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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File number 1-13662
BOISE CASCADE OFFICE PRODUCTS CORPORATION
800 West Bryn Mawr Avenue
Itasca, Illinois 60143
(630) 773 - 5000
A Delaware Corporation 82-0477390
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, computed by reference to the price at which the stock was sold as
of the close of business on February 27, 1998: $221,284,302.
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
Shares Outstanding
Class as of February 27, 1998
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Common Stock, $.01 par value 65,649,758
DOCUMENTS INCORPORATED BY REFERENCE
1. The registrant's annual report for the fiscal year ended December
31, 1997, portions of which are incorporated by reference into Parts I,
II, III, and IV of this Form 10-K, and
2. Portions of the registrant's proxy statement relating to its 1998
annual meeting of shareholders to be held on April 21, 1998, are
incorporated by reference into Part III of this Form 10-K ("the Company's
proxy statement").
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BOISE CASCADE OFFICE PRODUCTS CORPORATION
TABLE OF CONTENTS
PART I
<TABLE>
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Item Page
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<S> <C>
1. Business ........................................................ 3
2. Properties ...................................................... 15
3. Legal Proceedings ............................................... 16
4. Submission of Matters to a Vote of Security Holders ............. 16
PART II
5. Market for Registrant's Common Equity and Related Stockholder
Matters ......................................................... 16
6. Selected Financial Data ......................................... 17
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................... 18
7A. Quantitative and Qualitative Disclosures About Market Risk ...... 18
8. Financial Statements and Supplementary Data ..................... 18
9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure ............................................ 18
PART III
10. Directors and Executive Officers of the Registrant .............. 19
11. Executive Compensation .......................................... 21
12. Security Ownership of Certain Beneficial Owners and
Management ...................................................... 21
13. Certain Relationships and Related Transactions .................. 22
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K ........................................................ 22
</TABLE>
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This Form 10-K contains "forward-looking statements" that involve uncertainties
and risks. When used in this document, the words "believe," "intend,"
"expect," "plan," and similar expressions are intended to identify
forward-looking statements. There can be no assurance that actual results will
not differ from the results expressed in, or implied by, these forward-looking
statements. Factors which could cause or contribute to such differences
include, among others: the success of new initiatives; the pace of
acquisitions; the availability of financing for future acquisitions; the mix of
our sales by product category and country; the integration of acquired
companies; the effect of continued competitive pressure on pricing and margins;
the pace of cost structure improvements; the effects of the paper cycle; the
capabilities of operating and computer systems; and the uncertainties of
expansion into international markets, including currency exchange rates, legal
and regulatory requirements, and other factors.
PART I
ITEM 1. BUSINESS
OVERVIEW
Boise Cascade Office Products Corporation ("BCOP" and together with its
subsidiaries, the "Company" or "we") is one of the world's premier
business-to-business distributors of products for the office. We sell a broad
line of branded and private label office supplies, furniture, paper,
computer-related items, and promotional products. We purchase most of our
products directly from manufacturers and distribute them directly to end-user
customers.
Throughout our 34-year history, our primary marketing focus has been and
remains business customers. For much of that time, we concentrated on serving
the commodity office supply needs of large businesses in the United States.
More recently, we have broadened our marketing focus to include small and
medium-sized businesses and home offices, expanded our array of products and
services, and entered the office products distribution markets in Australia,
Canada, France, Germany, Spain, and the United Kingdom.
Our Customers. We market our products and services to large business
customers, including our national account customers in the U.S., through our
direct sales force, our annual full-line catalog (including a CD-ROM version),
our Internet-based ordering system ("I-97"), and a variety of specialized
catalogs. This is traditionally referred to as the contract stationer channel.
We serve small business and home office customers through the direct marketing
channel using targeted catalogs supported by sophisticated database marketing
programs and regional call centers to sell our products. We market to
medium-sized business customers using service elements of both channels,
depending upon specific customer needs. In 1997, approximately 85% of our
total sales were derived from the contract stationer channel and approximately
15% from the direct marketing channel.
Geographic Expansion. Until the beginning of 1996, we operated only in the
U.S., where we are a premier distributor of office products. Since the
beginning of 1996, we have expanded into Australia, Canada (under the name
Grand & Toy), France (under the names JPG and Boise Cascade Office Products
France), Germany (under the name Buro + Technik), Spain (under the name
Sistemas Kalamazoo), and the United Kingdom (under the names Neat Ideas and
Boise Cascade Office Products UK). We also operate office products
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retail stores in Canada to support Grand & Toy's service to its business
customers. In 1997, foreign operations accounted for approximately 20% of our
total net sales and approximately 19% of our total operating income. We expect
our international operations to become increasingly important in 1998 and in
future years. For financial information about our foreign operations, see Note
1, "Organization and Basis of Presentation," of the Notes to Financial
Statements in our 1997 Annual Report, which is incorporated by reference.
Our integrated network of 49 distribution centers in the U.S. enables us to
provide consistent products, prices, and service to our national account
customers. It also enables us to provide next-day delivery of virtually all
orders to our large business customers and approximately 75% of orders to our
small and medium-sized customers. In Canada we have a national network of nine
distribution centers. In Australia we have a national network of eight
distribution centers. In the U.K. and western Europe we have six distribution
centers which will form the nucleus of our network in Europe.
THE OFFICE PRODUCTS DISTRIBUTION INDUSTRY
United States. The office products distribution industry in the U.S. has
consolidated rapidly and is undergoing other significant changes. The industry
consists of companies that operate in one or more of three broad channels for
the marketing and distribution of office products to end-users. Business
customers have the opportunity to purchase office products through any of the
channels.
The contract stationer channel. Contract stationers typically serve large
and medium-sized business customers by marketing to them through both
product catalogs and sales forces, stocking products in distribution
centers, and delivering orders to customers the next business day. Orders
are received electronically, by telephone or fax, or are taken by a
salesperson on the customer's premises. Contract stationers typically
enter into contracts with their customers that specify prices for items
the customers may order, services to be provided, and other terms. Major
contract stationers purchase directly from manufacturers, rely upon
wholesaler intermediaries only to a limited extent for inventory backup
and increased product breadth, and offer significant volume-related
discounts and a high level of service to their customers. Historically,
contract stationers operated in only one or a very few major metropolitan
areas. We have been a significant exception for many years. In recent
years, principally as a result of consolidation by acquisition, several
other major contract stationers have emerged, each of which operates in a
number of major metropolitan areas and, in some cases, nationally.
The direct marketing channel. Direct marketers of office products
typically target small and medium-sized business customers and home
offices. While their procurement and order fulfillment functions are
similar to contract stationers, direct marketers rely exclusively on
catalogs and other database marketing programs, rather than direct sales
forces, to sell their product offerings. Their marketing is based upon
large, proprietary customer databases and sophisticated circulation
strategies designed to increase sales from catalog mailings to customers
and prospects. In addition to a few large direct marketing companies
which primarily distribute office products, several of the major contract
stationers and office products retailers now employ direct marketing
techniques to expand their customer bases. We first entered this channel
with our 1994 acquisition of the direct marketing operations of The
Reliable Corporation ("Reliable"), which at that time was the third
largest direct marketing distributor of office products in the United
States. Since 1995, we have expanded our presence in this channel through
a start-up in Canada,
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by acquiring direct marketing businesses in France, Spain, the United
Kingdom and the U.S., and by entering into a joint venture in Germany.
The retail channel. Office products retailers typically serve small and
medium-sized businesses, home offices, and individuals. For many years,
the retail channel consisted principally of a large number of independent
dealers, operating only one or a few relatively small stores in a single
local area and purchasing a limited inventory of office supplies from
wholesalers for resale at or near manufacturers' list prices. Over the
last decade, the retail channel has changed dramatically, primarily
because of the emergence and rapid growth of office products superstores.
The superstore concept typically involves a large suburban strip mall or
stand-alone store which employs a warehouse format, is open for business
seven days a week, stocks a large number and broad range of items in
inventory, purchases in volume, takes delivery at the store directly from
manufacturers, and offers many products at discounts from manufacturers'
list prices. Every major metropolitan area in the U.S. is now served by
at least one, and most are served by several, office products superstores.
Our participation in this channel is extremely limited, constituting less
than 3% of our sales in 1997.
The changes described above have blurred the lines between these three
marketing and distribution channels and between the companies operating in
these channels. Several major industry participants operate across these
channels and/or serve all or a large part of the office products customer
spectrum.
