UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 10-Q
(X) Quarterly Report Pursuant To Section 13 or 15(d) Of The Securities
Exchange Act Of 1934
For the quarterly period ended September 30, 1998
( ) Transition Report Pursuant To Section 13 or 15(d) Of The Securities
Exchange Act Of 1934
For the transition period from ________________ to ________________
Commission File Number: 1-13662
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, 1998
Common Stock, $.01 par value 65,728,524
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 September 30
1998 1997
Net sales $ 760,437 $ 679,877
Cost of sales, including purchases
from Boise Cascade Corporation
of $71,731 and $57,231 571,978 509,557
__________ __________
Gross profit 188,459 170,320
__________ __________
Selling and warehouse operating
expense 145,554 127,373
Corporate general and administrative
expense, including amounts paid
to Boise Cascade Corporation
of $657 and $653 11,985 11,307
Goodwill amortization 3,162 3,159
__________ __________
160,701 141,839
__________ __________
Income from operations 27,758 28,481
__________ __________
Interest expense 6,553 6,749
Other income, net 422 257
__________ __________
Income before income taxes 21,627 21,989
Income tax expense 9,800 9,457
__________ __________
Net income $ 11,827 $ 12,532
Earnings per share-basic $ .18 $ .20
Earnings per share-diluted $ .18 $ .20
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
1998 1997
Net sales $ 2,253,108 $ 1,878,218
Cost of sales, including purchases
from Boise Cascade Corporation
of $206,932 and $163,437 1,680,762 1,408,311
____________ ____________
Gross profit 572,346 469,907
____________ ____________
Selling and warehouse operating
expense 431,163 351,352
Corporate general and administrative
expense, including amounts paid
to Boise Cascade Corporation
of $1,944 and $1,947 37,797 29,886
Goodwill amortization 9,357 7,686
____________ ___________
478,317 388,924
____________ ___________
Income from operations 94,029 80,983
____________ ___________
Interest expense 19,903 13,895
Other income, net 1,301 390
____________ ___________
Income before income taxes 75,427 67,478
Income tax expense 32,283 28,325
____________ ___________
Net income $ 43,144 $ 39,153
Earnings per share-basic $ .66 $ .62
Earnings per share-diluted $ .66 $ .62
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
1998 1997 1997
ASSETS
Current
Cash and cash equivalents $ 39,729 $ 12,598 $ 28,755
Receivables, less allowances
of $8,730, $7,055, and $7,591 396,045 374,484 357,321
Inventories 213,170 186,571 197,990
Deferred income tax benefits 16,313 13,995 14,223
Other 19,860 24,994 23,808
___________ ___________ ___________
685,117 612,642 622,097
___________ ___________ ___________
Property
Land 27,586 27,900 28,913
Buildings and improvements 142,037 111,981 127,430
Furniture and equipment 199,902 180,154 175,778
Accumulated depreciation (143,603) (129,447) (129,951)
___________ ___________ ___________
225,922 190,588 202,170
___________ ___________ ___________
Goodwill, net of amortization
of $33,927, $20,450, and $24,019 442,657 433,497 438,830
Other assets 39,677 24,804 28,391
___________ ___________ ___________
Total assets $1,393,373 $1,261,531 $1,291,488
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
1998 1997 1997
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Notes payable $ 74,000 $ 1,200 $ 23,300
Current portion of long-term debt 2,531 2,997 2,917
Accounts payable
Trade and other 288,198 235,880 238,773
Boise Cascade Corporation 28,387 34,530 42,097
___________ ___________ ___________
316,585 270,410 280,870
___________ ___________ ___________
Accrued liabilities
Compensation and benefits 32,154 30,496 30,717
Income taxes payable - 4,662 3,370
Taxes, other than income 16,973 15,821 18,718
Other 45,062 39,896 30,848
___________ ___________ ___________
94,189 90,875 83,653
___________ ___________ ___________
487,305 365,482 390,740
___________ ___________ ___________
Other
Deferred income taxes - 371 -
Long-term debt, less current
portion 317,480 366,731 357,595
Other 33,225 36,043 37,518
___________ ___________ ___________
350,705 403,145 395,113
