Notes to Consolidated Financial StatementsNote 1:
Operations and Summary of Significant Accounting PoliciesNature 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 that operate from multiple locations and can benefit from selecting suppliers who can service them in many of their locations. In January 1999, the Company adopted a plan to discontinue its same-day 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 end 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 that 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.
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 that 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:
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 to 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 affected 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. 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 IncomeComprehensive 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:
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 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").