Significant changes are also taking place in the way business customers
purchase office products. More and more large multi-site businesses,
recognizing the efficiency and cost-effectiveness of uniform system-wide
purchasing of their office products, are entering into national contracts with
single distributors. We believe this move by customers to reduce suppliers and
consolidate purchasing power is gaining momentum. In addition, some major
businesses are beginning to use integrated procurement systems as they seek to
satisfy not only their office products needs but also their requirements for a
variety of other office-related services and supplies from a single source.
Small and medium-size businesses are also focusing on ways to increase
efficiency and reduce costs in meeting their requirements for office products,
which has resulted in the development of sophisticated direct marketing
techniques tailored to their needs.
International. The office products markets in Australia, Canada, France,
Germany, Spain, and the United Kingdom are similar to the U.S. market. Some
industry consolidation has occurred, to varying extents, in each country, and
the channels have blurred.
BUSINESS STRATEGY
We have grown rapidly due to both acquisitions and same-location sales
increases since 1993, when we sold the wholesale component of our business.
For the last three years, our year-over-year increases in net sales, sales on a
same-location basis, and operating income have been as follows:
Year-Over-Year Growth
<TABLE>
<CAPTION>
Year Net Sales Same-Location Sales Operating Income
---- --------- ------------------- ----------------
<S> <C> <C> <C>
1997 31% 14% 18%
1996 51% 14% 46%
1995 45% 26% 65%
</TABLE>
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We believe that the distribution of products to the office customer continues
to present growth opportunities. We intend to continue exploring such
opportunities through our business strategy, which includes the following
elements:
EXPAND OUR GEOGRAPHIC SCOPE
We now have businesses in Australia, Canada, France, Germany, Spain, and
the United Kingdom, as well as the United States. We intend to enter the
office products distribution business in other foreign countries where
practical and profitable, as well as to expand our operations in those
countries where we currently operate. We expect to do this through a
combination of acquisitions, joint ventures, alliances, and start-ups.
BROADEN OUR CUSTOMER BASE
- We plan to increase our national account business. We define a
"national account" as a multi-site customer served by two or more of our
distribution centers under a single contract. Large businesses with many
office sites across the U.S. are increasingly seeking to reduce product
and process costs by purchasing all of their office products needs from a
single company with national distribution capability under one
centrally-negotiated national contract.
We believe that we currently have a competitive advantage with respect
to such businesses in the U.S. because of the nationwide coverage of our
integrated distribution centers. This coverage enables us to provide
consistent delivery of products, prices, and service across all customer
locations. A key element of our strategy is to use this advantage to
expand our business with national account customers.
We have a specialized national account marketing staff, which is
dedicated to building and maintaining our business with national accounts.
The amount of our sales to such customers has grown significantly, as the
following table indicates:
<TABLE>
<CAPTION>
U.S. National Account Sales
---------------------------
Amount % of Total
Year (in millions) Net Sales
---- ------------- ----------
<S> <C> <C>
1997 $819 32%
1996 $555 28%
1995 $406 31%
</TABLE>
We are pursuing a similar national account strategy in our foreign
operations, which may serve multi-national accounts as well.
- We plan to increase our business with small and medium-sized
businesses and home offices. The office products distribution market for
small and medium-sized businesses and home offices is growing more rapidly
than the large business customer segment. A direct sales force usually
cannot serve these smaller customers cost-effectively. We believe that
the direct marketing channel provides the most convenient and
cost-effective way for customers in this market
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segment to purchase office products. An important element in our growth
strategy is to expand our business with this segment of the market, in
both geographic coverage and product offerings.
Starting with our April 1994 acquisition of the office products
distribution business of Reliable, we have expanded our direct marketing
business, both in the U.S. and abroad. In December 1995, we acquired Neat
Ideas, the United Kingdom's second largest office products direct
marketer. In December 1996, we purchased Quill Corporation's Canadian
customer list and began direct marketing in Canada through Grand & Toy.
With the formation of our joint venture with Otto Versand in January 1997,
we began direct marketing operations in Germany. In July 1997, we
purchased Jean-Paul Guisset S.A. ("JPG"), France's third largest office
products direct marketer, in which Otto Versand holds a minority interest.
In January 1998, we expanded our product offering when we purchased the
business of Fidelity Products Inc., a direct marketer of graphic arts
supplies and warehouse and shipping supplies.
As the following table indicates, our worldwide direct marketing business
has grown significantly during the last three years:
<TABLE>
<CAPTION>
Direct Marketing Channel
Sales
--------------------------- Number of
Amount % of Total Active Customers (1)
Year (in millions) Net Sales (at December 31)
---- ------------- ------------ --------------------
<S> <C> <C> <C>
1997 $379 15% 971,000
1996 $277 14% 573,000
1995 $201 15% 382,000
</TABLE>
____________
(1) An "active customer" is one which has made at least one purchase
during the preceding 12 months
INCREASE SALES OF CORE PRODUCTS AND ADD NEW PRODUCTS AND SERVICES
We plan to increase sales of certain existing product categories, such as
office papers and office furniture, as well as the sales of our newest
product categories, such as computer-related items and promotional
products. As part of this element of our growth strategy, we offer
customized procurement and product-related support services to our
customers, particularly in electronic commerce. By broadening our product
lines and services, we are better able to meet the needs of those
customers interested in reducing their supplier base and taking advantage
of "one-stop shopping." This also leverages our distribution and systems
infrastructure.
As a result of our efforts to broaden the product mix purchased by current
customers, our sales of office papers, measured by volume, increased
year-over-year by more than 37% in 1997 and more than 40% in 1996. Our
growth strategy also targets office furniture, with the goal of increasing
its sales across the system. To do this, we are using furniture sales
specialists, showrooms, and targeted catalogs. U.S. contract furniture
sales in 1997 increased 53% over 1996 levels.
In response to rapid increases in our customers' needs for computer
supplies, hardware, software, and peripherals, in September 1995, we
acquired Word Technology Systems, Inc. ("WTS"), a distributor of
computer-related products to businesses throughout the United States. In
1996, we
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formed an alliance with XL Connect Solutions, Inc., a technology-related
service company, which enables us to provide our customers a wide range of
services that complement our computer-related product offering. This past
year we have continued to expand our computer consumables business by
acquiring two businesses: TDI, based in Raleigh-Durham, North Carolina,
and Carlyle Computer Products Ltd., a Canadian company. We now market
computer-related products under the name Boise Technology from 20 of our
U.S. distribution centers. Eventually, we expect to increase the number
of U.S. distribution centers that carry the Boise Technology offering to
36.
Many of our customers use promotional products, such as jackets, T-shirts,
coffee mugs, and pen and pencil sets with corporate logos or unique
designs, for employee recognition and incentive programs and for marketing
and advertising. To bolster the range of products and related services
that we offer in this large and growing category, we acquired Oregon
Wholesale Novelty Company, Inc. ("OWNCO") in November 1996. In May 1997,
we acquired OstermanAPI, Inc., an Ohio-based company. At that time, we
formed Boise Marketing Services, Inc. ("BMSI"), a subsidiary of which we
own 88%. Both OWNCO and OstermanAPI are now part of this subsidiary, and
we are in the process of integrating those companies to provide an
expanded range of quality promotional products and services.
In January 1998, we entered into a co-marketing agreement with Wallace
Computer Services, Inc., a custom printer and forms distributor, to create
the alliance, Boise-Wallace Single SourceSM. This alliance will allow us
to offer our U.S. customers single-contact access to an integrated supply
system for office consumables, while ultimately reducing customer cost.
Wallace is a recognized leader in forms and consumable supplies management
services, as well as one of the largest manufacturers and distributors of
information management products in the United States. We expect that this
alliance will be the first of several such arrangements created to serve
our customers' needs.
Each of the foregoing elements of our growth strategy has both an acquisition
component and an internal growth component, the mix of which, for any given
element in any given year, will be different because of that year's priorities,
opportunities, capital availability, and other factors.