___________ ___________ ___________
Shareholders' equity
Common stock, $.01 par value,
200,000,000 shares authorized;
65,758,524, 65,586,125, and
65,588,258 shares issued and
outstanding at each period 658 656 656
Additional paid-in capital 359,224 356,565 356,599
Retained earnings 198,558 137,680 155,412
Accumulated other comprehensive
income (loss) (3,077) (1,997) (7,032)
___________ ___________ ___________
Total shareholders' equity 555,363 492,904 505,635
___________ ___________ ___________
Total liabilities and
shareholders' equity $1,393,373 $1,261,531 $1,291,488
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
1998 1997
Cash provided by (used for) operations
Net income $ 43,144 $ 39,153
Items in income not using (providing) cash
Depreciation and amortization 37,106 29,291
Deferred income taxes (3,392) (1,754)
Receivables (37,185) (14,933)
Inventories (13,991) 9,743
Accounts payable and accrued liabilities 53,824 28,675
Current and deferred income taxes (6,808) (7,430)
Other, net 8,304 (7,614)
__________ __________
Cash provided by operations 81,002 75,131
__________ __________
Cash used for investment
Expenditures for property and equipment (47,710) (44,182)
Acquisitions (4,042) (243,984)
Other, net (28,479) (20,504)
__________ __________
Cash used for investment (80,231) (308,670)
__________ __________
Cash provided by (used for) financing
Additions to long-term debt 159,645 219,999
Payments of long-term debt (201,740) -
Notes payable 50,700 (35,500)
Sale of stock - 48,463
Other, net 1,598 413
__________ __________
Cash provided by financing 10,203 233,375
__________ __________
Increase (decrease) in cash and cash equivalents 10,974 (164)
Balance at beginning of the period 28,755 12,762
__________ __________
Balance at September 30 $ 39,729 $ 12,598
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 a distributor of products for the
office through its contract stationer and direct marketing channels.
At September 30, 1998, 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 1997 Annual
Report.
(2) EARNINGS PER SHARE. Basic earnings per share for the three and nine
months ended September 30, 1998 and 1997, 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, 1998 and 1997, include the
weighted average impact of stock options assumed exercised using the
treasury method. Earnings per share is computed independently for
each period. As a result, the total of the per share results for the
first three quarters of 1997 does not equal the per share results for
the nine months ended September 30, 1997.
In 1997, we adopted Statement of Financial Accounting Standards No. 128
(SFAS 128), "Earnings Per Share." Earnings per share for 1997 have
been restated to reflect SFAS 128.
(3) COMPREHENSIVE INCOME (LOSS). Comprehensive income (loss) for the
periods include the following:
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
(expressed in thousands)
Net income $11,827 $12,532 $43,144 $39,153
Other comprehensive
income (loss)
Cumulative foreign
currency translation
adjustment, net of
income taxes 2,720 (1,931) 3,955 (3,493)
________ ________ ________ ________
Comprehensive income,
net of income taxes $14,547 $10,601 $47,099 $35,660
Accumulated other comprehensive income (loss) for each period was as
follows:
September 30 December 31
1998 1997 1997
(expressed in thousands)
Balance at beginning of period:
Minimum pension liability
adjustment, net of income taxes $ (417) $ (24) $ (24)
Cumulative foreign currency
translation adjustment, net of
income taxes (6,615) 1,520 1,520
Changes within periods:
Minimum pension liability
adjustment, net of income taxes - - (393)
Cumulative foreign currency
translation adjustment, net
of income taxes 3,955 (3,493) (8,135)
________ ________ ________
Balance at end of period $(3,077) $(1,997) $(7,032)
(4) 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 a maximum of five years or the useful
life of the product, whichever is less. If the useful life of the
product is shortened, the amortization period is adjusted. "Other
assets" in the Balance Sheets includes deferred software costs of
$24.9 million, $15.0 million, and $17.5 million at September 30, 1998
and 1997, and December 31, 1997.
