UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934
For the Quarterly Period Ended March 31, 1999
( ) Transition Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934
For the Transition Period From ____________ to ____________
Commission File number 1-13662
BOISE CASCADE OFFICE PRODUCTS CORPORATION
State of Incorporation IRS Employer Identification No.
Delaware 82-0477390
800 West Bryn Mawr Avenue
Itasca, Illinois 60143
(630) 773 - 5000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding
Class as of April 30, 1999
Common Stock, $.01 par value 65,758,524
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BOISE CASCADE OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES
STATEMENTS OF INCOME
(expressed in thousands, except share information)
(unaudited)
Three Months Ended March 31
1999 1998
Net sales $ 848,389 $ 759,808
Cost of sales, including purchases
from Boise Cascade Corporation
of $68,877 and $67,243 629,261 564,230
__________ __________
Gross profit 219,128 195,578
__________ __________
Selling and warehouse operating
expense 163,903 143,690
Corporate general and administrative
expense, including amounts paid to
Boise Cascade Corporation of $820
and $643 13,126 12,437
Goodwill amortization 3,626 3,170
__________ __________
180,655 159,297
__________ __________
Income from operations 38,473 36,281
__________ __________
Interest expense 6,452 6,465
Other income, net 315 423
__________ _________
Income before income taxes 32,336 30,239
Income tax expense 13,846 12,650
__________ __________
Net income $ 18,490 $ 17,589
Earnings per share-basic $ .28 $ .27
Earnings per share-diluted $ .28 $ .27
The accompanying notes are an integral part of these Financial Statements.
BOISE CASCADE OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES
BALANCE SHEETS
(expressed in thousands)
(unaudited)
March 31 December 31
ASSETS 1999 1998 1998
Current
Cash and cash equivalents $ 10,590 $ 53,151 $ 31,838
Receivables, less allowances
of $9,315, $7,707, and $9,539 434,785 382,826 394,013
Inventories 183,953 203,733 226,955
Deferred income tax benefits 20,719 18,404 14,335
Other 46,998 20,816 31,532
___________ ___________ ___________
697,045 678,930 698,673
___________ ___________ ___________
Property
Land 27,918 27,677 28,572
Buildings and improvements 148,510 128,708 143,192
Furniture and equipment 219,170 195,735 214,611
Accumulated depreciation (154,789) (140,054) (149,071)
___________ ___________ ___________
240,809 212,066 237,304
___________ ___________ ___________
Goodwill, net of amortization
of $40,734, $27,575, and $37,108 486,496 439,809 494,883
Other assets 40,738 33,117 30,885
___________ ___________ ___________
Total assets $1,465,088 $1,363,922 $1,461,745
The accompanying notes are an integral part of these Financial Statements.
BOISE CASCADE OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES
BALANCE SHEETS
(expressed in thousands, except share information)
(unaudited)
March 31 December 31
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998 1998
Current
Notes payable $ 60,600 $ 73,800 $ 72,100
Current portion of long-term debt 2,367 2,578 2,065
Accounts payable
Trade and other 266,688 272,972 279,928
Boise Cascade Corporation 36,749 28,710 29,297
___________ ___________ ___________
303,437 301,682 309,225
___________ ___________ ___________
Accrued liabilities
Compensation and benefits 39,395 26,053 38,144
Income taxes payable 16,129 15,679 796
Taxes, other than income 13,445 20,161 9,466
Other 64,098 54,950 36,861
___________ ___________ ___________
133,067 116,843 85,267
___________ ___________ ___________
499,471 494,903 468,657
___________ ___________ ___________
Other
Long-term debt, less current portion 319,723 307,224 354,224
Other 71,421 35,827 75,950
___________ ___________ ___________
391,144 343,051 430,174
___________ ___________ ___________
Shareholders' equity
Common stock, $.01 par value,
200,000,000 shares authorized;
65,758,524, 65,656,158, and
65,758,524 shares issued and
outstanding at each period 658 657 658
Additional paid-in capital 359,224 357,661 359,224
Retained earnings 226,970 172,968 208,480
Accumulated other comprehensive
income (12,379) (5,318) (5,448)
___________ ___________ ___________
Total shareholders' equity 574,473 525,968 562,914
___________ ___________ ___________
Total liabilities and
shareholders' equity $1,465,088 $1,363,922 $1,461,745
The accompanying notes are an integral part of these Financial Statements.
