EXHIBIT 13.1
FINANCIAL HIGHLIGHTS
1998 1997 1996
______________ ______________ ______________
Sales $6,162,123,000 $5,493,820,000 $5,108,220,000
Net income (loss) $ (36,982,000) $ (30,410,000) $ 9,050,000
Net income (loss) before
nonroutine items $ 20,744,000 $ (30,410,000) $ (5,450,000)
Net income (loss)
per common share
Basic $(1.00) $(1.19) $(.63)
Diluted $(1.00) $(1.19) $(.63)
Diluted before
nonroutine items $ .09 $(1.19) $(.93)
Shareholders' equity
per common share $23.84 $25.39 $27.30
Capital expenditures $313,660,000 $ 578,619,000 $ 832,167,000
Number of employees 23,039 22,514 19,976
Number of common
shareholders 17,842 19,045 20,370
Number of shares of
common stock
outstanding 56,338,426 56,223,923 48,476,366
STATEMENTS OF INCOME (LOSS)
Boise Cascade Corporation and Subsidiaries
Year Ended December 31
____________________________________
1998 1997 1996
__________ __________ __________
(expressed in thousands)
Revenues
Sales $6,162,123 $5,493,820 $5,108,220
__________ __________ __________
Costs and expenses
Materials, labor, and other
operating expenses 4,849,678 4,436,650 4,152,150
Depreciation, amortization, and
cost of company timber harvested 282,737 256,570 255,000
Selling and distribution expenses 666,759 553,240 446,530
General and administrative
expenses 150,455 139,060 119,860
Other (income) expense, net 71,843 710 (14,520)
__________ __________ __________
6,021,472 5,386,230 4,959,020
__________ __________ __________
Equity in net income (loss)
of affiliates (3,791) (5,180) 2,940
__________ __________ __________
Income from operations 136,860 102,410 152,140
__________ __________ __________
Interest expense (159,870) (137,350) (128,360)
Interest income 2,274 6,000 3,430
Foreign exchange gain (loss) (542) 10 (1,200)
Gain on subsidiary's issuance
of stock - - 5,330
__________ __________ __________
(158,138) (131,340) (120,800)
__________ __________ __________
Income (loss) before income taxes,
minority interest, and cumulative
effect of accounting change (21,278) (28,930) 31,340
Income tax (provision) benefit 2,659 9,260 (11,960)
__________ __________ __________
Income (loss) before minority
interest and cumulative effect
of accounting change (18,619) (19,670) 19,380
Minority interest, net of
income tax (9,773) (10,740) (10,330)
__________ __________ __________
Income (loss) before cumulative
effect of accounting change (28,392) (30,410) 9,050
Cumulative effect of accounting
change, net of income tax (8,590) - -
__________ __________ __________
Net income (loss) $ (36,982) $ (30,410) $ 9,050
========== ========== ==========
Net loss per common share
Basic and diluted before cumulative
effect of accounting change $ (.85) $(1.19) $(.63)
Cumulative effect of accounting
change (.15) - -
__________ __________ __________
Basic and diluted $(1.00) $(1.19) $(.63)
The accompanying notes are an integral part of these Financial Statements.
BALANCE SHEETS
Boise Cascade Corporation and Subsidiaries
December 31
___________________________
Assets 1998 1997
____________ ____________
(expressed in thousands)
Current
Cash $ 66,469 $ 56,429
Cash equivalents 7,899 7,157
____________ ____________
74,368 63,586
Receivables, less allowances of $10,933,000
and $9,689,000 526,359 570,424
Inventories 625,218 633,290
Deferred income tax benefits 92,426 54,312
Other 50,035 32,061
____________ ____________
1,368,406 1,353,673
____________ ____________
Property
Property and equipment
Land and land improvements 63,307 57,260
Buildings and improvements 575,509 554,712
Machinery and equipment 4,082,724 4,055,065
____________ ____________
4,721,540 4,667,037
Accumulated depreciation (2,150,385) (2,037,352)
____________ ____________
2,571,155 2,629,685
Timber, timberlands, and timber deposits 270,570 273,001
____________ ____________
2,841,725 2,902,686
____________ ____________
Goodwill, net of amortization of $37,327,000
and $24,020,000 501,691 445,722
Investments in equity affiliates 27,162 32,848
Other assets 227,715 234,995
____________ ____________
Total assets $ 4,966,699 $ 4,969,924
============ ============
Liabilities and Shareholders' Equity
Current
Short-term borrowings $ 129,512 $ 94,800
Current portion of long-term debt 161,473 30,176
Income taxes payable - 3,692
Accounts payable 499,489 470,445
Accrued liabilities
Compensation and benefits 130,480 126,780
Interest payable 36,166 39,141
Other 172,980 128,714
____________ ____________
1,130,100 893,748
____________ ____________
Debt
Long-term debt, less current portion 1,578,136 1,725,865
Guarantee of ESOP debt 155,731 176,823
____________ ____________
1,733,867 1,902,688
____________ ____________
Other
Deferred income taxes 255,660 230,840
Other long-term liabilities 301,920 224,663
____________ ____________
557,580 455,503
____________ ____________
Minority interest 116,753 105,445
____________ ____________
Commitments and contingent liabilities
Shareholders' equity
Preferred stock - no par value; 10,000,000
shares authorized;
Series D ESOP: $.01 stated value;
5,356,648 and 5,569,684 shares
outstanding 241,049 250,636
Deferred ESOP benefit (155,731) (176,823)
Series F: $.01 stated value; 115,000
shares outstanding in 1997 - 111,043
Common stock - $2.50 par value;
200,000,000 shares authorized;
56,338,426 and 56,223,923 shares outstanding 140,846 140,560
Additional paid-in capital 420,890 416,691
Retained earnings 788,918 879,043
Accumulated other comprehensive income (loss) (7,573) (8,610)
____________ ____________
Total shareholders' equity 1,428,399 1,612,540
____________ ____________
Total liabilities and shareholders' equity $ 4,966,699 $ 4,969,924
============ ============
Shareholders' equity per common share $23.84 $25.39
============ ============
The accompanying notes are an integral part of these Financial Statements.
STATEMENTS OF CASH FLOWS
Boise Cascade Corporation and Subsidiaries
Year Ended December 31
______________________________________
1998 1997 1996
__________ __________ __________
(expressed in thousands)
Cash provided by (used for) operations
Net income (loss) $ (36,982) $ (30,410) $ 9,050
Cumulative effect of accounting
change, net of income tax 8,590 - -
Items in income (loss) not using
(providing) cash
Equity in net (income) loss
of affiliates 3,791 5,180 (2,940)
Depreciation, amortization, and
cost of company timber harvested 282,737 256,570 255,000
Deferred income tax provision
(benefit) (11,030) (18,593) (13,498)
Minority interest, net of
income tax 9,773 10,740 10,330
Restructuring charges and
write-down of assets 123,282 - 9,955
Other (654) 1,265 3,322
Gain on sales of assets - - (25,054)
Gain on subsidiary's issuance
of stock - - (5,330)
Receivables 44,331 (12,291) (3,298)
Inventories 11,030 (66,060) (15,914)
Accounts payable and accrued
liabilities 48,029 (10,523) 6,045
Current and deferred income taxes (5,480) 2,735 (37,394)
Other (8,676) (9,577) 3,229
__________ __________ __________
Cash provided by operations 468,741 129,036 193,503
__________ __________ __________
Cash provided by (used for) investment
Expenditures for property and
equipment (229,305) (279,557) (595,253)
Expenditures for timber and
timberlands (7,420) (6,232) (5,510)
Investments in equity affiliates,
net (429) (20,276) (9,736)
Purchases of assets (27,282) (246,861) (188,463)
Sales of assets - - 781,401
Other (33,672) (27,687) (26,271)
__________ __________ __________
Cash used for investment (298,108) (580,613) (43,832)
__________ __________ __________
Cash provided by (used for) financing
Cash dividends paid
Common stock (33,775) (30,176) (28,909)
Preferred stock (21,866) (39,808) (44,389)
__________ __________ __________
(55,641) (69,984) (73,298)
Short-term borrowings 34,712 58,100 19,700
Additions to long-term debt 170,122 417,989 611,158
Payments of long-term debt (187,823) (159,201) (509,456)
Series F Preferred Stock redemption (115,001) - -
Other (6,220) 7,408 11,607
__________ __________ __________
Cash provided by (used for)
financing (159,851) 254,312 59,711
__________ __________ __________
Increase (decrease) in cash and
cash equivalents 10,782 (197,265) 209,382
Balance at beginning of the year 63,586 260,851 51,469
__________ __________ __________
Balance at end of the year $ 74,368 $ 63,586 $ 260,851
========== ========== ==========
The accompanying notes are an integral part of these Financial Statements.
STATEMENTS OF SHAREHOLDERS' EQUITY
Boise Cascade Corporation and Subsidiaries
For the Years Ended December 31, 1996, 1997, and 1998
________________________________________________________________________________________________________________________________
Accumu-
lated
Other
Total Addi- Compre-
Common Share- Deferred tional hensive-
Shares holders' Preferred ESOP Common Paid-In Retained Income
Outstanding Equity Stock Benefit Stock Capital Earnings (Loss)
________________________________________________________________________________________________________________________________
(expressed in thousands)
47,759,946 Balance at December 31, 1995 $1,694,438 $ 562,747 $(213,934) $119,400 $205,107 $1,029,547 $(8,429)
_____________________________________________________________________________________________________________________________
Comprehensive income (loss)
Net income 9,050 - - - - 9,050 -
Other comprehensive income,
net of tax
Cumulative foreign currency
translation adjustment 1,520 - - - - - 1,520
Minimum pension liability
adjustment 5,563 - - - - - 5,563
_________________________________________________________________________________
Other comprehensive income 7,083 - - - - - 7,083
_________________________________________________________________________________
Comprehensive income $ 16,133
============
Cash dividends declared
Common stock (29,050) - - - - (29,050) -
Preferred stock (44,389) - - - - (44,389) -
894,981 Stock options exercised 28,531 - - 2,237 26,294 - -
(178,561) Treasury stock cancellations (16,339) (9,585) - (446) (805) (5,503) -
Other 31,167 - 17,818 - 132 13,217 -
_____________________________________________________________________________________________________________________________
48,476,366 Balance at December 31, 1996 1,680,491 553,162 (196,116) 121,191 230,728 972,872 (1,346)
_____________________________________________________________________________________________________________________________
Comprehensive income (loss)
Net loss (30,410) - - - - (30,410) -
Other comprehensive income
(loss), net of tax
Cumulative foreign currency
translation adjustment (8,135) - - - - - (8,135)
Minimum pension liability
adjustment 871 - - - - - 871
_________________________________________________________________________________
Other comprehensive loss (7,264) - - - - - (7,264)
_________________________________________________________________________________
Comprehensive loss $ (37,674)
============
Cash dividends declared
Common stock (31,415) - - - - (31,415) -
Preferred stock (36,402) - - - - (36,402) -
Conversion of Series G
6,907,440 Preferred Stock - (176,404) - 17,269 159,135 - -
842,153 Stock options exercised 28,092 - - 2,105 25,987 - -
(3,092) Treasury stock cancellations (15,193) (15,079) - (8) (18) (88) -
1,056 Other 24,641 - 19,293 3 859 4,486 -
_____________________________________________________________________________________________________________________________
56,223,923 Balance at December 31, 1997 1,612,540 361,679 (176,823) 140,560 416,691 879,043 (8,610)
_____________________________________________________________________________________________________________________________
Comprehensive income (loss)
Net loss (36,982) - - - - (36,982) -
Other comprehensive income
(loss), net of tax
Cumulative foreign currency
translation adjustment 2,181 - - - - - 2,181
Minimum pension liability
adjustment (1,144) - - - - - (1,144)
_________________________________________________________________________________
Other comprehensive income 1,037 - - - - - 1,037
_________________________________________________________________________________
Comprehensive loss $ (35,945)
============
Cash dividends declared
Common stock (33,792) - - - - (33,792) -
Preferred stock (19,161) - - - - (19,161) -
Redemption of Series F
Preferred Stock (115,001) (111,043) - - - (3,958) -
110,839 Stock options exercised 3,489 - - 277 3,212 - -
(1,433) Treasury stock cancellations (9,637) (9,587) - (4) (11) (35) -
5,097 Other 25,906 - 21,092 13 998 3,803 -
_____________________________________________________________________________________________________________________________
56,338,426 Balance at December 31, 1998 $1,428,399 $ 241,049 $(155,731) $140,846 $420,890 $ 788,918 $(7,573)
=============================================================================================================================
The accompanying notes are an integral part of these Financial Statements.
NOTES TO FINANCIAL STATEMENTS
Boise Cascade Corporation and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION AND USE OF ESTIMATES. The financial statements include the
accounts of the company and all subsidiaries after elimination of
intercompany balances and transactions. 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 at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.