(5) DEBT. On June 26, 1997, we entered into a $450.0 million revolving
credit agreement with a group of banks that expires in 2001 and
provides for variable rates of interest based on customary
indices. In October 1998, we entered into an interest rate swap with a
notional amount of $25.0 million that expires in 2000. The swap
results in an effective fixed interest rate with respect to
$25.0 million of our revolving credit agreement borrowings. The
revolving credit agreement 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. 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. At September 30, 1998, borrowing under the
revolving credit agreement was $150.0 million.
In addition to the amount outstanding under the revolving credit
agreement, we had $74.0 million and $1.2 million of short-term notes
payable at September 30, 1998 and 1997. The maximum amount of short-
term notes payable during the nine months ended September 30, 1998 and
1997, was $116.6 million and $294.8 million. The average amount of
short-term notes payable during the nine months ended September 30,
1998 and 1997, was $64.7 million and $39.5 million. The weighted
average interest rate for the short-term notes payable was 5.9% and
5.8% for the periods.
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 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.
Cash payments for interest were $16.5 million and $13.0 million for the
nine months ended September 30, 1998 and 1997.
(6) TAXES. The estimated tax provision rate for the first nine months of
1998 was 43.0%, compared with an estimated tax provision rate of 42.0%
for the same period in the prior year. The increase is primarily due
to a shift in expected income and losses among our foreign operations
and the decrease in anticipated total income.
For the nine months ended September 30, 1998 and 1997, we paid income
taxes, net of refunds received, of $39.9 million and $30.7 million.
(7) ACQUISITIONS. During the first nine months of 1998, we completed two
acquisitions, and during the first nine months of 1997, we completed
seven acquisitions, all of which were accounted for under the purchase
method of accounting. Accordingly, the purchase prices were allocated
to the assets acquired and liabilities assumed based upon their
estimated fair values. The initial purchase price allocations may be
adjusted within one year of the date of purchase for changes in
estimates of the fair values of assets and liabilities. Such
adjustments are not expected to be significant to 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 12, 1998, we acquired the direct marketing business of
Fidelity Direct, based in Minneapolis, Minnesota. On February 28,
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.
On January 31, February 28, and April 17, 1997, we acquired contract
stationer businesses in Montana, Florida, and the United Kingdom. On
April 30 and May 30, 1997, we acquired computer consumables businesses
in North Carolina and Canada. On May 31, 1997, we acquired the
promotional products business of OstermanAPI, Inc., based in Maumee,
Ohio. In conjunction with the acquisition of Osterman, we formed a
majority-owned subsidiary, Boise Marketing Services, Inc. ("BMSI"), of
which we own 88%. Our previously acquired promotional products
company, OWNCO, also became part of BMSI. Also in January 1997, we
completed a joint venture with Otto Versand to direct market office
products in Europe. These transactions, including the joint venture
and the formation of the majority-owned promotional products
subsidiary, were completed for cash of $99.7 million, $2.9 million of
our common stock, and the recording of $14.2 million of acquisition
liabilities.
On July 7, 1997, we acquired 100% of the shares of Jean-Paul Guisset
S.A. ("JPG"), a French corporation. JPG is a direct marketer of office
products in France. The negotiated purchase price was FF850.0 million
(US$144.0 million) plus a price supplement payable in the year 2000, if
certain earnings and sales growth targets are reached. No liability has
been recorded for the price supplement as the amount of payment, if
any, is not assured beyond a reasonable doubt. If 1998 results
are duplicated in 1999, the price supplement to be paid would be
approximately US$29.0 million. In addition to the cash paid, we
recorded US$5.8 million of acquisition liabilities and assumed
US$10.1 million of long-term debt. In December 1997, Otto purchased a
10% interest in JPG, with an option to purchase an additional 40%
interest before January 15, 1999.
