UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934
For the Quarterly Period Ended September 30, 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 October 31, 1999
Common Stock, $.01 par value 65,800,212
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 September 30
1999 1998
Net sales $ 838,521 $ 760,437
Cost of sales, including purchases
from Boise Cascade Corporation
of $76,072 and $71,731 630,516 571,978
___________ ___________
Gross profit 208,005 188,459
___________ ___________
Selling and warehouse operating
expense 157,271 145,554
Corporate general and administrative
expense, including amounts paid
to Boise Cascade Corporation
of $817 and $657 12,690 11,985
Goodwill amortization 3,709 3,162
___________ ___________
173,670 160,701
___________ ___________
Income from operations 34,335 27,758
___________ ___________
Interest expense 5,932 6,553
Other income, net 487 422
___________ ___________
Income before income taxes 28,890 21,627
Income tax expense 12,507 9,800
___________ ___________
Net income $ 16,383 $ 11,827
Earnings per share-basic $ .25 $ .18
Average common shares
outstanding-basic 65,800,212 65,785,573
Earnings per share-diluted $ .25 $ .18
Average common shares
outstanding-diluted 65,800,212 65,812,831
The accompanying notes are an integral part of these Financial Statements.
BOISE CASCADE OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES
STATEMENTS OF INCOME
(expressed in thousands, except share information)
(unaudited)
Nine Months Ended September 30
1999 1998
Net sales $2,488,469 $2,253,108
Cost of sales, including purchases
from Boise Cascade Corporation
of $220,396 and $206,932 1,848,197 1,680,762
___________ ___________
Gross profit 640,272 572,346
___________ ___________
Selling and warehouse operating
expense 484,814 431,163
Corporate general and administrative
expense, including amounts paid
to Boise Cascade Corporation
of $2,458 and $1,944 38,098 37,797
Goodwill amortization 11,133 9,357
Other operating income (3,195) -
___________ ___________
530,850 478,317
___________ ___________
Income from operations 109,422 94,029
___________ ___________
Interest expense 18,180 19,903
Other income, net 1,286 1,301
___________ ___________
Income before income taxes 92,528 75,427
Income tax expense 39,377 32,283
___________ ___________
Net income $ 53,151 $ 43,144
Earnings per share-basic $ .81 $ .66
Average common shares
outstanding-basic 65,793,770 65,725,640
Earnings per share-diluted $ .81 $ .66
Average common shares
outstanding-diluted 65,800,780 65,792,665
The accompanying notes are an integral part of these Financial Statements.
BOISE CASCADE OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES
BALANCE SHEETS
(expressed in thousands)
(unaudited)
September 30 December 31
ASSETS 1999 1998 1998
Current
Cash and cash equivalents $ 19,560 $ 39,729 $ 31,838
Receivables, less allowances
of $10,042, $8,730, and $9,539 447,720 396,045 394,013
Inventories 210,783 213,170 226,955
Deferred income tax benefits 20,647 16,313 14,335
Other 31,741 19,860 31,532
___________ ___________ ___________
730,451 685,117 698,673
___________ ___________ ___________
Property
Land 28,483 27,586 28,572
Buildings and improvements 156,369 142,037 143,192
Furniture and equipment 229,442 199,902 214,611
Accumulated depreciation (173,759) (143,603) (149,071)
___________ ___________ ___________
240,535 225,922 237,304
___________ ___________ ___________
Goodwill, net of amortization
of $48,241, $33,927, and $37,108 488,400 442,657 494,883
Other assets 39,007 39,677 30,885
___________ ___________ ___________
Total assets $1,498,393 $1,393,373 $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)
September 30 December 31
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998 1998
Current
Notes payable $ 70,090 $ 74,000 $ 72,100
Current portion of long-term debt 2,593 2,531 2,065
Accounts payable
Trade and other 294,573 288,198 279,928
Boise Cascade Corporation 38,256 28,387 29,297
___________ ___________ ___________
332,829 316,585 309,225
___________ ___________ ___________
Accrued liabilities
Compensation and benefits 45,662 32,154 38,144
Income taxes payable - - 796
Taxes, other than income 12,352 16,973 9,466
Other 84,049 45,062 36,861
___________ ___________ ___________
142,063 94,189 85,267