OTHER (INCOME) EXPENSE, NET. "Other (income) expense, net" includes gains
and losses on the sale and disposition of property and other miscellaneous
income and expense items. Late in the fourth quarter of 1998, we announced
companywide cost-reduction initiatives and the restructuring of certain
operations. Also, Boise Cascade Office Products (BCOP), our 81.2%-held
subsidiary, is restructuring certain of its European operations. On
September 6, 1998, our Medford, Oregon, plywood plant was severely damaged
by fire. In the third quarter of 1998, we recorded a net gain in the
building products segment and a loss in corporate and other related to an
insurance settlement for this fire. Late in the second quarter of 1998, we
adopted a plan to restructure our wood products manufacturing business by
permanently closing four facilities. Also in the second quarter of 1998,
our paper and paper products segment recorded a charge for the revaluation
of certain paper-related assets (see Note 8).
In the fourth quarter of 1996, we completed the sale of our coated
publication paper business, consisting primarily of our pulp and paper mill
in Rumford, Maine, and 667,000 acres of timberland, to The Mead
Corporation. Also in 1996, we wrote down certain paper assets.
The components of "Other (income) expense, net" in the Statements of Income
(Loss) are as follows:
Year Ended December 31
______________________________
1998 1997 1996
________ ________ ________
(expressed in thousands)
Fourth-quarter restructuring charges $ 41,422 $ - $ -
Medford fire gain (45,000) - -
Second-quarter restructuring charges 80,900 - -
Asset write-down - - 9,955
Rumford sale - - (25,054)
Other, net (5,479) 710 579
________ ________ ________
$ 71,843 $ 710 $(14,520)
======== ======== ========
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 all years, the computation of diluted net loss per share
was antidilutive; therefore, the amounts reported for basic and diluted
loss were the same.
Year Ended December 31
______________________________
1998 1997 1996
________ ________ ________
(expressed in thousands)
Net income (loss) as reported
before cumulative effect of
accounting change $(28,392) $(30,410) $ 9,050
Preferred dividends(1) (15,578) (31,775) (39,248)
Excess of Series F preferred
stock redemption price over
carrying value(2) (3,958) - -
________ ________ ________
Basic and diluted loss before
cumulative effect of
accounting change (47,928) (62,185) (30,198)
Cumulative effect of
accounting change,
net of income tax (8,590) - -
________ ________ ________
Basic and diluted loss(3) $(56,518) $(62,185) $(30,198)
======== ======== ========
Average shares outstanding
used to determine basic and
diluted loss per common share 56,307 52,049 48,277
======== ======== ========
(1) The dividend attributable to our Series D convertible preferred stock
held by the company's ESOP (employee stock ownership plan) is net of
a tax benefit.
(2) 1998 included a negative 7 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.
(3) Adjustments reducing the net loss to arrive at diluted loss totaling
$2,054,000, $8,851,000, and $15,779,000 in 1998, 1997, and 1996 were
excluded because the calculation of diluted loss per share was
antidilutive. Also in 1998, 1997, and 1996, common shares of
4,601,000, 8,572,000, and 12,234,000 were excluded from average
shares because they were antidilutive.
In 1997, we adopted SFAS No. 128, "Earnings per Share," effective
December 15, 1997. The accounting change had no effect on any previously
reported 1996 loss-per-share amounts.
By July 15, 1997, 8,625,000 depositary shares of our Series G preferred
stock were converted or redeemed for 6,907,440 shares of common stock (see
Note 7). Had the conversion occurred on January 1, 1997, the reported
basic and diluted net loss per common share for the year ended December 31,
1997, would have decreased 20 cents to 99 cents.
FOREIGN CURRENCY TRANSLATION. Local currencies are considered the
functional currencies for most of the company's operations outside the
United States. Assets and liabilities are translated into U.S. dollars at
the rate of exchange in effect at the balance sheet date. Revenues and
expenses are translated into U.S. dollars at average monthly exchange rates
prevailing during the year. Resulting translation adjustments are included
in "Accumulated other comprehensive income (loss)." The 1998, 1997, and
1996 foreign exchange gain and losses reported on the Statements of Income
(Loss) arose primarily from translation adjustments where the U.S. dollar
is the functional currency.
REVENUE RECOGNITION. We recognize revenue when title to the goods sold
passes to the buyer, which is generally at the time of shipment.
CASH AND CASH EQUIVALENTS. Cash equivalents consist of short-term
investments that had a maturity of three months or less at the date of
purchase. At December 31, 1998, $18,795,000 of cash, cash equivalents, and
certain receivables of a wholly owned insurance subsidiary were committed
for use in maintaining statutory liquidity requirements of that subsidiary.
RECEIVABLES. In late September 1998, we sold fractional ownership
interests in a defined pool of trade accounts receivable. At December 31,
1998, $79,000,000 of sold accounts receivable were excluded from
receivables in the accompanying balance sheet and represented an increase
in cash provided by operations. This program represents a revolving 364-
day sale of receivables and may be renewed. The costs of this program
compare favorably with our alternative costs of incremental borrowing.
Costs related to the program are 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.
INVENTORY VALUATION. The company uses the last-in, first-out (LIFO) method
of inventory valuation for raw materials and finished goods inventories at
substantially all of our domestic wood products and paper manufacturing
facilities. In 1998, our building products segment reduced certain
inventory quantities that were valued at lower LIFO costs prevailing in
prior years. The effect of this reduction was to increase operating income
by approximately $6,100,000. All other inventories are valued at the lower
of cost or market, with cost based on the average or first-in, first-out
(FIFO) valuation method. Manufactured inventories include costs for
materials, labor, and factory overhead.
Inventories include the following:
December 31
________________________
1998 1997
________ ________
(expressed in thousands)
Finished goods and work in process $456,577 $453,268
Logs 87,688 107,625
Other raw materials and supplies 145,319 149,870
LIFO reserve (64,366) (77,473)
________ ________
$625,218 $633,290
======== ========
PROPERTY. Property and equipment are recorded at cost. Cost includes
expenditures for major improvements and replacements and the net amount of
interest cost associated with significant capital additions. Capitalized
interest was $1,341,000 in 1998, $10,575,000 in 1997, and $17,778,000 in
1996. Substantially all of our paper and wood products manufacturing
facilities determine depreciation by the units-of-production method, and
other operations use the straight-line method. Gains and losses from sales
and retirements are included in income as they occur except at certain pulp
and paper mills that use composite depreciation methods. At those
facilities, gains and losses are included in accumulated depreciation.
Beginning in 1999, we will discontinue the use of composite depreciation.
This change is not expected to have a material impact on our results of
operations or financial position. Depreciation is computed over the
following estimated useful lives:
Buildings and improvements 5 to 40 years
Furniture and fixtures 5 to 10 years
Machinery, equipment, and delivery trucks 3 to 20 years
Leasehold improvements 5 to 10 years
Cost of company timber harvested and amortization of logging roads are
determined on the basis of the annual amount of timber cut in relation to
the total amount of recoverable timber. Timber and timberlands are stated
at cost, less the accumulated cost of timber previously harvested.
A portion of our wood requirements are acquired from public and private
sources. Except for deposits required pursuant to wood supply contracts,
no amounts are recorded until such time as we become liable to purchase the
timber. At December 31, 1998, based on average prices at the time, the
unrecorded amount of those contracts was estimated to be approximately
$82,000,000.
In recent years, the amount of government timber available for commercial
harvest has declined because of environmental litigation, changes in
government policy, and other factors. More constraints on available timber
supply may be imposed. As a result, the company cannot accurately predict
future log supply. Curtailments or closures of certain wood products
manufacturing facilities are possible.
GOODWILL. Goodwill represents the excess of purchase price and related
costs over the value assigned to the net tangible assets of businesses
acquired. Goodwill is amortized on a straight-line basis over 40 years.
Periodically, the company reviews the recoverability of goodwill. The
measurement of possible impairment is based primarily on the ability to
recover the balance of the goodwill from expected future operating cash
flows on an undiscounted basis. In management's opinion, no material
impairment existed at December 31, 1998. Amortization expense was
$12,893,000 in 1998, $11,037,000 in 1997, and $6,830,000 in 1996.
INVESTMENTS IN EQUITY AFFILIATES. As of December 31, 1998, our principal
investment in affiliates accounted for using the equity method was a 47%
interest in Voyageur Panel, which built an oriented strand board plant in
Barwick, Ontario, Canada. We have an agreement with Voyageur Panel under
which we operate the plant and market its product. The debt of this
affiliate has been issued without recourse to the company.
DEFERRED SOFTWARE COSTS. We defer certain software costs that benefit
future years. These costs are amortized on the straight-line method over a
maximum of five years or the expected life of the software, whichever is
less. "Other assets" in the Balance Sheets includes deferred software
costs of $47,128,000 and $31,137,000 at December 31, 1998 and 1997.
Amortization of deferred software costs totaled $9,624,000, $4,499,000, and
$3,693,000 in 1998, 1997, and 1996. AICPA Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," is effective beginning in 1999. We currently account for
software costs in accordance with this statement.
ENVIRONMENTAL REMEDIATION AND COMPLIANCE. Environmental expenditures
resulting in additions to property, plant, and equipment that increase
useful lives are capitalized, while other environmental expenditures are
charged to expense. Liabilities are recorded when assessments and/or
remedial efforts are probable and the cost can be reasonably estimated.
For further information, see "Financial Review - Timber Supply and
Environmental Issues."
RESEARCH AND DEVELOPMENT COSTS. Research and development costs are
expensed as incurred. During 1998, research and development expenses were
$11,769,000, compared with $10,482,000 in 1997 and $11,403,000 in 1996.
SUBSIDIARY'S ISSUANCE OF STOCK. Changes in the company's proportionate
interest in its subsidiaries from the subsidiaries' issuance of stock to
third parties are recorded in income at the time the stock is issued by the
subsidiaries. Because we anticipated purchasing shares of a subsidiary's
stock, the change in our proportionate interest was included in "Additional
paid-in capital" in 1998 and 1997.
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 $8,590,000, or 15 cents per basic and diluted loss
per share, for the year ended December 31, 1998.
FINANCIAL INSTRUMENTS. At December 31, 1998, the estimated current market
value of the company's debt, based on then current interest rates for
similar obligations with like maturities, was approximately $25,000,000
greater than the amount of debt reported on the Balance Sheet. At
December 31, 1998, we had two interest rate swaps. The liquidation value
of the swaps, based on interest rates available for instruments with
similar characteristics, would have been approximately $776,000. The
estimated fair values of our other financial instruments, cash and cash
equivalents, and short-term borrowings are the same as their carrying
values. In the opinion of management, we do not have any significant
concentration of credit risks. Concentration of credit risks with respect
to trade receivables is limited due to the wide variety of customers and
channels to and through which our products are sold, as well as their
dispersion across many geographic areas. We have only limited involvement
with derivative financial instruments and do not use them for trading
purposes. Financial instruments such as interest rate swaps, rate hedge
agreements, and forward exchange contracts are used periodically to manage
well-defined risks. 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 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. At
December 31, 1998, we had no material exposure to losses from derivative
financial instruments (see Note 4).
NEW ACCOUNTING STANDARDS. In June 1998, the Financial Accounting Standards
Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." 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.
2. INCOME TAXES
The income tax (provision) benefit shown on the Statements of Income (Loss)
includes the following:
Year Ended December 31
______________________________
1998 1997 1996
________ ________ ________
(expressed in thousands)
Current income tax (provision) benefit
Federal $ - $ - $(10,807)
State - - (11,510)
Foreign (8,371) (9,333) (3,141)
________ ________ ________
(8,371) (9,333) (25,458)
________ ________ ________
Deferred income tax(provision) benefit
Federal 1,846 12,597 4,189
State 1,894 2,292 10,430
Foreign 7,290 3,704 (1,121)
________ ________ ________
11,030 18,593 13,498
________ ________ ________
Total income tax (provision) benefit $ 2,659 $ 9,260 $(11,960)
======== ======== ========
During 1998, we made cash payments net of refunds received of $13,033,000.
In 1997, we received income tax refunds net of cash payments of $1,332,000.
In 1996, we made cash payments net of refunds received of $55,368,000.
A reconciliation of the statutory U.S. federal tax (provision) benefit and
our reported tax (provision) benefit is as follows:
Year Ended December 31
______________________________
1998 1997 1996
________ ________ ________
(expressed in thousands)
Statutory tax (provision) benefit $ 7,447 $ 10,128 $(10,969)
Changes resulting from:
State taxes 683 1,490 (702)
Foreign tax provision different
than theoretical rate (3,166) (4,599) (2,364)
Effect of nontaxable gain on BCOP's
issuance of stock - - 1,866
Other, net (2,305) 2,241 209
________ ________ ________
Reported tax (provision) benefit $ 2,659 $ 9,260 $(11,960)
======== ======== ========
At December 31, 1998, we had U.S. federal loss carryforwards of
$168,752,000 expiring in 2012 and 2018. We believe that the loss
carryforwards will be fully realized based on future reversals of existing
temporary differences in taxable income. We also had $138,649,000 of
alternative minimum tax credits, which may be carried forward indefinitely.