BOISE CASCADE OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(expressed in thousands)
(unaudited)
Three Months Ended March 31
1999 1998
Cash provided by (used for) operations
Net income $ 18,490 $ 17,589
Items in income not using (providing) cash
Depreciation and amortization 14,792 13,756
Deferred income taxes (7,415) (4,499)
Receivables (40,772) (23,966)
Inventories 43,624 (4,554)
Accounts payable and accrued liabilities 24,960 36,397
Current and deferred income taxes 6,492 12,679
Other, net (13,451) 6,177
__________ __________
Cash provided by operations 46,720 53,579
__________ __________
Cash used for investment
Expenditures for property and equipment (14,733) (17,576)
Acquisitions (6,328) (4,042)
Other, net (1,071) (8,070)
__________ __________
Cash used for investment (22,132) (29,688)
__________ __________
Cash provided by (used for) financing
Payments of long-term debt (34,199) (50,266)
Notes payable (11,500) 50,500
Other, net (137) 271
__________ __________
Cash provided by (used for) financing (45,836) 505
__________ __________
Increase (decrease) in cash and cash equivalents (21,248) 24,396
Balance at beginning of the period 31,838 28,755
__________ __________
Balance at March 31 $ 10,590 $ 53,151
The accompanying notes are an integral part of these Financial Statements.
BOISE CASCADE OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(unaudited)
(1) ORGANIZATION AND BASIS OF PRESENTATION. Boise Cascade Office Products
Corporation (together with its subsidiaries, "the Company" or "we"),
headquartered in Itasca, Illinois, is one of the world's premier
business-to-business distributors of products for the office. At
March 31, 1999, Boise Cascade Corporation owned 81.2% of our outstanding
common stock.
The quarterly financial statements of the Company and its subsidiaries
have not been audited by independent public accountants, but in the
opinion of management, all adjustments necessary to present fairly the
results for the periods have been included. Except as may be disclosed
in the notes to the Financial Statements, the adjustments made were of a
normal, recurring nature. Quarterly results are not necessarily
indicative of results that may be expected for the year. We have
prepared the statements pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. These
quarterly financial statements should be read together with the
statements and the accompanying notes included in our 1998 Annual
Report.
(2) RESTRUCTURING RESERVE. In the fourth quarter of 1998, we initiated a
plan to restructure our operations in the United Kingdom (the
"restructuring"). The restructuring involves closing seven small
facilities and an administrative office and integrating selected
functions of our U.K. subsidiaries. The revenues and results of
operations of the facilities to be closed are not accounted for
separately. These closures are expected to be completed during the
first half of 1999 and will result in work force reductions of
approximately 140 warehouse and administrative support associates.
Also during December 1998, the Company terminated its joint venture with
Otto Versand ("Otto"). As a result of this dissolution, Otto acquired
our 50% interest in the joint venture. In addition, we repurchased
Otto's 10% ownership interest in Jean-Paul Guisset S.A. ("JPG"), our
direct marketing subsidiary in France. JPG is now 100% owned by the
Company.
As a result of the restructuring and joint venture dissolution, we
estimated and recorded charges of $11.1 million ($7.4 million or $.11
per share - diluted, net of tax benefit) in the fourth quarter of 1998.
The charges consisted of $1.4 million for termination payments to
employees; $0.9 million for legal and professional fees related to
facility closings and work force reductions; $3.4 million for facility,
automobile, and delivery truck leasehold terminations; and $4.4 million
of other costs, primarily costs to dissolve the joint venture with Otto.
These amounts were included in "Other operating expense" in the
Statements of Income. The charges also included $1.0 million for the
write-down of primarily customer-unique inventory in the market areas we
are exiting. The inventory write-down was reflected in "Cost of sales" in
the Statements of Income.
The restructuring liability is included in "Accrued liabilities, other"
in the Balance Sheets. Amounts charged against the reserve through
March 31, 1999, were as follows:
Termination Legal and
payments to professional Leasehold Other Inventory
employees fees terminations costs writedown
(expressed in thousands)
Beginning balance $ 1,400 $ 900 $ 3,400 $ 4,400 $ 1,000
Charges against
reserve 600 100 300 3,800 100
_______ _______ _______ ______ _______
Balance at
March 31, 1999 $ 800 $ 800 $ 3,100 $ 600 $ 900
Termination payments to employees are the result of workforce
reductions of 89 warehouse and administrative support associates as of
March 31, 1999.