___________ ___________ ___________
547,575 487,305 468,657
___________ ___________ ___________
Other
Long-term debt, less current portion 310,774 317,480 354,224
Other 28,371 33,225 75,950
___________ ___________ ___________
339,145 350,705 430,174
___________ ___________ ___________
Shareholders' equity
Common stock, $.01 par value,
200,000,000 shares authorized;
65,800,212, 65,758,524, and
65,758,524 shares issued and
outstanding at each period 658 658 658
Additional paid-in capital 359,557 359,224 359,224
Retained earnings 261,631 198,558 208,480
Accumulated other comprehensive
income (loss) (10,173) (3,077) (5,448)
___________ ___________ ___________
Total shareholders' equity 611,673 555,363 562,914
___________ ___________ ___________
Total liabilities and
shareholders' equity $1,498,393 $1,393,373 $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)
Nine Months Ended September 30
1999 1998
Cash provided by (used for) operations
Net income $ 53,151 $ 43,144
Items in income not using (providing) cash
Depreciation and amortization 45,148 37,106
Deferred income taxes (4,020) (3,392)
Restructuring reserve (3,988) -
Receivables (53,707) (37,185)
Inventories 19,869 (13,991)
Accounts payable and accrued liabilities 34,331 53,824
Current and deferred income taxes (5,408) (6,808)
Other, net 3,366 8,304
__________ __________
Cash provided by operations 88,742 81,002
__________ __________
Cash used for investment
Expenditures for property and equipment (33,429) (47,710)
Acquisitions (7,619) (4,042)
Other, net (14,970) (28,479)
__________ __________
Cash used for investment (56,018) (80,231)
__________ __________
Cash provided by (used for) financing
Additions to long-term debt 47,569 159,645
Payments of long-term debt (90,491) (201,740)
Notes payable ( 2,010) 50,700
Other, net (70) 1,598
__________ __________
Cash provided by (used for) financing (45,002) 10,203
__________ __________
Increase (decrease) in cash and
cash equivalents (12,278) 10,974
Balance at beginning of the period 31,838 28,755
__________ __________
Balance at September 30 $ 19,560 $ 39,729
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 September 30, 1999, Boise Cascade Corporation owned approximately
81% 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) 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. In
July 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137 that delayed the effective date of
Statement 133 until fiscal years beginning after June 15, 2000. We plan
to adopt this Statement in the first quarter of 2001. 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.
(3) RESTRUCTURING RESERVE. During the second quarter of 1999, we
revised the amount of a restructuring reserve that we established
in the fourth quarter of 1998 for our U.K. operations. The
restructuring program was less costly than originally anticipated.
As a result, we recorded an increase to operating income of approximately
$4.0 million ($2.7 million, net of tax benefit or $.04 per share-diluted)
in the second quarter of 1999. Of this amount, about $3.2 million was
included in "Other operating income" and about $0.8 million was included
in "Cost of sales" in the Statements of Income.
The restructuring liability is included in "Accrued liabilities, other"
in the Balance Sheets. Changes in the reserve balance through
September 30, 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 (200) - - (3,600) -
Balance at ________ _______ ________ ________ ________
December 31, 1998 $ 1,200 $ 900 $ 3,400 $ 800 $ 1,000
Charges against
reserve (600) (200) (400) (300) (200)
Reserves credited
to income (500) (600) (1,600) (500) (800)
________ _______ ________ ________ ________
Balance at
September 30, 1999 $ 100 $ 100 $ 1,400 $ - $ -
Reserves credited to income reflect lower legal and professional fees,
a sublease on one of the facilities, a decision to retain a small
printing portion of the business, and fewer terminations of employees.
Termination payments to employees are the result of workforce reductions
of about 90 warehouse and administrative support associates as
of September 30, 1999. We expect the restructuring to result in total
workforce reductions of approximately 100 warehouse and administrative
support associates.