The components of the net deferred tax liability on the Balance Sheets are
as follows:
December 31
__________________________________________
1998 1997
__________________________________________
(expressed in thousands)
__________________________________________
Assets Liabil- Assets Liabil-
ities ities
_________ _________ _________ _________
Employee benefits $ 90,671 $ 22,974 $ 92,139 $ 25,250
Property and equipment and
timber and timberlands 33,299 511,528 63,875 459,982
Net operating losses 63,268 - 50,419 -
Alternative minimum tax 138,649 - 144,687 -
Reserves 60,704 8,288 21,421 909
Inventories 13,555 - 12,266 274
State income taxes 23,490 36,883 26,596 38,677
Deferred charges 6,584 6,174 404 2,776
Differences in bases
of investments 3,365 959 8,382 55,574
Other 17,500 27,513 9,561 22,836
_________ _________ _________ _________
$ 451,085 $ 614,319 $ 429,750 $ 606,278
========= ========= ========= =========
Pretax income (loss) from domestic and foreign sources is as follows:
Year Ended December 31
___________________________________
1998 1997 1996
_________ _________ _________
(expressed in thousands)
Domestic $ (2,052) $ (26,189) $ 32,452
Foreign (19,226) (2,741) (1,112)
_________ _________ _________
Pretax income (loss) $ (21,278) $ (28,930) $ 31,340
========= ========= =========
At December 31, 1998, our foreign subsidiaries had $6,561,000 of
undistributed earnings which have been indefinitely reinvested. It is not
practical to make a determination of the additional U.S. income taxes, if
any, that would be due upon remittance of these earnings until the
remittance occurs.
Our federal income tax returns have been examined through 1993. Federal
income tax returns for 1994 and 1995 are presently under examination.
Certain deficiencies have been proposed, but we believe that we have
adequately provided for any such deficiencies and that settlements will not
have a material adverse effect on our financial condition or results of
operations.
3. LEASES
Lease obligations for which we assume substantially all property rights and
risks of ownership are capitalized. All other leases are treated as
operating leases. Rental expenses for operating leases, net of sublease
rentals, were $61,709,000 in 1998, $61,422,000 in 1997, and $52,090,000 in
1996. For operating leases with remaining terms of more than one year, the
minimum lease payment requirements, net of sublease rentals, are
$32,637,000 for 1999, $25,885,000 for 2000, $21,273,000 for 2001,
$15,827,000 for 2002, and $13,248,000 for 2003, with total payments
thereafter of $160,794,000.
Substantially all lease agreements have fixed payment terms based upon the
passage of time. Some lease agreements provide us with the option to
purchase the leased property. Additionally, certain agreements contain
renewal options averaging seven years, with fixed payment terms similar to
those in the original lease agreements.
4. DEBT
At December 31, 1998, we had a revolving credit agreement with a group of
banks. The agreement allows us to borrow as much as $600,000,000 at
variable interest rates based on customary indices and expires in June
2002. The revolving credit agreement contains financial covenants relating
to minimum net worth, minimum interest coverage ratio, and ceiling ratio of
debt to capitalization. Under this agreement, the payment of dividends by
the company is dependent upon the amount of net worth in excess of the
defined minimum. Our net worth at December 31, 1998, exceeded the defined
minimum by $118,012,000. At December 31, 1998, there was $115,000,000
outstanding under this agreement.
BCOP has a revolving credit agreement with a group of banks that allows
them to borrow as much as $450,000,000 at variable interest rates based on
customary indices and expires in June 2001. 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
$200,000,000 at December 31, 1998.
In October 1998, we entered into an interest rate swap with a notional
amount of $75,000,000 and an effective fixed interest rate of 5.1% with
respect to $75,000,000 of our revolving credit agreement borrowings. BCOP
also entered into an interest rate swap with a notional amount of
$25,000,000 and an effective fixed interest rate of 5.0% with respect to
$25,000,000 of their revolving credit agreement borrowings. Both swaps
expire in 2000. We are exposed to credit-related gains or losses in the
event of nonperformance by counterparties to these swaps; however, we do
not expect any counterparties to fail to meet their obligations.
At December 31, 1998 and 1997, we had $57,412,000 and $71,500,000 of short-
term borrowings outstanding, and BCOP had $72,100,000 and $23,300,000 of
short-term borrowings outstanding. The maximum amounts of short-term
borrowings outstanding during the years ended December 31, 1998 and 1997,
were $279,900,000 and $164,400,000. The average amount of short-term
borrowings outstanding during the years ended December 31, 1998 and 1997,
were $190,715,000 and $52,554,000. For 1998 and 1997, the average interest
rates for these borrowings were 5.8% and 5.9%.
In May 1998, BCOP issued $150,000,000 of 7.05% notes due in May 2005.
In February 1999, we will redeem $100,000,000 of our 9.875% notes that were
due in 2001.
At December 31, 1998, we had $489,400,000 and BCOP had $150,000,000 of
unused borrowing capacity registered with the Securities and Exchange
Commission for additional debt securities.
The scheduled payments of long-term debt are $161,473,000 in 1999,
$116,982,000 in 2000, $240,574,000 in 2001, $240,609,000 in 2002, and
$125,270,000 in 2003. Of the total amount shown in 2001, $200,000,000
represents the amount outstanding under BCOP's revolving credit agreement.
Of the total amount shown in 2002, $115,000,000 represents the amount
outstanding under our revolving credit agreement.
Cash payments for interest, net of interest capitalized, were $162,844,000
in 1998, $129,794,000 in 1997, and $124,317,000 in 1996.
We have guaranteed the debt used to fund an employee stock ownership plan
that is part of the Savings and Supplemental Retirement Plan for the
company's U.S. salaried employees (see Note 5). We have recorded the debt
on our Balance Sheets, along with an offset in the shareholders' equity
section that is titled "Deferred ESOP benefit." We have guaranteed certain
tax indemnities on the ESOP debt, and the interest rate on the guaranteed
debt is subject to adjustment for events described in the loan agreement.
Long-term debt, almost all of which is unsecured, consists of the
following:
December 31
__________________________
1998(1) 1997
__________ __________
(expressed in thousands)
9.9% notes, due in 2000, net of unamortized
discount of $66,000 $ 99,934 $ 99,879
9.875% notes, due in 2001, redeemed 1999 100,000 100,000
9.85% notes, due in 2002 125,000 125,000
7.05% notes, due in 2005, net of unamortized
discount of $299,000 149,701 -
9.45% debentures, due in 2009, net of
unamortized discount of $244,000 149,756 149,734
7.35% debentures, due in 2016, net of
unamortized discount of $91,000 124,909 124,903
Medium-term notes, Series A, with interest
rates averaging 8.1% and 8.2%, due in varying
amounts through 2013 383,100 415,405
Revenue bonds and other indebtedness, with
interest rates averaging 6.7% and 6.9%,
due in varying amounts annually through
2027, net of unamortized discount of $669,000 271,357 285,301
American & Foreign Power Company Inc. 5%
debentures, due in 2030, net of unamortized
discount of $1,020,000 20,852 20,819
Revolving credit borrowings, with interest
rates averaging 5.6% and 6.3% 315,000 435,000
__________ __________
1,739,609 1,756,041
Less current portion 161,473 30,176
__________ __________
1,578,136 1,725,865
Guarantee of ESOP debt, due in
installments through 2004 155,731 176,823
__________ __________
$1,733,867 $1,902,688
========== ==========
(1) The amount of net unamortized discount disclosed applies to long-term
debt outstanding at December 31, 1998.
5. RETIREMENT AND BENEFIT PLANS
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. We adopted this standard at
December 31, 1998.
Substantially all of our employees are covered by noncontributory defined
benefit pension plans. The pension benefit for salaried employees is based
primarily on the employees' years of service and highest five-year average
compensation. The benefit for hourly employees is generally based on a
fixed amount per year of service. Our contributions to our pension plans
vary from year to year, but we have made at least the minimum contribution
required by law in each year. The assets of the pension plans are invested
primarily in common stocks, fixed-income securities, and cash and cash
equivalents.
We also sponsor contributory savings and supplemental retirement plans for
most of our salaried and hourly employees. The program for salaried
employees includes an employee stock ownership plan. Under that plan, our
Series D ESOP convertible preferred stock (see Note 7) is being allocated
to eligible participants through 2004, as principal and interest payments
are made on the ESOP debt guaranteed by the company. Total expense for
these plans was $22,197,000 in 1998, compared with $20,910,000 in 1997 and
20,128,000 in 1996.
The type of retiree health care benefits provided and the extent of
coverage vary based on employee classification, date of retirement,
location, and other factors. The portion of the cost of coverage we pay
for salaried employees retiring in each year since 1986 has decreased.
Beginning in 1998, new retirees pay 100% of the cost of their health care
coverage premium. All of our postretirement health care plans are
unfunded. We explicitly reserve the right to amend or terminate our
retiree medical plans at any time, subject only to constraints, if any,
imposed by the terms of collective bargaining agreements. Accrual of costs
pursuant to accounting standards does not affect, or reflect, our ability
to amend or terminate these plans. Amendment or termination may
significantly impact the amount of expense incurred.
The following table, which includes only company-sponsored plans,
reconciles the beginning and ending balances of our benefit obligation:
Pension Benefits Other Benefits
_________________________________
1998 1997 1998 1997
______ ______ ______ ______
(expressed in millions)
Change in benefit obligation
Benefit obligation at
beginning of year $1,179 $1,089 $ 83 $ 84
Service cost 29 26 1 1
Interest cost 83 79 5 6
Amendments 10 1 - -
Actuarial (gain) loss 32 49 (1) 2
Closures and curtailments 16(1) - - -
Benefits paid (68) (65) (10) (10)
______ ______ ______ ______
Benefit obligation at
end of year $1,281 $1,179 $ 78 $ 83
====== ====== ====== ======
(1) See Note 8.
The following table reconciles the beginning and ending balances of the
fair value of plan assets:
Pension Benefits Other Benefits
_________________________________
1998 1997 1998 1997
______ ______ ______ ______
(expressed in millions)
Change in plan assets
Fair value of plan assets
at beginning of year $1,227 $1,103 $ - $ -
Actual return on plan assets 128 177 - -
Employer contribution 3 10 - -
Benefits paid (65) (63) - -
______ ______ ______ ______
Fair value of plan assets at
end of year $1,293 $1,227 $ - $ -
====== ====== ====== ======
The following table shows the funded status of our pension plans, including
amounts not recognized and recognized in our Statements of Income (Loss).
Our other benefit plans are unfunded.
Pension Benefits
________________
1998 1997
_____ _____
(expressed in
millions)
Funded status $ 12 $ 48
Unrecognized actuarial (gain) loss (16) (30)
Unrecognized prior service cost 27 21
Unrecognized net initial asset - (1)
_____ _____
Net amount recognized $ 23 $ 38
===== =====
The following table shows the amounts recognized in our Balance Sheets:
Pension Benefits Other Benefits
_________________________________
1998 1997 1998 1997
______ ______ ______ ______
(expressed in millions)
(Accrued)/prepaid benefit cost $ 54 $ 69 $ (92) $ (99)
Accrued benefit liability (48) (41) - -
Intangible asset 11 6 - -
Accumulated other
comprehensive income 6 4 - -
______ ______ ______ ______
Net amount recognized $ 23 $ 38 $ (92) $ (99)
====== ====== ====== ======
The assumptions used by our actuaries in the accounting for our plans are
estimates of factors that will determine among other things, the amount and
timing of future benefit payments. We also accrue postretirement benefit
costs.
The following table presents the assumptions used:
Pension Benefits Other Benefits
_____________________ _____________________
1998 1997 1996 1998 1997 1996
_____ _____ _____ _____ _____ _____
Weighted average
assumptions as
of December 31
Discount rate 7.00% 7.25% 7.50% 7.00% 7.25% 7.50%
Expected return
on plan assets 9.75% 9.75% 9.75% - - -
Rate of compensation
increase 4.50% 5.00% 5.00% - - -
For measurement purposes, a 7.0% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1998. The initial
1992 trend rate for medical care costs was 8.5%, which was assumed to
decrease ratably over the subsequent ten years to 6%. A 1% increase in the
trend rate for medical care costs would have increased the December 31,
1998, benefit obligation by $1,705,000 and postretirement health care
expense for the year ended December 31, 1998, by $146,000. A 1% decrease
in the trend rate for medical care costs would have decreased the
December 31, 1998, benefit obligation by $1,666,000 and postretirement
health care expense for the year ended December 31, 1998, by $140,000.
The components of net periodic benefit cost are as follows:
Pension Benefits Other Benefits
_______________________________ _______________________________
Year Ended December 31 Year Ended December 31
_______________________________ _______________________________
1998 1997 1996 1998 1997 1996
_________ _________ _________ _________ _________ _________
(expressed in thousands) (expressed in thousands)
Service cost $ 28,876 $ 25,845 $ 25,843 $ 790 $ 730 $ 920
Interest cost 82,972 79,279 76,168 5,380 5,930 6,350
Expected return on plan assets (110,587) (98,739) (91,712) - - -
Recognized net initial asset (611) (2,571) (2,119) - - -
Recognized actuarial loss (gain) 531 179 568 (310) (310) (280)
Amortization of prior service
costs 3,607 3,726 4,085 (2,320) (2,320) (2,820)
_________ _________ _________ _________ _________ _________
Company-sponsored plans 4,788 7,719 12,833 3,540 4,030 4,170
Multiemployer pension plans 544 592 593 - - -
_________ _________ _________ _________ _________ _________
Net periodic benefit cost $ 5,332 $ 8,311 $ 13,426 $ 3,540 $ 4,030 $ 4,170
========= ========= ========= ========= ========= =========
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plans with accumulated benefit
obligations in excess of plan assets were $354,000,000, $338,000,000, and
$290,000,000 as of December 31, 1998 and $325,000,000, $316,000,000, and
$279,000,000 as of December 31, 1997.
