UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 10 - Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________
Commission File Number: 1-5057
BOISE CASCADE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 82-0100960
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1111 West Jefferson Street
P.O. Box 50
Boise, Idaho 83728-0001
(Address of principal executive offices) (Zip Code)
(208) 384-6161
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding
Class as of October 31, 1998
Common stock, $2.50 par value 56,333,979
PART I - FINANCIAL INFORMATION
STATEMENTS OF INCOME (LOSS)
BOISE CASCADE CORPORATION AND SUBSIDIARIES
(expressed in thousands, except per share data)
Item 1. Financial Statements
Three Months Ended
September 30
________________________
1998 1997
__________ __________
(unaudited)
Sales $1,597,990 $1,442,340
__________ __________
Costs and expenses
Materials, labor, and other operating expenses 1,268,120 1,159,640
Depreciation, amortization, and cost of company
timber harvested 69,930 65,920
Selling and distribution expenses 164,860 145,390
General and administrative expenses 37,390 36,650
Other (income) expense, net (51,860) 350
__________ __________
1,488,440 1,407,950
__________ __________
Equity in net income (loss) of affiliates 1,630 (1,780)
__________ __________
Income from operations 111,180 32,610
__________ __________
Interest expense (40,970) (38,810)
Interest income 620 1,530
Foreign exchange loss (210) (70)
__________ __________
(40,560) (37,350)
__________ __________
Income (loss) before income taxes, minority interest,
and cumulative effect of accounting change 70,620 (4,740)
Income tax (provision) benefit (21,430) 890
__________ __________
Income (loss) before minority interest and
cumulative effect of accounting change 49,190 (3,850)
Minority interest, net of income tax (2,140) (2,350)
__________ __________
Income (loss) before cumulative effect of
accounting change 47,050 (6,200)
Cumulative effect of accounting change, net
of income tax - -
__________ __________
Net income (loss) $ 47,050 $ (6,200)
========== ==========
Net income (loss) per common share
Basic $ .77 $ (.23)
=========== ===========
Diluted $ .72 $ (.23)
=========== ===========
SEGMENT INFORMATION
BOISE CASCADE CORPORATION AND SUBSIDIARIES
(expressed in thousands)
Three Months Ended
September 30
_______________________
1998 1997
_________ __________
(unaudited)
Segment sales
Office products $ 760,437 $ 679,877
Building products 494,434 454,140
Paper and paper products 435,594 406,062
Intersegment eliminations and other (92,475) (97,739)
__________ __________
$1,597,990 $1,442,340
========== ==========
Segment operating income (loss)
Office products $ 29,283 $ 29,731
Building products 81,313 13,772
Paper and paper products 8,214 4,860
Equity in net income (loss) of affiliates 1,630 (1,780)
Corporate and other (9,260) (13,973)
__________ __________
Income from operations $ 111,180 $ 32,610
========== ==========
The accompanying notes are an integral part of these Financial Statements.
PART I - FINANCIAL INFORMATION
STATEMENTS OF INCOME (LOSS)
BOISE CASCADE CORPORATION AND SUBSIDIARIES
(expressed in thousands, except per share data)
Item 1. Financial Statements
Nine Months Ended
September 30
________________________
1998 1997
__________ __________
(unaudited)
Sales $4,625,940 $4,048,960
__________ __________
Costs and expenses
Materials, labor, and other operating expenses 3,661,070 3,307,040
Depreciation, amortization, and cost of company
timber harvested 211,320 185,790
Selling and distribution expenses 486,790 404,640
General and administrative expenses 111,520 102,260
Other (income) expense, net 29,650 820
__________ __________
4,500,350 4,000,550
__________ __________
Equity in net loss of affiliates (3,720) (3,360)
__________ __________
Income from operations 121,870 45,050
__________ __________
Interest expense (121,930) (98,190)
Interest income 1,790 5,360
Foreign exchange loss (300) (120)
__________ __________
(120,440) (92,950)
__________ __________
Income (loss) before income taxes, minority
interest, and cumulative effect of accounting
change 1,430 (47,900)
Income tax (provision) benefit (11,050) 17,720
__________ __________
Loss before minority interest and cumulative
effect of accounting change (9,620) (30,180)
Minority interest, net of income tax (7,730) (7,460)
__________ __________
Loss before cumulative effect of accounting
change (17,350) (37,640)
Cumulative effect of accounting change, net
of income tax (8,590) -
__________ __________
Net loss $ (25,940) $ (37,640)
========== ==========
Net loss per common share
Basic and diluted before cumulative effect of
accounting change $ (.60) $ (1.25)
Cumulative effect of accounting change (.15) -
__________ __________
Basic and diluted $ (.75) $ (1.25)
========== ==========
SEGMENT INFORMATION
BOISE CASCADE CORPORATION AND SUBSIDIARIES
(expressed in thousands)
Nine Months Ended
September 30
________________________
1998 1997
__________ __________
(unaudited)
Segment sales
Office products $2,253,108 $1,878,218
Building products 1,312,281 1,262,832
Paper and paper products 1,349,319 1,162,116
Intersegment eliminations and other (288,768) (254,206)
__________ __________
$4,625,940 $4,048,960
========== ==========
Segment operating income (loss)
Office products $ 98,382 $ 83,101
Building products 29,180 41,755
Paper and paper products 28,712 (36,611)
Equity in net loss of affiliates (3,720) (3,360)
Corporate and other (30,684) (39,835)
__________ __________
Income from operations $ 121,870 $ 45,050
========== ==========
The accompanying notes are an integral part of these Financial Statements.
BOISE CASCADE CORPORATION AND SUBSIDIARIES
BALANCE SHEETS
(expressed in thousands)
ASSETS
September 30 December 31
_______________________ ___________
1998 1997 1997
__________ __________ ___________
(unaudited)
Current
Cash $ 69,048 $ 59,918 $ 56,429
Cash equivalents 3,615 7,132 7,157
__________ __________ __________
72,663 67,050 63,586
Receivables, less allowances
of $9,821, $9,245, and $9,689 653,491 592,472 570,424
Inventories 601,967 565,092 633,290
Deferred income tax benefits 74,114 60,998 54,312
Other 27,101 38,155 32,061
__________ __________ __________
1,429,336 1,323,767 1,353,673
__________ __________ __________
Property
Property and equipment
Land and land improvements 55,586 54,782 57,260
Buildings and improvements 568,045 508,291 554,712
Machinery and equipment 4,109,958 4,040,206 4,055,065
__________ __________ __________
4,733,589 4,603,279 4,667,037
Accumulated depreciation (2,152,326) (1,974,291) (2,037,352)
__________ __________ __________
2,581,263 2,628,988 2,629,685
Timber, timberlands, and
timber deposits 271,212 276,663 273,001
__________ __________ __________
2,852,475 2,905,651 2,902,686
__________ __________ __________
Goodwill, net of amortization
of $34,091, $20,499, and $24,020 449,385 440,444 445,722
Investments in equity affiliates 27,223 31,226 32,848
Other assets 227,706 229,394 234,995
__________ __________ __________
Total assets $4,986,125 $4,930,482 $4,969,924
========== ========== ==========
The accompanying notes are an integral part of these Financial Statements.