(4) EARNINGS PER SHARE. Basic earnings per share for the three and nine
months ended September 30, 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 and nine months ended September 30, 1999 and 1998, include the
weighted average impact of stock options assumed exercised using the
treasury method. Earnings per share is computed independently for
each period.
For the three months For the nine months
ended September 30 ended September 30
1999 1998 1999 1998
BASIC EARNINGS PER SHARE
Net income $ 16,383 $ 11,827 $ 53,151 $ 43,144
Shares of common stock:
Weighted average
shares outstanding 65,800,212 65,757,737 65,775,016 65,700,493
Effect of contingent
shares - 27,836 18,754 25,147
65,800,212 65,785,573 65,793,770 65,725,640
Basic earnings per share $ .25 $ .18 $ .81 $ .66
DILUTED EARNINGS PER SHARE
Net income $ 16,383 $ 11,827 $ 53,151 $ 43,144
Shares of common stock:
Weighted average
shares outstanding 65,800,212 65,757,737 65,775,016 65,700,493
Effect of options - 27,258 7,010 67,025
Effect of contingent
shares - 27,836 18,754 25,147
65,800,212 65,812,831 65,800,780 65,792,665
Diluted earnings per share $ .25 $ .18 $ .81 $ .66
(5) COMPREHENSIVE INCOME (LOSS). Comprehensive income (loss) for the
periods include the following:
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
(expressed in thousands)
Net income $16,383 $11,827 $53,151 $43,144
Other comprehensive
income (loss)
Cumulative foreign
currency translation
adjustment, net of
income taxes 3,108 2,720 (4,725) 3,955
________ ________ ________ ________
Comprehensive income,
net of income taxes $19,491 $14,547 $48,426 $47,099
(6) 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 the expected useful life of the product.
If the useful life of the product is changed, the amortization period is
adjusted. "Other assets" in the Balance Sheets includes deferred
software costs of $30.6 million, $24.9 million, and $26.9 million at
September 30, 1999 and 1998, and December 31, 1998.
(7) 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 September 30, 1999,
borrowings under the agreement totaled $155 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 5.0% 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 the swap; however, we do not expect the counterparty
to fail to meet their obligations.
We have $300 million of shelf capacity for debt securities registered
with the Securities and Exchange Commission. In May 1998, we issued
$150 million of 7.05% Notes ("Notes") under this registration statement.
The Notes are due May 15, 2005. 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 $70.1 million and $74.0 million of short-term
notes payable at September 30, 1999 and 1998. The maximum amount of
short-term notes payable during the nine months ended September 30, 1999
and 1998, was $111.9 million and $116.6 million. The average amount of
short-term notes payable during the nine months ended September 30, 1999
and 1998, was $73.6 million and $64.7 million. The weighted average
interest rates for these borrowings were 5.5% and 5.9% for the periods.
Cash payments for interest were $15.6 million and $16.5 million for the
nine months ended September 30, 1999 and 1998.
(8) TAXES. The estimated annual tax provision rate for the first nine months
of 1999 and 1998 was approximately 43%.
For the nine months ended September 30, 1999 and 1998, we paid income
taxes, net of refunds received, of $46.3 million and $39.9 million.
(9) ACQUISITIONS. During the first nine months of 1999 we completed two
acquisitions, and during the first nine months of 1998 we also 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
generally being amortized over 40 years. The results of operations of
the acquired businesses are included in our operations subsequent to the
dates of acquisition.
In January 1999, we acquired the office supply business of Wallace
Computer Services, based in Lisle, Illinois. In September 1999, we
acquired Supply West, based in Perth, Western Australia. The
transactions were completed for cash of $7.6 million and the recording
of $2.6 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 acquisitions had occurred on
January 1, 1999, there would have been no significant change in the
results of operations for the first nine months of 1999. If the 1999 and
1998 acquisitions had occurred January 1, 1998, there would have been no
significant change in the results of operations for the first nine months
of 1998. 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.