Acquisitions have been, and we expect them to continue to be, an important
means by which we execute our strategy. Our acquisition decisions will be
driven by our desire to provide quality service to our customers and by the
availability of opportunities which suit our requirements, including
profitability and ability to enhance our geographic coverage or other elements
of customer service. The near-term focus of our acquisition program is to
increase our presence abroad in the contract stationer channel and to broaden
our product offerings in the United States. We also expect our direct
marketing presence in Europe to grow through both acquisitions and internal
growth initiatives. We may acquire additional contract stationers in the
United States. We typically seek to retain management of each acquired
business and to draw upon its specialized knowledge. In addition, we intend to
integrate acquired businesses into our nationwide distribution network to the
extent it is appropriate and cost-effective.
In the U.S., we have opened new distribution centers in selected metropolitan
areas where we wished to establish or expand our presence but where we could
not find an appropriate acquisition candidate. While a start-up typically
requires a smaller initial capital investment than an acquisition, it may take
two to four years to achieve profitability. We have transferred a base of
business from existing distribution centers to
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our recent start-ups in order to speed this process. Also, within the next few
years, we expect to relocate several existing distribution centers into new and
larger facilities.
An aggressive acquisition and expansion program such as ours is not without
risk. Competition, availability of suitable candidates, or capital
availability all may affect our ability to complete targeted acquisitions. In
addition, we encounter various risks associated with each acquisition which we
do complete, including the possible inability to integrate the acquired
business into our distribution network, increased goodwill amortization,
diversion of management's attention, and unanticipated problems, costs, or
liabilities, some or all of which could have a material adverse effect on our
operations and financial performance. With our expansion through acquisition
into foreign markets, the management and integration risks associated with our
acquisitions will be greater. Additional risks arising out of our operations
in foreign countries include those associated with currency exchange rates, new
and different legal and regulatory requirements, and language and cultural
differences.
BUSINESS MODEL
United States. Our objective is to be the preferred supplier of office
products to business customers of all sizes by outperforming our competitors at
all levels - to "out-national" our national competitors and "out-local" our
local competitors. To achieve this, our business model is designed to take
maximum advantage of both our centralized national capabilities and our local
presence in major markets across the country. We manage centrally where it is
efficient and cost effective to do so or where there is value to our customers
in nationwide consistency, and we manage locally where it meets local market
needs and opportunities or local customer requirements.
The majority of our U.S. distribution centers are linked through a common
computer system with our headquarters and with our other distribution centers.
This integrated distribution network enables us to provide consistent next-day
delivery of virtually the entire range of products offered in our full-line
catalog, at agreed-upon prices and service levels, to all of our large business
customers and approximately 75% of orders to our small and medium-sized
business customers throughout the country. It also facilitates the delivery of
consistent products, pricing, service, and reporting to our many national
account customers. In addition, it enables us to centralize certain
administrative, logistical, and other management functions, thereby reducing
operating costs. For example, we are able to centrally monitor inventory
levels and forecast future demand for items stocked at our distribution
centers. As a result, the responsibility for rebuying our most frequently
ordered items is a centralized function. This has reduced our inventory
restocking costs and improved our annual inventory turn rate. Since the
product overlap between our contract stationer and direct marketing businesses
is high, centralized rebuying for both channels has resulted in economies of
scale. We plan to continue converting recently and newly acquired distribution
centers to this common system.
Our merchandising activities are centralized, including product selection;
catalog preparation; and vendor selection, management, and evaluation. Sales
training, marketing programs, activity-based cost management programs,
accounting, logistics, and human resources management are other functions that
are primarily or totally managed centrally and can benefit from economies of
scale as we grow. Providing responsive and cost-effective customer service is
another important element of our business model, requiring an appropriate
balance between centralization and local autonomy. We provide customer
service at each distribution center to handle location-specific matters, and we
operate centralized call centers which enter customer orders and respond to
customer inquiries about product alternatives, order
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status, billing, and other matters. We have centralized call centers at Peru
and Ottawa, Illinois, and Bristol, Virginia, to handle inbound orders and
inquiries for our contract stationer and direct marketing customers. Our
integrated computer system enables us to organize certain customer support
functions in a centralized, cost-effective manner without compromising customer
focus.
A substantial part of our internal capital spending is directed toward making
our operations more efficient and cost effective. In addition to seeking to
improve the efficiency of our individual distribution centers, our logistics
experts focus on the efficiency of our distribution network as a whole in each
of the countries where we operate. Stocking strategies, distribution center
configurations, and delivery methods are all being designed to serve customers
better while minimizing our investment and controlling our operating costs. In
the U.S., we continue to consolidate the order fulfillment operations of our
direct marketing business with those of our contract stationer business. We
have an intercompany agreement under which BCOP fills orders for Reliable's
customers from eight of BCOP's distribution centers. Eventually, we expect to
use approximately 15 of BCOP's distribution centers to fill orders for
Reliable's direct marketing customers in the United States. Our steps to date
have increased the next-day delivery coverage of Reliable's direct marketing
operations and have reduced our overall occupancy and delivery costs (as a
percentage of sales).
We believe that a local distribution center presence is important to many of
our customers and can provide a competitive advantage within a specific
metropolitan area. While national accounts are coordinated centrally, our
sales force is distributed across our national network and supervised locally.
Each distribution center is a profit center. Its general manager is
responsible for local account targeting, pricing, and servicing; distribution
center productivity; sales management; and location-specific or
customer-specific products and services, alliances, and promotions. In each
local market, our business model draws on the local market knowledge of our
management team and sales representatives to develop and offer customized
services-from stocking customer-unique products to special reporting and
delivery services.
Our business model is data intensive. Through our activity-based cost
management system ("ABCM"), we measure our costs by activity, and then by
customer and by product. ABCM facilitates cost comparisons across all
distribution centers so that "best practices" can be identified at one location
and replicated at all locations where appropriate. The ABCM system enables us
to directly attribute over 90% of our actual costs to specific customer-related
activities. We also measure on an ongoing basis on-time delivery, order
accuracy and completeness, supplier performance by location, customer
satisfaction, associate satisfaction, and key process stability and capability.
We believe that these measurement systems, including ABCM, provide us with a
competitive advantage.
International. In each of the foreign countries where we have an extensive
system of distribution centers, currently Australia and Canada, we plan to
apply the major elements of our domestic business model: to link each of the
facilities via computer, offer similar products across the entire system, serve
the full range of customers from each facility, and centralize a variety of
functions where it is efficient and cost effective to do so, while performing
certain other functions locally. As part of our movement toward these goals in
Canada, we have begun construction on a new and more efficient distribution
facility for Toronto, Ontario.
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PRODUCTS
Our net sales by product category through all distribution channels, expressed
as a percentage of our total net sales, during each of the last three years
were as follows:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Office Supplies (2) 77% 84% 80%
Office Furniture (3) 13% 8% 9%
Other Products (4) 10% 8% 11%
---- ---- ----
100% 100% 100%
==== ==== ====
</TABLE>
_______________________
(2) Includes, among many other products, pens, staples, file
folders, binders, office papers, envelopes, tablets,
calculators, and computer-related products
(3) Includes desks, chairs, file cabinets, computer stations, and
furniture accessories
(4) Includes lunchroom supplies, janitorial supplies, and special
items, including promotional products
SALES AND MARKETING
Electronic Commerce. As part of our overall program of providing expanded
opportunities for electronic data interchange with our large business
customers, we developed and offer a CD-ROM version of our annual full-line
catalog. Interactive features of the CD-ROM catalog provide customers, by
computer, the same information on each item as the printed version of the
catalog provides. The features also permit a customer to view complementary
items, see prices specific to that customer, and order electronically.
We also developed and offer I-97, an Internet-based ordering system that allows
customers to order our compete range of products "on-line." I-97 provides
customers with customized levels of security and authorizations to ensure that
each order has the proper approval. Features of I-97 include multi-tiered
approvals, user-customized security, credit card capabilities, a variety of
viewing options, and true electronic data interchange ("EDI") capabilities. To
use I-97, customers only need access to the Internet and browser software.
EDI between our mainframe computer and our customers' systems,
local-area-network-based electronic commerce systems, and the systems mentioned
above accounted for approximately 18% of our inbound order volume in 1997.
OPERATIONS
Logistics and systems support. Advanced information technology is critical in
a nationwide distribution business involving thousands of different items under
tight time constraints. We were a pioneer in our industry in the use of
computer systems to facilitate this process. We have developed and use
customized software applications to carry out or assist in performing a great
variety of business functions, including, among other things: order entry;
order processing; receiving, storing, and "picking" inventory; routing delivery
vehicles; measuring productivity and transaction quality; generating customized
reports; preparing accounting statements; and tracking product and customer
data.