BOISE CASCADE CORPORATION AND SUBSIDIARIES
BALANCE SHEETS
(expressed in thousands, except share amounts)
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30 December 31
_______________________ ___________
1998 1997 1997
__________ __________ ___________
(unaudited)
Current
Short-term borrowings $ 167,465 $ 1,200 $ 94,800
Current portion of long-term debt 57,143 116,867 30,176
Income taxes payable - 564 3,692
Accounts payable 501,085 474,234 470,445
Accrued liabilities
Compensation and benefits 137,730 132,407 126,780
Interest payable 39,999 31,389 39,141
Other 219,868 173,561 128,714
__________ __________ __________
1,123,290 930,222 893,748
__________ __________ __________
Debt
Long-term debt, less current
portion 1,667,855 1,639,718 1,725,865
Guarantee of ESOP debt 171,513 191,868 176,823
__________ __________ __________
1,839,368 1,831,586 1,902,688
__________ __________ __________
Other
Deferred income taxes 243,493 228,279 230,840
Other long-term liabilities 219,339 231,721 224,663
__________ __________ __________
462,832 460,000 455,503
__________ __________ __________
Minority interest 114,935 102,159 105,445
__________ __________ __________
Shareholders' equity
Preferred stock -- no par value;
10,000,000 shares authorized;
Series D ESOP: $.01 stated
value; 5,406,548; 5,607,467;
and 5,569,684 shares
outstanding 243,295 252,336 250,636
Deferred ESOP benefit (171,513) (191,868) (176,823)
Series F: $.01 stated value;
115,000 shares outstanding
in 1997 - 111,043 111,043
Common stock -- $2.50 par value;
200,000,000 shares authorized;
56,333,984; 55,947,919; and
56,223,923 shares outstanding 140,835 139,870 140,560
Additional paid-in capital 420,724 407,448 416,691
Retained earnings 817,013 892,525 879,043
Accumulated other comprehensive
income (loss) (4,654) (4,839) (8,610)
__________ __________ __________
Total shareholders' equity 1,445,700 1,606,515 1,612,540
__________ __________ __________
Total liabilities and shareholders'
equity $4,986,125 $4,930,482 $4,969,924
========== ========== ==========
The accompanying notes are an integral part of these Financial Statements.
BOISE CASCADE CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(expressed in thousands)
Nine Months Ended
September 30
________________________
1998 1997
_________ _________
(unaudited)
Cash provided by (used for) operations
Net loss $ (25,940) $ (37,640)
Cumulative effect of accounting change, net of
income tax 8,590 -
Items in net loss not using (providing) cash
Equity in net loss of affiliates 3,720 3,360
Depreciation, amortization, and cost of company
timber harvested 211,320 185,790
Deferred income tax provision (benefit) 6,277 (21,438)
Minority interest, net of income tax 7,730 7,460
Write-down of assets 46,103 -
Other (12,599) 1,227
Receivables 4,444 (34,301)
Inventories 28,112 (93)
Accounts payable and accrued liabilities 49,151 24,068
Current and deferred income taxes (15,667) (10,309)
Other 20,437 (2,184)
_________ _________
Cash provided by operations 331,678 115,940
_________ _________
Cash provided by (used for) investment
Expenditures for property and equipment (175,805) (208,841)
Expenditures for timber and timberlands (6,973) (4,900)
Investments in equity affiliates, net (429) (16,747)
Purchases of facilities (4,042) (236,820)
Other (18,995) (16,340)
_________ _________
Cash used for investment (206,244) (483,648)
_________ _________
Cash provided by (used for) financing
Cash dividends paid
Common stock (25,324) (21,781)
Preferred stock (12,911) (27,817)
_________ _________
(38,235) (49,598)
Short-term borrowings 72,665 (35,500)
Additions to long-term debt 179,672 331,000
Payments of long-term debt (212,308) (71,828)
Series F Preferred Stock redemption (115,005) -
Other (3,146) (167)
_________ _________
Cash provided by (used for) financing (116,357) 173,907
_________ _________
Increase (decrease) in cash and cash equivalents 9,077 (193,801)
Balance at beginning of the year 63,586 260,851
_________ _________
Balance at September 30 $ 72,663 $ 67,050
========= =========
The accompanying notes are an integral part of these Financial Statements.
NOTES TO QUARTERLY FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION. We have prepared the quarterly financial statements
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations. These statements should be read together with the
statements and the accompanying notes included in our 1997 Annual Report.
The quarterly financial statements have not been audited by independent
public accountants, but in the opinion of management, all adjustments
necessary to present fairly the results for the periods have been included.
The net income (loss) for the three and nine months ended September 30,
1998 and 1997, necessarily involved estimates and accruals. Except as may
be disclosed within these "Notes to Quarterly Financial Statements," the
adjustments made were of a normal, recurring nature. Quarterly results are
not necessarily indicative of results that may be expected for the year.
(2) On September 6, 1998, our Medford, Oregon, plywood plant was severely
damaged by fire. In the third quarter of 1998, we recorded a net pretax
gain of $46.5 million in the Building Products segment and a loss in
Corporate and Other of $1.5 million related to an insurance settlement for
this fire. This gain is recorded in "Other (income) expense, net" in the
accompanying Statements of Income (Loss). This gain increased net income,
or reduced net loss, $27.5 million for the three and nine months ended
September 30, 1998. Basic income per share increased 49 cents and diluted
income per share increased 45 cents for the three months ended
September 30, 1998. Basic and diluted loss per share was reduced 49 cents
for the nine months ended September 30, 1998.
Late in the second quarter of 1998, we adopted a plan to restructure our
wood products manufacturing business by permanently closing four
facilities, including sawmills in Elgin, Oregon; Horseshoe Bend, Idaho; and
Fisher, Louisiana; and a plywood plant in Yakima, Washington. The
Horseshoe Bend and Fisher sawmills have closed, and the Elgin sawmill and
Yakima plant are scheduled to close in 1999. Employment for 494 workers at
these locations will be affected by these closures. Related to these
closures, our Building Products segment recorded pretax losses in the
second quarter of 1998 of $27.0 million for the write-down of assets,
$14.0 million for severance and other employee-related costs, and
$21.0 million for other exit costs, for a total of $62.0 million. These
charges are recorded in "Other (income) expense, net" in the accompanying
Statement of Income (Loss). These facilities had sales of $19.0 million
and $63.1 million for the three and nine months ended September 30, 1998,
and sales of $28.3 million and $76.9 million for the same periods in 1997.
Operating income for these facilities was $.8 million for the three months
ended September 30, 1998, and an operating loss of $6.4 million for the
nine months ended September 30, 1998. For the three and nine months ended
September 30, 1997, these facilities had operating losses of $2.6 million
and $6.6 million.