6. BOISE CASCADE OFFICE PRODUCTS CORPORATION
On September 25, 1997, BCOP issued 2,250,000 shares of unregistered common
stock, all of which was purchased by Boise Cascade. The transaction was
completed at a price of $21.5495 per share, for a total of $48,486,375. At
December 31, 1998, we owned 53,398,724 shares, or 81.2% of BCOP's
outstanding common stock.
In 1998, 1997, and 1996, BCOP made various 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 value of assets and liabilities. Such
adjustments are not expected to be significant to our results of operations
or 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
acquisitions.
BCOP acquired six businesses during 1998, eight businesses during 1997, and
19 businesses during 1996. Amounts paid, acquisition liabilities recorded,
debt assumed, and stock issued for these acquisitions were as follows:
1998 1997 1996
________ ________ ________
(expressed in thousands,
except share amounts)
Cash paid $ 27,282 $254,025 $180,139
Acquisition liabilities recorded $ 49,062 $ 12,674 $ 35,346
Debt assumed $ 162 $ 10,137 $ -
Stock issued
Shares - 135,842 321,652
Value $ - $ 2,882 $ 6,886
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. On August 14, 1998, BCOP acquired the contract stationer business
of Wilson's, based in Canada. On October 1, 1998, they acquired the
contract stationer business of Atlas Office Supplies, based in
Indianapolis, Indiana. On November 2, 1998, they acquired the contract
stationer business of Midesha Enterprises, based in Memphis, Tennessee. On
November 27, 1998, they acquired the computer consumables business of
Canadisc, based in Canada. These transactions were completed for cash of
$19,897,000, debt assumed of $162,000, and the recording of $8,062,000 of
acquisition liabilities.
The 1997 amounts include the acquisition of 100% of the shares of Jean-Paul
Guisset S.A. (JPG) for approximately FF850,000,000 (US$144,000,000) plus a
price supplement payable in the year 2000, if certain earnings and sales
growth targets are reached. The maximum amount of the price supplement is
FF300,000,000 or approximately US$51,000,000. At the time of purchase, no
liability was recorded for the price supplement, as the amount of payment,
if any, was not assured beyond a reasonable doubt. In 1998, a payment of
US$4,430,000 was made and a payable of US$41,000,000 was recorded based on
results in 1998 and 1997. Approximately FF128,500,000 (US$20,500,000) was
repatriated to BCOP from JPG during the third quarter of 1997. In 1997, in
addition to the cash paid, BCOP recorded approximately US$5,800,000 of
acquisition liabilities and assumed US$10,137,000 of long-term debt. JPG
is a direct marketer of office products in France.
In January 1997, BCOP formed a joint venture with Otto Versand (Otto) to
begin direct marketing office products in Europe, initially in Germany. In
December 1997, Otto purchased a 10% interest in JPG for approximately
FF72,200,000 (US$13,000,000). In December 1998, BCOP and Otto dissolved
the joint venture. Otto acquired BCOP's 50% interest in the joint venture.
In addition, BCOP repurchased Otto's 10% interest in JPG for $2,955,000,
plus the repayment of a loan and accrued interest from Otto of
approximately $13,700,000. JPG is now 100% owned by BCOP.
Also in 1997, BCOP acquired the assets of the promotional products business
of OstermanAPI, Inc. (Osterman), based in Maumee, Ohio, for cash of
$56,000,000 and the recording of $882,000 of liabilities. 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.
The 1996 amounts include the acquisition of 100% of the shares of Grand &
Toy Limited (Grand & Toy) from Cara Operations Limited (Toronto) for
approximately C$140,000,000 (US$102,084,000). In addition, BCOP recorded
acquisition liabilities of approximately US$9,907,000. Grand & Toy owns
and operates office products distribution centers and approximately 70
retail stores across Canada.
Unaudited pro forma results of operations reflecting the acquisitions, net
of the impact of the minority interest, are as follows. If the 1998
acquisitions had occurred January 1, 1998, sales for the year ended
December 31, 1998, would have increased $39,000,000, net loss would have
decreased $490,000, and basic and diluted loss per share would have
decreased 1 cent. If the 1998 and 1997 acquisitions had occurred
January 1, 1997, sales for the year ended December 31, 1997, would have
increased $217,000,000, and net loss and basic and diluted loss per share
would have been unchanged. If the 1997 and 1996 acquisitions had occurred
January 1, 1996, sales for the year ended December 31, 1996, would have
increased $417,000,000, net income would have increased $1,158,000, and
basic and diluted loss per share would have decreased 2 cents. This
unaudited pro forma financial information does not necessarily represent
the actual results of operations that would have resulted if the
acquisitions had occurred on the dates assumed.
As a result of BCOP's acquisition activity, short-term acquisition
liabilities of $5,710,000 and $14,642,000 at December 31, 1998 and 1997,
were included in "Other current liabilities." Additionally, long-term
acquisition liabilities of $51,621,000, primarily for the JPG price
supplement, and $15,869,000 at December 31, 1998 and 1997, were included in
"Other long-term liabilities."
7. SHAREHOLDERS' EQUITY
PREFERRED STOCK. At December 31, 1998, 5,356,648 shares of 7.375% Series D
ESOP convertible preferred stock were outstanding. The stock is shown on
the Balance Sheets at its liquidation preference of $45 per share. The
stock was sold in 1989 to the trustee of our Savings and Supplemental
Retirement Plan for salaried employees (see Note 5). Each ESOP preferred
share is entitled to one vote, bears an annual cumulative dividend of
$3.31875, and is convertible at any time by the trustee to 0.80357 share of
common stock. The ESOP preferred shares may not be redeemed for less than
the liquidation preference.
In February 1998, we redeemed 115,000 shares of our Series F preferred
stock at a price of $1,000 per preferred share ($25 per depositary share)
plus accrued but unpaid dividends.
By July 15, 1997, 8,625,000 of our depositary shares of Series G preferred
stock were converted or redeemed for 6,907,440 shares of our common stock.
COMMON STOCK. We are authorized to issue 200,000,000 shares of common
stock, of which 56,338,426 shares were issued and outstanding at
December 31, 1998. Of the unissued shares, a total of 10,022,604 shares
were reserved for the following:
Conversion of Series D ESOP preferred stock 4,304,441
Issuance under Key Executive Stock Option Plan 5,529,278
Issuance under Director Stock Compensation Plan 88,885
Issuance under Director Stock Option Plan 100,000
We have a shareholder rights plan which was adopted in December 1988,
amended in September 1990, and renewed in September 1997. The renewed
rights plan became effective in December 1998. Details are set forth in
the Renewed Rights Agreement filed with the Securities and Exchange
Commission on November 12, 1997.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS). At December 31, 1998, the
balance shown on the Statements of Shareholders' Equity for "Accumulated
other comprehensive income (loss)," consisted of a minimum pension
liability adjustment of $3,138,000 and a cumulative foreign currency
translation adjustment of $4,435,000. These amounts are net of income
taxes calculated at a rate of approximately 39%.
STOCK OPTIONS. We have three stock option plans, the BCC Key Executive
Stock Option Plan (KESOP), the BCC Director Stock Compensation Plan (DSCP),
and the BCC Director Stock Option Plan (DSOP). In addition, BCOP has two
stock option plans, the BCOP Key Executive Stock Option Plan (KESOP) and
the BCOP Director Stock Option Plan (DSOP). Both the company and BCOP
account for these plans under APB Opinion No. 25, "Accounting for Stock
Issued to Employees." Under this opinion, the only compensation cost
recognized is for grants under the BCC DSCP and for grants under terms of
which the number of options exercisable is based on future performance.
Compensation costs recognized in 1998, 1997, and 1996 were $244,000,
$227,000, and $810,000.
Had compensation costs for these five plans been determined consistent with
SFAS No. 123, "Accounting for Stock-Based Compensation," our 1998 net loss
would have been increased pro forma by $7,661,000, and basic and diluted
loss per share would have increased pro forma by 14 cents. The pro forma
increase to net loss in 1997 would have been $7,222,000, and basic and
diluted loss per share would have increased 14 cents. The pro forma
reductions in 1996 would have decreased net income $7,574,000, and basic
and diluted loss per share would have increased 16 cents. The pro forma
compensation cost may not be representative of that to be expected in
future years.
The BCC KESOP provides for the grant of options to purchase shares of our
common stock to key employees of the company. The exercise price is equal
to the fair market value of our common stock on the date the options are
granted. Options expire, at the latest, ten years and one day following
the grant date.
The 4,321,756 options outstanding at December 31, 1998, have exercise
prices between $18.125 and $43.75 and a weighted average remaining
contractual life of 6.6 years.
The fair value of each BCC option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1998, 1997, and 1996: risk-free
interest rates of 5.4%, 6.0%, and 6.6%; expected dividends of 60 cents for
each year; expected lives of 4.2 years for each year, and expected stock
price volatility of 30% for each year.
A summary of the status of the BCC KESOP at December 31, 1998, 1997, and
1996, and the changes during the years then ended is presented in the table
below:
1998 1997 1996
_____________________________________________________________________
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
_____________________________________________________________________
Balance at beginning
of year 3,649,966 $33.19 4,228,736 $32.55 4,340,033 $31.28
Options granted 841,890 28.88 751,100 36.88 804,900 31.38
Options exercised (109,000) 25.30 (839,333) 28.25 (894,981) 25.02
Options expired (61,100) 39.14 (490,537) 41.80 (21,216) 44.11
_________ _________ _________
Balance at end of year 4,321,756 32.47 3,649,966 33.19 4,228,736 32.55
========= ========= =========
Exercisable at end of year 3,479,866 33.33 2,898,866 32.24 3,423,836 32.83
Weighted average fair value
of options granted
(Black-Scholes) $7.89 $10.88 $9.30
The BCC DSOP, available only to nonemployee directors, provides for annual
grants of options. The exercise price of these options is equal to the
fair market value of our common stock on the date the options are granted.
The options expire the earlier of three years after the director ceases to
be a director or ten years after the grant date. Total shares subject to
options at December 31, 1998, 1997, and 1996, were 70,500, 49,500, and
30,000, with weighted average exercise prices of $34.07, $36.57, and
$36.25.
The BCC DSCP permits nonemployee directors to elect to receive grants of
options to purchase shares of our common stock in lieu of cash
compensation. The difference between the $2.50-per-share exercise price of
DSCP options and the market value of the common stock subject to the
options is intended to offset the cash compensation that participating
directors have elected not to receive. Options expire three years after
the holder ceases to be a director. Total shares subject to options at
December 31, 1998, 1997, and 1996, were 43,172, 34,542, and 30,245.
The BCOP KESOP provides for the grant of options to purchase shares of
BCOP's common stock to key employees of BCOP. The exercise price is equal
to the fair market value of BCOP's common stock on the date the options are
granted. One-third of the options become exercisable in each of the three
years following the grant date and expire, at the latest, ten years
following the grant date.
The 2,021,105 options outstanding at December 31, 1998, have exercise
prices between $12.50 and $26.625 and a weighted average remaining
contractual life of nine years.
The fair value of each BCOP option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1998, 1997, and 1996: risk-free
interest rates of 5.5%, 6.1%, and 5.2%; no expected dividends; expected
lives of 4.2 years for each year; and expected stock price volatility of
35% for each year.
A summary of the status of the BCOP KESOP at December 31, 1998, 1997, and
1996, and the changes during the years then ended is presented in the table
below:
1998 1997 1996
_____________________________________________________________________
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
_____________________________________________________________________
Balance at beginning
of the year 1,490,139 $20.10 1,059,442 $18.66 647,400 $12.57
Options granted 782,200 18.22 495,700 23.08 501,200 25.54
Options exercised (152,334) 12.50 (24,468) 12.50 (75,225) 12.50
Options expired (98,900) 21.92 (40,535) 22.38 (13,933) 19.78
_________ _________ _________
Balance at end of the year 2,021,105 19.86 1,490,139 20.10 1,059,442 18.66
========= ========= =========
Exercisable at end
of the year 826,305 19.13 483,039 16.72 140,569 12.60
Weighted average fair value
of options granted
(Black-Scholes) $6.78 $8.61 $9.14
The BCOP DSOP, available only to nonemployee directors, provides for annual
grants of options. The exercise price of options under this plan is equal
to the fair market value of BCOP's common stock on the date the options are
granted. Options expire the earlier of three years after the director
ceases to be a director or ten years after the grant date. Total shares
outstanding at December 31, 1998, 1997, and 1996, were 64,000, 39,000, and
24,000, with weighted average exercise prices of $16.99, $18.58, and
$17.50.