To provide additional system flexibility and capacity, we are converting part
of our principal computer network in the U.S. from a mainframe to a distributed
system. The system employs a new software
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applications package developed by and licensed from an outside contractor which
specializes in distribution companies. The software is a combination of
pre-existing modules and custom applications developed specifically for us and
tailored to our needs.
Order entry. We offer a wide range of order entry options to our large
business customers. Customers wishing to place an order with us in the U.S.
may (1) give the order in person to a sales associate; (2) convey the order by
telephone or facsimile transmission either to a customer service representative
at a local distribution center or, using a toll-free number, to a
representative at a central customer service facility; or (3) enter the order
by using a personal computer or other computer interface, including on-line
ordering using I-97.
Ease in ordering is also a key component of customer service in our direct
marketing operations. To facilitate order placement and entry, we maintain a
24-hour, seven-day-a-week, toll-free number for ordering by telephone or fax.
These lines are linked to our central order reception and customer service
centers in Illinois, where customer service associates receive orders and enter
them into a computerized order processing system. A credit check is performed
electronically and, if credit is approved, each order is transmitted to the
appropriate distribution center based on a pre-programmed ordering system which
uses customer zip codes and other factors to assure rapid fulfillment and
delivery.
Stocking, order fulfillment, and delivery. Our distribution centers receive
and store inventory and fill customer orders. Most of our distribution centers
regularly stock all of the core items offered in our full-line catalog. Our
stocking strategy at each distribution center is designed to ensure our ability
to provide delivery of all catalog items at the lowest cost on a next-day basis
to large business customers and on a next- or second-day basis to our other
customers. Our stocking strategy reflects a rigorously analyzed economic
tradeoff between carrying a particular item in inventory at a particular
distribution center or sourcing it from a nearby distribution center or
wholesaler.
Orders received during the day are picked, packed, and assembled using a
variety of automated equipment. This is performed at the appropriate
distribution center for delivery the following day to customers within the
next-day service area for that center. Depending on population density and
other logistical factors, the next-day service area of a given distribution
center can cover up to a 400-mile radius from the distribution center. Based
on an optimized route structure allowing us to schedule specific vehicles and
delivery times, our software can determine the optimal sequence in which orders
are to be loaded into delivery vehicles. The vehicles may be either owned or
leased by us or operated by common or contract carriers, depending on the cost
effectiveness of each alternative.
Procurement. Our computer system monitors inventory levels and forecasts
demand for each item which we stock and recommends the timing and amount of
future purchases. We have centralized the rebuying function for those items
most frequently ordered by our customers, which we believe contributes to more
efficient purchasing decisions and lower procurement costs.
To assist in making vendor selection decisions and in reducing inventory cost,
we have developed and use a detailed vendor management and evaluation program.
This program enables our central purchasing staff to measure the performance
of each of our vendors in a number of areas and then evaluate them based
upon these measurements.
12
<PAGE> 13
Foreign operations. In each of the foreign countries where we have an
extensive system of distribution centers, currently Australia and Canada, our
operations are structured similarly to our domestic operations. Within those
countries, most distribution facilities are integrated on the same computer
systems. This allows us to take advantage of efficiencies and centralize many
common administrative processes. It also positions these foreign operations to
serve large corporate customers on a coordinated national basis.
EMPLOYEES
At December 31, 1997, we had a worldwide total of approximately 11,000 full-
and part-time employees ("associates"). Of these, approximately 4,000 were
employed primarily in marketing and sales, order processing, and customer
service; approximately 3,600 were located at our distribution centers in
inventory receipt and storage, order filling, and as drivers of delivery
vehicles; and approximately 3,400 were employed in other operations,
management, and administration. Part-time employees supplement our associates
in customer service and order filling during those periods each day when there
are surges in incoming calls or outgoing orders.
COMPETITION
We face a highly competitive environment in each of the office products
distribution channels in which we operate. Competition is based principally on
price, service, and customer relationships. We are one of the premier
distributors of office products through the contract stationer and direct
marketing channels with operations in Australia, Canada, France, Germany,
Spain, the United Kingdom and the United States.
United States. In the contract stationer channel, the consolidation of the
industry into a relatively small number of major, publicly held participants,
each seeking to establish a national distribution network similar to our own,
is largely complete. A number of these participants, including some of the
superstores, have grown at rapid rates, principally through the acquisition of
local or regional contract stationers. Some of our competitors have greater
financial resources and purchasing power than we do. The contract stationer
operations of the superstores also benefit from their national advertising and
franchising programs. We also compete with the smaller local and regional
contract stationers, many of which have long-standing customer relationships.
Our superior ability, to date, to link together our network of domestic
distribution centers, including those which we have recently acquired, into an
integrated national system enables us to deliver consistent products, prices,
and service across all locations of multi-site customers. We believe that this
gives us a competitive advantage with multi-site customers.
In the direct marketing channel, we compete for the small and medium-sized
business customers and the home office customer primarily against two larger
direct marketers of office products as well as the office products superstores
and small retail dealers. We believe the synergies between our direct
marketing business and our contract stationer business give us a competitive
advantage, in terms of service and cost, over the other direct marketing
companies. We also believe that we have a competitive advantage over the
superstores and small retail dealers in that our customers are able to avoid
the time and cost associated with store visits and transporting merchandise
from the store to their offices. As part of the significant blurring of the
lines between distribution channels which has occurred in recent years,
several of the major contract stationers and office products superstores now
employ direct marketing techniques to expand their customer bases.
13
<PAGE> 14
As indicated earlier, some large companies are starting to use integrated
procurement systems to purchase office products and office-related services and
supplies. Other companies that provide office-related services and supplies,
including document management, printing services, industrial supplies,
information technology and computer supplies, are providing some competition
today and will likely provide increased competition in the future.
International. In Canada, we are one of the largest contract stationers and we
have a strong position in retail. Through its long operating history in
Canada, Grand & Toy has developed excellent name recognition. In the contract
stationer channel in Canada, we compete with several major companies who have
made acquisitions in Canada similar to the consolidation process in the U.S.,
in addition to numerous local competitors. Two of the U.S.-based superstores
have retail operations in Canada. We are the only sizable direct marketer of
office products in Canada.
In Australia, we compete with two of the large U.S.-based office products
distribution companies in the contract stationer channel and with many local
distributors. We do not currently have direct marketing operations in
Australia.
In the United Kingdom, we currently do business in both the direct marketing
and contract stationer channels. We compete with a larger direct marketing
company, with companies in the retail channel, and with other contract
stationers.
In Germany, our current presence consists of our 50% interest in the joint
venture with Otto Versand to direct market office products.
In France, our acquisitions this year of JPG and Society Europa marked our
entry into the direct marketing and contract stationer channels in that
country. We compete with a larger direct marketing company, with companies in
the retail channel, and with other contract stationers.
In Spain, we acquired Sistemas Kalamazoo, a direct marketer of office products
in February 1998. We compete with companies in the retail channel and other
direct marketers.
ENVIRONMENTAL MATTERS
We are subject to federal and state and local laws, regulations, and ordinances
that govern activities which might have adverse environmental effects, such as
discharges to air and water, as well as the handling and storage of hazardous
wastes. None of our facilities typically engage in activities or generate
discharges of the types generally governed by these laws and regulations. We
believe we are in substantial compliance with all such applicable laws and
regulations.
We are also subject to federal laws and regulations which impose liability for
the costs of cleaning up, and certain damages resulting from, sites of past
spills, disposals, or other forms of environmental damage, including those
which might have occurred prior to our ownership at particular sites. We are
currently not aware of any environmental conditions at any of the sites that we
operate which, individually or in the aggregate, would be likely to have a
material adverse effect on our financial condition or results of operations.
Nevertheless, there can be no assurance that any such environmental conditions
in the future will not have a material adverse effect on our financial
condition or results of operations.
14
<PAGE> 15
ITEM 2. PROPERTIES
Our corporate headquarters, together with our Chicago metropolitan area
distribution center, is located in a combined facility that we own at 800 W.