Also in the second quarter of 1998, our Paper and Paper Products segment
recorded a pretax charge of $19.0 million for the revaluation of certain
paper-related assets. Included in the revaluation is an $8.0 million
write-down of a 60% owned joint venture in China that produces carbonless
paper. This charge is also recorded in "Other (income) expense, net" in
the accompanying Statement of Income (Loss).
(3) NET INCOME (LOSS) PER COMMON SHARE. Net income (loss) per common share was
determined by dividing net income (loss), as adjusted, by applicable shares
outstanding. For the nine months ended September 30, 1998, and for the
three and nine months ended September 30, 1997, the computation of diluted
net loss per share was antidilutive; therefore, amounts reported for basic
and diluted loss were the same.
Three Months Ended Nine Months Ended
September 30 September 30
___________________ ____________________
1998 1997 1998 1997
________ ________ ________ ________
(expressed in thousands)
BASIC
Net income (loss) as reported
before cumulative effect of
accounting change $ 47,050 $ (6,200) $(17,350) $(37,640)
Preferred dividends(a) (3,515) (6,249) (12,094) (25,546)
Excess of Series F Preferred
Stock redemption price over
carrying value(b) - - (3,958) -
________ ________ ________ ________
Basic income (loss) before
cumulative effect of
accounting change 43,535 (12,449) (33,402) (63,186)
Cumulative effect of accounting
change, net of income tax - - (8,590) -
________ ________ ________ ________
Basic income (loss) $ 43,535 $(12,449) $(41,992) $(63,186)
======== ======== ======== ========
Average shares outstanding used
to determine basic income
(loss) per common share 56,332 54,814 56,297 50,658
======== ======== ======== ========
DILUTED
Basic income (loss) before
cumulative effect of
accounting change $ 43,535 $(12,449) $(33,402) $(63,186)
Preferred dividends
eliminated 3,515 - - -
Supplemental ESOP
contribution (3,001) - - -
________ ________ ________ ________
Diluted income (loss) before
cumulative effect of
accounting change 44,049 (12,449) (33,402) (63,186)
Cumulative effect of accounting
change, net of income tax - - (8,590) -
________ ________ ________ ________
Diluted income (loss) $ 44,049 $(12,449) $(41,992) $(63,186)
======== ======== ======== ========
Average shares outstanding used
to determine basic income
(loss) per common share 56,332 54,814 56,297 50,658
Stock options, net 134 - - -
Series D convertible preferred
stock 4,383 - - -
________ ________ ________ ________
Average shares used to determine
diluted earnings (loss) per
common share 60,849 54,814 56,297 50,658
======== ======== ======== ========
(a) Dividend attributable to our Series D convertible preferred stock held by
our ESOP (Employee Stock Ownership Plan) is net of a tax benefit.
(b) Nine months ended September 30, 1998, included a negative seven cents
related to the redemption of the Series F Preferred Stock. The loss used
in the calculation of loss per share was increased by the excess of the
amount paid to redeem the preferred stock over its carrying value.
(4) COMPREHENSIVE INCOME (LOSS). Comprehensive income (loss) for the periods
include the following:
Three Months Ended Nine Months Ended
September 30 September 30
____________________ ____________________
1998 1997 1998 1997
________ ________ ________ ________
(expressed in thousands)
Net income (loss) $ 47,050 $ (6,200) $(25,940) $(37,640)
Other comprehensive income (loss)
Cumulative foreign currency translation
adjustment, net of income taxes 2,721 (1,931) 3,956 (3,493)
________ ________ ________ ________
Comprehensive income (loss), net of income taxes $ 49,771 $ (8,131) $(21,984) $(41,133)
======== ======== ======== ========
Accumulated other comprehensive income (loss) for each period ended was as
follows:
September 30 December 31
__________________ ___________
1998 1997 1997
________ ________ ___________
(expressed in thousands)
Balances at beginning of period
Minimum pension liability
adjustment, net of income taxes $(1,995) $(2,866) $(2,866)
Cumulative foreign currency
translation adjustment, net of
income taxes (6,615) 1,520 1,520
Changes within periods
Minimum pension liability
adjustment, net of income taxes - - 871
Cumulative foreign currency
translation adjustment, net of
income taxes 3,956 (3,493) (8,135)
_______ _______ _______
Balance at end of period $(4,654) $(4,839) $(8,610)
======= ======= =======
(5) RECEIVABLES. In late September 1998, we sold fractional ownership
interests in a defined pool of trade accounts receivable for $85 million.
Accordingly, they are excluded from receivables in the accompanying
balance sheet. This program represents a revolving sale of receivables
committed to by the purchasers for 364 days and is subject to renewal. The
costs of this program compare favorably to our alternative costs of
incremental borrowing. Costs related to the program will be included in
"Other (income) expense, net" in the Statements of Income (Loss). Under
the accounts receivable sale agreement, the maximum amount available from
time to time is subject to change based on the level of eligible
receivables, restrictions on concentrations of receivables, and the
historical performance of the receivables we sell.
(6) DEFERRED SOFTWARE COSTS. We defer purchased and internally developed
software and related installation costs for computer systems that are used
in our businesses. Deferral of costs begins when technological feasibility
of the project has been established and it is determined that the software
will benefit future years. These costs are amortized on the straight-line
method over a maximum of five years or the useful life of the product,
whichever is less. If the useful life of the product is shortened, the
amortization period is adjusted. "Other assets" in the Balance Sheets
includes deferred software costs of $36.9 million, $22.8 million, and
$31.1 million at September 30, 1998 and 1997, and December 31, 1997.
(7) INVENTORIES. Inventories include the following:
September 30 December 31
__________________ ___________
1998 1997 1997
________ ________ ___________
(expressed in thousands)
Finished goods and work in process $458,999 $425,284 $453,268
Logs 74,097 74,956 107,625
Other raw materials and supplies 145,144 146,830 149,870
LIFO reserve (76,273) (81,978) (77,473)
________ ________ ________
$601,967 $565,092 $633,290
======== ======== ========
(8) CUMULATIVE EFFECT OF ACCOUNTING CHANGE. As of January 1, 1998, we adopted
the provisions of a new accounting standard, AICPA Statement of Position
98-5, "Reporting on the Costs of Start-Up Activities," which required the
write-off of previously capitalized preoperating costs. Adoption of this
standard resulted in a charge for the cumulative effect of accounting
change, net of tax, of $8.6 million, or 15 cents per basic and diluted loss
per share, for the nine months ended September 30, 1998.
(9) INCOME TAXES. We used an estimated annual tax rate of 15% for the three and
nine months ended September 30, 1998, except for the tax effect of the gain
related to the Medford fire which was calculated using a combined federal
and state statutory rate of approximately 39%. The estimated annual tax
rate of 15% is the same rate used for the three and six months ended
June 30, 1998. In 1997, we used an actual annual tax benefit rate of 32%.
The tax rate percentage is subject to fluctuations due primarily to the
sensitivity of the rate to low income levels, the impact of unusual items
such as the restructuring and revaluation charges and the Medford fire
gain, and the mix of our income sources.
For the three and nine months ended September 30, 1998, we paid income
taxes, net of refunds received, of $1.2 million and $10.3 million, and
$1.9 million and $9.4 million for the same periods in 1997.