In 1998, we made a partial payment of the price supplement of
FF27.0 million (US$4.4 million). At September 30, 1999, we have a
liability for the maximum remaining amount of the price supplement,
FF273.0 million (US$43.5 million), which is included in "Other current
liabilities" in the Balance Sheets.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Three Months Ended September 30, 1999, Compared with Three Months Ended
September 30, 1998
Results of Operations
Net sales in the third quarter of 1999 increased 10% to $838.5 million,
compared with $760.4 million in the third quarter of 1998. The growth in
sales resulted primarily from same-location sales growth. Same-location sales
increased 7% in the third quarter of 1999, compared with sales in the third
quarter of 1998. Excluding the negative impact of paper price changes and
foreign currency changes, same-location sales increased 8%.
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 $630.5 million in the third quarter of 1999, which was 75.2% of
net sales. This compares with $572.0 million reported in the same period of
the prior year, which represented 75.2% of net sales. Gross profit as a
percentage of net sales was 24.8% for both the third quarters of 1999 and 1998
but decreased from 26.5% of net sales in the second quarter of 1999. The
decrease in gross profit from the second quarter of 1999 was primarily due to
rising paper prices. Paper prices have been rising during 1999. We are
passing these price increases along to our customers, but with a lag, which
negatively affected our gross margins in the quarter.
Operating expense was 20.7% of net sales in the third quarter of 1999,
compared with 21.1% in the third quarter of 1998. Within the operating
expense category, selling and warehouse operating expense was 18.8% of net
sales in the third quarter of 1999, compared with 19.1% in the third quarter
of 1998. This decrease resulted, in part, from lower operating costs in
Canada as we resolved the warehouse integration issues in our new distribution
center. Corporate general and administrative expense was 1.5% of net sales in
the third quarter of 1999, compared with 1.6% in 1998. Goodwill amortization
increased to $3.7 million in the third quarter of 1999, compared with $3.2
million in the third quarter of 1998. The increase in goodwill amortization
was the result of additional goodwill arising from our acquisitions.
Income from operations in the third quarter of 1999 increased to $34.3
million, or 4.1% of net sales, compared to our third quarter 1998 operating
income of $27.8 million, or 3.7% of net sales. Compared to third quarter
1998, our third quarter 1999 operating income includes an improvement of
approximately $1.2 million in our European operations affected by our
restructuring efforts. This improvement is primarily non-cash and mainly
represents the 1998 losses incurred in our joint venture with Otto Versand.
Interest expense was $5.9 million in the third quarter of 1999, compared with
$6.6 million in the third quarter of 1998. The decrease in interest expense
is due to lower debt balances compared with the prior period.
Net income in the third quarter of 1999 was $16.4 million, or 2.0% of net
sales, compared with $11.8 million, or 1.6% of net sales in the same period of
the prior year.
Nine Months Ended September 30, 1999, Compared with Nine Months Ended
September 30, 1998
Net sales for the nine months ended September 30, 1999, increased 10% to $2.5
billion, compared with $2.3 billion a year ago. The increase was due
primarily to same-location sales growth. Same-location sales increased 7%
year to year. Excluding the negative impact of paper price changes and
foreign currency changes, same-location sales grew 9%.
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 $1.8 billion for the nine months ended September 30, 1999, which
was 74.3% of net sales. This compares with $1.7 billion reported in the same
period of the prior year, which represented 74.6% of net sales. Gross profit
as a percentage of net sales was 25.7% and 25.4% for the first nine months of
1999 and 1998. The increase was due to higher gross margins in many of our
businesses, with particular strength in our domestic operations. Our higher
margins were primarily the result of lower procurement costs.
Operating expense was 21.3% of net sales for the first nine months of 1999,
compared with 21.2% in the same period of the prior year. Excluding the
impact of nonroutine items associated with restructuring, operating expense
for the first nine months of 1999 was 21.5% (see "Restructuring Reserve"
section for detailed information). Within the operating expense category,
selling and warehouse operating expense was 19.5% of net sales for the first
nine months of 1999, compared with 19.1% in 1998. The increase is due, in
part, to increased investment in our growth initiatives and a modest employee-
wide bonus program implemented during the last half of 1998. Corporate
general and administrative expense was 1.5% of net sales for the first nine
months of 1999, compared with 1.7% in 1998. Goodwill amortization increased
to $11.1 million for the first nine months of 1999, compared with $9.4 million
in 1998. The increase in goodwill amortization was the result of additional
goodwill arising from our acquisitions.