Bryn Mawr Avenue in Itasca, Illinois, a suburb northwest of Chicago (1). As of
February 27, 1998, we operated 72 distribution centers, including the suburban
Chicago distribution center, at the following locations:
<TABLE>
<CAPTION>
AUSTRALIA CANADA (4)
--------- ------
<S> <C>
Adelaide, South Australia Calgary, Alberta
Brisbane, Queensland Moncton, New Brunswick
Canberra, Australian Capital Territory Montreal, Quebec
Kalgoorlie, Western Australia Ottawa, Ontario
Melbourne, Victoria (2) Toronto, Ontario (2)
Perth, Western Australia (Don Mills and Bermondsey)
Sydney, New South Wales Vancouver, British Columbia
Winnipeg, Manitoba (2)
FRANCE GERMANY
------ -------
Paris (2) Karlsruhe
SPAIN UNITED KINGDOM
----- --------------
Madrid (Vizcaya) Chorley, England (5)
Doncaster, England (6)
UNITED STATES
-------------
Albuquerque, New Mexico Milwaukee (New Berlin), Wisconsin
Atlanta (Smyrna), Georgia Minneapolis/St. Paul, Minnesota (2)
Boise, Idaho (Golden Valley and New Hope)
Boston (Billerica), Massachusetts Nashville, Tennessee
Burlington, Vermont New Castle, Delaware
Butte, Montana New York (Carlstadt, New Jersey),
Charlotte, North Carolina New York
Chicago (Itasca), Illinois Norfolk (Chesapeake), Virginia
Cleveland (Independence), Ohio Oklahoma City, Oklahoma
Columbus, Ohio Orlando, Florida
Dallas (Garland), Texas Philadelphia (Bristol), Pennsylvania
Denver, Colorado Phoenix, Arizona
Detroit (Warren), Michigan Pittsburgh, Pennsylvania
Grand Rapids, Michigan Portland, Maine
Hartford (Naugatuck), Connecticut Portland, Oregon (2)
Honolulu, Hawaii (3) Raleigh-Durham, North Carolina
Houston, Texas Reno, Nevada
Jacksonville, Florida Rochester, New York
Kalamazoo, Michigan St. Louis, Missouri
Kansas City, Missouri Salt Lake City, Utah
Las Vegas, Nevada San Francisco (Menlo Park),
Los Angeles (Garden Grove), California California
Louisville, Kentucky Seattle (Kent), Washington (2)
Maumee, Ohio Washington (Elkridge, Maryland), DC
Miami, Florida
</TABLE>
15
<PAGE> 16
(1) Some headquarters departments are located in leased office space in
Schaumburg, Illinois.
(2) Consists of two facilities.
(3) Consists of three owned facilities located on the islands of Oahu,
Maui, and Hawaii and two leased facilities on the islands of Oahu and
Kauai. We also lease and operate four retail stores on the island of
Oahu.
(4) With the acquisition of Grand & Toy, we also operate approximately
70 retail stores throughout Canada.
(5) Consists of eight facilities located throughout northern England.
(6) Land subject to a long leasehold, with a lease term in excess of 50 years.
The majority of our distribution centers are leased with lease terms expiring
between 1998 and 2006. We own facilities in Arizona, California, Florida,
Georgia, Hawaii, Illinois, Massachusetts, Michigan, Minneapolis, Missouri,
North Carolina, Pennsylvania, and Washington and in Canada, France, and the
United Kingdom.
In addition to the distribution centers listed above, we lease office space in
Ottawa, Illinois, and own facilities in Peru, Illinois, and Bristol, Virginia,
where we operate central telephone calling centers for incoming orders and
customer service. We also lease several sales offices throughout the United
States.
We own substantially all equipment used in our facilities.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the fourth quarter
of 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the New York Stock Exchange. The high and low
sales prices for our common stock are presented in Note 11, "Quarterly Results
of Operations (unaudited)," of the Notes to Financial Statements in our 1997
Annual Report and are incorporated herein by reference. At February 27, 1998,
the approximate number of holders of common shares was 7,000.
16
<PAGE> 17
We intend to retain our earnings to finance our growth and for general
corporate purposes and, therefore, do not anticipate paying cash dividends in
the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data for the
Company for each of the five years 1997 through 1993. The selected historical
income statement data and balance sheet data as of December 31, 1997, 1996,
1995, 1994, and 1993, have been derived from our audited financial statements.
The data set forth below should be read in conjunction with, and are qualified
in their entirety by reference to, the disclosures in Items 7 and 8 of this
Form 10-K.
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------------
1997 (1) 1996 (2) 1995 (3) 1994 (4) 1993
---------- ---------- ---------- ---------- ----------
(in thousands, except share and operating data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net Sales $2,596,732 $1,985,564 $1,315,953 $908,520 $682,819
Income from operations 119,250 101,300 69,467 42,199 28,777
Net income $ 56,886 $ 55,349 $ 43,179 $ 26,465 $ 18,046
Basic and diluted earnings per share
(proforma 1995, 1994, 1993) (5): $ .89 $ .88 $ .70 $ .43 $ .29
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA
December 31
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Working capital $ 231,357 $ 168,641 $ 145,824 $104,835 $ 77,475
Total assets 1,291,488 905,362 544,124 352,369 227,959
Total long-term obligations 384,790 170,030 14,358 5,511 3,892
Shareholders' equity 505,635 404,785 339,417 233,432 149,819
</TABLE>
(1) During 1997, we acquired eight businesses. The acquisitions were
accounted for as purchases. Data for the year ended December 31, 1997,
include the results of operations of the acquired businesses for the
periods subsequent to their acquisitions.
(2) During 1996, we acquired 19 businesses. The acquisitions were
accounted for as purchases. Data for the year ended December 31, 1996,
include the results of operations of the acquired businesses for the
periods subsequent to their acquisitions.
(3) During 1995, we acquired 10 businesses. The acquisitions were accounted
for as purchases. Data for the year ended December 31, 1995, include
the results of operations of the acquired businesses for the periods
subsequent to their acquisitions.
(4) Effective April 30, 1994, we acquired the direct marketing office
products distribution business of Reliable. Also during 1994 we acquired
two other businesses. The acquisitions were accounted
17
<PAGE> 18
for as purchases. Data for the year ended December 31, 1994, include the
results of operations of the acquired businesses subsequent to their
acquisitions.
(5) Information concerning basic and diluted earnings per share and pro forma
earnings per share is included in Note 2, "Summary of Significant
Accounting Policies" of the Notes to Financial Statements in our 1997
Annual Report and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations are presented under the caption "Financial Review" in our 1997
Annual Report and are incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information concerning quantitative and qualitative disclosures about market
risk is included under the caption "Disclosures of Certain Financial Market
Risks" of our management's discussion and analysis of financial condition and
results of operations and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements and related notes, together with the report of
independent public accountants, are presented in our 1997 Annual Report on
pages 20-34 and are incorporated herein by reference.
The unaudited income statement for the three months ended December 31, 1997, is
presented in our Fact Book for the fourth quarter of 1997 and is incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
18
<PAGE> 19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The directors and nominees for directors of the Company are presented under the
caption "Election of Directors" in our proxy statement. This information is
incorporated herein by reference.
<TABLE>
<CAPTION>
Executive Officers as of February 27, 1998:
- ------------------------------------------
Date
First Elected
Name Age Position as an Officer
- ---- --- -------- ------------
<S> <C> <C> <C>
Peter G. Danis Jr. (1) 66 Chief Executive Officer
and Director 4/1/95
Christopher C. Milliken (2) 52 President and Director 4/1/95
A. James Balkins III (3) 45 Senior Vice President, Chief
Financial Officer, Treasurer
and Corporate Secretary 4/1/95
Richard L. Black 52 Senior Vice President, The Reliable
Corporation, Canada, and Europe 4/1/95
Carol B. Moerdyk (3) 47 Senior Vice President,
U.S. Contract Operations 4/1/95
Lawrence E. Beeson 54 Vice President, Marketing 4/1/95
Kenneth W. Cupp 51 Vice President and Region Manager 4/22/97
Darrell R. Elfeldt 54 Vice President and Controller 4/1/95
David A. Goudge 50 Vice President, Product Marketing 4/22/97
Larry L. Gunther 55 Vice President and
Chief Information Officer 7/29/97
John A. Love 57 Vice President, Human Resources 4/1/95
Gary A. Massel 58 Vice President, Logistics 7/29/97
Michael F. Meehan 49 Vice President and Region Manager 4/22/97
Stephen M. Thompson 55 Vice President and Region Manager 4/1/95
Peter D. Vanexan 51 Vice President and
Managing Director, Grand & Toy 4/22/97
</TABLE>
19
<PAGE> 20
(1) Executive Vice President, Boise Cascade Corporation.