Unaudited pro forma results of operations reflecting the acquisitions
would have been as follows. If the 1998 acquisitions had occurred
January 1, 1998, sales for the first nine months of 1998 would have
remained $2.3 billion, net income would have increased to
$43.2 million, and basic earnings per share would have remained $.66.
If the 1998 and 1997 acquisitions had occurred January 1, 1997, sales
for the first nine months of 1997 would have increased to $2.0 billion,
net income would have increased to $39.8 million, and basic earnings
per share would have increased to $.63. The 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.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Three Months Ended September 30, 1998, Compared with Three Months Ended
September 30, 1997
Results of Operations
Net sales in the third quarter of 1998 increased 12% to $760.4 million,
compared with $679.9 million in the third quarter of 1997. The growth in
sales resulted primarily from same-location sales growth. Same-location
sales increased 10% in the third quarter of 1998, compared with the third
quarter of 1997.
Cost of sales, which includes the cost of merchandise sold and delivery and
occupancy costs, increased to $572.0 million in the third quarter of 1998,
which was 75.2% of net sales. This compares with $509.6 million reported in
the same period of the prior year, which represented 74.9% of net sales.
Gross profit as a percentage of net sales was 24.8% and 25.1% for the third
quarters of 1998 and 1997. Gross profit decreased in the third quarter of
1998 partly because of increased delivery and occupancy costs at our
Canadian operations, as a result of operational challenges associated with
the move into a new distribution center in Toronto.
Operating expense was 21.1% of net sales in the third quarter of 1998,
compared with 20.9% in the third quarter of 1997. The increase was due, in
part, to our direct marketing acquisitions, which have both higher gross
margins and higher operating expenses. The increase was also due to higher
operating costs at our Canadian operations, as a result of operational
challenges associated with the move into a new Toronto distribution center.
Within the operating expense category, selling and warehouse operating
expense was 19.1% of net sales in the third quarter of 1998, compared with
18.7% in the third quarter of 1997. Corporate general and administrative
expense was 1.6% of net sales in the third quarter of 1998, compared with
1.7% in 1997. Goodwill amortization was $3.2 million for both the third
quarters of 1998 and 1997.
As a result of the factors discussed above, income from operations in the
third quarter of 1998 decreased to $27.8 million, or 3.7% of net sales,
compared with third quarter 1997 operating income of $28.5 million, or 4.2%
of net sales.
Interest expense was $6.6 million in the third quarter of 1998, compared
with $6.7 million in the third quarter of 1997. The decrease in interest
expense resulted from capitalization of interest during the third quarter of
1998 in connection with several facility expansions; lower outstanding
principal, on average; and some fluctuation in variable interest rates,
offset by the higher interest rate on our 7.05% Notes issued in May 1998.
Net income in the third quarter of 1998 decreased to $11.8 million, or 1.6%
of net sales, compared with $12.5 million, or 1.8% of net sales in the same
period of the prior year.
Nine Months Ended September 30, 1998, Compared with Nine Months Ended
September 30, 1997
Net sales for the nine months ended September 30, 1998, increased 20% to
$2.3 billion, compared with $1.9 billion a year ago. The increase was due
to a combination of acquisitions and same-location sales growth. Same-
location sales increased 11% year to year.
Cost of sales, which includes the cost of merchandise sold and delivery and
occupancy costs, increased to $1.7 billion for the nine months ended
September 30, 1998, which was 74.6% of net sales. This compares with
$1.4 billion reported in the same period of the prior year, which
represented 75.0% of net sales. Gross profit as a percentage of net sales
was 25.4% and 25.0% for the first nine months of 1998 and 1997. The
increase was primarily due to increases in our domestic contract stationer
and direct marketing gross margins. The increase was offset slightly by
higher delivery and occupancy costs at our Canadian operations that resulted
from operational challenges as we moved into a new distribution center in
Toronto..