Excluding the impact of nonroutine items, income from operations for the first
nine months of 1999 was $105.4 million, or 4.2% of net sales, compared with
1998 operating income of $94.0 million, or 4.2% of net sales. Compared to the
first nine months of 1998, our operating income for the first nine months of
1999 includes an improvement of approximately $3.1 million in our European
operations affected by our restructuring efforts. This improvement is
primarily non-cash and mainly represents the 1998 losses incurred in our joint
venture with Otto Versand.
Interest expense was $18.2 million for the first nine months of 1999, compared
with $19.9 million in 1998. The decrease in interest expense is due to lower
debt balances compared with the prior period.
Excluding nonroutine items associated with restructuring, net income for the
first nine months of 1999 was $49.2 million, or 2.0% of net sales, compared
with $43.1 million, or 1.9% of net sales, in the same period of the prior
year.
Restructuring Reserve
During the second quarter of 1999, we revised the amount of a restructuring
reserve that we established in the fourth quarter of 1998 for our U.K.
operations. The restructuring program was less costly than originally
anticipated. As a result, we recorded an increase to operating income of
approximately $4.0 million ($2.7 million, net of tax benefit or $.04 per
share-diluted) in the second quarter of 1999. Of this amount, about $3.2
million was included in "Other operating income" and about $0.8 million was
included in "Cost of sales" in the Statements of Income.
The restructuring liability is included in "Accrued liabilities, other" in the
Balance Sheets. Changes in the reserve balance through September 30, 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 (200) - - (3,600) -
Balance at ________ _______ ________ ________ ________
December 31, 1998 $ 1,200 $ 900 $ 3,400 $ 800 $ 1,000
Charges against
reserve (600) (200) (400) (300) (200)
Reserves credited
to income (500) (600) (1,600) (500) (800)
________ _______ ________ ________ ________
Balance at
September 30, 1999 $ 100 $ 100 $ 1,400 $ - $ -
Reserves credited to income reflect lower legal and professional fees, a
sublease on one of the facilities, a decision to retain a small printing
portion of the business, and fewer terminations of employees. Termination
payments to employees are the result of workforce reductions of about 90
warehouse and administrative support associates as of September 30, 1999. We
expect the restructuring to result in total workforce reductions of
approximately 100 warehouse and administrative support associates.
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 and the relocation of several
existing distribution centers into new and larger facilities, 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 September 30, 1999, $155 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 5.0% with respect to the
$25 million of our revolving credit agreement borrowings.
We have $300.0 million of shelf capacity for debt securities registered with
the Securities and Exchange Commission. In May 1998, we issued $150.0 million
of 7.05% Notes ("Notes") under this registration statement. The Notes are due
May 15, 2005. 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 $70.1 million at September 30, 1999.
The maximum amount of short-term notes payable during the nine months ended
September 30, 1999, was $111.9 million. The average amount of short-term
notes payable during the nine months ended September 30, 1999, was $73.6
million. The weighted average interest rate for these borrowings was 5.5%
As a result of our acquisition activity, we also had short-term acquisition
liabilities of $52.9 million, primarily for the JPG price supplement, at
September 30, 1999, which were included in "Accrued liabilities, other."
Additionally, we had long-term acquisition liabilities of $2.3 million at
September 30, 1999, which were included in "Other long-term liabilities" (see
Note 9, "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 September 30,
1999, 3.8 million shares remained unissued under this registration statement.
Net cash provided by operations in the first nine months of 1999 was $88.7
million. This was the result of $90.2 million of net income, depreciation and
amortization, and other noncash items, and a $1.5 million decrease in certain
components of working capital. Net cash used for investment in the first nine
months of 1999 was $56.0 million, which included $33.4 million of expenditures
for property and equipment, and $7.6 million for acquisitions. Net cash used
for financing was $45.0 million for the first nine months of 1999, resulting
from reductions in our total debt outstanding.