(10) DEBT. At September 30, 1998, we had a revolving credit agreement with a
group of banks that permits us to borrow as much as $600 million at
variable interest rates based on customary indices. This agreement expires
in June 2002. In October 1998, we entered into an interest rate swap with
a notional amount of $75 million that expires in 2000. The swap results in
an effective fixed interest rate with respect to $75 million of our
revolving credit agreement borrowings. The revolving credit agreement
contains financial covenants relating to minimum net worth, minimum
interest coverage ratios, and ceiling ratios of debt to capitalization.
Under this agreement, the payment of dividends is dependent upon the
existence of and the amount of net worth in excess of the defined minimum.
Our net worth at September 30, 1998, exceeded the defined minimum by
$133 million. At September 30, 1998, there were $125 million of borrowings
outstanding under this agreement.
Our majority-owned subsidiary, Boise Cascade Office Products Corporation
("BCOP"), has a $450 million revolving credit agreement with a group of
banks that expires in June 2001 and provides variable interest rates based
on customary indices. In October 1998, BCOP entered into an interest rate
swap with a notional amount of $25 million that expires in 2000. The swap
results in an effective fixed interest rate with respect to $25 million of
BCOP's revolving credit agreement borrowings. The BCOP revolving credit
facility contains customary restrictive financial and other covenants,
including a negative pledge and covenants specifying a minimum fixed charge
coverage ratio and a maximum leverage ratio. BCOP may, subject to the
covenants contained in the credit agreement and to market conditions, raise
additional funds through the agreement and through other external debt or
equity financings in the future. Borrowings under BCOP's agreement were
$150 million at September 30, 1998.
Also at September 30, 1998, we had $93.5 million of short-term borrowings
outstanding and BCOP had $74.0 million of short-term borrowings
outstanding. At September 30, 1997, we had no short-term borrowings
outstanding, while BCOP had $1.2 million of short-term borrowings
outstanding. The maximum amount of short-term borrowings outstanding
during the nine months ended September 30, 1998 and 1997, was
$279.9 million and $294.8 million. The average amount of short-term
borrowings outstanding during the nine months ended September 30, 1998 and
1997, was $205.9 million and $43.4 million. The average interest rate for
these borrowings was 5.9% for 1998 and 5.8% for 1997.
In late 1997, we filed a registration statement with the Securities and
Exchange Commission for an additional $400 million of shelf capacity for
debt securities. The effective date of our filing was March 25, 1998. Our
total borrowing capacity was $489.4 million at September 30, 1998.
In early 1998, BCOP filed a registration statement with the Securities and
Exchange Commission to register $300 million of shelf capacity for debt
securities. The effective date of the filing was April 22, 1998. On
May 12, 1998, BCOP issued $150.0 million of 7.05% Notes under this
registration statement. The Notes are due May 15, 2005. Proceeds from the
issuance were used to repay borrowings under BCOP's revolving credit
agreement. BCOP has $150.0 million of borrowing capacity remaining under
this registration statement.
Cash payments for interest, net of interest capitalized, were $43.5 million
and $121.1 million for the three and nine months ended September 30, 1998,
and $51.5 million and $111.1 million for the three and nine months ended
September 30, 1997.
(11) BOISE CASCADE OFFICE PRODUCTS CORPORATION. During the first nine months of
1998, BCOP completed two acquisitions, and during the first nine months of
1997, BCOP completed seven acquisitions, all of which were accounted for
under the purchase method of accounting. Accordingly, the purchase prices
were allocated to the assets acquired and liabilities assumed based upon
their estimated fair values. The initial purchase price allocations may be
adjusted within one year of the date of purchase for changes in estimates
of the fair values of assets and liabilities. Such adjustments are not
expected to be significant to our results of operations or our financial
position. The excess of the purchase price over the estimated fair value
of the net assets acquired was recorded as goodwill and is being amortized
over 40 years. The results of operations of the acquired businesses are
included in our operations subsequent to the dates of acquisition.
On January 12, 1998, BCOP acquired the direct marketing business of
Fidelity Direct, based in Minneapolis, Minnesota. On February 28, 1998,
BCOP acquired the direct marketing business of Sistemas Kalamazoo, based in
Spain. These transactions were completed for cash of
$4.0 million, debt assumed of $0.2 million, and the recording of
$3.8 million of acquisition liabilities.
On January 31, February 28, and April 17, 1997, BCOP acquired contract
stationer businesses in Montana, Florida, and the United Kingdom. On
April 30, and May 30, 1997, BCOP acquired computer consumables businesses
in North Carolina and Canada. On May 31, 1997, BCOP acquired the
promotional products business of OstermanAPI, Inc., based in Maumee, Ohio.
In conjunction with the acquisition of Osterman, BCOP formed a majority-
owned subsidiary, Boise Marketing Services, Inc. ("BMSI"), of which BCOP
owns 88%. BCOP's previously acquired promotional products company, OWNCO,
also became part of BMSI. Also in January 1997, BCOP completed a joint
venture with Otto Versand to direct market office products in Europe.
These transactions, including the joint venture and the formation of the
majority-owned promotional products subsidiary, were completed for cash of
$99.7 million, $2.9 million of BCOP's common stock, and the recording of
$14.2 million of acquisition liabilities.
On July 7, 1997, BCOP acquired 100% of the shares of Jean-Paul Guisset S.A.
("JPG"), a French Corporation. JPG is a direct marketer of office products
in France. The negotiated purchase price was FF850.0 million
(US$144.0 million) plus a price supplement payable in the year 2000, if
certain earnings and sales growth targets are reached. No liability has
been recorded for the price supplement as the amount of payment, if any, is
not assured beyond a reasonable doubt. If 1998 results are duplicated in
1999, the price supplement to be paid would be approximately
US$29.0 million. In addition to the cash paid, BCOP recorded US$5.8 million
of acquisition liabilities and assumed US$10.1 million of long-term debt.
In December 1997, Otto purchased a 10% interest in JPG, with an option to
purchase an additional 40% interest before January 15, 1998.
Unaudited pro forma results of operations reflecting the above acquisitions
would have been as follows. If the 1998 acquisitions had occurred on
January 1, 1998, sales for the first nine months of 1998 would have been
unchanged, net loss would have decreased $100,000, and basic and diluted
loss per share would have been unchanged. If the 1998 and 1997
acquisitions had occurred on January 1, 1997, sales for the first nine
months of 1997 would have increased by $100 million, net loss would have
decreased by $600,000, and basic and diluted loss per share would have been
unchanged. This unaudited pro forma financial information does not
necessarily represent the actual results of operations that would have
occurred if the acquisitions had taken place on the dates assumed.
(12) SHAREHOLDERS' EQUITY. We have a shareholder rights plan which was adopted
in December 1988, amended in September 1990, and renewed in September 1997.
The Renewed Rights Agreement becomes operative upon the expiration of the
existing Rights Agreement.