Operating expense was 21.2% of net sales for the first nine months of 1998,
compared with 20.7% in the same period of the prior year. This increase
resulted, in part, from our direct marketing acquisitions, which have both
higher gross margins and higher operating expenses. Direct marketing
acquisitions made in the last half of 1997 increased our cost average
compared to the prior year. Operating expense for the first nine months of
1998 also increased due to higher operating costs at our Canadian operations
that resulted from operational challenges associated with the move into a
new Toronto distribution center. Within the operating expense category,
selling and warehouse operating expense was 19.1% of net sales for the first
nine months of 1998, compared with 18.7% in 1997. Corporate general and
administrative expense was 1.7% of net sales for the first nine months of
1998, compared with 1.6% in 1997. Goodwill amortization increased to
$9.4 million for the first nine months of 1998, compared with $7.7 million
in 1997. The increase in goodwill amortization was the result of recording
goodwill arising from our acquisitions.
As a result of the factors discussed above, income from operations for the
first nine months of 1998 increased to $94.0 million, or 4.2% of net sales,
compared with 1997 operating income of $81.0 million, or 4.3% of net sales.
Interest expense was $19.9 million for the first nine months of 1998,
compared with $13.9 million in 1997. The increase in interest expense
resulted primarily from debt incurred in conjunction with our acquisition
and capital spending programs. The increase also was due to our issuance of
$150.0 million of 7.05% Notes in May 1998, which have a slightly higher
interest rate than our revolving credit agreement and short-term notes
payable.
Net income for the first nine months of 1998 increased to $43.1 million, or
1.9% of net sales, compared with $39.2 million, or 2.1% of net sales in the
same period of the prior year.
Liquidity and Capital Resources
Our principal requirements for cash have been to make acquisitions, fund
technology development and working capital needs, upgrade and expand our
facilities at existing locations, and open new distribution centers. The
execution of our strategy for growth, including acquisitions, technology
developments, and the relocation of several existing distribution centers
into new and larger facilities, is expected to require capital outlays over
the next several years.
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
$450.0 million revolving credit agreement that expires in 2001 and provides
for variable rates of interest based on customary indices. In October 1998,
we entered into an interest rate swap with a notional amount of
$25.0 million that expires in 2000. The swap results in an effective fixed
interest rate with respect to $25.0 million of our revolving credit
agreement borrowings. The credit agreement is available for acquisitions
and general corporate purposes. It 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. At
September 30, 1998, $150.0 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 addition to the amount outstanding under the revolving credit agreement,
we had short-term notes payable of $74.0 million at September 30, 1998. The
maximum amount of short-term notes payable during the nine months ended
September 30, 1998, was $116.6 million. The average amount of short-term
notes payable during the nine months ended September 30, 1998, was
$64.7 million. The weighted average interest rate for the short-term notes
payable was 5.9%.
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 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 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, 1998, 3.5 million shares remained unissued under this
registration statement.
On September 25, 1997, we issued 2.25 million shares of common stock at
$21.55 per share to Boise Cascade Corporation for total proceeds of
$48.5 million. At September 30, 1998, Boise Cascade Corporation owned 81.2%
of our outstanding common stock.
Net cash provided by operations in the first nine months of 1998 was
$81.0 million. This was the result of $76.9 million of net income,
depreciation and amortization, and other noncash items; and a $4.1 million
decrease in 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.
Net cash provided by operations in the first nine months of 1997 was
$75.1 million. This was the result of $66.7 million of net income,
depreciation and amortization, and other noncash items; and an $8.4 million
decrease in working capital. Net cash used for investment in the first nine
months of 1997 was $308.7 million, which included $44.2 million of
expenditures for property and equipment and $244.0 million for acquisitions.
Net cash provided by financing was $233.4 million for the first nine months
of 1997, resulting primarily from borrowings we made to fund acquisitions.
The majority of our 1998 and 1997 acquisitions have been completed for cash,
resulting in higher outstanding balances under our credit agreement and
short-term borrowing capacity. The increase in borrowings has caused
interest expense to increase for the first nine months of 1998 compared with
the same period of 1997.
New Accounting Standards
In 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." This
Statement establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements
and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. We
are still evaluating what impact, if any, this Statement will have on us.