(3) EARNINGS PER SHARE. Basic earnings per share for the three months
ended March 31, 1999 and 1998, were computed by dividing net income by
the weighted average number of shares of common stock outstanding for
the periods. Diluted earnings per share for the three months ended
March 31, 1999 and 1998, include the weighted average impact of stock
options assumed exercised using the treasury method.
(4) COMPREHENSIVE INCOME (LOSS). Comprehensive income (loss) for the
periods include the following:
Three Months Ended
March 31
1999 1998
(expressed in thousands)
Net income $ 18,490 $ 17,589
Other comprehensive income (loss)
Cumulative foreign currency translation
adjustment, net of income taxes (6,931) 1,714
_________ _________
Comprehensive income, net of income taxes $ 11,559 $ 19,303
(5) DEFERRED SOFTWARE COSTS. We defer purchased and internally developed
software and related installation costs for computer systems that are
used in our business. Deferral of costs begins when technological
feasibility of the project has been established and it is determined
that the software will benefit future years. These costs are amortized
on the straight-line method over five years or the expected
life of the product, whichever is less. If the useful life of the
product is shortened, the amortization period is adjusted. "Other
assets" in the Balance Sheets includes deferred software costs of
$27.4 million, $20.1 million, and $26.9 million at March 31, 1999 and
1998 and December 31, 1998.
(6) DEBT. On June 26, 1997, we entered into a $450 million revolving credit
agreement with a group of banks that expires in June 2001 and
provides for variable rates of interest based on customary indices. The
revolving credit agreement is available for acquisitions and general
corporate purposes. It contains financial and other covenants, including
a negative pledge and covenants specifying a minimum fixed charge
coverage ratio and a maximum leverage ratio. At March 31, 1999,
borrowings under the agreement totaled $165 million. We may, subject
to the covenants contained in the credit agreement and to market
conditions, refinance existing debt or raise additional funds through
the agreement and through other external debt or equity financings in
the future. In October 1998, we entered into an interest rate swap
with a notional amount of $25 million that expires in 2000. The swap
results in an effective fixed interest rate of 5.1% with respect to
$25 million of our revolving credit agreement borrowings. We are
exposed to credit-related gains or losses in the event of nonperformance
by the counterparty to this swap; however, we do not expect the
counterparty to fail to meet their obligations.
We filed a registration statement with the Securities and Exchange
Commission to register $300 million of shelf capacity for debt
securities. The effective date of the filing was April 22, 1998. On
May 12, 1998, we issued $150 million of 7.05% Notes ("Notes") under
this registration statement. The Notes are due May 15, 2005.
Proceeds from the issuance were used to repay borrowings under our
revolving credit agreement. We have $150 million of borrowing capacity
remaining under this registration statement.
In addition to the amount outstanding under the revolving credit
Agreement and Notes, we had $60.6 million and $73.8 million of short-term
notes payable at March 31, 1999 and 1998. The maximum amount of short-
term notes payable during the three months ended March 31, 1999 and 1998,
was $93.3 million and $104.6 million. The average amount of short-term
notes payable during the three months ended March 31, 1999 and 1998,
were $71.0 million and $63.7 million. The weighted average interest
rates for these borrowings was 5.4% and 5.9% for the periods.
Cash payments for interest were $4.0 million and $6.7 million for the
three months ended March 31, 1999 and 1998.
(7) TAXES. The estimated tax provision rate for the first three months of
1999 was 43.0%, compared with a tax provision rate of 42.0% for the same
period in the prior year. The increase is primarily due to a shift in
earnings among our foreign operations and the impact of nondeductible
goodwill.
For the three months ended March 31, 1999 and 1998, we paid income
taxes, net of refunds received, of $5.9 million and $3.1 million.
(8) ACQUISITIONS. During the first three months of 1999 we completed one
acquisition, and during the first three months of 1998 we completed
two acquisitions, all of which were accounted for under the purchase
method of accounting. Accordingly, the purchase prices were allocated
to the assets acquired and liabilities assumed based upon their estimated
fair values. The initial purchase price allocations may be adjusted
within one year of the date of purchase for changes in estimates of the
fair values of assets and liabilities. Such adjustments are not expected
to be significant to results of operations or the financial position of
the Company. The excess of the purchase price over the estimated fair
value of the net assets acquired was recorded as goodwill and is being
amortized over 40 years. The results of operations of the acquired
businesses are included in our operations subsequent to the dates of
acquisition.