(13) NEW ACCOUNTING STANDARDS. In 1997, the Financial Accounting Standards Board
issued SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information." This Statement establishes standards for the way
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. We will adopt the Statement at year-end 1998. We
are still evaluating what impact it will have on our reportable segments.
Adoption of this Statement will have no impact on our net income.
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits." This Statement standardizes the disclosure requirements for
pensions and other postretirement benefits and is effective for fiscal
years beginning after December 15, 1997. This Statement will have no
impact on our net income.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position 98-1 (SOP 98-1), "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." This
SOP is effective for financial statements for fiscal years beginning after
December 15, 1998, with earlier application encouraged. We currently
account for software costs generally in accordance with this SOP. In April
1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities." This SOP provides guidance on the financial reporting of
start-up costs and organization costs. It requires costs of start-up
activities and organization costs to be expensed as incurred. This SOP is
effective for financial statements for fiscal years beginning after
December 15, 1998, with earlier application encouraged. Unamortized costs
are required to be expensed at the time of adoption of the SOP. We adopted
this standard as of January 1, 1998 (see note 8).
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This
Statement establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an
asset or liability measured at its fair value. This Statement is effective
for fiscal years beginning after June 15, 1999. We plan to adopt this
Statement in the first quarter of 2000. We are in the process of reviewing
this new standard. Adoption of this Statement is not expected to have a
significant impact on our results of operations or financial position.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998, COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1997
Our net income for the third quarter of 1998 was $47.1 million, compared with a
net loss of $6.2 million for the third quarter of 1997. Basic income per common
share for the third quarter of 1998 was 77 cents and diluted income per common
share was 72 cents. For the same quarter in 1997, basic loss and diluted loss
per common share were 23 cents. Sales for the third quarter of 1998 were $1.6
billion and $1.4 billion in the third quarter of 1997. Third quarter 1998
results included a gain from the fire insurance settlement discussed below.
On September 6, 1998, our Medford, Oregon, plywood plant was severely damaged by
fire. In the third quarter of 1998, we recorded a net pretax gain of $46.5
million in the Building Products segment and a loss in Corporate and Other of
$1.5 million related to an insurance settlement for this fire. This gain is
recorded in "Other (income) expense, net" in the Statements of Income (Loss).
This gain increased net income $27.5 million for the three months ended
September 30, 1998. Basic income per share increased 49 cents and diluted
income per share increased 45 cents for the three months ended September 30,
1998. We are currently evaluating options to reconfigure, rebuild, or abandon
our Medford, Oregon, plywood plant.
Operating income in the office products segment in the third quarter of 1998 was
$29.3 million, compared to $29.7 million in the third quarter of 1997. Net
sales in the third quarter of 1998 increased 12% to $760.4 million, compared
with $679.9 million in the third quarter of 1997. The growth in sales resulted
primarily from same-location sales growth. Same-location sales increased 10% in
the third quarter of 1998, compared with the third quarter of 1997. Gross
margins were 24.8% in the third quarter of 1998, compared to 25.1% in the year-
ago third quarter. Gross profit decreased in the third quarter of 1998 partly
because of increased delivery and occupancy costs at BCOP's Canadian operations
as a result of operational challenges associated with the move into a new
Toronto distribution center. BCOP's operating expenses were 20.9% of net
sales in the third quarter of 1998, compared with 20.7% in the third quarter of
1997. The increase in the third quarter of 1998 was due, in part, to BCOP's
direct marketing acquisitions, which have both higher gross margins and higher
operating expenses. The increase was also due to higher operating costs at our
Canadian operations, as a result of operational challenges associated with the
move into a new Toronto distribution center. BCOP's operating margin was 3.9%
in 1998 and 4.4% in 1997.
Our Building Products segment had operating income of $81.3 million in the third
quarter of 1998. This includes $46.5 million related to the Medford fire
insurance settlement gain. Excluding the gain, this segment had operating income
of $34.8 million. Operating income for the third quarter of 1997 was
$13.8 million. Sales increased 9% to $494.4 million compared to $454.1 million a
year ago. The increase in results, excluding the insurance gain, is due to
stronger structural panel markets and significant sales growth in building
materials distribution, particularly of panels and engineered wood products.
Building materials distribution sales increased 25% in the third quarter of
1998, compared with the third quarter of 1997. Additionally, average plywood
prices increased 4% in the third quarter of 1998, compared with year-ago levels.
These increases were offset by 9% lower lumber prices and 4% lower I-joist
prices. Particleboard prices were about flat. Laminated veneer lumber prices
were also about flat. Sales volumes for all of our building products, except
lumber, improved. Plywood was up 11.5 million square feet, lumber was down 33.8
million board feet, laminated veneer lumber was up 0.4 million cubic feet, I-
joist was up 10.2 million equivalent lineal feet, and particleboard was up 1.2
million square feet.
Our Paper and Paper Products segment reported operating income of $8.2 million
in the third quarter of 1998. In the third quarter of 1997, this segment
recorded operating income of $4.9 million. Sales increased 7% to $435.6 million
in the third quarter of 1998 from $406.1 million in the third quarter of 1997.
Performance improved year-over-year primarily because of higher uncoated free
sheet sales volume, despite taking nearly 30,000 tons of market- and weather-
related production curtailments. Total sales volumes for the third quarter of
1998 increased 23,000 tons to 650,000 tons, compared with 627,000 tons in the
third quarter of 1997. Uncoated free sheet volumes increased 28,000 tons as our
new world-class uncoated free sheet paper machine in Jackson, Alabama, is now
operating at close to rated capacity. Newsprint sales volumes increased 3,000
tons. These increases were offset by a 3,000 ton sales volume reduction in
containerboard and a 5,000 ton sales volume reduction in market pulp. Although
containerboard prices increased 17% and newsprint prices increased 3% in the
third quarter of 1998 compared to the third quarter of 1997, our uncoated free
sheet prices declined 4%. Uncoated free sheet accounts for about 54% of our
sales volume. Pulp prices were about flat.
Paper segment manufacturing costs per ton in the third quarter of 1998 were 5%
higher than in the comparison quarter. The increase from quarter to quarter was
due to higher fixed costs spread over a reduced number of tons due to market-and
weather-related production curtailments taken in the third quarter. The
increase is also due to higher variable costs, primarily wood costs.
Total debt outstanding was $2.1 billion at September 30, 1998, compared with
$1.9 billion at September 30, 1997. Total debt outstanding was $2.0 billion at
December 31, 1997. Interest expense was $41.0 million in the third quarter of
1998, compared with $38.8 million in the same period last year. The increase
was due primarily to higher debt levels.
NINE MONTHS ENDED SEPTEMBER 30, 1998, COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1997
We had a net loss of $25.9 million, or 75 cents per basic and diluted common
share, for the first nine months of 1998. For the first nine months of 1997, we
had a net loss of $37.6 million. Basic loss and diluted loss per common share
were $1.25. Sales for the first nine months of 1998 were $4.6 billion, compared
with $4.0 billion for the same period in the prior year. Results for the first
nine months of 1998 included the effects of the items discussed below.
