendment and Restatement of the Company, filed on August 22, 1996 (incorporated by reference to the Company's Form 10-K for the year ended March 1, 1997). *3.3 Amended and Restated By-Laws of the Company, effective upon the filing of this Form 10-K for the year ended January 30, 1999. 4.1 Specimen Common Stock Certificate of the Company. 4.2 Form of Warrant Agreement. 4.3 Indenture dated as of February 28, 1994 by and among the Company, the Guarantors named therein and First Trust National Association for the $100,000,000 9 1/8% Senior Subordinated Notes. 4.4 Indenture dated as of June 24, 1996 by and among the Company and Bankers Trust Company, as trustee, for the 4 1/2% Convertible Notes due July 1, 2000 (including Form of Notes) (incorporated by reference to the Company's Registration Statement on Form S-3, File No. 333-12451). 4.5 First Supplemental Indenture dated as of October 15, 1996 relating to the Company's 4 1/2% Convertible Notes (incorporated by reference to the Company's Registration Statement on Form S-3, File No. 333-12451). 4.6 Form of 4 1/2% Convertible Note (incorporated by reference to the Company's Registration Statement on Form S-3, File No. 333- 12451). 4.7 Rights Agreement dated as of January 29, 1998 between the Company and Chasemellon Shareholder Services, L.L.C. as Rights Agent (incorporated by reference to the Company's Form 8-A dated January 30, 1998) 4.8 Indenture dated as of May 29, 1998 for the 9 5/8% Senior Subordinated Notes due 2008 by and among CEX Holdings, Inc., Corporate Express, Inc. and the other Guarantors listed therein and The Bank of New York. 4.9 Supplemental Indenture dated as of September 24, 1998 relating to CEX Holdings, Inc.'s 9 5/8% Senior Subordinated Notes due 2008. 10.1 Amended and Restated 1992 Stock Option Plan, Form of Non- qualified Stock Option Agreement and Form of Incentive Stock Option Agreement. 10.2 1994 Executive Stock Option Plan. 10.3 Form of Indemnification Agreement between the Company and its officers and directors. 10.4 1994 Stock Option and Incentive Plan. 10.5 1994 Employee Stock Purchase Plan. *10.6 Employment Agreement dated as of April 28, 1997 by and between the Company and Mark Hoffman. -76- CORPORATE EXPRESS, INC. Exhibit Number Description - ------ ----------- 10.7 Corporate Express, Inc. Supplemental Stock Option Plan (incorporated by reference to the Company's Form 10-K for the year ended March 1, 1997). 10.8 Agreement and Plan of Merger dated as of September 10, 1997 by and among the Company, IDD Acquisition Corp. and Data Documents Incorporated (Incorporated by reference to the Company's Report on Form 8-K dated September 10, 1997). 10.9 Credit Agreement dated as of April 17, 1998 and the First Amendment to the Credit Agreement dated as of April 23, 1998 among the Company, CEX Holdings, Inc., Various Banks, The First National Bank of Chicago, as Syndication Agent, the Bank of New York, as Co-Documentation Agent, DLJ Capital Funding, Inc., as Co-Documentation Agent and Bankers Trust Company as Administrative Agent (incorporated by reference to the Company's Annual Report on Form 10-K dated May 1, 1998). 10.10 Second Amendment to Credit Agreement dated as of January 29, 1999 among the Company, CEX Holdings, Inc., various banks, The First National Bank of Chicago, as Syndication Agent, the Bank of New York and DLJ Capital Funding, Inc., as Co-Documentation Agents and Bankers Trust Company as Administrative Agent (incorporated by reference to the Company's Report on Form 8-K dated February 12, 1999). *10.11 Board of Directors Arrangement Concerning Jirka Rysavy. *10.12 Agreement Among the Company, Martin Franklin, and Other Parties Thereto, dated March 30, 1999. *21.1 List of Subsidiaries. *23.1 Consent of Independent Accountants. *27.1 Financial Data Schedule. __________________ *Filed herewith. (b) Reports on Form 8-K None. -77- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CORPORATE EXPRESS, INC. (Registrant) By: /s/ Gary M. Jacobs ----------------------------- GARY M. JACOBS Executive Vice President, Secretary and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Robert L. King - -------------------------- ROBERT L. KING Chief Executive Officer (Principal Executive Officer) and President April 13, 1999 /s/ Gary M. Jacobs - -------------------------- GARY M. JACOBS Executive Vice President, Secretary and April 13, 1999 Chief Financial Officer (Principal Financial Officer) and Principal Accounting Officer /s/ James P. Argyropoulos - -------------------------- JAMES P. ARGYROPOULOS Director April 13, 1999 /s/ Martin Franklin - -------------------------- MARTIN FRANKLIN Director April 13, 1999 /s/ Janet A. Hickey - -------------------------- JANET A. HICKEY Director April 13, 1999 /s/ Jirka Rysavy - -------------------------- JIRKA RYSAVY Director April 13, 1999 /s/ Mo Siegel - -------------------------- MO SIEGEL Director April 13, 1999 /s/ Jeffrey Steiner - -------------------------- JEFFREY STEINER Director April 13, 1999
-78- SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Year Ended January 30, 1999, Eleven Months Ended January 31, 1998, and Year Ended March 1, 1997 (a) (In thousands)
Balance at Charged to Charged to Balance beginning costs and other at end of period expenses accounts Deductions of period ---------- ---------- ---------- ---------- --------- Allowance for Doubtful Accounts: Period ended March 1, 1997 5,527 3,586 4,126 (3,697) 9,542 Period ended January 31, 1998 9,542 3,609 2,123 (3,917) 11,357 Year ended January 30, 1999 11,357 5,235 945 (5,765) 11,772 Inventory Reserve: Period ended March 1, 1997 8,142 4,306 - (3,546) 8,902 Period ended January 31, 1998 8,902 3,871 - (4,752) 8,021 Year ended January 30, 1999 8,021 4,431 - (5,793) 6,659 Valuation Allowance for Deferred Tax Assets: Period ended March 1, 1997 2,433 (47) 3,663 - 6,049 Period ended January 31, 1998 6,049 (2,386) (1,408) (b) - 2,255 Year ended January 30, 1999 2,255 - - - 2,255
(a) The period ended January 31, 1998 represents the eleven-month transition period for the Company. The period ended March 1, 1997 includes the twelve months ended March 1, 1997 for Corporate Express, Inc., and fourteen months ended March 1, 1997 for Hermann Marketing, Inc. as each company had different fiscal year ends. (b) Represents additional allowances as a result of the purchase acquisitions EX-3.3 2 AMENDED AND RESTATED BY-LAWS EXHIBIT 3.3 AMENDED AND RESTATED BYLAWS OF CORPORATE EXPRESS, INC. ARTICLE I Offices and Agents ------------------ 1. Principal Office. The principal office of the Corporation shall ---------------- be located in Broomfield, Colorado, or elsewhere within or without the State of Colorado, as may be subsequently designated by the Board of Directors. The Corporation may have other offices and places of business at such places within or without the State of Colorado as shall be determined by the directors or as the business of the Corporation may require from time to time. 2. Registered Office. The registered office of the Corporation ----------------- required by the Colorado Business Corporation Act must be continually maintained in the State of Colorado, and it may be, but need not be, identical with the principal office, if located in the State of Colorado. The address of the registered office of the Corporation may be changed from time to time as provided by the Colorado Business Corporation Act. 3. Registered Agent. The Corporation shall maintain a registered ---------------- agent in the State of Colorado as required by the Colorado Business Corporation Act. Such registered agent may be changed from time to time as provided by the Colorado Business Corporation Act. ARTICLE II Shareholders Meetings --------------------- 1. Annual Meeting. The annual meeting of the shareholders shall be -------------- held for the purpose of electing directors and transacting such other corporate business as may come before the meeting. The date, time and place of the annual meeting shall be determined by resolution of the Board of Directors. If the election of directors is not held as provided herein at any annual meeting of the shareholders, or at any adjournment thereof, the Board of Directors shall cause the election to be held at a special meeting of the shareholders as soon thereafter as it may conveniently be held. Notice of an annual meeting need not include a description of the purpose or purposes of the meeting except when the purpose of the meeting is to consider (i) an amendment to the Articles of Incorporation of the Corporation, (ii) a merger or share exchange in which the Corporation is a party and, with respect to a share exchange, in which the Corporation's shares will be acquired, (iii) the sale, lease, exchange or other disposition, other than in the usual and regular course of business, of all or substantially all of the property of the Corporation or of another entity which the Corporation controls, in each case with or without goodwill, (iv) the dissolution of the Corporation or (v) any other purpose for which a statement of purpose is required by the Colorado Business Corporation Act. 2. Special Meetings. Unless otherwise prescribed by the Colorado ---------------- Business Corporation Act, special meetings of the shareholders of the Corporation may be called at any time by the chairman of the Board of Directors, by the chief executive officer, by the president, by resolution of the Board of Directors or by the Board of Directors upon receipt of one or more written demands for a meeting, stating the purpose or purposes for which it is to be held, signed and dated by the holders of at least ten percent (10%) of all votes entitled to be cast on any issue proposed to be considered at the meeting. Notice of a special meeting shall include a description of the purpose or purposes for which the meeting is called. 3. Place of Meeting. The annual meeting of the shareholders of the ---------------- Corporation may be held at any place, either within or without the State of Colorado, as may be designated by the Board of Directors. The person or persons authorized to call and so calling any special meeting of the shareholders pursuant to Section 2 of this Article II may designate any place, within or without the State of Colorado, as the place for the meeting. If no designation is made, the place of meeting shall be the principal office of the Corporation. A waiver of notice signed by all shareholders entitled to vote at a meeting may designate any place as the place for holding such meeting. 4. Notice of Meeting. Except as otherwise provided in these Bylaws ----------------- or by the Colorado Business Corporation Act, notice stating the date, time and place of the meeting shall be given no fewer than ten (10) and no more than sixty (60) days before the date of the meeting, except that if the number of authorized shares is to be increased, at least thirty (30) days' notice shall be given. Notice shall be given personally or by mail, private carrier, telephone (if reasonable under the circumstances), telegraph, teletype, electronically transmitted facsimile or other form of wire or wireless communication by or at the direction of the chief executive officer, the president, the secretary, or the officer or other person calling the meeting to each shareholder of record entitled to vote at such meeting. If mailed and if in a comprehensible form, such notice shall be deemed to be given and effective when deposited in the United States mail, addressed to the shareholder at his or her address as it appears in the Corporation's current record of shareholders, with postage prepaid. If notice is given other than by mail, and provided that the notice is in comprehensible form, the notice is given and effective on the date received by the shareholder. No notice need be sent to any shareholder if three successive notices mailed to the last known address of such shareholder have been returned as undeliverable until such time as another address for such shareholder is made known to the Corporation by such shareholder. To the extent permitted by law, any previously scheduled meeting of the shareholders may be postponed, and any special meeting of the shareholders may be cancelled, by resolution of the Board of Directors upon public notice given prior to the date previously scheduled for such meeting of shareholders. -2- When a meeting is adjourned to a different date, time or place, notice need not be given of the new date, time or place if the new date, time or place is announced at the meeting before adjournment. At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than 120 days, or if a new record date is fixed for the adjourned meeting, a new notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting as of the new record date. 5. Waiver of Notice. Any shareholder, either before, or after any ---------------- shareholders' meeting, may waive in writing notice of the meeting, and his waiver shall be deemed the equivalent of giving notice. By attending a meeting, a shareholder waives his right to object to lack of notice or to a defective notice unless the shareholder objects to the holding of such meeting or the transacting of business at such meeting at the beginning of such meeting, and waives his right to object to consideration at such meeting of a particular matter within the purpose or purposes described in the meeting notice, unless such shareholder objects to considering the matter when it is presented. 6. Fixing of Record Date. The Board of Directors of the Corporation --------------------- may provide that the stock transfer books shall be closed for a stated period, but not to exceed, in any case, fifty (50) days. If the stock transfer books shall be closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders such books shall be closed for at least ten (10) days immediately preceding said meeting. The Board of Directors may fix in advance a date as the record date for the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or shareholders entitled to received payment of any dividend or in order to make a determination of shareholder for any other proper purpose, such date in any case to be not more then seventy (70) days and, in case of a meeting of shareholders, not less than ten (10) days prior to the date on which the particular action requiring such determination of shareholders is to be taken. If no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders or shareholders entitled to receive payment of a dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this Section such determination shall apply to any adjournment thereof. Notwithstanding the foregoing, the record date for determining the shareholders entitled to take action without a meeting or entitled to be given notice of action so taken shall be the date a writing upon which the action is taken is first received by the Corporation. The record date for determining shareholders entitled to demand a special meeting shall be the date of the earliest of the demands pursuant to which the meeting is called. 