On January 11, 1999, we acquired the office supply business of
Wallace Computer Services, based in Lisle, Illinois. The transaction
was completed for cash of $6.3 million and the recording of $0.2 million
of acquisition liabilities.
In January 1998, we acquired the direct marketing business of
Fidelity Direct, based in Minneapolis, Minnesota. In February 1998, we
acquired the direct marketing business of Sistemas Kalamazoo,
based in Spain. These transactions were completed for cash of
$4.0 million, debt assumed of $0.2 million, and the recording of
$3.8 million of acquisition liabilities.
Unaudited pro forma results of operations reflecting the acquisitions
would have been as follows. If the 1999 acquisition had occurred on
January 1, 1999, there would have been no significant change in the
results of operations for the first three months of 1999. If the 1999
and 1998 acquisitions had occurred January 1, 1998, sales for the first
three months of 1998 would have increased to $771.5 million, net income
would have decreased to $17.5 million, and basic earnings per share would
have remained $.27. This unaudited pro forma financial information does
not necessarily represent the actual results of operations that would
have occurred if the acquisitions had taken place on the dates assumed.
In 1997, we acquired 100% of the shares of Jean-Paul Guisset S.A.
("JPG"). JPG is a direct marketer of office products in France. The
negotiated purchase price was approximately FF850.0 million
(US$144.0 million) plus a price supplement payable in the year 2000,
if certain earnings and sales growth targets are reached.
The maximum amount of the price supplement is FF300.0 million or
approximately US$50.0 million. 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, we made a payment of
US$4.4 million and recorded a liability for the price supplement based on
results in 1998 and 1997. At March 31, 1999, we have a US$37.7 million
liability for the price supplement which is included in "Other long-term
liabilities" in the Balance Sheets.
In January 1997, we formed a joint venture with Otto Versand ("Otto"), of
which we owned 50%, to direct market office products in Europe. In
December 1997, Otto purchased a 10% interest in JPG at book value. No
gain or loss was recorded on this transaction. In December 1998,
the Company and Otto dissolved the joint venture. Otto acquired our 50%
interest in the joint venture. In addition, we repurchased Otto's 10%
interest in JPG for approximately $3.0 million and we repaid a loan, plus
accrued interest, from Otto of approximately $13.7 million. JPG is now
100% owned by the Company (also see Note 2, "Restructuring Reserve").
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Three Months Ended March 31, 1999, Compared with Three Months Ended
March 31, 1998
Results of Operations
Net sales in the first quarter of 1999 increased 12% to $848.4 million,
compared with $759.8 million in the first quarter of 1998. The growth in
sales resulted from a combination of same-location sales growth and
acquisitions. Same-location sales increased 8% in the first quarter of 1999,
compared with sales in the first quarter of 1998. Excluding the negative
impact of paper price changes and foreign currency changes, same-location
sales increased 10%.
Cost of sales, which includes the cost of merchandise sold, the cost to
deliver products to customers, and the occupancy costs of our facilities,
increased to $629.3 million in the first quarter of 1999, which was 74.2% of
net sales. This compares with $564.2 million reported in the same period of
the prior year, which represented 74.3% of net sales. Gross profit as a
percentage of net sales was 25.8% and 25.7% for the first quarters of 1999 and
1998.
Operating expense was 21.3% of net sales in the first quarter of 1999,
compared with 21.0% in the first quarter of 1998. Within the operating
expense category, selling and warehouse operating expense was 19.3% of net
sales in the first quarter of 1999, compared with 18.9% in 1998. The increase
in the first quarter of 1999 was due, in part, to additional payroll
associated with the expansion of our U.S. sales force and support of our
growth initiatives. Corporate general and administrative expense was 1.5% of
net sales in the first quarter of 1999, compared with 1.6% in 1998. Goodwill
amortization increased to $3.6 million in the first quarter of 1999, compared
with $3.2 million in the first quarter of 1998. The increase in goodwill
amortization was the result of additional goodwill arising from our
acquisitions.
As a result of the factors discussed above, income from operations in the
first quarter of 1999 increased to $38.5 million, or 4.5% of net sales,
compared to our first quarter 1998 operating income of $36.3 million, or 4.8%
of net sales.