(2) Senior Vice President, Boise Cascade Corporation.
(3) Vice President, Boise Cascade Corporation.
Peter G. Danis Jr. has served as Chief Executive Officer and President of Boise
Cascade Office Products Corporation since 1995. In February 1998, Mr. Danis
retired as President of the Company and announced his intention to retire as
Chief Executive Officer of the Company, effective April 1998. Mr. Danis will
continue to serve on the Company's Board of Directors. Prior to 1995, Mr.
Danis served as Executive Vice President and General Manager, Office Products
Distribution Division of Boise Cascade Corporation since 1993. Prior thereto,
Mr. Danis served in various capacities at Boise Cascade Corporation including
as Executive Vice President, Office Products and Building Products from 1989 to
1993; Senior Vice President from 1981 to 1989; and Vice President, Office
Products from 1977 to 1981.
Christopher C. Milliken was elected President of the Company in February 1998.
Previously, Mr. Milliken served as Senior Vice President, Operations, of the
Company since 1995. Prior to 1995, Mr. Milliken served as a Region Manager of
Boise Cascade Office Products Distribution Division since 1991 and in various
positions with the Division since 1977.
A. James Balkins III was elected Senior Vice President, Chief Financial Officer
and Treasurer in February 1998. Prior to 1998, Mr. Balkins served as Corporate
Secretary of the Company since 1995 and Vice President, Corporate Planning and
Development of Boise Cascade Corporation since 1996. Previously, Mr. Balkins
served in various capacities at Boise Cascade Corporation including Corporate
Secretary from 1991 to 1997 and Associate General Counsel from 1984 to 1996.
Richard L. Black was elected Senior Vice President, The Reliable Corporation,
Canada, and Europe, in February 1998. Mr. Black has served as President of The
Reliable Corporation, a wholly-owned subsidiary of the Company, since 1994.
Prior to 1994, Mr. Black served as Vice President, Marketing of Rivertown
Trading Company from 1992 to 1994 and, prior thereto, as Vice President, New
Business Development of Fingerhut Corporation, both direct marketing companies.
Carol B. Moerdyk was elected Senior Vice President, U.S. Contract Operations,
of the Company in February 1998. Previously, Ms. Moerdyk served as Senior Vice
President, Chief Financial Officer, and Treasurer of the Company since 1995.
Prior to 1995, Ms. Moerdyk served as Vice President and Assistant to the
General Manager of Office Products of Boise Cascade Corporation since 1992 and
in various capacities at Boise Cascade Corporation including Vice President,
Corporate Planning and Development from 1990 to 1992 and Corporate Planning and
Development Director from 1986 to 1990.
Lawrence E. Beeson served as Vice President, Marketing of Hallmark Cards, Inc.
from 1990 to March 1995 and as Senior Vice President, Marketing for KFC Corp.,
a subsidiary of Pepsico Inc., prior thereto.
Prior to being elected an officer of the Company, Kenneth W. Cupp served as a
Region Manager of Boise Cascade Office Products Corporation since 1995.
20
<PAGE> 21
Prior to being elected an officer of the Company, Darrell R. Elfeldt served as
Finance and Distribution Director of Boise Cascade Office Products Distribution
Division since 1993. He has served in various positions with the division
since 1980.
Prior to being elected an officer of the Company, David A. Goudge served as the
Director of Product Marketing of Boise Cascade Office Products Distribution
Division since 1993.
Larry L. Gunther has served as the Chief Information Officer of Boise Cascade
Office Products Corporation since June 1997. Previously, Mr. Gunther served as
Chief Information Officer of the North Atlantic Group of Gillette for five
years and as Chief Information Officer of the Consumer Products Group of
Bristol-Myers Squibb for 11 years.
Prior to being elected an officer of the Company, John A. Love served as the
Human Resources Director of Boise Cascade Office Products Distribution Division
since 1978.
Prior to being elected an officer of the Company, Gary A. Massel served as the
Director of Logistics of Boise Cascade Office Products Corporation since 1995.
Prior to being elected an officer of the Company, Michael A. Meehan served as a
Region Manager of Boise Cascade Office Products Corporation since 1995.
Prior to being elected an officer of the Company, Stephen M. Thompson served as
a Region Manager of Boise Cascade Office Products Distribution Division since
1976. Previously, Mr. Thompson served with the Division in various capacities
since 1970.
Prior to being elected an officer of the Company, Peter D. Vanexan served as
the Managing Director of Grand & Toy of Boise Cascade Office Products
Corporation since 1996.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning compensation of our executive officers for the year
ended December 31, 1997, is presented under the caption "Compensation Tables"
in our proxy statement. This information is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Information concerning the security ownership of certain
beneficial owners as of December 31, 1997, is set forth under the
caption "Beneficial Ownership" in our proxy statement and is
incorporated by reference.
(b) Information concerning security ownership of management as of
December 31, 1997, is set forth under the caption "Security
Ownership of Directors and Executive Officers" in our proxy statement
and is incorporated by reference.
(c) Information concerning compliance with Section 16 of the Securities
and Exchange Act of 1934 is set forth under the caption "Section
16(a) Beneficial Ownership Reporting Compliance" in our proxy
statement and is incorporated by reference.
21
<PAGE> 22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions during
1997 is set forth under the caption "Related Party Transactions" in our proxy
statement and in Note 5, "Transactions With Boise Cascade Corporation," of the
Notes to Financial Statements in our 1997 Annual Report both of which are
incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Form 10-K for
Boise Cascade Office Products Corporation:
(1) Financial Statements
(i) The Income Statement for the three months ended December 31,
1997, is incorporated by reference from our Fact Book for the
fourth quarter of 1997.
(ii) The Financial Statements, the Notes to Financial Statements,
and the Report of Independent Public Accountants listed below
are incorporated by reference from our 1997 Annual Report.
- Balance Sheets as of December 31, 1997 and 1996.
- Statements of Income for the years ended December 31,
1997, 1996, and 1995.
- Statements of Cash Flows for the years ended December 31,
1997, 1996, and 1995.
- Statements of Shareholders' Equity for the years ended
December 31, 1997, 1996, and 1995.
- Notes to Financial Statements.
- Report of Independent Public Accountants.
(2) Financial Statement Schedules
None required.
(3) Exhibits
Required exhibits are listed in the Index to Exhibits and are
incorporated by reference.
(b) Reports on Form 8-K
No Form 8-K's were filed during the last quarter covered by this
report.
(c) Exhibits.
See Index to Exhibits.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By /s/ Peter G. Danis Jr.
---------------------------------
Peter G. Danis Jr.
Chief Executive Officer
Dated: March 18, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 18, 1998.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
<S> <C>
(i) Principal Executive Officer:
/s/ Peter G. Danis Jr. Chief Executive Officer
-----------------------------
PETER G. DANIS JR.
(ii) Principal Financial Officer:
/s/ A. James Balkins III Senior Vice President and
----------------------------- Chief Financial Officer
A. JAMES BALKINS III
(iii) Principal Accounting Officer:
/s/ Darrell R. Elfeldt Vice President and Controller
-----------------------------
DARRELL R. ELFELDT
(iv) Directors:
/s/ Peter G. Danis Jr.
-----------------------------
PETER G. DANIS JR.
/s/ George J. Harad
-----------------------------
GEORGE J. HARAD
/s/ John B. Carley
-----------------------------
JOHN B. CARLEY
/s/ James G. Connelly III
-----------------------------
JAMES G. CONNELLY III
/s/ Theodore Crumley
-----------------------------
THEODORE CRUMLEY
/s/ Christopher C. Milliken
-----------------------------
CHRISTOPHER C. MILLIKEN
/s/ A. William Reynolds
--------------------------
A. WILLIAM REYNOLDS
</TABLE>
23
<PAGE> 24
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report dated January 29, 1998, incorporated by reference in this Form 10-K
for the year ended December 31, 1997, into Boise Cascade Office Products
Corporation's registration statement on Form S-8 (File No. 33-96348);
registration statement on Form S-8 (File No. 33-96512); registration statement
on Form S-8 (file No. 333-1132); registration statement on Form S-8 (File No.
333-1134); registration statement on Form S-8 (File No. 333-1152); and
post-effective amendment No. 1 to registration statement on Form S-1 (File No.