We will adopt this Statement at year-end 1998. Adoption of this Statement
will have no impact on net income.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position 98-1 (SOP 98-1), "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." This
SOP is effective for financial statements for fiscal years beginning after
December 31, 1998, with earlier adoption encouraged. We currently account
for software costs generally in accordance with this SOP.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This
Statement establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an
asset or liability measured at its fair value. This Statement is effective
for fiscal quarters of fiscal years beginning after June 15, 1999. We plan
to adopt this Statement in the first quarter of 2000. We are in the process
of reviewing this Statement. As our international operations expand, we
continue to evaluate the related foreign currency risks; but at this time,
adoption of this Statement is not expected to have a significant impact on
our results of operations or financial position.
Year 2000 Computer Issue
Many computer systems in use today were designed and developed using two
digits, rather than four, to specify the year. As a result, such systems
will recognize the year 2000 as "00." This could cause many computer
applications to fail completely or to create erroneous results unless
corrective measures are taken. We utilize software and related computer
technologies that will be affected by this issue. We are currently
implementing, or planning to implement, several computer system replacements
or upgrades before the year 2000, all of which will be year 2000 compliant.
Most of the costs associated with these replacements and upgrades have been
or will be deferred. (See Note 4 in "Notes to Quarterly Financial
Statements.") We have evaluated what actions will be necessary to make our
remaining computer systems year 2000 compliant and expect to complete all
necessary changes by year-end 1999. The expense associated with these
actions is expected to total $4.0 to $5.0 million, with the majority being
spent during 1997 and 1998. We have discussed this issue with our
significant suppliers and large customers to determine the extent to which
we could be affected if their systems are not year 2000 compliant. While
there can be no guarantee that systems of other companies will be year 2000
compliant before the year 2000, we currently do not expect any material
adverse effects to the Company.
The Euro Conversion
On January 1, 1999, 11 of the 15 member countries of the European Union are
scheduled to establish fixed conversion rates between their existing
sovereign currencies and the Euro. The participating countries have agreed
to adopt the Euro as their common legal currency on that date. The
conversion to the Euro will require certain changes to our information
technology and other systems to accommodate Euro-denominated transactions.
The cost of these changes is not expected to be material to the Company. We
currently expect all of our European operations to be 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
We expect our cross-selling efforts in furniture, computer-related
consumables, promotional products, and office papers to result in additional
sales to our existing customers. We also expect to grow sales by developing
business with new customers. The pace of our revenue growth will partially
depend on the success of these initiatives and the strength of the U.S.
economy. It will also depend, in part, on our plans to make further
acquisitions in the U.S. and internationally. Our level of future
acquisition activity will reflect the extent of economically acceptable
opportunities available to us.
Several of our recent acquisitions have presented significant challenges.
Those operations that have underperformed our expectations are being
seriously addressed. In all cases, these businesses will be restructured to
an acceptable level of profitability, or exited, as is appropriate in each
case.
Our gross margins and operating expense ratios vary among our product
categories, distribution channels, and geographic locations. As a result,
we expect fluctuations in these ratios as our sales mix evolves over time.
Office papers and converted paper products represent a significant portion
of our sales. It is unclear to what extent or when prices might
significantly rise or fall and what favorable or adverse impact those
changes might have on our future financial results.
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, continued same-location
sales growth; the timing and amount of any paper price changes; the changing
mix of products sold to our customers; the pace and success of our
acquisition program; the timing and success of efforts to make systems year
2000 and Euro compliant; the success of cost structure improvements; 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; and 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
risks. To date, these risks have not been significant and are not expected
to be so in the near term. Changes in our debt and our continued
international expansion could increase these risks. To manage volatility
relating to these risks, we may enter into various derivative transactions
such as interest rate swaps, rate hedge agreements, and forward exchange
contracts. We do not use derivative financial instruments for trading
purposes.
In October 1998, we entered into an interest rate swap with a notional
amount of $25.0 million that expires in 2000. The swap results in an
effective fixed interest rate with respect to $25.0 million of our revolving
credit agreement borrowings.