Interest expense was $6.5 million in the first quarters of 1999 and 1998. Our
interest expense is the result of debt incurred in conjunction with our
acquisition and capital spending programs.
Net income in the first quarter of 1999 increased to $18.5 million, or 2.2% of
net sales, compared with $17.6 million, or 2.3% of net sales in the same
period of the prior year.
Restructuring Reserve
In the fourth quarter of 1998, we initiated a plan to restructure our
operations in the United Kingdom (the "restructuring"). The restructuring
involves closing seven small facilities and an administrative office and
integrating selected functions of our U.K. subsidiaries. The revenues and
results of operations of the facilities to be closed are not accounted for
separately. These closures are expected to be completed during the first half
of 1999 and will result in work force reductions of approximately 140
warehouse and administrative support associates.
Also during December 1998, we terminated our joint venture with Otto Versand
("Otto"). As a result of this dissolution, Otto acquired our 50% interest in
the joint venture. In addition, we repurchased Otto's 10% ownership interest
in Jean-Paul Guisset S.A. ("JPG"), our direct marketing subsidiary in France.
JPG is now 100% owned by the Company.
As a result of the restructuring and joint venture dissolution, we estimated
and recorded charges of $11.1 million ($7.4 million or $.11 per share -
diluted, net of tax benefit) in the fourth quarter of 1998. The restructuring
liability is included in "Accrued liabilities, other" in the Balance Sheets.
Amounts charged against the reserve through March 31, 1999, were as follows:
Termination Legal and
payments to professional Leasehold Other Inventory
employees fees terminations costs writedown
(expressed in thousands)
Beginning balance $ 1,400 $ 900 $ 3,400 $ 4,400 $ 1,000
Charges against
reserve 600 100 300 3,800 100
_______ _______ _______ ______ _______
Balance at
March 31, 1999 $ 800 $ 800 $ 3,100 $ 600 $ 900
Termination payments to employees are the result of workforce reductions of 89
warehouse and administrative support associates as of March 31, 1999.
Liquidity and Capital Resources
Our principal requirements for cash have been to make acquisitions, fund
technology development and working capital needs, expand our facilities at
existing locations, and open new distribution centers. The execution of our
strategy for growth, including acquisitions, the relocation of several
existing distribution centers into new and larger facilities, and increasing
our number of delivery trucks, is expected to require capital outlays over the
next several years. Our restructuring efforts (see "Restructuring Reserve"
section) are not expected to have a material impact on our liquidity.
To finance our capital requirements, we expect to rely upon funds from a
combination of sources. In addition to cash flow from operations, we have a
$450 million revolving credit agreement that expires in 2001 and provides for
variable rates of interest based on customary indices. The revolving credit
agreement is available for acquisitions and general corporate purposes. It
contains financial and other covenants, including a negative pledge and
covenants specifying a minimum fixed charge coverage ratio and a maximum
leverage ratio. At March 31, 1999, $165 million was outstanding under this
agreement. We may, subject to the covenants contained in the credit agreement
and to market conditions, refinance existing debt or raise additional funds
through the agreement and through other external debt or equity financings in
the future. In October 1998, we entered into an interest rate swap with a
notional amount of $25 million that expires in 2000. The swap results in an
effective fixed interest rate of 5.1% with respect to $25 million of our
revolving credit agreement borrowings.
We filed a registration statement with the Securities and Exchange Commission
to register $300.0 million of shelf capacity for debt securities. The
effective date of the filing was April 22, 1998. On May 12, 1998, we issued
$150.0 million of 7.05% Notes ("Notes") under this registration statement.
The Notes are due May 15, 2005. Proceeds from the issuance were used to repay
borrowings under our revolving credit agreement. We have $150.0 million of
borrowing capacity remaining under this registration statement.
In addition to the amount outstanding under the revolving credit agreement and
Notes, we had short-term notes payable of $60.6 million at March 31, 1999.
The maximum amount of short-term notes payable during the three months ended
March 31, 1999, was $93.3 million. The average amount of short-term notes
payable during the three months ended March 31, 1999, was $71.0 million. The
weighted average interest rate for these borrowings was 5.4%.