Under each of the plans, options may not, except under unusual
circumstances, be exercised until one year following the grant date.
8. RESTRUCTURING ACTIVITIES
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. These
closures are due to poor financial results and a decrease in wood supply.
The Horseshoe Bend and Fisher sawmills have closed, and the Elgin sawmill
and Yakima plywood plant will close in 1999. Employment for 494 workers at
these locations will be affected by these closures. These facilities had
sales of $76,700,000, $98,800,000, and $107,200,000 for the years ended
December 31, 1998, 1997, and 1996, and operating losses of $3,400,000,
$9,700,000, and $7,100,000 for the years ended December 31, 1998, 1997, and
1996.
The assets still to be shut down have been written down to zero, their
estimated net realizable value at the date of closure. Had we continued to
depreciate these assets, 1998 operating expense would have increased
approximately $2,000,000.
Also in the second quarter of 1998, our paper and paper products segment
recorded a pretax charge related to the revaluation of certain paper-
related assets. Included in the revaluation is an $8,000,000 write-down of
a 60%-owned joint venture in China that produced carbonless paper.
In the fourth quarter of 1998, we announced a companywide cost-reduction
initiative and the restructuring of certain operations. Specific actions
include the elimination of approximately 400 job positions, primarily in
our manufacturing businesses and Boise headquarters, through a combination
of early retirements, layoffs, and attrition. Our paper research and
development facility in Portland, Oregon, will close in 1999. BCOP will
close eight facilities in the United Kingdom and integrate selected
functions of the operations with their other United Kingdom operations.
These BCOP closures are expected to be completed during the first half of
1999 and will result in work force reductions of approximately 140
employees. BCOP also dissolved an unprofitable joint venture in Germany.
We recorded pretax charges in 1998 as shown in the following table. Except
for $960,000 of inventory write-downs recorded in "Material, labor, and
other operating expenses," these charges were recorded in "Other (income)
expense, net."
1998 Restructuring Charges
_________________________________________
Asset Employee- Other
Write- Related Exit
Downs Costs Costs Total
________ ________ ________ ________
(expressed in thousands)
Second Quarter
Building products $ 27,200 $ 14,000 $ 20,700 $ 61,900
Paper and paper products 18,800 200 - 19,000
Fourth Quarter
Office products 300 1,400 9,400 11,100
Building products - 2,800 - 2,800
Paper and paper products 7,200 11,300 - 18,500
Corporate and other - 9,600 400 10,000
________ ________ ________ ________
$ 53,500 $ 39,300 $ 30,500 $123,300
Asset write-downs were for plant and equipment and investment in joint
ventures. No intangible assets were written down. Employee-related costs
are primarily for severance payments and the present value of unrecorded
early retirement benefits. Approximately $16,000,000 of the employee-
related costs will be paid by our retirement plans and will require no cash
expenditures. We estimate that 978 people will terminate or take early
retirement. Through December 31, 1998, 229 had left the company. Other
exit costs include tear-down and environmental clean up costs related to
the closing facilities, operating lease costs after operations cease, and a
payment to dissolve the BCOP joint venture.
Restructuring liabilities are included in "Accrued liabilities, other" in
the accompanying Balance Sheets. An analysis of restructuring reserve
activity is as follows:
Year Ended December 31
______________________________
1998 1997 1996
________ _______ _________
(expressed in thousands)
Balance at beginning of year $ 1,400 $ 2,300 $ 18,400
Current-year reserves
Charged to income 55,500 1,000 200
Reclassed from other accounts - - -
Charges against reserves (10,700) (1,700) (16,300)
Reserves credited to income - (200) -
________ _______ _________
Balance at end of year $ 46,200 $ 1,400 $ 2,300
The activity in 1996 and 1997 primarily relates to the reconfiguration of
our Vancouver mill which began in 1995.
9. SEGMENT INFORMATION
In 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." We
adopted this statement at December 31, 1998. Adoption of the standard had
no impact on our net income. Previously reported segment information has
been restated to conform to the new standard.
We operate our business using four reportable segments. The segments
include office products, building products, paper and paper products, and
corporate and other. These segments represent distinct businesses that are
managed separately because of the differing products and services. Each of
these businesses requires distinct operating and marketing strategies.
Management reviews the performance of the company based on these operating
segments.
The office products segment (BCOP) is engaged in the marketing and selling
of office supplies, computer consumables, office furniture, paper products,
and promotional products. All of the products sold by this segment are
purchased from manufacturers or from industry wholesalers, except office
papers, which are sourced primarily from our paper operations. This
segment has operations in the United States, Australia, Canada, France,
Spain, and the United Kingdom.
The building products segment manufactures, markets, and distributes
various products that are used for construction. These products include
lumber, structural panels, particleboard, and engineered wood products.
Most of these products are sold to independent wholesalers and dealers and
through our own wholesale building materials distribution outlets.
The paper and paper products segment manufactures, markets, and distributes
various paper products, including uncoated free sheet, packaging papers,
newsprint, corrugated containers, and market pulp. These products are sold
to distributors and industrial customers primarily by our own sales
personnel.
The corporate and other segment includes corporate support staff services
and related assets and liabilities.
The segments are measured on operating profits before interest expense,
income taxes, minority interest, extraordinary items, and cumulative effect
of accounting changes. Certain expenses are allocated to the operating
segments. For some of these allocated expenses, the related assets and
liabilities remain in the corporate and other segment. The segments follow
the same accounting principles described in the Summary of Significant
Accounting Policies. Sales between the segments are recorded primarily at
market prices.
No single customer accounts for 10% or more of consolidated trade sales.
Boise Cascade's export sales to foreign unaffiliated customers were
$163,005,000 in 1998, $177,071,000 in 1997, and $182,889,000 in 1996.
During 1998, BCOP had foreign operations in Australia, Canada, France,
Germany, Spain, and the United Kingdom. During 1997, BCOP had foreign
operations in Australia, Canada, France, Germany, and the United Kingdom.
During 1996, BCOP had operations in Australia, Canada, and the United
Kingdom. For the years ended December 31, 1998, 1997, and 1996, BCOP's
foreign operations had sales of $695,688,000, $517,202,000, and
$296,396,000. Revenues are attributed to geographic regions based on the
location of the business. At December 31, 1998, 1997, and 1996, long-lived
assets of BCOP's foreign operations were $344,099,000, $290,966,000, and
$130,963,000.
An analysis of segment sales by product line is as follows:
Year Ended December 31
______________________________
1998 1997 1996
________ ________ ________
(expressed in thousands)
Office products
Office supplies $1,875.4 $1,723.1 $1,353.1
Office papers 394.7 334.4 286.0
Computer consumables 313.5 180.9 126.5
Office furniture 378.3 284.2 215.1
Promotional products 105.4 74.1 4.8
________ ________ ________
3,067.3 2,596.7 1,985.5
________ ________ ________
Building products
Structural panels 620.3 539.6 454.8
Lumber 513.5 608.8 538.4
Building supplies 218.1 185.8 261.2
Engineered wood products 210.1 161.6 120.8
Particleboard 58.6 61.1 64.0
Other 101.9 88.3 117.9
________ ________ ________
1,722.5 1,645.2 1,557.1
________ ________ ________
Paper and paper products
Uncoated free sheet 1,024.9 933.5 928.9
Containerboard and corrugated
containers 339.2 285.1 304.3
Newsprint 201.8 193.3 205.6
Market pulp 47.0 81.5 111.2
Other 138.7 111.2 323.2
________ ________ ________
1,751.6 1,604.6 1,873.2
________ ________ ________
Corporate and other 79.8 76.3 74.7
Intersegment eliminations (459.1) (429.0) (382.3)
________ ________ ________
Total $6,162.1 $5,493.8 $5,108.2
======== ======== ========
An analysis of our operations by segment is as follows:
Selected
Components of
Income (Loss)
________________
Depreci-
Income ation,
(Loss) Amorti-
Before Equity zation,
Income Taxes, in Net and Invest-
(Loss) Minority Income Cost of ment
Sales Before Interest, (Loss) Company in
_____________________________ Taxes and and Non- of Timber Capital Equity
Inter- Minority routine Affil- Har- Expendi- Affil-
Trade segment Total Interest(1) Items(2) iates vested tures(3) Assets iates
___________________________________________________________________________________________________
(expressed in millions)
YEAR ENDED DECEMBER 31, 1998
Office products $3,066.2 $ 1.1 $3,067.3 $ 121.5 $ 132.6 $(4.2) $ 51.2 $142.5 $1,461.3 $ -
Building products 1,682.5 40.0 1,722.5 57.7 75.9 1.9 41.3 45.7 611.6 27.2
Paper and paper products 1,389.3 362.3 1,751.6 10.0 47.5 (1.5) 181.1 119.7 2,646.7 -
Corporate and other 24.1 55.7 79.8 (50.6) (39.1) - 9.1 5.8 401.4 -
___________________________________________________________________________________________________
Total 6,162.1 459.1 6,621.2 138.6 216.9 (3.8) 282.7 313.7 5,121.0 27.2
___________________________________________________________________________________________________
Intersegment eliminations - (459.1) (459.1) - - - - - (154.3) -
Interest expense - - - (159.9) (159.9) - - - - -
___________________________________________________________________________________________________
Consolidated totals $6,162.1 $ - $6,162.1 $ (21.3) $ 57.0 $(3.8) $282.7 $313.7 $4,966.7 $27.2
===================================================================================================
YEAR ENDED DECEMBER 31, 1997
Office products $2,595.1 $ 1.6 $2,596.7 $ 119.8 $ 119.8 $(2.5) $ 41.1 $346.6 $1,291.5 $ 4.3
Building products 1,603.6 41.6 1,645.2 45.0 45.0 (2.7) 42.0 53.2 653.7 23.6
Paper and paper products 1,275.2 329.4 1,604.6 (11.6) (11.6) - 166.2 173.0 2,760.0 4.9
Corporate and other 19.9 56.4 76.3 (44.8) (44.8) - 7.3 5.8 330.0 -
___________________________________________________________________________________________________
Total 5,493.8 429.0 5,922.8 108.4 108.4 (5.2) 256.6 578.6 5,035.2 32.8
___________________________________________________________________________________________________
Intersegment eliminations - (429.0) (429.0) - - - - - (65.3) -
Interest expense - - - (137.3) (137.3) - - - - -
___________________________________________________________________________________________________
Consolidated totals $5,493.8 $ - $5,493.8 $ (28.9) $ (28.9) $(5.2) $256.6 $578.6 $4,969.9 $32.8
===================================================================================================
YEAR ENDED DECEMBER 31, 1996
Office products $1,983.5 $ 2.0 $1,985.5 $ 101.5 $ 101.5 $ - $ 27.2 $265.1 $ 905.3 $ -
Building products 1,505.5 51.6 1,557.1 36.0 36.0 - 40.4 88.4 661.9 13.6
Paper and paper products 1,601.6 271.6 1,873.2 77.9 47.5 2.9 179.6 472.7 2,648.9 5.8
Corporate and other 17.6 57.1 74.7 (55.7) (45.7) - 7.8 6.0 540.1 -
___________________________________________________________________________________________________
Total 5,108.2 382.3 5,490.5 159.7 139.3 2.9 255.0 832.2 4,756.2 19.4
___________________________________________________________________________________________________
Intersegment eliminations - (382.3) (382.3) - - - - - (45.5) -
Interest expense - - - (128.4) (128.4) - - - - -
___________________________________________________________________________________________________
Consolidated totals $5,108.2 $ - $5,108.2 $ 31.3 $ 10.9 $ 2.9 $255.0 $832.2 $4,710.7 $19.4
===================================================================================================
(1) Interest income has been allocated to our segments in the amounts of
$2,274,000 for 1998, $6,000,000 for 1997, and $3,430,000 for 1996.
(2) See Note 1 "Other (income) expense, net" and Note 8 "Restructuring
activities" for an explanation of the nonroutine items. Significant noncash
items are discussed in Note 8.
(3) Capital expenditures include acquisitions made by BCOP through the
issuance of common stock, assumption of debt, and recording of liabilities.
10. LITIGATION AND LEGAL MATTERS
We are involved in litigation and administrative proceedings primarily
arising in the normal course of our business. In the opinion of
management, our recovery, if any, or our liability, if any, under any
pending litigation or administrative proceeding would not materially affect
our financial condition or operations.