7. Voting List. The officer or agent having charge of the stock ----------- transfer books for share of the Corporation shall make, at least ten (10) days before each meeting of -3- shareholders, a complete list of the shareholders entitled to vote at such meeting (or any adjournment thereof) arranged in alphabetical order by voting groups and within each voting group by class or series, with the address of and the number of shares held by each, which list, for a period of ten (10) days prior to such meeting, shall be kept on file at the principal office of the Corporation, whether within or without the State of Colorado. A shareholder, his agent or attorney may inspect and copy the list during regular business hours and during the period it is available for inspection, provided, (i) the shareholder has been a shareholder for at least three (3) months immediately preceding the demand or holds at least five percent (5%) of all outstanding shares of any class of shares as the date of the demand, (ii) the demand is made in good faith and for a purpose reasonably related to the demanding shareholder's interest as a shareholder, (iii) the shareholder describes with reasonable particularity the purpose and records the shareholder desires to inspect, (iv) the records are directly connected with the described purpose and (v) the shareholder pays a reasonable charge covering the costs of labor and material for such copies, not to exceed the cost of production and reproduction. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder for any purpose germane to the meeting during the whole time of the meeting. The original stock transfer books shall be prima facie evidence as to who are the shareholders entitled to examine such list or transfer books or to vote at any meeting of shareholders. 8. Proxies. At all meetings of shareholders, a shareholder may ------- vote by proxy by signing an appointment form either personally or by his duly authorized attorney-in-fact. A shareholder may also appoint a proxy by transmitting or authorizing the transmission of a telegram, teletype, or other electronic transmission providing a written statement of the appointment to the proxy, to a proxy solicitor, proxy support service organization or other person duly authorized by the proxy to receive appointments as agent for the proxy, or to the Corporation. The transmitted appointment shall set forth or be transmitted with written evidence from which it can be determined that the shareholder transmitted or authorized the transmission of the appointment. The proxy appointment form shall be filed with the Secretary of the Corporation by or at the time of the meeting. The appointment of a proxy is effective when received by the Corporation and is valid for eleven (11) months unless a different period is expressly provided in the appointment form. Any complete copy, including an electronically transmitted facsimile, of an appointment of a proxy may be substituted for or used in lieu of the original appointment for any purpose for which the original appointment could be used. Revocation of a proxy does not affect the right of the Corporation to accept the proxy's appointment unless (i) the Corporation had notice that the appointment was coupled with an interest and notice that the interest is extinguished is received by the Secretary or other officer or agent authorized to tabulate votes before the proxy exercises his authority under the appointment or (ii) other notice of the revocation of the appointment is received by the Secretary or other officer or agent authorized to tabulate votes before the proxy exercises his authority under the appointment. Other notice of revocation may, in the discretion of the -4- Corporation, be deemed to include the appearance at a shareholders meeting of the shareholder who granted the proxy appointment and his voting in person on any matter subject to a vote at such meeting. The death or incapacity of the shareholder appointing a proxy does not affect the right of the Corporation to accept the proxy's authority unless notice of the death or incapacity is received by the Secretary or other officer or agent authorized to tabulate votes before the proxy exercised his authority under the appointment. The Corporation shall not be required to recognize an appointment made irrevocable if it has received a writing revoking the appointment signed by the shareholder either personally or by the shareholders attorney-in-fact, notwithstanding that the revocation may be a breach of an obligation of the shareholder to another person not to revoke the appointment. A transferee for value of shares subject to any irrevocable appointment may revoke the appointment if the transferee did not know of its existence when he acquired the shares and the irrevocable appointment was not noted on the certificate representing the shares. Subject to the provisions of Article II, Section 10 below or any express limitation on the proxy's authority appearing on the appointment form, a corporation is entitled to accept the proxy's vote or other action as that of the shareholder making the appointment. 9. Voting Rights. Except to the extent that the voting rights of ------------- the shares of any class or series are otherwise established, limited or denied by the Articles of Incorporation and except as otherwise required by law, each outstanding share, regardless of class, shall be entitled to one vote and each fractional share is entitled to a corresponding fractional vote on each matter submitted to a vote at a meeting of shareholders. At each election for directors every shareholder of record entitled to vote at such election shall have the right to vote in person or by proxy the number of votes to which such shareholder is entitled for as many persons as there are directors to be elected and for whose election he has a right to vote. Cumulative voting shall not be permitted for any purpose. Except as permitted by law, no shares held by another corporation, if the majority of shares entitled to vote for the election of directors of such other corporation are held by this Corporation, shall be voted at any meeting or counted in determining the total number of outstanding shares entitled to vote at any given time. Except as provided in the preceding sentence, shares standing in the name of another corporation, domestic or foreign, may be voted by such officer, agent or proxy as the Bylaws of such corporation may prescribe or, in the absence of such provision, as the Board of Directors of such corporation may determine, or in the absence of such determination, by the chief executive officer of such corporation. -5- If shares having voting power stand of record in the names of two or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety or otherwise, or if two or more persons have the same fiduciary relationship respecting the same shares, voting with respect to the shares shall have the following effect: (i) if only one person votes, his act binds all; (ii) if two or more persons vote, but the vote is evenly split on any particular matter, each faction may vote the shares in question proportionately, or any person voting the shares of a beneficiary, if any, may apply to any court of competent jurisdiction in the State of Colorado to appoint an additional person to act with the persons voting the shares. The shares shall then be voted as determined by a majority of such persons and the person appointed by the court. If a tenancy is held in unequal interests, a majority or even split for the purpose of this subsection shall be a majority or even split in interest, except that the effects of voting stated above shall not be applicable if the secretary of the Corporation is given written notice of alternative voting provisions and is furnished with a copy of the instrument or order wherein the alternate voting provisions are stated. Shares held by an administrator, executor, guardian or conservator may be voted by him, either in person or by proxy, without a transfer of such shares into his name. Shares standing in the name of a trustee may be voted by him, either in person or by proxy, but no trustee shall be entitled to vote shares held by him without a transfer of such shares into his name. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into his name if authority so to do be contained in an appropriate order of the court by which such receiver was appointed. 10. Corporation's Acceptance of Votes. If the name signed on a vote, --------------------------------- consent, waiver, proxy appointment, or proxy appointment revocation corresponds to the name of a shareholder, the Corporation, if acting in good faith, is entitled to accept the vote, consent, waiver, proxy appointment, or proxy appointment revocation and to give it effect as the act of the shareholder. If the name signed on a vote, consent, waiver, proxy appointment, or proxy appointment revocation does not correspond to the name of a shareholder, the Corporation, if acting in good faith, is nevertheless entitled to accept the vote, consent, waiver, proxy appointment, or proxy appointment revocation and to give it effect as the act of the shareholder if: (a) The shareholder is an entity and the name signed purports to be that of an officer or agent of the entity; (b) The name signed purports to be that of an administrator, executor, guardian, or conservator representing the shareholder and, if the Corporation requests, evidence of fiduciary status acceptable to the Corporation has been presented with respect to the vote, consent, waiver, proxy appointment or proxy appointment revocation; -6- (c) The name signed purports to be that of a receiver or trustee in bankruptcy of the shareholder and, if the Corporation requests, evidence of this status acceptable to the Corporation has been presented with respect to the vote, consent, waiver, proxy appointment or proxy appointment revocation; (d) The name signed purports to be that of a pledgee, beneficial owner, or attorney-in-fact of the shareholder and, if the Corporation requests, evidence acceptable to the Corporation of the signatory's authority to sign for the shareholders has been presented with respect to the vote, consent, waiver, proxy appointment or proxy appointment revocation; (e) Two or more persons are the shareholder as cotenants or fiduciaries and the name signed purports to be the name of at least one of the cotenants or fiduciaries and the person signing appears to be acting on behalf of all the contenants or fiduciaries; or (f) The acceptance of the vote, consent, waiver, proxy appointment or proxy appointment revocation is otherwise proper under rules established by the Corporation that are not inconsistent with the provisions of this Section 10. The Corporation is entitled to reject a vote, consent, waiver, proxy appointment, or proxy appointment revocation if the secretary or other officer or agent authorized to tabulate votes, acting in good faith, has reasonable basis for doubt about the validity of the signature on it or about the signatory's authority to sign for a shareholder. The Corporation and its officer or agent who accepts or rejects a vote, consent, waiver, proxy appointment or proxy appointment revocation in good faith and in accordance with the standards of this Section 10 are not liable in damages for the consequences of the acceptance or rejection. 11. Quorum and Voting Requirements. Except as otherwise provided ------------------------------ in the Articles of Incorporation, the presence, in person or by proxy, of the holders of a majority of the shares outstanding and entitled to vote shall constitute a quorum at meetings of the shareholders. If a quorum is present, the affirmative vote of a majority of the shares represented at the meeting and entitled to vote on the subject matter shall be the act of the shareholders unless the vote of a greater number or voting by classes is required by the Colorado Business Corporation Act or the Articles of Incorporation. In the event any shareholders withdraw from a duly organized meeting at which a quorum was initially present, the remaining shares represented shall constitute a quorum for the purpose of continuing to do business, and the affirmative vote of the majority of the remaining shares represented at the meeting and entitled to vote on the subject matter shall be the act of the shareholders unless the vote of a greater number or voting by classes is required by the Colorado Business Corporation Act or the Articles of Incorporation. -7- 12. Adjournments. The Chairman of a meeting or the holders of a ------------ majority of the shares entitled to vote, represented in person or by proxy, may adjourn the meeting from time to time, whether or not there is a quorum. No notice of the time and place of adjourned meetings need be given except as required by law. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. Any meeting of the shareholders may adjourn from time to time until its business is completed. 13. Action by Shareholders Without Meeting. Any action required or -------------------------------------- permitted to be taken at a shareholders' meeting may be taken without a meeting if all of the shareholders entitled to vote thereon consent to such action in writing. Action taken under this Section 13 shall be effective as of the date the last writing necessary to effect the action is received by the Corporation, unless all of the writings necessary to effect the action specify a later date as the effective date of the action, in which case such later date shall be the effective date of the action. If the Corporation received writings describing and consenting to the action signed by all of the shareholders entitled to vote with respect to the action, the effective date of the action may be any date that is specified in all of the writings as the effective date of the action. Any such writings may be received by the Corporation by electronically transmitted facsimile or other form of wire or wireless communication providing the Corporation with a complete copy thereof, including a copy of the signature thereto. Action taken under this Section 13 has the same effect as action taken at a meeting of shareholders and may be described as such in any document. Any shareholder who has signed a writing describing and consenting to action taken pursuant to this Section 13 may revoke such consent by a writing signed by the shareholder describing the action and stating that the shareholder's prior consent thereto is revoked, but only if such writing is received by the Corporation before the effectiveness of the action. 14. Meetings by Telecommunication. Any or all of the shareholders may ----------------------------- participate in an annual or special shareholders' meeting by, or the meeting may be conducted through use of, any means of communication by which all persons participating in the meeting may hear each other during the meeting. A shareholder participating in a meeting by this means is deemed to be present in person at the meeting. 