As a result of our acquisition activity, we also had short-term acquisition
liabilities of $7.3 million at March 31, 1999, which were included in "Accrued
liabilities, other." Additionally, we had long-term acquisition liabilities
of $46.8 million, primarily for the JPG price supplement, at March 31, 1999,
which were included in "Other long-term liabilities" (see Note 8,
"Acquisitions," in the Notes to Financial Statements for more information on
our acquisition activity.)
In June 1996, we filed a registration statement with the Securities and
Exchange Commission for 4.4 million shares of common stock to be offered from
time to time in connection with future acquisitions. As of March 31, 1999,
3.9 million shares remained unissued under this registration statement.
Net cash provided by operations in the first three months of 1999 was $46.7
million. This was the result of $25.9 million of net income, depreciation and
amortization, and other noncash items, and a $20.8 million net decrease in
certain components of working capital. Net cash used for investment in the
first three months of 1999 was $22.1 million, which included $14.7 million of
expenditures for property and equipment, and $6.3 million for acquisitions.
Net cash used for financing was $45.8 million for the first three months of
1999.
Net cash provided by operations in the first three months of 1998 was $53.6
million. This was the result of $26.8 million of net income, depreciation and
amortization, and other noncash items, and a $26.7 million decrease in certain
components of working capital. Net cash used for investment in the first
three months of 1998 was $29.7 million, which included $17.6 million of
expenditures for property and equipment, and $4.0 million for acquisitions.
Net cash provided by financing was $0.5 million for the first three months of
1998.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. This
Statement is effective for fiscal years beginning after June 15, 1999. We
plan to adopt this Statement in the first quarter of 2000. We are in the
process of reviewing this Statement. Adoption of this Statement is not
expected to have a significant impact on our results of operations or
financial position.
Year 2000 Computer Issue
We have undertaken a comprehensive review of our operations worldwide to
identify our preparedness for the year 2000 issue and are executing a plan for
our operations to address this issue. The status of our continued year 2000
progress is as follows: All of the computer systems we use to service our
U.S. contract stationer and promotional products customers are year 2000
compliant. The computer systems we use to service our U.S. direct marketing
customers are scheduled to be year 2000 compliant by June of 1999. All of our
foreign operations' computer systems are year 2000 compliant with the
exception of our direct marketing operation in the U.K., which is scheduled to
be compliant by May of 1999. In conclusion, all of our computer systems are
either currently year 2000 compliant or are scheduled to be compliant by June
of 1999.
We have also been reviewing our year 2000 compliance in our infrastructure
(e.g. telecommunication, HVAC, security systems, utilities, warehouse
equipment, voice mail systems, desktop and portable personal computers). We
expect to complete most remediation and certification testing in the first
half of 1999, with extended remediation and certification scheduled throughout
1999.
We have discussed the year 2000 issue with our critical suppliers to determine
the extent to which we could be affected if their systems are not year 2000
compliant. Most of our critical suppliers have confirmed that they already
are, or specifically when they expect to be, compliant. Throughout 1999, we
intend to continue monitoring this compliance.
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
inability to process orders, to obtain or deliver products and services to our
customers, or to collect amounts due to us from customers. We are currently
developing contingency plans in the event that critical systems, suppliers, or
customers encounter year 2000 problems.
The overall incremental costs to make our systems compliant are expected to be
less than $5 million. Approximately $4.2 million has been spent through
March 31, 1999. These costs are being expensed as incurred. We have also
incurred costs over the last several years for year 2000 compliant computer
system additions, replacements, and upgrades in order to realize efficiencies
and process improvements. These costs are generally capitalized and amortized
over a period of three to five years.
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 impact
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.
The Euro Conversion
On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
and the Euro. The participating countries adopted the Euro as their common
legal currency on that date. The conversion to the Euro required certain
changes to our information systems to accommodate Euro-denominated
transactions. The cost of these changes was not material to the Company. All
of our affected European operations were Euro compliant by the end of 1998.
While the competitive impact of the Euro conversion remains uncertain, we
currently do not anticipate a negative impact on our European operations.
Alternatively, the conversion to the Euro may provide additional marketing
opportunities for our European operations.