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
1998 1997
____________________________________ __________________________________
Fourth Third Second First Fourth Third Second First
(1) (2) (3) (4)
____________________________________ __________________________________
(expressed in millions, except per-share
and stock price information)
________________________________________________________________________________________________________________
Net sales $1,536 $1,598 $1,538 $1,490 $1,445 $1,442 $1,333 $1,274
Gross profit(6) 276 260 248 246 244 217 174 166
Net income (loss) before cumulative
effect of accounting change (11) 47 (64) - 7 (6) (16) (15)
Cumulative effect of accounting
change, net of tax - - - (9) - - - -
Net income (loss) (11) 47 (64) (9) 7 (6) (16) (15)
Net income before nonroutine
items(7) 8 12 1 - N/A N/A N/A N/A
Net income (loss) per share
before cumulative effect of
accounting change
Basic (.25) .77 (1.20) (.17)(5) .02 (.23) (.53) (.51)
Diluted (.25) .72 (1.20) (.17)(5) .02 (.23) (.53) (.51)
Cumulative effect of accounting
change, net of tax - - - (.15) - - - -
Net income (loss) per share
Basic (.25) .77 (1.20) (.32)(5) .02 (.23) (.53) (.51)
Diluted (.25) .72 (1.20) (.32)(5) .02 (.23) (.53) (.51)
Net income (loss)(7)
per diluted share before
nonroutine items .08 .14 (.04) (.10) N/A N/A N/A N/A
Common stock dividends
paid per share .15 .15 .15 .15 .15 .15 .15 .15
Common stock prices(8)
High 32-3/4 33-5/8 40-3/8 37-1/8 45-9/16 43-1/4 38-3/4 38-1/8
Low 22-1/4 23-1/8 30-7/8 27-13/16 27-3/4 34-7/8 28-3/8 30-3/8
==========================================================================
(1) Includes a pretax charge of $42,382,000 for a companywide cost-
reduction initiative and the restructuring of certain operations (see
Note 8).
(2) Includes a pretax gain of $45,000,000 related to an insurance
settlement for our Medford, Oregon, plywood plant, which was severely
damaged by fire (see Note 1).
(3) Includes a pretax charge of $61,900,000 for the restructuring of our
wood products manufacturing business and a pretax charge of
$19,000,000 for the revaluation of certain paper-related assets (see
Note 8).
(4) Includes a net of tax charge of $8,590,000 for the adoption of AICPA
Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities" (see Note 1).
(5) Includes a negative 7 cents related to the redemption of the Series F
preferred stock.
(6) Gross profit equals "Sales" less "Materials, labor, and other
operating expenses" and "Depreciation, amortization, and cost of
company timber harvested."
(7) 1998 net income before nonroutine items and net income (loss) per
diluted share before nonroutine items excludes the after-tax impact of
the nonroutine items discussed in notes (1) through (5) above.
(8) Our common stock is traded principally on the New York Stock Exchange.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Boise Cascade Corporation:
We have audited the accompanying balance sheets of Boise Cascade Corporation (a
Delaware corporation) and subsidiaries as of December 31, 1998 and 1997, and the
related statements of income (loss), cash flows, and shareholders' equity for
the years ended December 31, 1998, 1997, and 1996. These financial statements
are the responsibility of the company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Boise Cascade Corporation and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boise, Idaho
January 29, 1999
REPORT OF MANAGEMENT
The management of Boise Cascade Corporation is primarily responsible for the
information and representations contained in this annual report. The financial
statements and related notes were prepared in conformity with generally accepted
accounting principles appropriate in the circumstances. In preparing the
financial statements, management has, when necessary, made judgments and
estimates based on currently available information.
Management maintains a comprehensive system of internal controls based on
written policies and procedures and the careful selection and training of
employees. The system is designed to provide reasonable assurance that assets
are safeguarded against loss or unauthorized use and that transactions are
executed in accordance with management's authorization. The concept of
reasonable assurance is based on recognition that the cost of a particular
accounting control should not exceed the benefit expected to be derived.
Our Internal Audit staff monitors our financial reporting system and the related
internal accounting controls, which are also selectively tested by Arthur
Andersen LLP, Boise Cascade's independent public accountants, for purposes of
planning and performing their audit of our financial statements.
The Audit Committee of the board of directors, which is composed solely of
nonemployee directors, meets periodically with management, representatives of
our Internal Audit Department, and Arthur Andersen LLP representatives to assure
that each group is carrying out its responsibilities. The Internal Audit staff
and the independent public accountants have access to the Audit Committee,
without the presence of management, to discuss the results of their audits,
recommendations concerning the system of internal accounting controls, and the
quality of financial reporting.
FINANCIAL REVIEW
Results of Operations
1998 1997 1996
__________________________________________________
Sales $ 6.2 billion $ 5.5 billion $ 5.1 billion
Net income (loss) $(37.0) million $(30.4) million $ 9.1 million
Net income (loss)
per diluted share $(1.00) $(1.19) $(0.63)
Net income (loss)
before nonroutine items $ 20.7 million $(30.4) million $(5.4) million
Net income (loss)
per diluted share before
nonroutine items $0.09 $(1.19) $(0.93)
The net loss in 1998 included a pretax charge of $42.4 million for the
restructuring of certain operations and for companywide cost-reduction
initiatives announced in the fourth quarter. Additionally, 1998 results include
a pretax gain of $45.0 million related to an insurance settlement for the
company's plywood plant in Medford, Oregon, which was severely damaged by fire
on September 6, 1998. The net loss also includes a pretax charge of
$80.9 million for the restructuring of our wood products manufacturing business
and the revaluation of certain paper-related assets under a plan adopted in the
second quarter. These nonroutine items are included in "Other (income) expense,
net" in the Statement of Income (Loss). 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." This statement required the
write-off of previously capitalized preoperating costs, which resulted in an
after-tax charge of $8.6 million, or 15 cents per diluted share. Also included
in 1998 earnings per share is a negative 7 cents per diluted share related to
the redemption of our Series F preferred stock. The after-tax and after-
minority-interest effect of these nonroutine items negatively affected 1998 net
income $57.7 million, or $1.09 per diluted share. See Note 8 in the Notes to
Financial Statements for additional information on our 1998 restructuring
charges.
Earnings in 1996 included a net pretax gain of approximately $25.1 million from
the sale of our coated publication paper business based in Rumford, Maine. Also
included in 1996 earnings was a pretax write-down of $10.0 million for certain
paper assets and gains of $5.3 million from a subsidiary's issuance of stock.
These items resulted in an after-tax gain of $14.5 million, or 30 cents per
diluted share.
Interest expense was $159.9 million in 1998, $137.4 million in 1997, and
$128.4 million in 1996. Part of the increase in interest expense was due to
lower capitalized interest. Capitalized interest was $1.3 million in 1998,
$10.6 million in 1997, and $17.8 million in 1996. The amount of interest
capitalized has decreased significantly since the expansion of the Jackson,
Alabama, pulp and paper mill in April 1997. The balance of the increase in
interest expense was due primarily to higher debt levels.
Our 1998 tax benefit rate was 12.5%. Excluding the nonroutine items described
above, the tax provision rate would have been 44%. Our 1997 tax benefit rate
was 32%. We had a tax provision rate of 46% in 1996 excluding nonroutine items.
The changes in our tax rates were due primarily to the sensitivity of the rate
to lower income levels and the mix of income sources.
We continue to improve the competitive position of our businesses. For a
discussion of the progress we've made in achieving our business strategies, see
"Strategic Progress . . . In a Difficult Business Environment."
Office Products Distribution
1998 1997 1996
________________________________________________
Sales $ 3.1 billion $ 2.6 billion $ 2.0 billion
Segment income $121.5 million $119.8 million $101.5 million
Segment income
before nonroutine items $132.6 million $119.8 million $101.5 million
(percentage of sales)
Gross profit 25.7% 25.2% 26.1%
Operating expenses 21.7% 20.6% 21.0%
Operating expenses
before nonroutine items 21.4% 20.6% 21.0%
Operating profit 4.0% 4.6% 5.1%
Operating profit before
nonroutine items 4.3% 4.6% 5.1%
In the fourth quarter of 1998, Boise Cascade Office Products (BCOP) entered into
a plan for restructuring their operations in the United Kingdom. The
restructuring involves closing seven small contract stationer facilities and an
administrative office and integrating selected functions with their other United
Kingdom operations. These closures are expected to be completed during the
first half of 1999.
Also during December 1998, BCOP terminated their joint venture with Otto Versand
(Otto). As a result of the dissolution of the joint venture, Otto acquired
BCOP's 50% interest in the joint venture. In addition, BCOP repurchased Otto's
10% ownership interest in its French direct-marketing subsidiary, Jean Paul
Guisset S.A. (JPG). Now, JPG is 100% owned by BCOP.
As a result of the restructuring and joint-venture dissolution, BCOP recorded
charges of $11.1 million in the fourth quarter.
BCOP's business strategy over the past three years has included aggressive sales
growth. This has been accomplished principally by increasing sales in existing
operations and completing acquisitions. Same-location sales grew 11% in 1998,
compared with 1997, and 14% in 1997, compared with 1996. Both paper price
changes and foreign currency fluctuations impact same-location sales growth.
Holding paper prices constant and excluding the impact of foreign currency
changes, BCOP's same-location sales growth would have been 12% in 1998 and 17%
in 1997. BCOP completed six acquisitions in 1998, eight acquisitions in 1997,
and 19 acquisitions in 1996. In 1998, sales of the businesses acquired during
1997 grew about $189 million. In 1997, sales of the businesses acquired during
1996 increased approximately $192 million.
The 1998 increase in gross profit as a percent of net sales, compared with 1997,
was due in part to having a full calendar year of results for JPG. JPG has
higher gross margins and higher operating expenses than BCOP's other operations.
The 1998 increase was also due to lower procurement costs and to leveraging
fixed occupancy costs over higher sales volume.
The 1997 decrease in gross profit as a percent of net sales, compared with 1996,
resulted in part from competitive pressures on gross margins. Additionally, in
the first half of 1996, paper costs to BCOP were declining rapidly from the peak
reached late in 1995, which raised BCOP's gross profit in the first half of
1996. In 1997, paper costs were more stable but significantly lower,
constraining 1997 margins.
The 1998 increase in operating expenses as a percent of sales, compared with
1997, was partly due to having a full year of operating expenses for JPG. The
increase was also due to higher operating cost structures, relative to revenues,
for several other European operations; additional costs associated with the move
into a new Toronto warehouse; and costs for customer prospecting as part of
BCOP's entry into Belgium. In addition, operating expenses were negatively
impacted by the European restructuring charge and dissolution of the joint
venture.
The 1997 decrease in operating expenses as a percent of sales, compared with
1996, resulted in part from leveraging expenses across a larger revenue base and
from specific initiatives to increase efficiency, for example, by increasing
central procurement and integrating distribution programs. The decrease also
resulted from efficiencies gained from centralized customer service centers and
centralization of the inventory rebuying function.
In January 1999, BCOP acquired the contract stationer business of Wallace
Computer Services with annualized sales of about $40 million at the time of
announcement.
In 1998, BCOP acquired six businesses, including one in Spain and two in Canada.
The annualized sales of the acquisitions completed in 1998 were approximately
$62 million at the time of announcement.
In 1997, BCOP acquired eight businesses, including two companies in France and
one in the United Kingdom and entered into a joint venture. The annualized
sales of the acquisitions completed in 1997 were $340 million at the time of
announcement.
In 1996, BCOP acquired 19 businesses, including four companies in Canada and
three in Australia. The annualized sales of the acquisitions completed in 1996
were $460 million at the time of announcement. Additional information about
BCOP acquisitions is in Note 6 accompanying the financial statements.
Boise Cascade holds 81.2% of BCOP's common stock.
Building Products
1998 1997 1996
_________________________________________________
Sales $ 1.7 billion $ 1.6 billion $ 1.5 billion
Segment income $57.7 million $45.0 million $36.0 million
Segment income
before nonroutine items $75.9 million $45.0 million $36.0 million
In the fourth quarter of 1998, the building products segment recorded a pretax
charge of $2.8 million, primarily for the elimination of job positions through
early retirements and layoffs.
On September 6, 1998, our Medford, Oregon, plywood plant was severely damaged by
fire. The Medford plant fire temporarily reduced our plywood capacity by 20%.
The building products segment realized a $46.5 million pretax gain as the result
of an insurance settlement for the loss. We are also insured for business
interruption losses while the plant is being rebuilt. The rebuild of the plant
with 200 million square feet of capacity should be completed by the end of 1999.
Late in the second quarter of 1998, we adopted a plan to restructure our wood
products manufacturing business by permanently closing sawmills in Elgin,
Oregon; Horseshoe Bend, Idaho; and Fisher, Louisiana; and a plywood plant in
Yakima, Washington. The building products segment recorded a pretax charge of
$61.9 million related to these closures. At year-end, the sawmills in Fisher
and Horseshoe Bend had been closed. We will close the Elgin sawmill and the
Yakima plywood plant in 1999. The effect of these closures will be to reduce
our plywood capacity by about 11% and our lumber capacity by about 28%. These
facilities had sales of $76.7 million in 1998, $98.8 million in 1997, and
$107.2 million in 1996. Operating losses for these facilities were $3.4 million
in 1998, $9.7 million in 1997, and $7.1 million in 1996.
Sales increased in 1998, relative to the prior years, primarily because of
growth in building materials distribution. Building materials distribution
sales were $861 million in 1998, $732 million in 1997, and $690 million in 1996.
The sales growth increase resulted partly from the addition of three facilities
in 1996 and one in 1997, as well as increasing sales at existing locations.
Sales growth in engineered wood products and structural panels also contributed
to the increase. Price declines of 8% in lumber and 2% in plywood, along with a
13% decline in lumber sales volume, partially offset the overall increase in
sales in 1998, compared with 1997. In 1997, prices for lumber were up 10%, and
prices for plywood were up 3% over those of 1996, while sales volumes for
plywood and lumber were down slightly, compared with 1996.