15. Notice of Shareholder Business and Nominations. (a) Notice ---------------------------------------------- Required. (1) Nominations of persons for election to the Board of Directors of the Corporation may be made at an annual meeting of shareholders, or at a special meeting of shareholders at which directors are to be elected pursuant to the Corporation's notice of meeting, and the proposal of business to be considered by the shareholders may be made at an annual meeting of shareholders, (A) pursuant to the Corporation's notice of meeting, (B) by or at the direction of the Board of Directors or (C) by any shareholder of the Corporation who was a shareholder of record at the time of the giving of notice provided for in this Section 15(a), who is -8- entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 15(a). (2) For nominations or other business to be properly brought by a shareholder pursuant to clause (C) of paragraph (1) of this Section 15(a) before an annual meeting, or, in the case of nominations, before a special meeting called by the Corporation for the purpose of electing one or more directors to the Board of Directors, the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation and such other business must otherwise be a proper matter for shareholder action. To be timely, a shareholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation, in the case of an annual meeting, not later than the close of business on the 90th day, nor earlier than the close of business on the 120th day, prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date or in the event of a special meeting, notice by the shareholder to be timely must be so delivered not earlier than the close of business on the 120th day prior to such meeting and not later than the close of business on the later of the 90th day prior to such meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. In no event shall the public announcement of an adjournment of any meeting commence a new time period for the giving of a shareholder's notice as described above. Such shareholder's notice shall set forth (A) as to each person whom the shareholder proposes to nominate for election or reelection as a director all information relating to such person that is or would be required to be disclosed in solicitations of proxies for election of directors in an election contest, or is or would be otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (B) as to any other business that the shareholder proposes to bring before an annual meeting, a brief description of the business desired to be brought before the annual meeting (including the complete text of any resolutions intended to be presented thereat), the reasons for conducting such business at the annual meeting and any material interest in such business of such shareholder and the beneficial owner, if any, on whose behalf the proposal is made; and (C) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such shareholder, as they appear on the Corporation's books, and of such beneficial owner and (ii) the class and number of shares of the Corporation which are owned beneficially and of record by such shareholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of paragraph (2) of this Section 15(a) to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Corporation at least 100 days prior to the first anniversary of the preceding year's annual meeting, a shareholder's notice required by this Section 15(a) shall also be considered timely, but only with respect to nominees for any new positions created by -9- such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the Corporation. (b) General. (1) Only such persons who are nominated in accordance with the procedures set forth in this Section 15 shall be eligible to serve as directors, and only such business shall be conducted at a meeting of shareholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 15. Except as otherwise provided by law, the Chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made, or proposed, as the case may be, in accordance with the procedures set forth in this Section 15 and, if any proposed nomination or business is not in compliance with this Section 15, to declare that such defective proposal or nomination shall be disregarded. (2) For purposes of this Section 15, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service, or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this Section 15, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in or contemplated by this Section 15. Nothing in this Section 15 shall be deemed to affect any rights of (i) shareholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or (ii) the holders of any series of Preferred Stock to elect directors under specified circumstances. 16. Other Procedures for Shareholder Meetings. (a) Election of ----------------------------------------- directors at all meetings of the shareholders at which directors are to be elected shall be by ballot. (b) The Board of Directors by resolution shall appoint one or more inspectors, which inspector or inspectors may include individuals who serve the Corporation in other capacities, including, without limitation, as officers, employees, agents or representatives, to act at the meetings of shareholders and make a written report thereof. One or more persons may be designated as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate has been appointed to act or is able to act at a meeting of shareholders, the Chairman of the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before discharging his or her duties, shall take and sign an oath to faithfully execute the duties of inspector with strict impartiality and according to the best or his or her ability. The inspectors shall have the duties prescribed by law. (c) Meetings of shareholders shall be presided over by the Chairman of the Board, if any, or in the absence or at the designation of the Chairman of the Board, by the -10- Chief Executive Officer, or in the absence of the Chief Executive Officer, by the President, or in the absence of the President, by a Vice President, or in the absence of the foregoing persons by a chairman designated by the Board of Directors, or in the absence of such designation, by a chairman chosen at the meeting. The Secretary, or in the absence of the Secretary an Assistant Secretary, shall act as secretary of the meeting, but in the absence of the Secretary and any Assistant Secretary the chairman of the meeting may appoint any person to act as secretary of the meeting. (d) The order of business at each meeting of shareholders shall be as determined by the chairman of the meeting. The chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts and things as are necessary or desirable for the proper conduct of the meeting, including, without limitation, the establishment of procedures for the maintenance of order and safety, limitations on the time allotted to questions or comments on the affairs of the Corporation, restrictions on entry to such meeting after the time prescribed for the commencement thereof and the time of the opening and closing of the voting polls. ARTICLE III Board of Directors ------------------ 1. Number, Qualifications and Term of Office. Except as otherwise ----------------------------------------- provided in the Articles of Incorporation or the Colorado Business Corporation Act, the business and affairs of the Corporation shall be managed by a Board of Directors, consisting of five members. Each director shall be a natural person of the age of eighteen years or older, but does not need to be a resident of the State of Colorado or a shareholder of the Corporation. The Board of Directors, by resolution, may increase or decrease the number of directors from time to time. Except as otherwise provided in these Bylaws, each director shall be elected at each annual meeting of shareholders and shall hold such office until the next annual meeting of shareholders and until his successor shall be elected and shall qualify. No decrease in the number of directors shall have the effect of shortening the term of any incumbent director. 2. Performance of Duties. Pursuant to the provisions of the Colorado --------------------- Business Corporation Act, a director shall perform his duties as a director, including his duties as a member of any committee of the Board upon which he may serve, in good faith, in a manner he reasonably believes to be in the best interests of the Corporation, and with such care as an ordinarily prudent person in a like position would use under similar circumstances. 3. Vacancies. Any director may resign at any time by giving written --------- notice to the chairman of the Board of Directors and to the chief executive officer, president or secretary of the Corporation. A resignation of a director is effective when the notice is received by the Corporation unless the notice specifies a later effective date. Unless otherwise -11- specified in the notice, the acceptance of such resignation by the Corporation shall not be necessary to make it effective. Any vacancy on the Board of Directors may be filled by the affirmative vote of a majority of the remaining Board of Directors even if less than a quorum is remaining in office. A director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office. Any directorship to be filled by reason of an increase in the number of directors shall be filled by the affirmative vote of a majority of the directors then in office or by an election at an annual meeting or special meeting of shareholders called for that purpose. A director elected to fill a position resulting from an increase in the number of directors shall hold office until the next annual meeting of shareholders and until his or her successor has been elected and qualified. 4. Removal. At a meeting of shareholders called expressly for that ------- purpose, the entire Board of Directors or any individual directors may be removed from office without assignment of cause by the vote of the majority of the shares entitled to vote an election of directors. 5. Removal of Directors by Judicial Proceeding. A director may be ------------------------------------------- removed by the District Court of the Colorado county where the principal office is located or if the Corporation has no principal office in the State of Colorado, by the District Court of the Colorado county in which its registered office is located, upon a finding by the District Court that the Director engaged in fraudulent or dishonest conduct or gross abuse of authority or discretion with respect to the Corporation and that removal is in the best interests of the Corporation. The judicial proceeding may be commenced either by the Corporation or by shareholders holding at least ten percent (10%) of the outstanding shares of any class. 6. Compensation. By resolution of the Board of Directors, any ------------ director may be paid any one or more of the following: his expenses, if any, of attendance at meetings; a fixed sum for attendance at each meeting; a stated salary as director; or such other compensation as the Corporation and the director may reasonably agree upon. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. ARTICLE IV Meetings of the Board --------------------- 1. Place of Meetings. The regular or special meetings of the Board ----------------- of Directors or of any committee designated by the Board shall be held at the principal office of the Corporation or at any other place within or without the State of Colorado that a majority of the Board of Directors or of any such committee, as the case may be, may designate from time to time by resolution. 2. Regular Meetings. The Board of Directors shall meet each year ---------------- immediately before or after and at the same place as the annual meeting of the shareholders for the -12- purpose of electing officers and transacting such other business as may come before the meeting. The Board of Directors or any committee designated by the Board may provide, by resolution, for the holding of additional regular meetings without other notice than such resolution. 3. Special Meetings. Special meetings of the Board of Directors or ---------------- of any committee designated by the Board may be called at any time by the chairman of the board, if any, by the chief executive officer, or by three or more members of the Board of Directors or of any such committee, as the case may be, provided that if any such committee consists of less than four members, then a special meeting of such committee may be called by a majority of the members thereof. 4. Notice of Meetings. Notice of the regular meetings of the Board ------------------ of Directors or of any committee designated by the Board need not be given. Except as otherwise provided by these Bylaws or the laws of the State of Colorado, written notice of each special meeting of the Board of Directors or of any such committee setting forth the time and the place of the meeting shall be given to each director not less than one (1) day prior to the date and time fixed for the meeting. Notice of any special meeting may be either personally delivered or mailed to each director at his business address, by telephone (if reasonable under the circumstances) or by notice transmitted by telegraph, telex, electronically transmitted facsimile or other form of wire or wireless communication. If mailed, such notice shall be deemed to be given and to be effective on the earlier of (i) three (3) days after such notice is deposited in the United States mail properly addressed, with postage prepaid, or (ii) the date shown on the return receipt if mailed by registered or certified mail return receipt requested. If notice be given by telephone (if reasonable under the circumstances), telex, electronically transmitted facsimile or other similar form of wire or wireless communication, such notice shall be deemed to be given and to be effective when sent, and with respect to a telegram, such notice shall be deemed to be given and to be effective when the telegram is delivered to the telegraph company. If a director has designated in writing one or more reasonable addresses or facsimile numbers for delivery of notice to him, notice sent by mail, telegraph, telex, electronically transmitted facsimile or other form of wire or wireless communication shall not be deemed to have been given or to be effective unless sent to such addresses or facsimile numbers, as the case may be. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. 5. Waiver of Notice. A director may, in writing, waive notice of any ---------------- special meeting of the Board of Directors or of any committee designated by the Board either before, at, or after the meeting and his waiver shall be deemed the equivalent of giving notice. Such waiver shall be delivered to the Corporation for filing with the corporate records. Attendance or participation of a director at a meeting waives any required notice of that meeting unless at the beginning of the meeting or promptly upon the director's arrival, the director objects to holding the meeting or transacting business at the meeting because of lack -13- of notice or defective notice and does not thereafter vote for or assent to action taken at the meeting. 