Business Outlook
Our core domestic operations remain strong. We continue to expect our cross-
selling efforts in furniture, computer consumables, promotional products, and
office paper to result in additional sales to our existing customers. In
addition, we see excellent opportunities in serving the middle-market, which
represents businesses of 25 to 100 employees. Our custom-designed sales
effort, Boise Express, is aimed specifically at this market. We also expect
to grow sales by serving new customers through a larger sales force. The pace
of our revenue growth will partially depend on the success of these
initiatives. In addition, continued same-location sales growth will depend,
in part, on conditions outside our control such as economic conditions and the
competitive environment in which we operate.
Our sales growth also depends, in part, on our ability to identify appropriate
acquisition candidates in the U.S. and internationally. Acquisitions remain
an important part of our growth strategy. We will continue to pursue
acquisitions of businesses that fit our business model.
Our French subsidiary, JPG, continues to perform well, posting double-digit
sales and operating income growth. We are continuing our investment in
developing our operations in Spain and Belgium, both of which are progressing
nicely.
We believe our gross margins will continue to be impacted principally by the
competitive environment in which we operate, including the pricing strategies
established by our competitors. While we believe that our efforts to lower
our procurement costs will be successful over time, there is no assurance that
our gross margins may not decline under competitive pressure. In addition,
office paper has historically impacted our gross margins as paper prices rise
or fall. We are uncertain as to the timing or magnitude of any future changes
in paper prices. Also, it is difficult to accurately predict what favorable
or adverse impact changes in paper prices might have on our future gross
margins or financial results. However, we believe our office paper business
can be managed to maintain acceptable margins and cost effectively provide our
customers with this important product. To a lesser extent our gross margins
will be impacted by our ability to lower our delivery costs and leverage our
fixed occupancy costs. Gross margins and operating expense ratios generally
vary among product categories, distribution channels, and geographic
locations. As a result, we expect some fluctuation in these ratios over time
as our sales mix evolves.
Risk Factors Associated With Forward Looking Statements
The Management's Discussion and Analysis of Financial Condition and Results of
Operations includes "forward looking statements" which involve uncertainties
and risks. There can be no assurance that actual results will not differ from
the Company's expectations. Factors which could cause materially different
results include, among others, the success of developing business with new
customers and of cross-selling efforts to existing customers; the timing and
amount of any paper price changes; continued same-location sales growth; the
changing mix of products sold to our customers; the success of our
restructuring efforts; the timing and success of efforts to make systems year
2000 and Euro compliant; the pace and success of our acquisition program; the
uncertainties of expansion into international markets, including fluctuations
in currency exchange rates, legal and regulatory requirements, and other
factors.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
Changes in interest rates and currency rates expose us to financial market
risk. Our debt is a combination of variable-rate and fixed-rate debt. We
experience only modest changes in interest expense when market interest rates
change. Consequently, our market risk-sensitive instruments do not subject us
to material market risk exposure. Our operations in Australia, Belgium,
Canada, France, Spain, and the United Kingdom are denominated in currencies
other than U.S. dollars. Most foreign currency transactions have been
conducted in the local currency, with minimal cross-border product movement,
limiting our exposure to changes in currency rates. 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 use interest rate swaps and rate hedge agreements to
hedge underlying debt obligations or anticipated transactions. For qualifying
hedges, our financial statements reflect interest rate differentials as
adjustments to interest expense over the life of the swap or underlying debt.
We defer gains and losses related to qualifying hedges of foreign currency
firm commitments and anticipated transactions, and we recognize such gains and
losses in income or as adjustments of carrying amounts when the hedged
transaction occurs. We mark to market all other forward exchange contracts
and include unrealized gains and losses in current period net income. We had
no material exposure to losses from derivative financial instruments held at
March 31, 1999. We do not use derivative financial instruments for trading
purposes.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not currently involved in any legal or administrative
proceedings that it believes could have, either individually or in the
aggregate, a material adverse effect on its business or financial condition.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Required exhibits are listed in the Index to Exhibits and are
incorporated by reference.
(b) No Form 8-K's were filed during the quarter covered by this
report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BOISE CASCADE
OFFICE PRODUCTS CORPORATION
As Duly Authorized Officer and
Chief Accounting Officer: /s/Thomas J. Jaszka
_____________________________
Thomas J. Jaszka
Vice President and Controller
Date: May 14, 1999
BOISE CASCADE OFFICE PRODUCTS CORPORATION
INDEX TO EXHIBITS
Filed With the Quarterly Report on Form 10-Q
for the Quarter Ended March 31, 1999
Number Description Page
11 Computation of Per Share Earnings
27 Financial Data Schedule