Excluding nonroutine items, the increase in operating income in 1998 over 1997
was due to lower net wood costs and positive LIFO reserve adjustments arising
primarily from lower log inventory levels. Increased contributions from our
growing engineered wood products and building materials distribution businesses
and oriented strand board (OSB) joint venture also contributed to the improved
performance. However, decreasing sales prices in 1998, compared with 1997, as
discussed on page 35, partially offset these favorable variances.
The improvement in 1997 segment income, compared with 1996, was primarily due to
higher average annual prices for lumber and plywood. These favorable price
variances were partially offset by unfavorable net wood and conversion costs and
less favorable LIFO reserve adjustments.
Late in 1996, we started up an engineered wood products facility in Alexandria,
Louisiana, with the capacity to produce 4.4 million cubic feet of laminated
veneer lumber and wood I-joists annually. In 1998, the facility ran at 41% of
capacity, and in 1997, the facility ran at 27% of capacity. In 1998, we added
3.6 million cubic feet of capacity, for a total of 8.0 million cubic feet.
In May 1997, our joint venture, Voyageur Panel, started up an OSB plant in
Barwick, Ontario, Canada. At year-end 1998, the plant was operating at full
capacity. The plant has the capacity to produce 400 million square feet of OSB
panels annually. Boise Cascade holds 47% of the equity, operates the plant, and
markets the product. We account for the joint venture on the equity method.
Accordingly, its sales are not included in the building products segment sales.
Segment results do include $1.9 million of equity in earnings in 1998 and $2.7
million of equity in losses in 1997 from this joint venture.
Paper and Paper Products
1998 1997 1996
___________________________________________________
Sales $ 1.8 billion $ 1.6 billion $ 1.9 billion
Segment income (loss) $10.0 million $(11.6) million $77.9 million
Segment income (loss)
before nonroutine
items $47.5 million $(11.6) million $47.5 million
In the fourth quarter of 1998, the paper and paper products segment recorded a
pretax charge of $18.5 million for the restructuring of the paper manufacturing
business, primarily by eliminating positions through a combination of early
retirements and layoffs, and the closure of our paper research and development
facility in Portland, Oregon, in 1999.
In the second quarter of 1998, the 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 was an $8.0 million write-down of a joint
venture in China that produced carbonless paper. Boise Cascade owned 60% of the
joint venture.
In 1996, this segment recorded a nonroutine gain of approximately $40.4 million
from the sale of our coated publication paper business in Rumford, Maine, on
November 1, 1996, offset by a $10.0 million write-down of certain other paper
assets. In 1996, Rumford contributed $21.1 million of operating income.
Segment sales increased 9% in 1998. Contributing to this increase was a 3%
increase in weighted average product prices, along with nearly a 3% increase in
overall sales volume. The increase in volume in 1998 was due primarily to
operating our new Jackson, Alabama, paper machine at close to full capacity,
offset in part by 84,000 tons of market- and weather-related production
curtailments taken during the year. Sales volume from the new Jackson machine
totaled 308,000 tons in 1998. In 1998, a significant amount of our uncoated
free sheet sales volume from our smaller paper machines -- 21%, or 298,000 tons
- -- was from value-added grades, a 7% increase over 1997. Value-added grades
generally have higher unit costs than commodities but also higher net sales
prices and profit margins. Overall, the net selling price of the 302,000 tons
of value-added grades we sold in 1998 was $257 per ton higher than the net
selling price of our commodities. The spread in 1997 was $287 per ton, and in
1996, excluding Rumford, $268 per ton.
Sales declined 14% in 1997, compared with 1996, primarily because of the sale of
our Rumford facility. In 1996, the Rumford facility contributed $308.8 million
of sales. Also in 1997, weighted average product prices were down 10%, and unit
sales volumes were down 4%. The decrease in unit sales volume from 1996 to 1997
was the result of the sale of Rumford, which contributed 365,000 tons of sales
volume in 1996, offset in part by increased production from our existing
machines and the start-up of the new Jackson machine in April 1997. Sales
volume from the new Jackson machine totaled 174,000 tons of uncoated free sheet
paper in 1997.
Excluding nonroutine items, operating income increased in 1998 because of higher
average paper prices and a modest increase in unit sales volume. The decrease
between adjusted operating income in 1996 and the loss reported in 1997 was due
primarily to lower paper prices, modestly lower sales volumes, and the 1996
contribution from the Rumford mill. Offsetting price and volume declines in
1997 was a 5% decrease in unit manufacturing costs, excluding costs at Rumford.
Financial Condition and Liquidity
Operating Activities. Cash provided by operations was $468.7 million in 1998,
$129.0 million in 1997, and $193.5 million in 1996. The increase in 1998 was
due, in part, to improved operating results, including the Medford fire
insurance settlement gain and changes in working capital. In late September
1998, we sold fractional ownership interests in a defined pool of trade accounts
receivable. At December 31, 1998, $79,000,000 of the sold accounts receivable
were excluded from receivables in the balance sheet and represent an increase in
cash provided by operations. The lower amounts in 1997 and 1996 were primarily
due to lower income levels, after adjusting for noncash items, and higher
inventory and receivable balances. Our working capital ratio was 1.21:1 in
1998, compared with 1.51:1 in 1997.
Investing Activities. Total capital investment in 1998 was $313.7 million,
compared with total capital investments of $578.6 million in 1997 and
$832.2 million in 1996. Amounts include acquisitions made by BCOP through the
issuance of its common stock, assumption of debt, and recording of liabilities.
Capital investment in 1999 is expected to be approximately $300 million,
excluding acquisitions, and will be allocated to cost-saving, modernization,
expansion, replacement, maintenance, and environmental and safety projects.
Cash used for investment was $298.1 million in 1998, $580.6 million in 1997, and
$43.8 million in 1996. Cash expenditures for property and equipment, timber and
timberlands, and investments in equity affiliates totaled $237.2 million in
1998, $306.1 million in 1997, and $610.5 million in 1996. The decreasing
amounts are primarily due to the completion of the Jackson pulp and paper mill
expansion in 1997. Cash purchases of assets, primarily due to BCOP's expansion
program, totaled $27.3 million in 1998, $246.9 million in 1997, and
$188.5 million in 1996. Sources of cash in 1996 include cash proceeds totaling
$781.4 million from sales of assets, primarily Rumford.
Financing Activities. Cash used for financing was $159.9 million in 1998. Cash
provided by financing was $254.3 million in 1997 and $59.7 million in 1996.
Dividend payments totaled $55.6 million in 1998, compared with $70.0 million and
$73.3 million in 1997 and 1996. The decrease is due to the conversion of our
Series G preferred stock into 6.9 million shares of common stock in 1997 and the
redemption of our Series F preferred stock for $115 million in cash in early
1998. In all three years, our quarterly cash dividend was 15 cents per common
share. In 1998, short-term borrowings, primarily notes payable, increased
$34.7 million, compared with increases of $58.1 million and $19.7 million in
1997 and 1996. At December 31, 1998, we had $57.4 million of short-term
borrowings outstanding, and BCOP had $72.1 million of short-term borrowings
outstanding. At December 31, 1997, we had $71.5 million of short-term
borrowings outstanding, while BCOP had $23.3 million outstanding. Long-term
debt decreased $17.7 million in 1998 and increased $258.8 million and
$101.7 million in 1997 and 1996. The increases in 1997 and 1996 were primarily
due to our expansion at the Jackson mill and BCOP's acquisition program.
At December 31, 1998 and 1997, we had $2.0 billion of debt outstanding. Our
debt-to-equity ratio was 1.42:1 and 1.26:1 at December 31, 1998 and 1997.
Our debt and debt-to-equity ratio include the guarantee by the company of the
remaining $155.7 million of debt incurred by the trustee of our leveraged
Employee Stock Ownership Plan. While that guarantee has a negative impact on
our debt-to-equity ratio, it has virtually no effect on our cash coverage ratios
or on other measures of our financial strength.
We have a revolving credit agreement with a group of banks that permits us to
borrow as much as $600 million based on customary indices. As of December 31,
1998, borrowings under the agreement totaled $115 million. When the agreement
expires in June 2002, any amount outstanding will be due and payable. 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 payment of dividends is dependent on the existence of and the
amount of net worth in excess of the defined minimum under the agreement. As of
December 31, 1998, we were in compliance with our debt covenants, and our net
worth exceeded the defined minimum by $118 million.
At December 31, 1998, we had $489.4 million of borrowing capacity for additional
debt securities registered with the Securities and Exchange Commission.
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. As of December 31, 1998, BCOP had outstanding
borrowings of $200 million under this agreement and was in compliance with its
debt covenants.
1998 Capital Investment by Business
Replace-
ment,
Timber Environ-
Quality/ and mental,
Expan- Effi- Timber- and
sion ciency(1) lands Other Total
_____________________________________________________________________________
(expressed in millions)
_____________________________________________________________________________
Office products(2) $ 82 $ 56 $- $ 5 $143
Building products 12 14 4 16 46
Paper and paper products 18 25 3 73 119
Corporate and other - - - 6 6
_______________________________________________
Total $112 $ 95 $ 7 $100 $314
===============================================
(1) Quality and efficiency projects include quality improvements,
modernization, energy, and cost-saving projects.
(2) Capital expenditures include acquisitions made by BCOP through the
issuance of common stock, assumption of debt, and recording of
liabilities.
In April 1998, BCOP registered $300 million of shelf capacity with the
Securities and Exchange Commission. On May 12, 1998, BCOP issued $150 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 million of borrowing capacity
remaining under this registration statement.
Additional information about our credit agreements and debt is in Note 4
accompanying the financial statements.
In February 1998, we redeemed 115,000 shares of our Series F preferred stock at
a price of $1,000 per preferred share ($25 per depositary share) plus accrued
but unpaid dividends. By July 15, 1997, we converted or redeemed 8.625 million
depositary shares of our Series G conversion preferred stock for 6.907 million
shares of common stock.
In February 1999, we redeemed $100 million of our 9.875% notes that were due in
2001. In addition we estimate that the restructuring programs announced in 1998
will require cash outlays of approximately $23 million in 1999. These and our
other cash requirements will be funded through a combination of cash flows from
operations, borrowings under our existing credit facilities, and issuance of new
debt or equity securities.
We believe inflation has not had a material effect on our financial condition or
results of operations. However, there can be no assurance that we will not be
affected by inflation in the future. Our sales overall are not subject to
significant seasonal variations.
Disclosures of Certain Financial Market Risks
Changes in interest rates and currency rates expose the company 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 currencies, 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. We had no material exposure to losses from
derivative financial instruments held at December 31, 1998. We do not use
derivative financial instruments for trading purposes.
The following table provides information about our derivative financial
instruments and other financial instruments that are sensitive to changes in
interest rates, including interest rate swaps and debt obligations. For debt
obligations, the table presents principal cash flows and related weighted
average interest rates by expected maturity dates. For interest rate swaps, the
table presents notional amounts and weighted average interest rates by expected
(contractual) maturity dates. Notional amounts are used to calculate the
contractual payments to be exchanged under the contract. For obligations with
variable interest rates, the table sets forth payout amounts based on current
rates and does not attempt to project future interest rates. We have other
instruments that are subject to market risk, such as obligations for pension
plans and other postretirement benefits, that are not reflected in the table.
December 31
__________________________________________
1998 1997
_____________________ ___________________
There- Fair Fair
1999 2000 2001 2002 2003 after Total Value Total Value
________________________________________________________________________________________________________________________________
(in millions)
Debt (excludes ESOP debt
guarantee)
Short-term borrowings $129.5 - - - - - $ 129.5 $ 129.5 $ 94.8 $ 94.8
Average interest rates 6.1% - - - - - 6.1% - 7.0% -
Long-term debt
Fixed-rate debt $160.7 $116.2 $ 64.8 $199.8 $124.9 $854.6 $1,521.0 $1,544.9 $1,305.1 $1,424.6
Average interest rates 9.0% 9.8% 7.0% 8.1% 9.0% 7.4% 8.0% - 8.3% -
Variable-rate debt $ 0.8 $ 0.8 $175.8 $ 40.8 $ 0.4 - $ 218.6 $ 218.6 $ 450.9 $ 450.9
Average interest rates 3.7% 3.7% 5.8% 5.9% 3.6% - 5.8% - 6.1% -
Interest rate swaps
Notional principal amount of
interest rate exchange agreements
(variable to fixed) - $100.0 - - - - $ 100.0 $ 0.8 - -
Average pay rate - 4.7% - - - - 4.7% - - -
Average receive rate - 5.1% - - - - 5.1% - - -
Timber Supply and Environmental Issues
In recent years, the amount of timber available for commercial harvest in the
United States has declined due to environmental litigation, changes in
government policy, and other factors. More constraints on available timber
supply may be imposed. As a result, we cannot accurately predict future log
supply. In 1998, we closed sawmills in Fisher, Louisiana, and Horseshoe Bend,
Idaho, largely because of reductions in timber supply and consequent increases
in timber costs. We announced closures of a sawmill in Elgin, Oregon, and a
plywood plant in Yakima, Washington, in part for the same reasons. In 1997, we
reduced the number of work shifts at two wood products manufacturing facilities,
partly because of limited log supply. Additional curtailments or closures of
our wood products manufacturing facilities are possible.