6. Quorum. At meetings of the Board of Directors or of any committee ------ designated by the Board a majority of the number of directors fixed by or pursuant to these Bylaws, or a majority of the members of any such committee, as the case may be, shall be necessary to constitute a quorum for the transaction of business. If the number of directors is not fixed, then a majority of the number in office immediately before the meeting begins, shall constitute a quorum. If a quorum is present, the act of the majority of directors present shall be the act of the Board of Directors or of any such committee, as the case may be, unless the act of a greater number is required by these Bylaws, the Articles of Incorporation or the Colorado Business Corporation Act. The directors present at a duly organized meeting may, to the extent permitted by law, continue to transact business until adjournment, notwithstanding the withdrawal of enough directors to leave less than a quorum. 7. Presumption of Assent. A director who is present at a meeting of --------------------- the Board of Directors or a committee thereof when action is taken is deemed to have assented to the action taken unless: (a) the director objects at the beginning of such meeting or promptly upon his arrival, to the holding of the meeting or the transacting of business at the meeting and does not thereafter vote for or assent to any action taken at the meeting; (b) the director contemporaneously requests that his dissent or abstention as to any specific action taken be entered in the minutes of such meeting; or (c) the director causes written notice of his dissent or abstention as to any specific action to be received by the chairman of the Board, if any, or the presiding officer of such meeting before its adjournment or to the secretary within 15 minutes after adjournment of such meeting. The right of dissent or abstention as to a specific action taken in a meeting of a Board or a committee thereof is not available to a director who votes in favor of the action taken. 8. Executive Committee; Other Committees. The Board of Directors ------------------------------------- may, by a resolution adopted by a majority of the full Board of Directors, designate one (1) or more of its members to constitute an executive committee and one or more other committees, each of which shall have and may exercise all of the authority of the Board of Directors or such lesser authority as may be set forth in said resolution; except that no such committee shall have the authority of the Board of Directors to: (i) declare dividends or distributions; (ii) approve or recommend to shareholders actions or proposals required by the Colorado Business Corporation Act to be approved by shareholders; (iii) fill vacancies on the Board of Directors or any committee thereof; (iv) amend these Bylaws; (v) approve a plan of merger -14- not requiring shareholder approval; (vi) reduce earned or capital surplus; (vii) authorize or approve the reacquisition of shares unless pursuant to a general formula method specified by the Board of Directors; or (viii) authorize or approve the issuance or sale of, or any contract to issue or sell, shares or designate the terms of a series of a class of shares and except that the Board of Directors, having acted regarding general authorization for the issuance or sale of shares or any contract therefor, may pursuant to a general formula or method specified by the Board of Directors by resolution or by adoption of a stock option or other plan, authorize a committee to fix the terms of any contract for the sale of the shares and to fix the terms upon which such shares may be issued or sold, including, without limitation, the price, the dividend rate, provisions for redemption, sinking fund, conversion, or voting or preferential rights, and provisions for other features of a class of shares or a series of a class of shares, with full power in such committee to adopt any final resolution setting forth all terms thereof and to authorize the statement of the terms of a series for filing with the Secretary of State of the State of Colorado under the Colorado Business Corporation Act. If any such delegation of the authority of the Board of Directors is made as provided herein, all references to the Board of Directors contained in these Bylaws, the Articles of Incorporation, the Colorado Business Corporation Act or any other applicable law or regulation relating to the authority so delegated shall be deemed to refer to such committee. Neither the designation of any such committee, the delegation of authority to such committee, nor any action by such committee pursuant to its authority shall alone constitute compliance by any member of the Board of Directors, not a member of the committee in question, with his responsibility to act in good faith, in a manner he reasonably believes to be in the best interests of the Corporation, and with such care as an ordinarily prudent person in a like position would use under similar circumstances. 9. Informal Action by Directors. Any action required or permitted ---------------------------- be taken at a Board of Directors' meeting or a meeting of any committee thereof may be taken without a meeting if all members thereof consent to such action in writing and such writing is delivered to the secretary of the Corporation for inclusion in the minutes or for filing with the corporate records. Action taken under this Section 9 is effective at the time the last director signs a writing describing the action taken unless the directors establish a different effective date, and unless, before such time, a director has revoked his consent by a writing signed by the director and received by the chief executive officer and secretary. Action taken pursuant to this Section 9 has the same effect as action taken at a meeting of the directors or committee members and may be described as such in any document. 10. Telephonic Meetings. One or more members of the Board of ------------------- Directors or any committee designated by the Board may participate in a regular or special meeting by or conduct the meeting through the use of any means of communication by which all directors participating may hear each other during the meeting. A director participating in a meeting by this means is deemed to be present at the meeting. -15- ARTICLE V Standards of Conduct -------------------- In discharging his duties, a director or officer is entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by (i) one or more officers or employees of the Corporation whom the director or officer reasonably believes to be reliable and competent in the matters presented, (ii) legal counsel, a public accountant, or other person as to matters which the director or officer reasonably believes to be within such persons' professional or expert competence, or (iii) in the case of a director, a committee of the Board of Directors of which the director is not a member if the director reasonably believes the committee merits confidence. A director or officer is not liable as such to the Corporation or its shareholders for any action he takes or omits to take as a director or officer, as the case may be, if, in connection with such action or omission, he performed the duties of the position in compliance with this Article V. ARTICLE VI Officers and Agents ------------------- 1. General. The officers of the Corporation shall consist of a ------- chairman of the Board, a chief executive officer, a president and a secretary and, in the discretion of the Board, a treasurer; in addition, one or more vice presidents, and such other officers, assistant officers, agents and employees that the board of Directors may from time to time deem necessary may be elected by the Board of Directors or be appointed in a manner prescribed by the Board. Two or more offices may be held by the same person. Officers shall hold office until their successors are chosen and have qualified, unless they are sooner removed from office as provided in these Bylaws. All officers of the Corporation shall be natural persons of the age of eighteen years or older. Officers of the Corporation need not be residents of the State of Colorado or directors or shareholders of the Corporation. 2. General Duties. All officers and agents of the Corporation, as -------------- between themselves and the Corporation, shall have such authority and shall perform such duties in the management of the Corporation as may be provided in these Bylaws or as may be determined by resolution of the Board of Directors not inconsistent with these Bylaws. In all cases where the duties of any office, agent or employee are not prescribed by the Bylaws or by the Board of Directors, such officer, agent or employee shall follow the orders and instructions of the chief executive officer. 3. Vacancies. When a vacancy occurs in one of the executive offices --------- by reason of death, resignation or otherwise, it shall however be filed by a resolution of the -16- Board of Directors. The officer so selected shall hold office until his successor is chosen and qualified. 4. Salaries. The salaries of the officers, agents and employees of -------- the Corporation may be fixed by the Board of Directors, or by any committee designated by the Board or, in the absence of contrary resolution or action by the Board, by the chief executive officer. 5. Resignation. An officer may resign at any time by giving written ----------- notice of resignation to the chief executive officer of the Corporation. A resignation of an officer is effective when the notice is received by the Corporation unless the notice specifies a later effective date. If a resignation is made effective at a later date, the Board of Directors may permit the officer to remain in office until the effective date and may fill the pending vacancy before the effective date if the Board of Directors provides that the successor does not take office until the effective date, or the Board of Directors may remove the officer at any time before the effective date and may fill the resulting vacancy. 6. Removal. Any officer, agent or employee of this Corporation may ------- be removed by the Board of Directors or the chief executive officer whenever in its judgment the best interests of the Corporation may be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer, agent or employee shall not, of itself, create contract rights. 7. Chairman of the Board. The chairman of the Board, if any, shall --------------------- preside as chairman at meetings of the shareholders and the Board of Directors. He shall, in addition, have such other duties as the Board may prescribe that he perform. At the request of the chief executive officer, the chairman of the Board may, in the case of the chief executive officer's absence or inability to act, temporarily act in his place. In the case of death of the chief executive officer or in the case of his absence or inability to act without having designated the chairman of the Board to act temporarily in his place, the chairman of the Board shall perform the duties of the chief executive officer, unless the Board of Directors, by resolution, provides otherwise. If the chairman of the Board shall be unable to act in place of the chief executive officer, the president may exercise such powers and perform such duties as provided below. 8. Chief Executive Officer. The chief executive officer shall, ----------------------- subject to the direction and supervision of the Board of Directors, be the most senior officer of the Corporation and shall have primary, general and active control of its affairs and business and general supervision of its officers, agents and employees. He shall have authority to expend Corporation funds, to incur debt on behalf of the Corporation, and to acquire and dispose of property, real and personal, tangible and intangible. In the event the position of chairman of the Board shall not be occupied or the chairman shall be absent or otherwise unable to act, the chief executive officer shall preside at meetings of the shareholders and directors and shall discharge the duties of the presiding officer. He shall, unless otherwise directed by the -17- Board of Directors, attend in person or by substitute appointed by him, or shall execute on behalf of the Corporation written instruments appointing a proxy or proxies to represent the Corporation at all meetings of the shareholders of any other corporation in which the Corporation shall hold any stock. He may, on behalf of the Corporation in person or by substitute or by proxy, execute written waivers of notice and consents with respect to any such meetings. At all such meetings and otherwise, the chief executive officer, in person or by substitute or by proxy as aforesaid, may vote the stock so held by the Corporation and may execute written consents and other instruments with respect to such stock and may exercise any and all rights and powers incident to the ownership of said stock, subject however to the instructions, if any, of the Board of Directors. The chief executive officer shall have custody of the treasurer's bond, if any. 9. President. The president shall assist the chief executive --------- officer, as directed by the Board of Directors or the chief executive officer, and shall perform such duties as may be assigned to him from time to time by the Board of Directors or the chief executive officer. If the office of chief executive officer is vacant, the president shall have the powers and perform the duties of chief executive officer until such vacancy is filled by the Board of Directors. 10. Vice Presidents. Each vice president shall have such powers and --------------- perform such duties as the Board of Directors may from time to time prescribe or as the chief executive officer may from time to time delegate to him. At the request of the chief executive officer, in the case of the president's absence or inability to act, any vice president may temporarily act in the president's place. In the case of the death of the president, or in the case of his absence or inability to act without having designated a vice president or vice presidents to act temporarily in his place, the Board of Directors, by resolution, may designate a vice president or vice presidents, to perform the duties of the president. 11. Secretary. The secretary shall keep or cause to be kept in books, --------- provided for that purpose, the minutes of the meetings of the shareholders, executive committee, if any, and any other committees, and of the Board of Directors; shall see that all notices are duly given in accordance with the provisions of these Bylaws and as required by law; shall be custodian of the records and of the seal of the Corporation and see that the seal is affixed to all documents, the execution of which on behalf of the Corporation under its seal is duly authorized and in accordance with the provisions of these Bylaws; and, in general, shall perform all duties incident to the office of secretary and such other duties as may, from time to time, be assigned to him by the Board of Directors by the president. In the absence of the secretary or his inability to act, the assistant secretaries, if any, shall act with the same powers and shall be subject to the same restrictions as are applicable to the secretary. 