On September 6, 1998, our Medford, Oregon, plywood plant was severely damaged by
fire. In the third quarter of 1998 we recorded a net pretax gain of
$46.5 million in the Building Products segment and a loss in Corporate and Other
of $1.5 million related to an insurance settlement for this fire. This gain is
recorded in "Other (income) expense, net" in the Statements of Income (Loss).
This gain increased net income $27.5 million for the nine months ended
September 30, 1998. Basic loss and diluted loss per common share were reduced
49 cents for the nine months ended September 30, 1998. We are currently
evaluating options to reconfigure, rebuild, or abandon, our Medford, Oregon,
plywood plant.
Late in the second quarter of 1998, we adopted a plan to restructure our wood
products manufacturing business by permanently closing four facilities,
including sawmills in Elgin, Oregon; Horseshoe Bend, Idaho; and Fisher,
Louisiana; and a plywood plant in Yakima, Washington. The Horseshoe Bend and
Fisher sawmills have closed, and the Elgin sawmill and Yakima plant will close
in 1999. Employment for 494 workers at these locations will be affected by
these closures. Related to these closures, our Building Products segment
recorded pretax losses in the second quarter of 1998 of $27.0 million for the
write-down of assets, $14.0 million for severance costs, and $21.0 million for
other exit costs, for a total of $62.0 million. These charges are recorded in
"Other (income) expense, net" in the Statement of Income (Loss). These
facilities had sales of $63.1 million for the nine months ended September 30,
1998 and sales of $76.9 million for the same period in 1997. Operating losses
for these facilities were $6.4 million for the nine months ended September 30,
1998, and $6.6 million for the nine months ended September 30, 1997.
Also in the second quarter of 1998, our Paper and Paper Products segment
recorded a pretax charge of $19.0 million for the revaluation of certain paper-
related assets. Included in the revaluation is an $8.0 million write-down of a
60% owned joint venture in China that produces carbonless paper. This charge is
also recorded in "Other (income) expense, net" in the accompanying Statement of
Income (Loss).
The impact of the restructuring of the wood products manufacturing business, the
revaluation of paper-related assets, and the related impact on our estimated
1998 taxes, increased net loss $65.2 million, or $1.16 per basic and diluted
share, for the nine months ended September 30, 1998.
Also included in the $25.9 million loss is a net of tax charge of $8.6 million,
or 15 cents per basic and diluted loss per share, for the adoption of the
provisions of a new accounting standard, AICPA Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities." This Statement required the
write-off of previously capitalized preoperating costs. It was adopted as of
January 1, 1998.
Excluding the insurance gain, the restructuring and revaluation charges and
related tax impacts, and the accounting change, net income for the first nine
months of 1998 would have been $20.4 million, or 7 cents per basic and diluted
share.
Our Office Products segment had operating income of $98.4 million for the first
nine months of 1998, compared with $83.1 million for the first nine months of
1997. Sales increased 20% to $2.3 billion, compared with $1.9 billion a year
ago. The increase was due to a combination of acquisitions and same-location
sales growth. Same location sales increased 11% year to year. Gross margins
were 25.4% in the first nine months of 1998, compared to 25.0% a year ago. The
increase was primarily due to increases in BCOP's domestic contract stationer
and direct marketing gross margins. The increase was offset slightly by higher
delivery and occupancy costs at BCOP's Canadian operations that resulted from
operational challenges as BCOP moved into a new distribution center in Toronto.
Operating expenses were 21.0% of net sales in the first nine months of 1998,
compared with 20.6% in the first nine months of 1997. This increase resulted,
in part, from BCOP's direct marketing acquisitions, which have both higher gross
margins and higher operating expenses. Direct marketing acquisitions made in
the last half of 1997 increased BCOP's cost average compared to the prior year.
Operating expense for the first nine months of 1998 also increased due to higher
operating costs at BCOP's Canadian operations that resulted from operational
challenges associated with the move into a new Toronto distribution center.
BCOP's operating margin was 4.4% in 1998 and in 1997.
Our Building Products segment had operating income of $29.2 million in the first
nine months of 1998. This includes the gain from the Medford fire insurance
settlement of $46.5 million and $62.0 million of restructuring charges.
Excluding these items, this segment earned $44.7 million, compared with income
of $41.8 million in the prior year. Sales for the first nine months of 1998 were
$1.31 billion, up 4% from the $1.26 billion reported in the prior year. The
improvement in operating results is due primarily to stronger structural panel
markets and significant sales growth in building materials distribution,
particularly of panels and engineered wood products. Sales increased 17% to
$658.9 million in 1998, from $562.0 million in 1997. Sales volume for plywood
was up 29 million square feet, sales volume for laminated veneer lumber was up
8.1 million cubic feet, I-joist sales volume was up 19 million equivalent lineal
feet, while particleboard sales volume was about flat. Lumber sales volume
declined 70 million board feet. Prices were lower for all products during the
first nine months of 1998 compared to the first nine months of 1997. Lumber
prices were down 11%, plywood prices were down 3%, particleboard prices were
down 3%, I-joist prices were down 4%, and laminated veneer lumber prices were
about flat.
Our Paper and Paper Products segment had operating income of $28.7 million for
the first nine months of 1998. This includes the charge taken in the second
quarter of $19.0 million for the revaluation of assets. Excluding this charge,
this segment would have earned $47.7 million compared with a loss of
$36.6 million for the first nine months of 1997. Sales increased 16% to
$1.35 billion, compared with $1.16 billion a year ago. The increase is due to
increased sales volume for uncoated free sheet paper, despite taking nearly
44,000 tons of market- and weather-related production curtailments, and improved
average paper prices for all of the grades we produce. Uncoated free sheet
average prices increased 4%, containerboard average prices increased 25%,
newsprint average prices increased 11%, and pulp average prices increased 5%.
In addition, sales volumes increased 71,000 tons to 1,953,000 tons compared with
1,882,000 tons a year ago. Uncoated free sheet sales volumes increased 87,000
tons and containerboard sales volumes increased 14,000 tons. These increases
were offset by a 5,000 tons sales volume decrease in newsprint and a 25,000 ton
sales volume decrease in market pulp.
Paper segment manufacturing costs per ton in the first nine months of 1998 were
5% higher than the comparison period. The increase was primarily due to higher
wood costs.
Total debt outstanding was $2.1 billion at September 30, 1998, compared with
$1.9 billion at September 30, 1997. Total debt outstanding was $2.0 billion at
December 31, 1997. The increase was due primarily to higher short-term
borrowings. Interest expense was $121.9 million for the first nine months of
1998, compared with $98.2 million in the same period last year. Part of the
increase in interest expense was due to lower capitalized interest. Capitalized
interest in 1998 was $537,000, compared to $10.4 million in 1997. With the
start-up of the expansion of the Jackson pulp and paper mill in April 1997, the
amount of interest capitalized has decreased significantly. The balance of the
increase is due primarily to higher debt levels.
FINANCIAL CONDITION
At September 30, 1998, we had working capital of $306.0 million. Working
capital was $393.5 million at September 30, 1997, and $459.9 million at
December 31, 1997. Cash provided by operations was $331.7 million for the first
nine months of 1998, compared with $115.9 million for the same period in 1997.