333-3660).
/s/ Arthur Andersen LLP
Boise, Idaho
March 18, 1998
24
<PAGE> 25
BOISE CASCADE OFFICE PRODUCTS CORPORATION
INDEX TO EXHIBITS
Filed With the Annual Report on Form 10-K
for the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Number Description Page Number
---------- --------------------------------------------------- -----------
<S> <C> <C> <C>
2.1 (1) Asset Transfer and Subscription Agreement
dated April 1, 1995 --
2.2 (2) Share Purchase Agreement dated July 2, 1997,
by and among Boise Cascade Office Products
Corporation, Jean-Paul Guisset, and Mrs.
Marie Annick Guisset --
3.1 (3) Restated Certificate of Incorporation --
3.2 (4) Bylaws, as amended October 11, 1995 --
4.1 (1) Specimen Certificate Representing Shares of
Common Stock --
4.2 (5) Credit Agreement dated June 26, 1997 --
9 Inapplicable --
10.1 (4) Form of Executive Officer Severance Agreement,
adopted January 30, 1996 --
10.2 (3) Administrative Services Agreement dated
April 1, 1995 --
10.3 (6) Paper Sales Agreement dated April 1, 1995 --
10.4 (3) License Agreement dated April 1, 1995 --
10.5 (3) Shareholder Agreement dated April 1, 1995 --
10.6 (3) Tax Matters Agreement dated April 1, 1995 --
10.7 (7) Key Executive Stock Option Plan, adopted
February 20, 1995 --
10.8 (8) Director Stock Option Plan, as amended through
December 17, 1996 --
10.9 (3) Form of Confidential Information and Noncompetitive
Agreement, approved February 20, 1995 --
10.10 (3) Early Retirement Plan for Executive Officers,
effective February 20, 1995 --
10.11 (3) Supplemental Pension Plan, effective
February 20, 1995 --
10.12 (3) Key Executive Deferred Compensation Plan,
effective February 20, 1995 --
10.13 (3) Executive Officer Financial Counseling Program,
adopted February 20, 1995 --
10.14 (4) Split-Dollar Life Insurance Plan, as amended
July 27, 1995 --
10.15 (8) Supplemental Health Care Plan for Executive
Officers, revised July 31, 1996 --
10.16 (3) Executive Officer Severance Pay Policy, adopted
February 20, 1995 --
</TABLE>
25
<PAGE> 26
<TABLE>
<CAPTION>
Number Description Page Number
---------- --------------------------------------------------- -----------
<S> <C> <C> <C>
10.17 (3) Key Executive Performance Plan, adopted
February 20, 1995 --
10.18 1997 and 1998 Performance Criteria for the Key
Executive Performance Plan 28
10.19 (3) Board of Directors Deferred Compensation Plan,
effective February 14, 1995 --
10.20 (4) 1995 Executive Officer Deferred Compensation
Plan, effective January 1, 1996 --
10.21 (4) 1995 Board of Directors Deferred Compensation
Plan, effective January 1, 1996 --
10.22 (9) Form of Deferred Compensation and
Benefits Trust dated January 30, 1996 --
11 Computation of Per Share Earnings 30
12 Ratio of Earnings to Fixed Charges 31
13.1 Incorporated sections of the Boise Cascade Office
Products Corporation 1997 Annual Report 32
13.2 Incorporated sections of the Boise Cascade Office
Products Corporation Fact Book for the fourth
quarter of 1997 52
16 Inapplicable --
18 Inapplicable --
21 Significant subsidiaries of the registrant 56
22 Inapplicable --
23 Consent of Arthur Andersen LLP (see page 24)
24 Inapplicable --
27 Financial Data Schedule 57
28 Inapplicable --
99 Inapplicable --
</TABLE>
(1) Exhibits 2.1 and 4.1 were filed under the same exhibit numbers in
our Amendment No. 1 to the Registration Statement on Form S-1 filed on
March 28, 1995, and are incorporated by reference.
(2) Exhibit 2.2 was filed as Exhibit 2 in our current report on
Form 8-K filed on July 17, 1997, and is incorporated by reference.
(3) Exhibits 3.1, 10.2, 10.4, 10.5, 10.6, 10.9, 10.10, 10.11,
10.12, 10.13, 10.16, 10.17, and 10.19 were filed under the same exhibit
numbers in our Registration Statement on Form S-1 filed on February 22,
1995, and are incorporated by reference.
(4) Exhibits 3.2, 10.1, 10.14, 10.20, and 10.21 were filed under
the same exhibit numbers in our 1995 Annual Report on Form 10-K and are
incorporated by reference.
(5) The Credit Agreement dated June 26, 1997, was filed as Exhibit 4 in
our Quarterly Report on Form 10-Q for the quarter ended June 30, 1997,
and is incorporated by reference.
(6) Exhibit 10.3 was filed under the same exhibit number in our Amendment
No. 1 to the Registration Statement on Form S-1 filed on March 28,
1995, and is incorporated by
26
<PAGE> 27
reference. The Company has been granted an order of confidential
treatment with respect to a portion of Exhibit 10.3.
(7) The Key Executive Stock Option Plan, as amended through April 23, 1996,
was filed as Exhibit 10.1 in our Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996, and is incorporated by reference.
(8) Exhibits 10.8 and 10.15 were filed under the same exhibit numbers
in our 1996 Annual Report on Form 10-K and are incorporated by
reference.
(9) The Form of Deferred Compensation and Benefits Trust dated
January 30, 1996, was filed as Exhibit 10 in our Quarterly Report on
Form 10-Q for the quarter ended March 31, 1996, and is incorporated by
reference.
27
<PAGE> 1
Exhibit 10.18
BOISE CASCADE OFFICE PRODUCTS CORPORATION
KEY EXECUTIVE PERFORMANCE PLAN
1997 Payout Criteria
PAYOUT AS A PERCENT OF SALARY
<TABLE>
<CAPTION>
Financial PRESIDENT
Improvement CEO COO/CFO RELIABLE VP
- -------------- ------ ------- -------- -----
<S> <C> <C> <C> <C>
Less than
($47,329,996) 0.0% 0.0% 0.0% 0.0%
($23,729,000) 19.9% 14.9% 13.2% 11.6%
($23,728,999) 49.9% 37.4% 33.2% 29.1%
($21,000,000) 52.5% 39.3% 35.0% 30.6%
$ 0 112.5% 84.3% 75.0% 65.6%
$10,500,000 122.4% 91.8% 81.6% 71.4%
</TABLE>
- - For Financial Improvement in excess of $10.5 Million, the
payout increases proportionally to the increase from
$0 Million to $10.5 Million.
- - The payout is interpolated on a straight line for Financial
Improvement not shown in the table.
- - Financial Improvement is measured by calculating the company's
economic value added.
Economic Value Added = Net Operating Profit Before Tax -
Capital Charge
Net Operating Profit
Before Tax (NOPBT)* = Income from operating assets
+ Imputed interest of capitalized
lease obligations
- Amortization of restructuring
losses
* Unusual nonrecurring and nonoperating income or expense
items do not affect NOPBT
Capital Charge = Capital x 16%
Capital** = Operating Capital
+ Imputed capital value of lease
obligations
- Gain from the sale of assets
+ Unamortized restructuring losses
** Nonrecurring and nonoperating losses do not affect Operating
Capital. There may be adjustments to Operating Capital for
strategic investments while they are under construction and
up to two additional years subject to approval by the
Compensation Committee of the Board.
<PAGE> 2
BOISE CASCADE OFFICE PRODUCTS CORPORATION
KEY EXECUTIVE PERFORMANCE PLAN
1998 Payout Criteria
PAYOUT AS A PERCENT OF SALARY
<TABLE>
<CAPTION>
Financial
Improvement CEO SVP VP
- -------------- ------- ------- -------
<S> <C> <C> <C>
Less than
($61,215,000) 0.0% 0.0% 0.0%
($35,000,000) 15.0% 11.2% 8.7%
($ 1,448,000) 72.5% 54.4% 42.3%
($ 1,447,999) 102.5% 76.9% 59.8%
$ 0 105.0% 78.7% 61.2%
$35,000,000 125.0% 93.7% 72.9%
</TABLE>
- - For Financial Improvement in excess of $35 Million, the
payout increases proportionally to the increase from
$0 Million to $35 Million.