12. Treasurer. The treasurer shall have custody of corporate funds --------- and securities. He shall keep full and accurate accounts of receipts and disbursements and shall deposit all corporate monies and other valuable effects in the name and to the credit of the Corporation in the depository or depositories of the Corporation, and shall render an account -18- of his transactions as treasurer and of the financial condition of the Corporation to the chief executive officer, president and/or the Board of Directors upon request. Such power given to the treasurer to deposit and disburse funds shall not, however, preclude any other officer or employee of the Corporation from also depositing and disbursing funds when authorized to do so by the Board of Directors for the faithful performance of the duties of his office. The treasurer shall have such other powers and perform such other duties as may be from time to time prescribed by the Board of Directors or the chief executive officer or such other person appointed from time to time by the chief executive officer. In the absence of the treasurer or his inability to act, the assistant treasurers, if any, shall act with the same authority and shall be subject to the same restrictions as are applicable to the treasurer. 13. Delegation of Duties. Whenever an officer is absent, or -------------------- whenever, for any reason, the Board of Directors may deem it desirable, the Board may delegate the powers and duties of an officer to any other officer or officers or to any director or directors. ARTICLE VII Conflicts of Interests ---------------------- No contract or other transaction between the Corporation and one or more of its directors, or any other corporation, partnership, association or other organization in which one or more of its directors or officers is a director or officer or is financially interested shall be either void or voidable solely for that reason or solely because such director or officer is present at or participates in the meeting of the Board of Directors or a committee thereof that authorizes, approves, or ratifies such contract or transaction or solely because their votes are counted for such purpose if: (A) The material facts of such relationship, interest, contract or transaction are disclosed to or known by the Board of Directors or committee thereof, that in good faith authorizes, approves, or ratifies the contract or transaction by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors are less than a quorum; (B) The material facts of such relationship, interest, contract or transaction are disclosed to or known by the shareholders entitled to vote thereon, and the contract or transaction is specifically authorized, approved or ratified in good faith by vote of the shareholders; or (C) The contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified by the Board of Directors, a committee thereof, or the shareholders. -19- Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or a committee thereof which authorizes, approves or ratifies such contract or transaction. ARTICLE VIII Indemnification of Officers, Directors and Others ------------------------------------------------- 1. Definitions. Unless the context of this Article VIII indicates ----------- otherwise, initially capitalized terms used herein shall have the meanings given in Section 7-109-101 of the Colorado Business Corporation Act. 2. Standards for Indemnification. ----------------------------- A. General. Except as provided in Subsection B(4) below, the ------- Corporation shall indemnify against Liability, to the fullest extent authorized by the Colorado Business Corporation Act, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide a broader indemnification rights than permitted prior thereto), incurred in any Proceeding by an individual made a Party to the Proceeding because he is or was a Director or officer of the Corporation or any subsidiary of the Corporation (an "Indemnitee") if: (a) he conducted himself in good faith; (b) he reasonably believed: (i) in the case of conduct in his Official capacity with the Corporation, that his conduct was in the Corporation's best interests; or (ii) that in all other cases, that his conduct was at least not opposed to the Corporation's best interests; and (c) in the case of any criminal proceeding, he had no reasonable cause to believe his conduct was unlawful. B. Employee Benefit Plans. An Indemnitee's conduct with respect to ---------------------- an employee benefit plan for a purpose he reasonably believed to be in the interests of participants in or beneficiaries of the plan is conduct that satisfies the requirements of clause (b)(ii) of Subsection 2(A) above. An Indemnitee's conduct with respect to an employee benefit plan for a purpose that he did not reasonably believe to be in the interests of the participants in or beneficiaries of the plan shall be deemed not to satisfy the requirements of clause (i) of Subsection 2(A) above. C. Termination of a Proceeding. The termination of any proceeding by --------------------------- judgment, order, settlement, or conviction, or upon a plea of nolo contendere or its equivalent, is not of itself determinative that the individual did not meet the standard of conduct set forth in Subsection 2(A) above. D. Cases in Which Indemnification is Prohibited. The Corporation -------------------------------------------- may not indemnify an Indemnitee under this Section 2 either (a) in connection with a Proceeding by or in the right of the Corporation in which the Indemnitee was adjudged liable to the Corporation; or (b) in connection with any Proceeding charging improper personal benefit to the -20- Indemnitee, whether or not involving action in his Official capacity, in which he was adjudged liable on the basis that personal benefit was improperly received by him. E. Reasonable Expenses Only. Indemnification permitted under this ------------------------ Section B in connection with a Proceeding by or in the right of the Corporation is limited to reasonable expenses incurred in connection with the Proceeding. F. Application of Indemnification Obligations. The indemnity and ------------------------------------------ prepayment obligations of the Corporation and the standards for indemnification set forth in this Article VIII shall apply in all cases, even if the conduct, act or omission in question occurred prior to the date that such indemnity and prepayment obligations were adopted by the Corporation by amendment to these Bylaws. 3. Mandatory Indemnification. Unless limited by these Bylaws, the ------------------------- Corporation shall be required to indemnify an Indemnitee who was wholly successful, on the merits or otherwise, in defense of any Proceeding to which he was a Party, against reasonable expenses incurred by him in connection with the Proceeding. 4. Court Ordered Indemnification. Unless limited by these Bylaws, an ----------------------------- Indemnitee who is or was a Party to a Proceeding may apply for indemnification to the court conducting the Proceeding or to another court of competent jurisdiction. On receipt of an application, the court, after giving any notice the court considers necessary, may order indemnification in the following manner: A. Mandatory Indemnification. If it determines the Indemnitee is ------------------------- entitled to mandatory indemnification under Section 3 above, the court shall order indemnification, in which case the court shall also order the Corporation to pay the Indemnitee's reasonable expenses incurred to obtain court-ordered indemnification. B. Indemnification Where Regardless of Meeting Standard of Conduct. --------------------------------------------------------------- If it determines that the Indemnitee is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, whether or not he met the standard of conduct set forth in Subsection 2(A) of this Article VIII or was adjudged liable in the circumstances described in Subsection 2(D) of this Article, the court may order such indemnification as the court deems proper; except that the indemnification with respect to any Proceeding in which liability shall have been adjudged in the circumstances described in said Subsection 2(D) is limited to reasonable expenses incurred. 5. Indemnification Procedure. ------------------------- A. Authorization of Indemnification Required. The Corporation may ----------------------------------------- not indemnify an Indemnitee under Section B of this Article VIII unless authorized in the specific case after a determination has been made that indemnification of the Indemnitee is per- -21- missible in the circumstances because he has met the standard of conduct set forth in Subsection 2(A). B. Determination by the Board of Directors. The determination --------------------------------------- required to be made by Subsection 5(A) shall be made: (a) by the Corporation's Board of Directors by a majority vote of a quorum, which quorum shall consist of directors not parties to the Proceeding; or (b) if a quorum cannot be obtained, by a majority vote of a committee of the Board designated by the Board, which committee shall consist of two or more directors not parties to the proceeding; except that directors who are parties to the proceeding may participate in the designation of directors for the committee. C. Determination by Body Other Than the Board of Directors. If the ------------------------------------------------------- quorum cannot be obtained or the committee cannot be established under Subsection 5(B), or even if a quorum is obtained or a committee designated if such quorum or committee so directs, the determination required to be made by Subsection 5(A) shall be made: (a) by independent legal counsel selected by a vote of the Corporation's Board of Directors or the committee in the manner specified in clause (a) or (b) of Subsection 5(B) or, if a quorum of the full Board cannot be obtained and a committee cannot be established, by independent legal counsel selected by a majority vote of the full Board; or (b) by the shareholders. D. Standard for Authorizing Indemnification. Authorization of ---------------------------------------- indemnification and evaluation as to reasonableness of expenses shall be made in the same manner as the determination that indemnification is permissible is made by independent legal counsel, authorization of indemnification and evaluation as to reasonableness of expenses shall be made by the body that selected said counsel. 6. Pre-Payment or Reimbursement of Expenses. ---------------------------------------- A. General. The Corporation shall pay for or reimburse the ------- reasonable expenses incurred by an Indemnitee who is a Party to a Proceeding because he is or was a Director or officer of the Corporation or any subsidiary of the Corporation, in advance of the final disposition of the Proceeding if: (a) the Indemnitee furnishes the Corporation a written affirmation of his good- faith belief that he has met the standard of conduct described in clause (a) of Subsection 2(A); (b) the Indemnitee furnishes the Corporation a written undertaking, executed personally or on his behalf, to repay the advance if it is determined that he did not meet such standard of conduct; and (c) a determination is made that the facts then known to those making the determination would not preclude indemnification under this Section F. B. Undertaking. The undertaking required by clause (b) of Subsection ----------- 6(A) shall be an unlimited general obligation of the Indemnitee, but need not be secured and may be accepted without reference to financial ability to make repayment. -22- C. Authorization of Pre-Payments. Determinations and authorizations ----------------------------- of payments under this Section 6 shall be made in the manner specified in Section 5 of this Article VIII. 7. Expenses Incurred as a Witness. The Corporation shall pay or ------------------------------ reimburse Expenses incurred by an Indemnitee in connection with his appearance, or preparation for his appearance, as a witness in a Proceeding or at a deposition related to a Proceeding, at a time when he has not been made a named defendant or respondent in the Proceeding. If the Indemnitee is not an officer or Director of the Company at the time his appearance is required at a Proceeding or deposition related to a Proceeding, the Company shall pay the Indemnitee $500.00 for each day (or part thereof) that the Indemnitee is required to attend such Proceeding or deposition. 8. Employees and Agents. Unless limited by these Bylaws: -------------------- A. Indemnification and Advancement of Expenses. The Corporation may ------------------------------------------- indemnify and advance expenses, pursuant to Sections 2, 3 and 6 of this Article VIII to an employee or agent of the Corporation who is not an Indemnitee, in defense of any Proceeding to which he was a Party by reason of his employment by or relationship with the Corporation, to the same extent as an Indemnitee; and B. Greater Rights of Indemnification Permitted. The Corporation may ------------------------------------------- indemnify and advance expenses to an employee or agent of the Corporation who is not an Indemnitee to a greater extent if consistent with law, these Bylaws, the Articles of Amendment and Restatement of the Corporation, resolution of the shareholders or directors, or in a contract. 9. Insurance. The Corporation may purchase and maintain insurance --------- on behalf of a person who is or was a Director, officer, employee, fiduciary or agent of the Corporation, or any subsidiary of the Corporation, or who, while a Director, officer, employee, fiduciary or agent of the Corporation or any subsidiary of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, fiduciary or agent of any other foreign or domestic corporation or of any partnership, joint venture, trust, other enterprise or employee benefit plan against any liability asserted against or incurred by him in any such capacity or arising out of his Status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article VIII. Any such insurance may be procured from any insurance company designated by the Board of Directors of the Corporation, whether such insurance company is formed under the laws of Colorado or any other jurisdiction of the United States or elsewhere, including any insurance company in which the Corporation has equity or any other interest, through stock ownership or otherwise. 10. Report to Shareholders. Any indemnification of or advance of ---------------------- expenses to a Director in accordance with this Article VIII, if arising out of a proceeding by or on be- -23- half of the Corporation, shall be reported in writing to the shareholders with or before the notice of the next shareholders' meeting. 