This increase is due, in part, to improved operating results, including
adjustments for noncash items, such as higher depreciation expense and asset
write-downs.
In addition, in late September 1998, we sold fractional ownership interests in a
defined pool of trade accounts receivable for $85 million. The sold accounts
receivable are excluded from receivables in the balance sheet and represent an
increase in cash provided by operations.
At September 30, 1998, we had a revolving credit agreement with a group of banks
that permitted us to borrow as much as $600 million at variable interest rates
based on customary indices. This agreement expires in June 2002. In October
1998, we entered into an interest rate swap with a notional amount of $75
million that expires in 2000. This swap results in an effective fixed interest
rate with respect to $75 million of our revolving credit agreement borrowings.
The revolving credit agreement contains financial covenants relating to minimum
net worth, minimum interest coverage ratios, and ceiling ratios of debt to
capitalization. Under this agreement, the payment of dividends is dependent upon
the existence of and the amount of net worth in excess of the defined minimum.
Our net worth at September 30, 1998, exceeded the defined minimum by $133
million. At September 30, 1998, there were $125 million of borrowings
outstanding under this agreement.
Our majority-owned subsidiary, Boise Cascade Office Products Corporation
("BCOP"), has a $450 million revolving credit agreement with a group of banks
that expires in June 2001 and provides variable interest rates based on
customary indices. In October 1998, BCOP entered into an interest rate swap
with a notional amount of $25 million that expires in 2000. This swap results
in an effective fixed interest rate with respect to $25 million of BCOP's
revolving credit agreement borrowings. The BCOP revolving credit facility
contains customary restrictive financial and other covenants, including a
negative pledge and covenants specifying a minimum fixed charge coverage ratio
and a maximum leverage ratio. BCOP may, subject to the covenants contained in
the credit agreement and to market conditions, raise additional funds through
the agreement and through other external debt or equity financings in the
future. Borrowings under BCOP's agreement were $150 million at September 30,
1998.
At September 30, 1998, Boise Cascade Corporation and BCOP met all of the
financial covenants related to debt.
Also at September 30, 1998, we had $93.5 million of short-term borrowings
outstanding and BCOP had $74.0 million of short-term borrowings outstanding. At
September 30, 1997, we had no short-term borrowings outstanding, while BCOP had
$1.2 million of short-term borrowings outstanding. The maximum amount of short-
term borrowings outstanding during the nine months ended September 30, 1998 and
1997, were $279.9 million and $294.8 million. The average amount of short-term
borrowings outstanding during the nine months ended September 30, 1998 and 1997,
were $205.9 million and $43.4 million. The average interest rate for these
borrowings was 5.9% for 1998 and 5.8% for 1997.
In late 1997, we filed a registration statement with the Securities and Exchange
Commission for an additional $400 million of shelf capacity for debt securities.
The effective date of our filing was March 25, 1998. Our total borrowing
capacity was $489.4 million at September 30, 1998.
In early 1998, BCOP filed a registration statement with the Securities and
Exchange Commission to register $300 million of shelf capacity for debt
securities. The effective date of the filing was April 22, 1998. On May 12,
1998, BCOP issued $150.0 million of 7.05% Notes under this registration
statement. The Notes are due May 15, 2005. Proceeds from the issuance were used
to repay borrowings under BCOP's revolving credit agreement. BCOP has
$150.0 million of borrowing capacity remaining under this registration
statement.
Capital expenditures for the first nine months of 1998 and 1997 were
$191.3 million and $490.3 million. Capital expenditures for the year ended
December 31, 1997, were $578.6 million. The decrease in capital expenditures is
primarily due to lower acquisition spending for BCOP and the completion of the
Jackson pulp and paper mill expansion in May 1997.
An expanded discussion and analysis of financial condition is presented on pages
18 and 19 of the Company's 1997 Annual Report under the captions "Financial
Condition" and "Capital Investment."
MARKET CONDITIONS
Negative pressures from global economic turmoil continue. As a result, we
expect near-term deterioration in our paper and building products businesses.
These pressures, combined with the typical seasonal slowdown, are likely to lead
to weaker paper and wood products markets in the months ahead.
Pulp and paper prices in October are lower than the third-quarter average, and
it is likely that we will take more uncoated free sheet downtime in the fourth
quarter. We still have confidence in the long-term prospects of our paper
business. Very little new capacity is being planned or constructed anywhere in
the world. So when global demand does begin to recover, perhaps in the second
half of 1999, we expect supply-and-demand balances to tighten.
Our office products distribution business should show stronger results in the
fourth quarter, as the business continues to resolve its recent operating
difficulties.
NEW ACCOUNTING STANDARDS
In 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." This
Statement establishes standards for the way public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. We will adopt the Statement
at year-end 1998. We are still evaluating what impact it will have on our
reportable segments. Adoption of this Statement will have no impact on net
income.
In February 1998, the Financial Accounting Standards Board issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits." This
Statement standardizes the disclosure requirements for pensions and other
postretirement benefits and is effective for fiscal years beginning after
December 15, 1997. This Statement will have no impact on our net income.
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This SOP is
effective for financial statements for fiscal years beginning after December 15,
1998, with earlier application encouraged. We currently account for software
costs generally in accordance with this SOP. In April 1998, the AICPA issued
SOP 98-5, "Reporting on the Costs of Start-Up Activities." This SOP provides
guidance on the financial reporting of start-up costs and organization costs.
It requires costs of start-up activities and organization costs to be expensed
as incurred. This SOP is effective for financial statements for fiscal years
beginning after December 15, 1998, with earlier application encouraged.
Unamortized costs are required to be expensed at the time of adoption of the
SOP. We implemented this SOP effective January 1, 1998.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This Statement
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. This Statement is effective for fiscal quarters of
fiscal years beginning after June 15, 1999. We plan to adopt this Statement in
the first quarter of 2000. We are in the process of reviewing this new
standard. Adoption of this Statement is not expected to have a significant
impact on our results of operations or financial position.
TIMBER SUPPLY
The amount of public timber available for harvest in the Pacific Northwest has
declined due to environmental litigation and changes in government policy. We
expect these constraints on the available public timber to increase. In
addition, federal laws, such as the Endangered Species Act, can impact the
supply of timber from privately owned lands, increasing the cost of forest
management and harvesting operations. These factors make it extremely difficult
to accurately predict future timber supplies in the Pacific Northwest.
YEAR 2000 COMPUTER ISSUE
Many computer systems in use today were designed and developed using two digits,
rather than four, to specify the year. As a result, such systems will recognize
the year 2000 as "00." This could cause many computer applications to fail
completely or to create erroneous results unless corrective measures are taken.
We utilize software and related computer technologies in both our business and
manufacturing computer systems. Both systems will be affected by the Year 2000
issue. We have established a senior information system management team to
monitor our activities in the development of Year 2000 compliant systems across
our entire company. This team is responsible for evaluating our compliance with
Year 2000 requirements and implementing changes.