With less federal timber available than in years past, we meet an important
share of our raw material needs with our approximately 2.4 million acres of
owned or controlled timberland. Our Northwest pulp and paper mills receive
approximately 83% of their softwood chips either directly from or through trades
with our wood products and whole-log chipping operations. We have also taken
steps to reduce our need for externally purchased softwood chips. In 1997, we
began harvesting fast-growing hybrid cottonwood trees at our fiber farm near
Wallula, Washington. Roughly 25% of the pulp used by our Wallula white paper
machine during 1998 was made from this cottonwood fiber.
We invest substantial capital to comply with federal, state, and local
environmental laws and regulations. During 1998, expenditures for our ongoing
environmental compliance program amounted to $16 million. We expect to spend
approximately $35 million in 1999 for this purpose. Failure to comply with
pollution control standards could result in interruption or suspension of our
operations at affected facilities or could require additional expenditures. We
expect that our operating procedures and expenditures for ongoing pollution
prevention will allow us to continue to meet applicable environmental standards.
The Environmental Protection Agency issued rules in 1997 that further regulate
air and water emissions from pulp and paper mills. These rules, among other
things, set standards for the discharge of chlorinated organics. We estimate
that the capital investment needed to meet the rule requirements will be
approximately $120 million over the next four years. We have begun to
substitute chlorine dioxide for elemental chlorine in the pulp-bleaching
process. Chlorine dioxide is a chemical with a name similar to that of
elemental chlorine but with very different chemical and physical properties.
Over time, we will continue to reduce elemental chlorine in our pulp-bleaching
processes.
As of December 31, 1998, we had open issues with respect to 33 sites where we
have been notified that we are a "potentially responsible party" under the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) or
similar federal and state laws or where we have received a demand or claim by a
private party regarding hazardous substances or other contaminants. In most
cases, Boise Cascade is one of many potentially responsible parties, and our
alleged contribution to these sites is relatively minor. For sites where a
range of potential liability can be determined, we have established appropriate
reserves. We believe we have minimal or no responsibility with regard to
several other sites. We cannot predict with certainty the total response and
remedial costs, our share of the total costs, the extent to which contributions
will be available from other parties, or the amount of time necessary to
complete the cleanups. However, based on our investigations, our experience
with respect to cleanup of hazardous substances, the fact that expenditures
will, in many cases, be incurred over extended periods of time, and the number
of solvent potentially responsible parties, we do not believe that the known
actual and potential response costs will, in the aggregate, have a material
adverse effect on our financial condition or the results of operations.
Year 2000 Computer Issue
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 and amortized over approximately five years. (See Note 1 in the Notes
to Financial Statements.) A year 2000 compliance assessment was completed in
1998. Many of the existing systems were found to be compliant. We have begun
appropriate modifications of the noncompliant systems. We expect to complete
all necessary changes before year-end 1999.
We are currently surveying our critical suppliers and customers to determine
whether critical processes may be impacted by a lack of year 2000 compliance.
Most of our critical suppliers and customers have confirmed that they are or
have plans to be compliant by year-end 1999.
Incremental costs to make our systems compliant are expected to range from $10
million to $13 million. These costs are being expensed as incurred.
Approximately $5.7 million had been spent through December 31, 1998.
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 process orders and billings in a timely manner and to deliver
products to our customers in a timely manner. We are currently developing
contingency options in the event that critical systems or suppliers encounter
unforeseen year 2000 problems. Those contingency options will be completed by
mid-1999.
Our discussion of the year 2000 computer issue contains forward-looking
information. We believe that our critical computer systems will be year 2000-
compliant and that the costs to achieve compliance will not materially affect
our financial condition, operating results, or cash flows. Nevertheless,
factors that could cause actual results to differ from our expectations 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
In Europe, the conversion to the Euro required certain changes to BCOP's
information technology and other systems to accommodate Euro-denominated
transactions. The cost of these changes was not material. All of BCOP's
European operations affected were Euro-compliant by the end of 1998.
While the competitive impact of the Euro conversion remains uncertain, BCOP does
not anticipate a negative effect on its European operations. Rather, the
conversion to the Euro may provide additional marketing opportunities for BCOP's
European operations.
New Accounting Standards
New accounting standards are discussed under the caption New Accounting
Standards in Note 1 of the Notes to Financial Statements.
Outlook
BCOP expects to post significant growth in the year ahead, as they continue
their efforts to increase sales to their existing customers and expand their
customer base through expanded prospecting efforts. BCOP continues to evaluate
acquisition candidates in the United States and internationally. BCOP's margins
will be affected by the competitive environment in which they operate, as well
as by their continued efforts to lower costs.
The performance of our building products business will continue to improve, as
we shift our product mix to more engineered wood products and continue to grow
our distribution business at a healthy rate.
We expect continued weakness in pulp and paper markets early in 1999, with
supply and demand gradually coming back into balance during the course of the
year. The rate of pulp and paper capacity additions in North America is at its
lowest level in 40 years. Additions in Europe are almost as modest, and the
longer global economic turmoil persists, the more difficult it will be to
realize planned capacity additions in other parts of the world.
As we implement our restructuring initiatives, we anticipate annualized pretax
cost savings of approximately $70 million by 2000.
Forward-Looking Statements
Certain statements in the Financial Review and elsewhere in our Annual Report to
Shareholders may constitute 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; 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.
STRATEGIC PROGRESS . . . IN A DIFFICULT BUSINESS ENVIRONMENT
As Boise Cascade makes progress toward accomplishing our business strategies, we
are also making progress toward reaching our financial objectives: to be
consistently profitable and to earn our cost of capital over the course of the
business cycle. In 1998, we continued the fundamental shift in our business
mix and in the mix of our products and services and made substantial progress
toward improving the competitive position of each of our businesses.
Our orientation toward distribution continued to increase, and we expect our
growth in distribution to continue to outpace our growth in manufacturing. In
addition, both our manufacturing and distribution operations added more value-
added products and services, which complement, and in some cases replace,
commodity production.
BOISE CASCADE OFFICE PRODUCTS (BCOP)
BCOP sells office supplies, computer consumables, paper, office furniture, and
promotional products. Sales occur primarily through the contract stationer
channel, which includes midsize and large offices and national accounts, and the
direct-marketing channel, which includes small and medium-sized offices. BCOP's
growth was 18% in 1998.
BCOP's active acquisition program has helped its segment sales more than double
in the last three years, from $1.3 billion in 1995 to $3.1 billion in 1998.
Since the beginning of 1995, BCOP has made 43 acquisitions with total annualized
revenues of over $1.1 billion at the time of acquisition. The pace of
acquisitions slowed in 1998, as BCOP purchased six companies with annualized
sales of approximately $62.0 million. Although most of our European
acquisitions performed well in 1998, the underperformance of some caused BCOP to
dissolve a German joint venture and announce the restructuring of operations in
the United Kingdom. However, BCOP continues to look for acquisitions that will
strengthen its market position.
During 1998, BCOP acquired a direct-marketing office products business in Spain,
the largest regional computer supply company in Toronto, and a small office
furniture business in Canada. BCOP's direct-marketing subsidiary, The Reliable
Corporation, also expanded its domestic product offerings with the purchase of a
mail-order business that sells packing, shipping, and graphic arts products.
BCOP realized double-digit growth in direct-marketing sales in 1998 on the
strength of improving domestic sales and growth in JPG in France.
Sales to U.S. national accounts -- large multisite customers -- increased 25% to
over $1 billion in 1998. BCOP continues to stand out as the premier business-
to-business distributor of office products today that can provide truly
consistent national service for multisite operations. National accounts will
continue to be a major component of our business.
Boise Marketing Services, Inc. (BMSI), a BCOP subsidiary that sells customized
clothing, gifts, and other promotional merchandise, is one of the top U.S.
companies in this industry. BMSI is working with BCOP's national accounts to
promote and develop business. BMSI's revenues increased to $105 million in
1998.
BCOP continues to become more competitive and to expand its value-added
services, such as comprehensive usage reporting and electronic commerce. The
number of orders received electronically grew over 30% in 1998 and now
represents 20% of BCOP's total orders. BCOP is also expanding its approach to
the midsize market -- businesses of 25 to 100 employees -- with a custom-
designed sales effort that includes specialized catalogs and an Internet-based
ordering system.
BUILDING PRODUCTS
Our wholesale building materials distribution business sells a full line of
building supplies to traditional building materials centers, consumer-oriented
home centers, and industrial customers. Our distribution facilities sell about
40% of our laminated veneer lumber and wood I-joists and are a major channel for
our traditional wood products as well. This business has grown significantly
since 1995, expanding into the South and Midwest. In January 1999, we started
up a distribution facility in the Chicago area, bringing the number of
distribution facilities to 16. Sales volume grew 18% to $861 million in 1998.
We manufacture structural panels, lumber, and engineered wood products such as
laminated veneer lumber (LVL) and wood I-joists. Increasingly, we are shifting
our product mix in this business to engineered wood products. Sales of
engineered wood products grew 32% in 1998, following a 17% increase in 1997.
During 1998, we increased annual LVL capacity 35% to about 14 million cubic
feet. And our joint-venture oriented strand board plant in Barwick, Ontario,
Canada, which started up in May 1997, operated near full capacity during 1998.
In 1998, we closed sawmills in Fisher, Louisiana, and Horseshoe Bend, Idaho. We
also announced that a sawmill in Elgin, Oregon, and a plywood plant in Yakima,
Washington, will be closed in 1999. These facilities were unable to generate
acceptable financial returns. The closures will reduce our lumber capacity by
28% and plywood capacity by 11%. In addition, our Medford, Oregon, plywood
plant was severely damaged by fire in September 1998, reducing our plywood
capacity an additional 20%. We plan to rebuild a portion of the plant with a
smaller operation, which will supply raw material to our engineered wood
products operations in nearby White City. The new plant should be completed in
1999.
Finally, as timber in North America becomes increasingly unavailable for
harvest, we are taking steps to access foreign wood baskets. We began
construction of a joint-venture lumber operation in Chile and recently received
approval of our environmental impact statement for an OSB project there with the
same partner. We have also signed an agreement to develop a joint-venture
lumber operation in Brazil.
PAPER AND PAPER PRODUCTS
Boise Cascade manufactures uncoated free sheet papers (which include office
papers, printing grades, forms bond, envelope papers, and value-added papers),
packaging papers, corrugated containers, and newsprint. Our uncoated free sheet
paper machine in Jackson, Alabama, which started up in 1997, would have operated
at full capacity in 1998 but for market- and weather-related curtailments. As a
result, our sales volume of uncoated free sheet paper increased 7% to
1.4 million tons. In addition, our corrugated container sales volume increased
17% to 4.2 billion square feet.
We continued to shift production on our smaller paper machines from commodity
papers to value-added grades. We sold 302,000 tons of value-added papers in
1998, 298,000 of which were produced on our smaller machines, an increase of 7%
over 1997 levels. Sales prices for our value-added grades averaged about $257 a
ton more than for our commodity papers. Late in 1998, we installed an
additional printing press at our paper converting facility in Vancouver,
Washington, which will increase the plant's annual production capacity for
value-added security grades by 3,500 tons.
The increased emphasis on uncoated free sheet paper and the shift to value-added
grades on our smaller machines has helped to improve the competitive position of
our business. Part of that improvement can be seen in the relative machine size
of our uncoated free sheet system. In 1995, we had 17 uncoated free sheet
machines with an average of 79,000 tons of capacity per machine. Ten other
major North American producers had more capacity per machine. In 1998, we had
ten uncoated free sheet machines with 153,000 tons of capacity per machine, the
third-highest capacity per machine in the North American industry. When we've
completed our switch to value-added grades on our smaller machines, most of our
commodity uncoated free sheet will be produced on world-class machines.
Our employees' efforts to increase efficiency have also had an important impact
on improving our competitive position. In 1998, after adjusting for market- and
weather-related curtailments, our cash manufacturing costs were nearly 5% less
than they were in 1995.
Integration also makes Boise Cascade a more efficient company. Boise Cascade
Office Products is the single largest customer of our paper business. In 1998,
BCOP bought 361,000 tons of our office papers, a 13% increase over the amount
purchased in 1997. Our packaging plants used 52% of the containerboard we made,
moving us closer to our goal of 55% integration with our existing container
plants and our ultimate goal of 80% integration.
We also continue to work to improve our fiber base. Our paper mill in Wallula,
Washington, is using more of the cottonwood fiber from our 18,000-acre fiber
farm. And the growth rates on the fiber farm are higher than we thought they
would be. We have established fiber farm assessment projects in Alabama,
Louisiana, and Minnesota. In addition, we're increasing the amount of hardwood
fiber used at our paper mill in St. Helens, Oregon. And our Louisiana foresters
have adopted improved silvicultural methods that will increase the fiber yield
from our forests there.