11. Governing Law. This Article VIII shall be governed by and ------------- construed in accordance with Section 7-109-101 of the Colorado Business Corporation Act, as amended from time to time. 12. Non-Exclusivity of Rights. The rights to indemnification and to ------------------------- the advancement of expenses conferred in this Article VIII shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the Corporation's Articles of Amendment and Restatement, agreement, vote of shareholders or disinterested directors or otherwise. To the extent that the rights to indemnification granted by these Bylaws are inconsistent with those granted by the Corporation's Articles of Amendment and Restatement, the provisions of these Articles of Amendment and Restatement shall govern. ARTICLE IX Share Certificates and the Transfer of Shares --------------------------------------------- 1. Certificates Representing Shares. The shares may but need not be -------------------------------- represented by certificates. Unless the Colorado Business Corporation Act or another law expressly provides otherwise, the fact that the shares are not represented by certificates shall have no effect on the rights and obligations of shareholders of the Corporation. If the shares are represented by certificates, such certificates shall be in a form approved by the Board of Directors, consecutively numbered, and signed in the name of the Corporation by the chairman or vice chairman of the Board of Directors or by the chief executive officer, the president or a vice president and by the treasurer or an assistant treasurer or by the secretary or an assistant secretary, and shall be sealed with the seal of the Corporation or a facsimile thereof. Any or all of the signatures upon a certificate may be facsimiles if the certificate is countersigned by a transfer agent or registered by a registrar other than the Corporation itself or an employee of the Corporation. In case any officer who has signed such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the date of its issue. 2. Shares Without Certificates. Unless the Articles of --------------------------- Incorporation provide otherwise, the Board of Directors of the Corporation may authorize the issuance of any of its classes of series, if any, of shares without certificates. Such authorization shall not affect shares already represented by certificates until they are surrendered to the Corporation. Within a reasonable time after the issuance or transfer of shares without certificates, the Corporation shall send to the shareholder a written statement of the information required by the Colorado Business Corporation Act. 3. Issuance of Shares. Except as provided in the Articles of ------------------ Incorporation, the Board of Directors may authorize the issuance of shares for consideration consisting of -24- any tangible, intangible property or benefit to the Corporation, including cash, promissory notes, services performed and other securities of the Corporation. The Board of Directors shall determine that the consideration received or to be received for the shares to be issued is adequate. Such determination, in the absence of fraud, is conclusive insofar as the adequacy of such consideration relates to whether the shares are validly issued, fully paid and nonassessable. The promissory note of a subscriber or an affiliate of a subscriber for shares shall not constitute consideration for the shares unless the note is negotiable and is secured by collateral other than the shares, having a fair market value at least equal to the principal amount of the note. For the purposes of this Section 3, "promissory note" means a negotiable instrument on which there is an obligation to pay independent of collateral and does not include a nonrecourse note. Unless otherwise expressly provided in the Articles of Incorporation, shares having a par value may be issued for less than the par value. 4. Lost Certificates. The Board of Directors may direct a new ----------------- certificate to be issued in place of a certificate alleged to have been destroyed or lost if the owner makes an affidavit or affirmation of that fact and produces such evidence of loss or destruction as the Board may require. The Board, in its discretion, may as a condition precedent to the issuance of a new certificate require the owner to give the Corporation a bond in such form and amount and with such surety as it may determine as indemnity against any claim that may be made against the Corporation relating to the certificate allegedly destroyed or lost. 5. Transfer of Shares. ------------------ (a) Shares of the Corporation shall only be transferred on the stock transfer books of the Corporation by the holder of record thereof upon the surrender to the Corporation of the share certificates duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer and such documentary stamps as may be required by law. In that event, the surrendered certificates shall be cancelled, new certificates issued to the persons entitled to them, and the transaction recorded on the books of the Corporation. 6. Registered Shareholders. The Corporation shall be entitled to ----------------------- treat the registered holder of any shares of the Corporation as the owner thereof for all purposes, and the Corporation shall not be bound to recognize any equitable or other claim to, or interest in, such shares or rights deriving from such shares on the part of any person other than the registered holder, including without limitation any purchaser, assignee or transferee of such shares or rights deriving from such shares, unless and until such other person becomes the registered holder of such shares, whether or not the Corporation shall have either actual or constructive notice of the claimed interest of such other person. The Board of Directors may adopt by resolution a procedure whereby a shareholder may certify in writing to the Corporation that all or a portion of the shares registered in the name of such shareholder are held for the account of a specified person or persons. Such resolution shall set forth: (i) the classification of shareholder who may certify; (ii) the purpose or purposes for which the certification may be made; (iii) the form of certification -25- and information to be contained therein; (iv) if the certification is with respect to a record date or closing of the stock transfer books within which the certification must be received by the Corporation; and (v) such other provision with respect to the procedure as are deemed necessary or desirable. Upon receipt by the Corporation of a certification complying with the procedure the persons specified in the certification shall be deemed, for the purpose or purposes set forth in the certification, to be the holders of record of the number of shares specified in place of the shareholder making the certification. 7. Stock Ledger. An appropriate stock journal and ledger shall be ------------ kept by the secretary or such registrars or transfer agents as the directors by resolution may appoint in which all transfer agents as the directors by resolution may appoint in which all transactions in the shares of stock of the Corporation shall be recorded. 8. Notice of Restriction on Transfer. Notice of any restriction on --------------------------------- the transfer of the stock of the Corporation shall be placed on each certificate of stock issued. ARTICLE X Insurance --------- By action of the Board of Directors, notwithstanding any interest of the directors in the action, the Corporation may purchase and maintain insurance, in such scope and amounts as the Board of Directors deems appropriate, on behalf of any person who is or was a director, officer, employee, fiduciary or agent of the Corporation, or who, while a director, officer, employee, fiduciary or agent of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee fiduciary or agent of any other foreign or domestic corporation or of any partnership, joint venture, trust, profit or nonprofit unincorporated association, limited liability company or other enterprise or employee benefit plan, against any liability asserted against, or incurred by, him in that capacity or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of the Colorado Business Corporation Act. Any such insurance may be procured from any insurance company designated by the Board of Directors of the Corporation, whether such insurance company is formed under the laws of the State of Colorado or any company in which the Corporation has an equity interest or any other interest, through stock ownership or otherwise. ARTICLE XI Seal and Fiscal Year -------------------- 1. Seal. The Corporation shall have a seal in the form impressed to ---- the left of this paragraph of the Bylaws. -26- 2. Fiscal Year. The fiscal year of the Corporation shall be ----------- determined by the Board of Directors. Said fiscal year may be changed from time to time by the Board of Directors in its discretion. ARTICLE XII Dividends --------- Dividends shall be declared and paid out of the net profits and surplus of the Corporation as often and at such times as the Board of Directors may determine, taking into account reserve, capital and other needs of the Corporation. No unclaimed dividend shall bear interest against the Corporation. Dividends of capital stock may also be declared when, in the judgment of the Board of Directors, it is considered proper and in the interests of the Corporation. ARTICLE XIII Amendments ---------- Subject to repeal or change by action of the shareholders, the Board of Directors may amend, supplement or repeal these Bylaws or adopt new Bylaws, and all such changes shall affect and be binding upon the holders of all shares heretofore as well as hereafter authorized, subscribed for or offered. ARTICLE XIV Miscellaneous ------------- 1. Gender. Whenever required by the context, the singular shall ------ include the plural, the plural the singular, and one gender shall include all genders. 2. Invalid Provision. The invalidity or unenforceability of any ----------------- particular provision of these Bylaws shall not affect the other provisions herein, and these Bylaws shall be construed in all respects as if such invalid or unenforceable provision was omitted. 3. Governing Law. These Bylaws shall be governed and construed in ------------- accordance with the laws of the State of Colorado. I, Gary M. Jacobs, as Secretary of Corporate Express, Inc., hereby certify that the foregoing Amended and Restated Bylaws were adopted by the Board of Directors of the Corporation effective as of ______________, 1999. CORPORATE EXPRESS, INC. -27- By:/s/ Gary M. Jacobs ---------------------------------- Gary M. Jacobs, Secretary -28- EX-10.6 3 EMPLOYMENT AGREEMENT WITH MARK HOFFMAN EXHIBIT 10.6 EMPLOYMENT AGREEMENT This Agreement, effective as of April 28, 1997 ("Effective Date"), is by and between Corporate Express, Inc. (the "Company"), a Colorado corporation, and Mark Hoffman ("Employee"). WHEREAS, the Company wishes to employ Employee and Employee desires to accept such employment under the terms and conditions provided herein. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and promises contained herein, the parties agree as follows: 1. Employment. The Company shall employ Employee as President North ----------- American Operations, and Employee hereby accepts such employment and agrees to perform such duties and undertake such responsibilities as are customarily performed by others holding positions similar to that assigned to Employee in similar businesses, subject to the general and customary supervision of the Company's President and Chief Operating Officer. 2. Full-Time Best Efforts. Employee shall devote his full and ----------------------- exclusive professional time and attention to the performance of his obligations under this Agreement, and will at all times faithfully, industriously and to the best of his ability, experience and talent, perform all of his obligations hereunder. Notwithstanding the foregoing, the Company acknowledges that Employee may serve as an outside director of one company during the term of his employment, so long as such company is pre-approved by the President or CEO of the Company. Employee currently serves as a director of APS Holdings, Inc. ("APS") and the Company agrees that Employee may continue to serve in such capacity. 3. Term of Employment. Employee's term of employment shall continue ------------------- uninterrupted from the date of this Agreement until April 28, 2001. The term of this Agreement may be extended for one or more additional one year terms following the expiration of the initial term upon mutual agreement of the parties. 4. Compensation. Commencing April 28, 1997 and continuing during the ------------- term of this Agreement, the Company shall pay Employee an annual base salary of not less than $260,000 payable at the usual times for the payment of the Company's salaried employees, subject to adjustment as provided herein. Employee's base salary shall be reviewed at least annually and may be increased, but not decreased without Employee's consent, consistent with general salary increases for the Company's executive employees or as appropriate in light of the performance of Employee and the Company. Employee will be eligible for an annual bonus plan that will pay amounts based partially on the Company's earnings per share as compared to a plan approved by the Company's Board of Directors ("Plan") and partially on objectives negotiated with the President or CEO ("Objectives"). If Plan is achieved and the Objectives are obtained, Employee will receive a bonus equal to 50% of Employee's then-current base salary. If Plan is exceeded subject to targets established annually by the Board of Directors and the Objectives are exceeded, the bonus can increase to up to 100% of Employee's then-current base salary. 5. Benefits and Incentive Compensation. ------------------------------------ (a) Employee shall be entitled to receive all benefits (such as medical, dental, disability and life insurance, paid vacation, and retirement plan coverage) as are generally available from time to time to senior executives of the Company. Employee shall be eligible to participate in any bonus, incentive compensation, stock option, performance unit or similar plans or programs as the Company may maintain for compensating senior executives at such level of participation as the Company's Board of Directors may determine in its reasonable discretion based upon Employees's responsibilities and performance. (b) Promptly after approval of this Agreement by the Board of Directors of the Company and after the Effective Date of this Agreement, the Compensation Committee will grant Employee options to purchase 450,000 shares of common stock of the Company at the then current market price per share on the date of grant, which options will vest over 4 years in equal annual installments (25% per year), with the first installment vesting on the date that Employee and his family relocate their residence to the Denver area (the "Relocation Date"), or April 28, 1998, whichever occurs later. In addition, the Board will grant to Employee options to purchase 300,000 shares of common stock on similar terms and conditions as the performance vesting options granted at or about the same time to other executive officers. 