Over the last two years, we have been replacing many of our business computer
systems to realize cost savings and process improvements. These replacements,
all of which are Year 2000 compliant, will be completed before the year 2000.
Many of the costs associated with these replacements have been and will be
deferred. (See Note 6 in "Notes to Quarterly Financial Statements.") A Year
2000 compliance inventory of business computer systems that will not be replaced
was completed first quarter 1998. Many of the existing systems are compliant.
Costs to bring the remaining systems compliant, including BCOP's, are expected
to range from $6 to $8 million. These costs will be expensed as incurred. We
expect to complete all necessary changes by year-end 1999.
During the first half of 1998, we inventoried our manufacturing computer systems
in our Building Products and Paper and Paper Products segments for Year 2000
compliance. In the less complex Building Products process control systems, most
systems were found to be compliant. We identified any reprogramming necessary
and are in the process of making the appropriate modifications. In the more
complex Paper and Paper Products segment process control systems, we have
concluded our initial inventory and are doing further evaluation and development
of an implementation plan. We expect to complete all necessary changes by year-
end 1999. The costs associated with making these systems compliant are estimated
to be $4 to $5 million. We are currently identifying and surveying our
suppliers and customers to determine if critical processes may be impacted by
their lack of Year 2000 compliance. Many of our critical suppliers have already
confirmed that they are or will be compliant.
The most reasonably likely worst case scenario of failure by us or our suppliers
or customers to be Year 2000 compliant would be a temporary slowdown of
manufacturing operations at one or more of our locations and a temporary
inability to timely process orders and billings and to deliver products to our
customers. We are currently developing contingency options in the event that
critical systems or suppliers encounter unforeseen Year 2000 problems.
Our discussion of the year 2000 computer issue contains forward-looking
information. We believe that our computer systems will be year 2000 compliant
and that the costs to achieve compliance will not materially impact our
financial condition, operating results or cash flows. Nevertheless, there are
factors which could cause actual results to differ from our expectations. These
factors include the successful implementation of year 2000 initiatives by our
customers and suppliers, changes in the availability and costs of resources to
implement year 2000 changes, and our ability to successfully identify and
correct all systems affected by the year 2000 issue.
EURO CONVERSION
On January 1, 1999, 11 of the 15 member countries of the European Union are
scheduled to establish fixed conversion rates between their existing sovereign
currencies and the Euro. The participating countries have agreed to adopt the
Euro as their common legal currency on that date. The conversion to the Euro
will require certain changes to BCOP's information technology and other systems
to accommodate Euro-denominated transactions. The cost of these changes is not
expected to material. BCOP currently expects all of its European operations to
be Euro compliant by the end of 1998.
While the competitive impact of the Euro conversion remains uncertain, BCOP
currently does not anticipate a negative impact on its European operations.
Alternatively, the conversion to the Euro may provide additional marketing
opportunities for BCOP's European operations.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis includes forward-looking statements.
Because these forward-looking statements include risks and uncertainties, actual
results may differ materially from those expressed in or implied by the
statements. Factors that could cause actual results to differ include, among
other things, changes in domestic or foreign competition; the severity and
longevity of global economic turmoil; increases in capacity through construction
of new manufacturing facilities or conversion of older facilities to produce
competitive products; changes in production capacity across paper and wood
products markets; variations in demand for our products; changes in our cost for
or the availability of raw materials, particularly market pulp and wood; the
cost of compliance with new environmental laws and regulations; the pace and the
success of acquisitions; the success of office products acquisitions; changes in
same-location sales; cost structure improvements; the success and integration of
new initiatives and acquisitions; the successful integration of systems; the
success of computer-based system enhancements; and general economic conditions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Changes in interest rates and currency rates expose us to financial market risk.
Our debt is predominantly fixed-rate. We experience only modest changes in
interest expense when market interest rates change. Most foreign currency
transactions have been conducted in the local currency, limiting our exposure to
changes in currency rates. Consequently, our market risk-sensitive instruments
do not subject us to material market risk exposure. Changes in our debt and our
continued international expansion could increase these risks. To manage
volatility relating to these exposures, we may enter into various derivative
transactions such as interest rate swaps, rate hedge agreements, and forward
exchange contracts. Interest rate swaps and rate hedge agreements are used to
hedge underlying debt obligations or anticipated transactions. For qualifying
hedges, the interest rate differential is reflected as an adjustment to interest
expense over the life of the swap or underlying debt. Gains and losses related
to qualifying hedges of foreign currency firm commitments and anticipated
transactions are deferred and are recognized in income or as adjustments of
carrying amounts when the hedged transaction occurs. All other forward exchange
contracts are marked to market, and unrealized gains and losses are included in
current period net income. We had no material exposure to losses from
derivative financial instruments held at September 30, 1998. We do not use
derivative financial instruments for trading purposes.
In October 1998, we entered into an interest rate swap with a notional amount of
$75 million that expires in 2000. The swap results in an effective fixed
interest rate with respect to $75 million of our revolving credit agreement
borrowings. Also in October 1998, BCOP entered into an interest rate swap with
a notional amount of $25 million that expires in 2000. The swap results in an
effective fixed interest rate with respect to $25 million of BCOP's revolving
credit agreement borrowings.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to our annual report on Form 10-K for the year ended
December 31, 1997, for information concerning legal proceedings.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
In September 1998, we amended the advance notice provisions in our bylaws. To
be timely filed, we must receive shareholder proposals by at least 45 days
before the date we first mailed our proxy materials for the prior year's annual
meeting of shareholders. This amendment makes our bylaws consistent with the
newly adopted proxy rules of the Securities and Exchange Commission.
Shareholders wishing to submit proposals to be included in our 1999 proxy
statement were required to submit them by November 11, 1998. All other
proposals to be presented at the 1999 annual shareholders meeting must be
delivered to the corporate secretary, in writing, no later than January 25,
1999.
The amended bylaws are included as an Exhibit to this Form 10-Q.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Required exhibits are listed in the Index to Exhibits and are
incorporated by reference.
(b) Reports on Form 8-K.
No Form 8-Ks were filed during the third quarter of 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BOISE CASCADE CORPORATION
As Duly Authorized Officer and
Chief Accounting Officer: /s/ Tom E. Carlile
__________________________
Tom E. Carlile
Vice President and
Controller
Date: November 11, 1998
BOISE CASCADE CORPORATION
INDEX TO EXHIBITS
Filed With the Quarterly Report on Form 10-Q
for the Quarter Ended September 30, 1998
Number Description Page Number
______ ___________ ___________
3 Bylaws, as amended, September 24, 1998
10.1 Supplemental Early Retirement Plan for
Executive Officers, as amended through
July 30, 1998
10.2 1984 Key Executive Stock Option Plan, as
amended through July 31, 1998
10.3 Executive Officer Financial Counseling Program
description, as amended through July 30, 1998
10.4 Boise Cascade Corporation Director Stock Option
Plan, as amended through September 23, 1998
11 Computation of Per Share Earnings
12 Ratio of Earnings to Fixed Charges
27 Financial Data Schedule