Net cash provided by operations in the first nine months of 1998 was $81.0
million. This was primarily the result of $76.9 million of net income,
depreciation and amortization, and other noncash items, and a $4.1 million
decrease in certain components of working capital. Net cash used for
investment in the first nine months of 1998 was $80.2 million, which included
$47.7 million of expenditures for property and equipment, and $4.0 million for
acquisitions. Net cash provided by financing was $10.2 million for the first
nine months of 1998, resulting primarily from borrowings we made to fund
technology developments and facility relocations.
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. In July
1999, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 137 that delayed the effective date of Statement 133
until fiscal years beginning after June 15, 2000. We plan to adopt this
Statement in the first quarter of 2001. 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 completed a comprehensive review of our operations worldwide to
identify our preparedness for the year 2000 issue, and we are nearing
completion of a multi-year plan for our operations to address this issue. We
believe that all of the computer systems we use to service our customers in
all of our domestic and foreign locations are now year 2000 compliant.
We have reviewed the year 2000 compliance in our infrastructure (e.g.
telecommunication; heating, ventilation, and air conditioning; security
systems; utilities; warehouse equipment; voice mail systems; desktop and
portable personal computers). We believe that all of our data communications
infrastructure is now compliant and that nearly all of our voice
communications infrastructure (switches, automatic call distribution systems,
and voice mail systems) are compliant. With vendor-supplied software release
upgrades to three of our telephone switches in October, all of our voice
communications infrastructure will be compliant. We believe that all other
infrastructure critical to customer service is now compliant. We are
continuing to perform compliance testing on all residual infrastructure
components. Our four major data centers now have back-up power sources under
our management as a contingency against public utility power outages.
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 they already are
compliant or have specified when they expect to be compliant. 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 year 2000 compliant are
expected to be about $4.5 million. Approximately $4.4 million has been spent
through September 30, 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 the expected useful life of the product.
Our discussion of the year 2000 computer issue contains forward-looking
information. We believe our critical computer systems will be year 2000
compliant and 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 and our ability to successfully identify and correct all systems
affected by the year 2000 issue.
Business Outlook
Our core North American 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. Also, we have developed an approach to serve the middle-market,
which represents businesses of 25 to 100 employees. Our custom-designed sales
effort, Boise Express, targets this market. Growth potential also exists in
developing procurement management offerings for our customers, including
further investments in components of integrated supply and expansion of our
electronic commerce capabilities. The pace of our revenue growth will
partially depend on the success of these initiatives. We are also seeing
merger-driven consolidations among not only some of our large customers but
also among some of our key competitors. As a result, 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. Over the past several
years, acquisitions have contributed significantly to our revenue growth.
Although our acquisition pace has slowed, acquisitions remain an important
part of our growth strategy. We will continue to pursue acquisitions of
businesses that fit our business model.
Our French and Australian operations are performing well, posting double-digit
sales growth and operating income improvement. We are continuing to develop
our direct marketing operations in Spain and Belgium, both of which are
progressing nicely. In the U.K., our newly restructured operations create an
appropriate cost structure and efficient operating model upon which we can
grow this business.
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 and operating 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, our ability to implement our operating
strategies, integration, and restructuring plans and to realize cost savings
and efficiencies; the timing and amount of any paper price changes; continued
same-location sales growth; the changing mix of products sold to our
customers; the pace and success of our acquisition program; the success of new
product line introductions; the uncertainties of expansion into international
markets, including currency exchange rates, legal and regulatory requirements,
and other factors; changes in the competitive environment brought about by
consolidation of customers and competitors, and other competitive and general
economic conditions.
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
September 30, 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: November 10, 1999
BOISE CASCADE OFFICE PRODUCTS CORPORATION
INDEX TO EXHIBITS
Filed With the Quarterly Report on Form 10-Q
for the Quarter Ended September 30, 1999
Number Description Page
10.1 Form of Executive Officer Severance Agreement,
as amended through August 3, 1999
10.2 Early Retirement Plan for Executive Officers, as
amended through August 3, 1999
10.3 Supplemental Pension Plan, as amended through
August 3, 1999
27 Financial Data Schedule