6. Signing Bonus and Relocation Expenses. -------------------------------------- Upon approval of this Agreement by the Board of Directors, and on or immediately after the Effective Date of this Agreement, Employee shall receive a $100,000 signing bonus. So long as Employee relocates to Colorado by June 30, 1998, the Company will pay Employee an additional $100,000 which may be applied towards relocation expenses. The Company shall have no further responsibility to reimburse Employee for relocation costs. In addition, during the period between the Effective Date and the Relocation Date (but no later than June 30, 1998), the Company will reimburse Employee for the rent (up to $2,000 per month) paid by Employee for a furnished apartment, and reimburse Employee for travel costs related to three trips each month to his residence in Houston, Texas. Employee will provide adequate documentation for all items to be reimbursed by the Company. 7. Termination. ------------ (a) The Company may terminate this Agreement at any time for Cause effective immediately upon written notice to Employee. Such notice shall specify that a termination is being made for Cause and shall state the basis therefor. In such event, Employee shall accrue no additional rights or benefits pursuant to the terms of this Agreement from the date of such termination. For purposes of this Agreement, termination for "Cause" shall be defined as termination because of: 2 (i) The willful and continued failure by Employee to substantially perform or the gross negligence in the performance of his duties hereunder for a period of fifteen days after the President or CEO had made a written demand for performance which specifically identifies the manner in which the Board of Directors believes that Employee has not substantially performed his duties. (ii) The commission by Employee of a willful act of dishonesty or misconduct which is demonstrably injurious to the Company. (iii) A conviction or a plea of guilty or nolo contendere in ---- ---------- connection with fraud or any crime that constitutes a felony in the jurisdiction involved. (iv) The commission by Employee of repeated acts of alcohol abuse which are demonstrably injurious to the Company or the knowing use of any illegal substances. A termination for Cause must be made, if at all, within sixty days after the Company learns of the latest such event which entitles the Company to terminate Employee's employment hereunder. (b) Employee may terminate this Agreement upon fifteen days' prior written notice to the Company if the Company has breached any material term or condition of this Agreement without the express previous consent of Employee, and such breach is not cured within the fifteen day period following receipt of written notice of such breach by the Board of Directors of the Company. Employee's notice shall specify the manner in which Employee believes that the Company has breached this Agreement. A breach of this Agreement shall include a change of Employee's position within the Company if the new position is not a comparable position. A position shall be deemed to be "comparable" if it is for the performance of similar duties, at an equal or greater rate of compensation, at a location within fifty miles of Employee's work location, all as determined at the time of the change in position. (c) This Agreement shall terminate immediately upon the death of Employee or if Employee is unable to perform his duties hereunder by reason of illness, injury or incapacity for ninety consecutive days (during which time Employee shall continue to be compensated as provided herein). In either such event, Employee or his personal representative, beneficiaries or heirs shall be entitled to receive any benefits provided under any benefit or similar plan or policy adopted by the Company and applicable to Employee, but Employee shall accrue no additional rights or benefits pursuant to the terms of this Agreement from the date of such termination. 8. Termination Benefits. If Employee's employment shall be --------------------- terminated by the Company while this Agreement is in effect for any reason other than for Cause or upon the death or disability of Employee, or if Employee voluntarily terminates employment following a 3 breach of this Agreement by the Company which is not cured within the requisite period, then the Company shall pay Employee a termination benefit as follows: (a) The Company shall pay up to an amount equal to Employee's monthly base salary, using the rate of base salary in effect immediately prior to Employee's termination of employment, times twelve. Payments shall (i) commence upon termination, (ii) be made at the same rate using the same payment schedule as in effect immediately prior to such termination and (iii) terminate upon the earlier to occur of (a) the date Employee commences paid employment or, (b) until the termination benefit set forth in the preceding sentence has been paid in full. Employee will also receive his "Earned Bonus" at such time as bonuses are paid to other employees of the Company. "Earned Bonus" shall be calculated based upon the number of full months during the then current bonus period that Employee was employed by the Company divided by the number of months in said bonus period. (b) The Company shall continue to provide medical, dental and life insurance coverage to Employee at the same levels of coverage as in effect immediately prior to such date for twelve months. (c) One-fourth of any unvested stock options granted to Employee will immediately vest and shall be exercisable as provided in the stock option agreement evidencing such grant. (d) Notwithstanding anything in this Section 7 to the contrary, no less than 60 days after the date of a termination causing payment of termination benefits, the Company shall calculate the amount of any "parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"). If the Company determines that any part of the termination benefit provided pursuant to this Section 7 would not be deductible due to the provision of Section 280G of the Code, the termination benefit shall be reduced to the extent, but only to the extent necessary so that the amount of the termination benefit provided pursuant to this Section 7 will be deductible by the Company. The reduction shall be made in the last payment to be made to Employee hereunder and then, if necessary to the prior payments in reverse chronological order. 9. Confidentiality and Non-Competition. ------------------------------------ (a) During the course of his employment, Employee will be working with and will have unlimited access to the most sensitive confidential information and trade secrets of the Company and its subsidiaries (each a "Subsidiary"). Employee shall not, while employed by the Company or any Subsidiary, or at any time thereafter, without the prior written consent of the Company (i) disclose any trade secrets or confidential information of the Company or any Subsidiary (including but not limited to pricing information, customer lists, supply information, internal business procedures, management information systems and techniques, market studies, expansion plans and similar non-public information relating to the internal operations, business policies or practices of the Company or any Subsidiary) to any third party, or (ii) use or permit 4 the use of any such trade secrets or confidential information in any way to compete (directly or indirectly) with the Company or any Subsidiary or in any other manner adverse to the Company or any Subsidiary. Upon request from the Company, Employee shall promptly return all records, notes, data, memoranda and other information and documents, and copies thereof, which contain or may contain any such trade secrets and/or confidential information, and shall confirm in writing to the Company that all such materials have been returned. (b) Employee shall not, while employed by the Company or any Subsidiary or for a period of three years following the termination of Employee's employment (i) own any interest in, accept employment with, serve as an advisor, consultant, officer, director, agent or in any similar capacity to, or accept compensation (in any form) from, any person, firm or entity (including any new business started by Employee - alone or with others) engaged in any Competitive Business (as hereinafter defined), (ii) contact or solicit any individual or entity that was a customer of the Company or any Subsidiary during the period of Employee's employment for the purpose of diverting any existing or future business of such customers to a competing source or (iii) contact or solicit any employees of the Company (directly or indirectly) for the purpose of causing, inviting or encouraging any such employee to alter or terminate his or her employment relationship with the Company. Notwithstanding anything herein to the contrary, Employee shall be entitled to own as a passive investor no more than 1% of the capital stock of a company required to make public disclosure filings pursuant to the Securities Exchange Act of 1934 without being in violation of this paragraph (b). (c) For purposes of this paragraph, a "Competitive Business" means the sale of office products, furnishings, desktop software, equipment and/or related services, provided, however, that a business shall not be deemed to be a Competitive Business unless at least 10% of the gross revenues of such business are derived from the sale of office products, furnishings, desktop software, equipment and/or related services. For purposes of the foregoing 10% test, the gross revenues of the business shall be determined at the subsidiary, divisional or similar level according to the organizational structure of the entity in question. (d) If any court shall determine that the duration or geographical scope of any restriction contained in this Section 8 is unenforceable, it is the intention of the parties that the provisions set forth herein shall not be terminated but shall be deemed restricted, amended, and/or reformed to the extent necessary to render it valid and enforceable, provided that such restriction, amendment and/or reformation shall only be applicable to the enforcement of the provisions hereof within the jurisdiction of the court which made such determination. (e) Employee acknowledges and agrees that the provisions of this Section 8 are a reasonable and necessary protection of the immediate and substantial interests of the Company and its Subsidiaries, that any violation of these restrictions would cause substantial injury to the Company and/or its Subsidiaries, and that the Company would not have entered into this Agreement with Employee without the additional consideration offered by Employee in binding himself to the provisions of this Section 8. In the event of a breach or threatened breach 5 by Employee of any provision of this Section 8, the Company shall be entitled to apply to any court of competent jurisdiction for a temporary and/or permanent injunction restraining Employee from such breach or threatened breach; provided, however, that nothing herein contained shall be construed to preclude the Company from pursuing any other available remedy for such breach or threatened breach in addition to, or in lieu of, such injunctive relief. 10. Outside Directorship and Officership. Employee will resign from ------------------------------------- all of his director and officer positions (other than the one outside director position with APS) before April 28, 1997 so as of April 28, 1997 Employee will hold no such position (except for with APS) in any company not affiliated with the Company. 11. Inventions and Patents. Employee agrees that all reasonably ----------------------- patentable inventions, innovations or improvements in the Company's products or method of conducting its business (including new contributions, improvements, ideas and discoveries, whether patentable or not) conceived or made by him while he is employed by the Company belong to the Company, but may be used by Employee at any time without compensation to the Company (unless the covenant not to compete set forth in Section 8 hereof is in force). Employee will promptly disclose such inventions, innovations or improvements to the officers of the Company. 12. Arbitration. In the event of any dispute between Employee and ------------ the Company under or related to the terms of this Agreement, the parties hereto agree to submit such dispute to final and binding arbitration in Denver, Colorado pursuant to the Commercial Arbitration Rules of the American Arbitration Association. The decision of the arbitrator shall be final and binding on both parties, provided, however, that in arriving at a decision, the arbitrator shall find in favor of one party or the other, and shall not in rendering his decision fashion a compromise or otherwise order an outcome different than that proposed by one of the parties. Such arbitration proceedings shall be completed not later than 90 days following submission, except and only to the extent that such delay is attributable to the unavoidable delay of the arbitrator. The prevailing party in such arbitration shall be entitled to recover all reasonable costs incurred in connection therewith, including reasonable attorney's fees. 13. Miscellaneous. -------------- (a) For purposes of this Agreement, notices and other communications provided for herein shall be in writing and shall be deemed to have been duly given when delivered in person or by first class United States mail, postage prepaid. Notices to the Company shall be given to the Company's Secretary and Chairman of the Board, addressed to the Company's corporate headquarters. Notices to Employee shall be addressed to Employee's most recent address as set forth in the personnel records of the Company. Notices shall be effective upon receipt. Either party shall be entitled to change the address at which notice is to be given by providing notice to the other party of such change in the manner provided herein. 6 (b) This Agreement sets forth the entire agreement of the parties with respect to the subject matter hereof, and supersedes all prior agreements, whether written or oral. This Agreement may be amended only by a writing signed by both parties hereto. (c) This Agreement shall be binding upon, and inure to the benefit of the parties, their respective heirs, successors, personal representatives and assigns. (d) No waiver of any provision of this Agreement shall be valid until it is in writing and signed by the person or party against whom it is charged. (e) The invalidity or unenforceability of any provision of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed as if such invalid or unenforceable provision were omitted. (f) This Agreement shall be subject to and governed by the laws of the State of Colorado. (g) This Agreement is subject to approval by the Company's Board of Directors (the "Board") after the results of a reference and background check of Employee's history. Unless otherwise extended by the written consent of the Company, if this Agreement is not approved by the Board prior to March 1, 1997, the Company may terminate this Agreement without penalty or expense by giving written notice of such termination to Employee. In the event the Board approves this Agreement subject to specified changes or modifications, Employee may either consent to such changes or terminate this Agreement by written notice of such termination to the Company, which must be received within 7 days of Board approval. No termination by reason of the failure to obtain Board approval or the refusal of Employee to consent to changes required by the Board as a condition of such approval shall entitle Employee to receive the termination benefits set forth in paragraph 7 hereof. CORPORATE EXPRESS, INC. By: Robert King _________________________________ Title: _______________________________ EMPLOYEE Mark Hoffman ____________________________________ S:\LEGAL\EMPLOYME\HOFFMAN. 