Our operations in Australia, Belgium, Canada, France, Germany, Spain, and
the United Kingdom are denominated in currencies other than U.S. dollars.
Each of our operations conducts substantially all of its business in its
local currency with minimal cross-border product movement. As a result,
these operations are not subject to material operational risks associated
with fluctuations in exchange rates. Furthermore, our results of operations
were not materially impacted by the translation of our other operations'
currencies into U.S. dollars. Because we intend to expand the size and
scope of our international operations, this exposure to fluctuations in
exchange rates may increase. Accordingly, no assurance can be given that
our future results of operations will not be adversely affected by
fluctuations in foreign currency exchange rates. Although we currently are
not engaged in any foreign currency hedging activities, we may consider
doing so in the future. Such future hedges would be intended to minimize
the effects of foreign exchange rate fluctuations on our investment and
would not be done for speculative 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/Darrell R. Elfeldt
Darrell R. Elfeldt
Vice President and Controller
Date: November 11, 1998
BOISE CASCADE OFFICE PRODUCTS CORPORATION
INDEX TO EXHIBITS
Filed With the Quarterly Report on Form 10-Q
for the Quarter Ended September 30, 1998
Number Description Page
11 Computation of Per Share Earnings
27 Financial Data Schedule
EXHIBIT 11
BOISE CASCADE OFFICE PRODUCTS CORPORATION
COMPUTATION OF PER SHARE EARNINGS
(in thousands, except share information)
For the Three Months For the Nine Months
Ended September 30 Ended September 30
1998 1997 1998 1997
BASIC EARNINGS PER SHARE
Net income $ 11,827 $ 12,532 $ 43,144 $ 39,153
Shares of Common Stock:
Weighted average
shares outstanding 65,757,737 63,086,894 65,700,493 62,951,608
Effect of contingent
shares 27,836 430,207 25,147 447,267
__________ __________ __________ __________
65,785,573 63,517,101 65,725,640 63,398,875
Basic earnings
per share (1) $ .18 $ .20 $ .66 $ .62
DILUTED EARNINGS PER SHARE
Net income $ 11,827 $ 12,532 $ 43,144 $ 39,153
Shares of Common Stock:
Weighted average
shares outstanding 65,757,737 63,086,894 65,700,493 62,951,608
Effect of options 27,258 123,285 67,025 122,620
Effect of contingent
shares 27,836 430,207 25,147 447,267
__________ __________ __________ __________
65,812,831 63,640,386 65,792,665 63,521,495
Diluted earnings
per share (1) $ .18 $ .20 $ .66 $ .62
(1) In 1997, we adopted Statement of Financial Accounting
Standards No. 128 (SFAS 128), "Earnings Per Share." Earnings
per share for 1997 have been restated to reflect SFAS 128. The
impact of the adoption was to reduce basic earnings per share
by $.01.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The data schedule contains summary financial information extracted from Boise
Cascade Office Products Corporation's Balance Sheet at September 30, 1998, and
from its Statement of Income for the nine months ended September 30, 1998. The
information presented is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 39,729
<SECURITIES> 0
<RECEIVABLES> 404,775
<ALLOWANCES> 8,730
<INVENTORY> 213,170
<CURRENT-ASSETS> 685,117
<PP&E> 369,525
<DEPRECIATION> 143,603
<TOTAL-ASSETS> 1,393,373
<CURRENT-LIABILITIES> 487,305
<BONDS> 317,480
0
0
<COMMON> 658
<OTHER-SE> 554,705
<TOTAL-LIABILITY-AND-EQUITY> 1,393,373
<SALES> 2,253,108
<TOTAL-REVENUES> 2,253,108
<CGS> 1,680,762
<TOTAL-COSTS> 1,680,762
<OTHER-EXPENSES> 478,317
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,903
<INCOME-PRETAX> 75,427
<INCOME-TAX> 32,283
<INCOME-CONTINUING> 43,144
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,144
<EPS-PRIMARY> .66
<EPS-DILUTED> .66
</TABLE>