7 EX-10.11 4 BOARD OF DIRECTORS ARRANGEMENT EXHIBIT 10.11 In connection with inducing Jirka Rysavy to accept the position of Chairman Emeritus, senior member of Corporate Express, Inc. Board of Directors, the Board offers that: Rysavy, as Chairman Emeritus, shall continue to be an employee with a salary of half of his current level and with all of the same benefits as any executive officer (including retaining his existing office) for at least three (3) years. If for any reason any changes occur, Rysavy shall have until September 30, 2001 to exercise any of his options. Such options shall be treated the same as any options of an employee or an executive officer of Corporate Express, Inc. The Board also agrees that all communication with third parties, including the press and investment community, regarding responsibilities of Jirka Rysavy shall be described in the press release dated February 8, 1999, entitled "Rysavy Assumes Full-Time CEO Position at Gaiam." If additional communication is necessary regarding Jirka Rysavy's responsibilities, Jirka Rysavy must agree to said communication in advance. The Board also confirmed that all Rysavy's unvested options will be vested as of today (per Board agreement reached in September 1998). Dated January 28, 1999. _____________________ Mo Siegel For the Corporate Express, Inc. Board of Directors _____________________ Jirka Rysavy EX-10.12 5 AGREEMENT AMONG THE COMPANY, MARTIN FRANKLIN EXHIBIT 10.12 March 30, 1999 The Board of Directors Corporate Express, Inc. 1 Environmental Way Broomfield, CO 80021 To the Board of Directors: In consideration for, and as a pre-condition to, the appointment of Martin E. Franklin ("Franklin") as a director of Corporate Express, Inc., a Colorado corporation (the "Company"), Franklin, on behalf of himself and those parties for whom he is acting, including the parties filing a Schedule 13D with respect to the Company dated December 31, 1998, as subsequently amended, as set forth in Attachment A hereto (each, a "Filer"), hereby reiterates that he intends to serve as a director for the benefit of all the Company's shareholders, and that, barring any material change in Franklin's personal circumstances, or any significant impairment of Franklin's relationship with the other directors of the Company, Franklin intends to serve as a director for at least six months, and Franklin hereby agrees, subject to the provisions of the sentence next following, that for a period (the "Standstill Period") beginning on the date of this agreement, through and including the earlier of (i) the effective date of Franklin's resignation as a director of the Company and (ii) September 30, 1999, Franklin shall not: (a) make, or in any way participate, directly or indirectly, in any "solicitation" of "proxies" to vote (as such terms are used in the proxy rules of the SEC) securities of the Company, or seek to advise or influence any person or entity with respect to any voting of any securities of the Company, or initiate or propose any shareholder proposals for submission to a vote of shareholders, whether by action at a shareholder meeting or by written consent, with respect to the Company; (b) acquire or seek to acquire, by purchase or otherwise, ownership (including, but not limited to, beneficial ownership) of (i) 10% or more of any class of securities, including without limitation the common stock, issued by the Company, or direct or indirect rights (including convertible securities) or options to acquire such ownership, Board of Directors Corporate Express, Inc. March 30,1999 Page 2 or (ii) any of the assets or businesses of the Company, or direct or indirect rights or options to acquire such ownership; (c) make any public announcement with respect to or make or submit a proposal or offer (with or without conditions) for the securities or assets of the Company or any extraordinary transaction involving the Company or any of its subsidiaries; (d) submit or effect any filing or application, or seek to obtain any permit, consent or agreement, approval or other action, required by or from any regulatory agency with respect to an acquisition of the Company or any of its securities or assets; (e) otherwise act alone or in concert with others to seek to control the management, board of directors or policies of the Company; (f) institute, prosecute or pursue against the Company or any of its officers, directors, representatives, trustees, employees, attorneys, advisors, agents, affiliates or associates, (i) any claim with respect to any action hereafter duly approved by the Company's directors, or (ii) any claim on behalf of a class of the Company's security holders; (g) make any filing under the Exchange Act, including, without limitation, under Section 13(d) thereof, disclosing any intention, plan or arrangement inconsistent with the foregoing, form, join or in any way participate in a group to take any action otherwise prohibited by the terms of this agreement, or make any public announcement with respect to any of the foregoing; or (h) propose any of the foregoing unless and until such proposal is specifically invited by the Company. The Company agrees that the prohibitions of the preceding sentence shall not apply to any persons or entities that are not under control of Franklin or under the control of any Filer and are engaged in the regular business of trading in publicly-traded securities, and that this agreement shall not restrict or limit Franklin's ability to resign his position as a director of the Company during the Standstill Period at any time consistent with the Board of Directors Corporate Express, Inc. March 30,1999 Page 3 representations set forth in the first paragraph of this letter, upon delivery of two business days' written notice to the Company. Franklin acknowledges that the Colorado Business Corporation Act requires that he discharge his duties as a director in good faith, with the care an ordinarily prudent person in like position would exercise under similar circumstances, in a manner he reasonably believes to be in the best interests of all the shareholders of the Company, and he represents that it is his intention to act in accord with the foregoing principles. Franklin agrees not to use any proprietary, significant and material non- public information regarding the Company or its business activities, plans and projections other than in connection with the performance of his duties as a director of the Company and to hold all such information in confidence. Franklin represents to the Company that (1) to his knowledge, he is a member of a "group" (as such term is used in the rules of the SEC) that includes only the parties listed in Attachment A hereto, who hold in the aggregate 8,718,800 shares of the Company's common stock, and (2) he will make all filings required by Section 13(d) of the Exchange Act in a timely and accurate manner, including with respect to any change in the composition of the group and any plans or proposals reportable under Item 4 of Schedule 13D. The obligations in this paragraph shall survive the Standstill Period and any termination of this agreement. Upon the expiration of the Standstill Period, this agreement and any obligations of Franklin and the Filers related hereto shall cease to have any force or effect, except as otherwise specifically stated herein. This agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Colorado, without regard to the principles of conflict of laws. Remedies available to the Company if any provision of this agreement is not performed in accordance with its terms or is otherwise breached will include, but not be limited to, specific performance of any provision of this agreement. Board of Directors Corporate Express, Inc. March 30,1999 Page 4 If the foregoing correctly reflects your understanding of these matters, please indicate your agreement to the terms of this letter by signing and returning the enclosed copy of this letter. Very truly yours, MARTIN E. FRANKLIN ________________________________ IAN G.H. ASHKEN ________________________________ MARLIN PARTNERS I, L.P. By: MARLIN MANAGEMENT, L.L.C. By:_____________________________ Name: Title: MARLIN MANAGEMENT, L.L.C. By:_____________________________ Name: Title: Board of Directors Corporate Express, Inc. March 30,1999 Page 5 PETER A. HOCHFELDER _________________________________ ROBERT J. SOBEL _________________________________ MITCHELL A. KUFLIK _________________________________ BRAHMAN PARTNERS II, L.P. By: BRAHMAN MANAGEMENT, L.L.C. By:______________________________ Name: Title: BRAHMAN INSTITUTIONAL PARTNERS, L.P. By: BRAHMAN MANAGEMENT, L.L.C. By:______________________________ Name: Title: BY PARTNERS, L.P. Board of Directors Corporate Express, Inc. March 30,1999 Page 6 By: BRAHMAN MANAGEMENT, L.L.C. By:______________________________ Name: Title: BRAHMAN MANAGEMENT, L.L.C. By:______________________________ Name: Title: BRAHMAN CAPITAL CORP. By:______________________________ Name: Title: Board of Directors Corporate Express, Inc. March 30,1999 Page 7 Acknowledged and Agreed: CORPORATE EXPRESS, INC. By:______________________________ Name: Title: EX-21.1 6 LIST OF SUBSIDIARIES EXHIBIT 21.1 SUBSIDIARIES USDS Canada, Ltd. 3152740 Canada, Inc. Swift Messenger Service Canada, Ltd. SCI Siman CEX Holdings, Inc. (Colorado) ASAP Software Express, Inc. (Illinois) Corporate Express Call Center Services, Inc. (Delaware) Sofco Inc. (New York) SQP, Inc. (New York) S&Q Property, Inc. (New York) Hermann Marketing, Inc. (Missouri) Data Documents Incorporated (Delaware) Corporate Express Document & Print Management, Inc. (Nebraska) Moore Labels, Inc. (Kansas) Distribution Resources Co. (Colorado) Corporate Express Real Estate, Inc. (Delaware) Corporate Express Office Products, Inc.. (Delaware) Corporate Express of Texas, Inc. (Delaware) Federal Sales Service, Inc. (Virginia) Virginia Impressions Products Co., Inc. (Virginia) MicroMagnetic Systems, Inc. (Virginia) Corporate Express Delivery Systems, Inc. (Delaware) American Delivery System, Inc. (Michigan) Corporate Express Distribution Services, Inc. (Michigan) New Delaware Delivery, Inc. (Delaware) Red Arrow Corporation (Missouri) RAC, Inc. Red Arrow Spotting Services, Inc. Red Arrow Trucking Co. Red Arrow Warehousing, Co. Rush Trucking, Inc. Corporate Express Delivery Systems - Intermountain, Inc. (Delaware) Corporate Express Delivery Leasing - Intermountain, Inc. (Delaware) Corporate Express Delivery Systems - Mid-Atlantic, Inc. (Delaware) Corporate Express Delivery Leasing - Mid-Atlantic, Inc. (Delaware) Corporate Express Delivery Systems - Mid-West, Inc. (Delaware) Corporate Express Delivery Leasing - Mid-West, Inc. (Delaware) Corporate Express Delivery Systems - New England, Inc. (Delaware) Corporate Express Delivery Leasing - New England, Inc. (Delaware) Corporate Express Delivery Systems - Northeast, Inc. (Delaware) Corporate Express Delivery Leasing - Northeast, Inc. (Delaware) Corporate Express Delivery Leasing - Southeast, Inc. (Delaware) Air Courier Dispatch of New Jersey, Inc. (Minnesota) Sunbelt Courier, Inc. (Arkansas) Tricor America, Inc. (California) Corporate Express Delivery Systems - Southwest, Inc. (Delaware) Corporate Express Delivery Leasing - Southwest, Inc. (Delaware) Corporate Express Delivery Systems - West Coast, Inc. (Delaware) Corporate Express Delivery Systems A.1 Division, Inc. Corporate Express Delivery Leasing - West Coast, Inc. (Delaware) Midnite Express International Couriers Limited Midnight Express International Courier, Inc. Midnite Express International (Australia) Pty. Limited Corporate Express Delivery Systems - A.V Division, Inc. Corporate Express Delivery Systems - Expedited, Inc. (Delaware) Corporate Express Delivery Leasing - Expedited, Inc. (Delaware) Corporate Express Delivery Administration, Inc. (Nevada) Corporate Express Delivery Management Business Trust (Delaware Business Trust) Corporate Express (Holdings) Limited Corporate Express (UK) Ltd Network (Office Supplies) Ltd Unistat (Office Supplies Systems) Limited The Harrison Terry Group Limited C.C.S. (Northern) Limited Corporate Express Canada, Ltd. Centura Office Products, Inc. Boulevard Produits de Bureau Inc. O'Neil Stationery & Office Equipment, Ltd. Corporate Express South Pacific Pty Ltd. Corporate Express Holdings Australia Pty Limited Corporate Express Australia Limited Ballment Manufacturing Co. Pty Limited Corporate Express Australia (NSW) Pty Limited Corporate Express Australia (Vic) Pty Limited Corporate Express Australia (SA) Pty Limited Revson Australia Pty Limited Boulton Robinson Office Supplies Pty Ltd Corporate Express Australia (ACT) Pty Limited Corporate Express New Zealand Limited Corporate Express Australia (NT) Pty Limited Corporate Express (Deutschland) GmbH Reese GmbH & Co. BIT Messerknecht GmbH Messerknecht BuroKommunication GmbH Buro-Partner Eugen Haas EDV Dienst Schmidt Nimsa, SA (France) Trivial Information, SA (France) Cession 26e Avenue (France) Corporate Express S.P.A. - Kanzend Papier Burobedorf Panatronic Slattery Office Supplies T & D Norton Corporate Express Holding V.V. Dingler Kantoorcentium B.V. Corporate Express Europe Holding AG Glenvara Design Print Ltd. Glen C Office Supplies Ltd. EX-23.1 7 CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Corporate Express, Inc. on Form S-8 (File No. 33-86574), Form S-8 (File No. 333- 16457), Form S-8 (File No. 333-02880), Form S-8 (File No. 333-02882), Form S-8 (File No. 33-94464), Form S-8 (File No. 333-31755), Form S-8 (File No. 333- 35233), Form S-8 (File No. 333-43193), Form S-8 (File No. 333-44811), Form S-4 (File No. 333-07909), and Form S-3 (File No. 333-12451) of our report dated March 19, 1999, on our audits of the consolidated financial statements and financial statement schedule of Corporate Express, Inc. as of January 30, 1999 and January 31, 1998, and for the year ended January 30, 1999, the eleven-month period ended January 31, 1998 and the year ended March 1, 1997 which report is included in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP Denver, Colorado March 19, 1999 EX-27.1 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-K OF CORPORATE EXPRESS, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 YEAR 11-MOS JAN-30-1999 JAN-31-1998 FEB-01-1998 MAR-02-1997 JAN-30-1999 JAN-31-1998 14,831 32,812 0 0 601,569 518,096 11,772 11,357 285,754 251,108 1,090,393 958,329 325,027 296,580 100,265 71,380 2,415,590 2,266,991 651,325 492,352 1,319,938 842,206 0 0 0 0 28 28 444,299 932,405 2,415,590 2,266,991 3,752,591 2,837,111 3,752,591 2,837,111 2,879,015 2,155,289 780,870 577,033 0 0 0 0 75,302 34,014 23,616 71,239 19,451 31,509 1,943 41,049 (69,652) 3,355 (5,581) 0 0 0 (73,290) 44,404 ($0.65) $0.34 ($0.64) $0.32
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