- - The payout is interpolated on a straight line for Financial
Improvement not shown in the table.
- - Financial Improvement is measured by calculating the company's
economic value added.
Economic Value Added = Net Operating Profit Before Tax -
Capital Charge
Net Operating Profit
Before Tax (NOPBT)* = Income from operating assets
+ Imputed interest of capitalized
lease obligations
- Amortization of restructuring
losses
* Unusual nonrecurring and nonoperating income or expense
items do not affect NOPBT
Capital Charge = Capital x 16%
Capital** = Operating Capital
+ Imputed capital value of lease
obligations
- Gain from the sale of assets
+ Unamortized restructuring losses
** Nonrecurring and nonoperating losses do not affect Operating
Capital. There may be adjustments to Operating Capital for
strategic investments while they are under construction and
up to two additional years subject to approval by the
Compensation Committee of the Board.
<PAGE> 1
EXHIBIT 11
BOISE CASCADE OFFICE PRODUCTS CORPORATION
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
For the Year Ended December 31
------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
(in thousands, except share information)
BASIC EARNINGS PER SHARE
Net income ............................ $ 56,886 $ 55,349 $ 43,179
============== ============== ==============
Shares of Common Stock:
Weighted average shares outstanding .. 63,788,448 62,444,170 61,660,100
Effect of contingent shares .......... 345,541 475,828 139,340
-------------- -------------- --------------
64,133,989 62,919,998 61,799,440
============== ============== ==============
Basic earnings per share
(pro forma 1995) (1) .................. $ .89 $ .88 $ .70
============== ============== ==============
DILUTED EARNINGS PER SHARE
Net income ............................ $ 56,886 $ 55,349 $ 43,179
============== ============== ==============
Shares of Common Stock:
Weighted average shares outstanding .. 63,788,448 62,444,170 61,660,100
Effect of contingent shares .......... 345,541 475,828 139,340
Effect of options .................... 118,370 216,286 33,842
-------------- -------------- --------------
64,252,359 63,136,284 61,833,282
============== ============== ==============
Diluted earnings per share
(pro forma 1995) (1) .................. $ .89 $ .88 $ .70
============== ============== ==============
</TABLE>
(1) Information concerning basic, diluted, and pro forma earnings per share
is included in Note 2, "Summary of Significant Accounting Policies,"
of the Notes to Financial Statements in our 1997 Annual Report and is
incorporated herein by reference.
<PAGE> 1
EXHIBIT 12
BOISE CASCADE OFFICE PRODUCTS CORPORATION
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
For the Year Ended December 31
--------------------------------------------
1997 1996 1995 1994
-------- ----------- ----------- --------
<S> <C> <C> <C> <C>
(dollars in thousands)
Interest costs and amortization
of debt costs $ 20,308 $ 7,868 $ 725 $ -
Interest factor related to
noncapitalized leases (1) 4,456 4,839 2,203 1,632
-------- ----------- ----------- --------
Total fixed charges $ 24,764 $ 12,707 $ 2,928 $ 1,632
======== =========== =========== ========
Income before income taxes $ 99,784 $ 93,812 $71,370 $43,194
Total fixed charges 24,764 12,707 2,928 1,632
-------- ----------- ----------- --------
Total earnings before
fixed charges $124,548 $106,519 $74,298 $44,826
======== =========== =========== ========
Ratio of earnings to fixed charges 5.0 8.4 25.4 27.5
</TABLE>
(1) Interest expense for operating leases with terms of one year or
longer is based on an imputed interest rate for each lease.
<PAGE> 1
EXHIBIT 13.1
FINANCIAL REVIEW
RESULTS OF OPERATIONS
1997 COMPARED WITH 1996
Net sales in 1997 increased 31% to $2.6 billion, from $2.0 billion in 1996.
The growth in sales resulted from acquisitions and internal growth.
Same-location sales increased 14%. Sales growth was constrained by lower
paper prices. Holding paper prices constant, same-location sales increased
17%. Businesses acquired during 1996 had sales in 1996 of approximately $332
million and sales in 1997 of $524 million. The increase is due to the
implementation of our business model in these acquisitions, including
increasing sales to our national accounts and broadening product offerings,
as well as a full calendar year of ownership in 1997.
Cost of sales, which includes the costs of merchandise sold, delivery, and
occupancy, increased in 1997 to $1.9 billion, which was 74.8% of net sales.
This compares with $1.5 billion, or 73.9% of net sales, in 1996. The 0.9%
decrease in gross margin resulted in part from continued competitive
pressures on gross margins, especially in national accounts. Additionally, in
the first half of 1996, paper costs to us were declining rapidly from the
peak reached late in 1995, which raised our gross margin in the first half of
1996. In 1997, paper costs were more stable but significantly lower,
constraining our 1997 margins. We believe that the increasingly competitive
nature of the industry and the increasing price sensitivity of customers will
continue to put downward pressure on gross margins. In addition, changes in
our product mix or marketing strategy could, from time to time, affect gross
margins. For example, we continue to increase our sales of computer-related
consumables, a product line that had significantly lower gross margins and
associated operating expenses in 1997 than our more traditional office
products line.
Operating expense was 20.6% of net sales in 1997, compared with 21.0% in
1996. This decrease resulted in part from leveraging expenses across a larger
revenue base and from specific initiatives to increase efficiency, for
example, by increasing central procurement and integrating distribution
programs. Within the operating expense category, selling and warehouse
operating expense was 18.6% of net sales in 1997, compared with 18.9% in
1996. The decrease was a result of efficiencies gained from our centralized
call centers and the centralization of our inventory rebuying function.
Corporate general and administrative expense declined to 1.6% of net sales in
1997 from 1.7% in 1996, because we were able to spread the cost of
centralized functions over our higher revenues. Goodwill amortization was
0.4% of net sales in 1997 compared with 0.3% in 1996. The increase between
1996 and 1997 resulted from our acquisition activity in 1996 and 1997.
As a result of the factors discussed above, income from operations was $119
million in 1997, an 18% increase over $101 million in 1996. Our operating
margin decreased to 4.6% from 5.1% of net sales in 1996.
Interest expense was $20 million in 1997 compared with $8 million in 1996.
The increase resulted from debt incurred in conjunction with our acquisition
and capital spending programs.
Income tax expense was $43 million in 1997 compared with $38 million in 1996.
The increase resulted from our higher taxable income in 1997 and from an
increase in our effective tax rate. Our effective tax rate increased to 43%
in 1997 from 41% in 1996, primarily as a result of increased nondeductible
goodwill and foreign income taxed at a higher rate.
Net income increased 3% to $57 million, or 2.2% of net sales, compared with
$55 million, or 2.8% of net sales, in 1996.
1996 COMPARED WITH 1995
Net sales in 1996 increased 51% to $2.0 billion, from $1.3 billion in 1995.
The growth in sales resulted primarily from acquisitions. Businesses acquired
during 1995 had sales in 1995 of $90 million. Sales for the 1995 acquisitions
increased to $264 million for 1996 because they were owned for the full
calendar year and we had begun to implement our business model in these
acquisitions, including increasing sales to national accounts and broadening
product offerings. Businesses acquired during 1996 had sales in 1996 of $332
million. Excluding the incremental effect of the 1995 and 1996 acquisitions,
net sales increased $200 million, primarily as a result of growth in national
account sales, our broader product offering, and growth in direct marketing
sales.
BOISE CASCADE OFFICE PRODUCTS 15
<PAGE> 2
FINANCIAL REVIEW
Cost of sales, which includes the costs of merchandise sold, delivery, and
occupancy, increased in 1996 to $1.5 billion, which was 73.9% of net sales.
This compares with $981 million, which represented 74.5% of net sales, in
1995. The 0.6% increase in gross margins for 1996 compared with 1995 resulted
primarily from our acquisition of Neat Ideas, a direct marketing company
based in the United Kingdom, and Grand & Toy Limited, one of Canada's
largest contract stationers. Both of these companies have gross margins which
are higher than the average gross margin of our other business. In addition,
our average gross margin on office paper sales was higher in 1996 than in 1995,
when we experienced difficulty in passing through cost increases early in the
year.
Operating expense was 21.0% of net sales in 1996, compared with 20.2% in
1995. This increase was primarily the result of our increased presence in
direct marketing and the international contract stationer business, both of
which have higher operating expenses than the average of our other business.
Sharply lower paper prices in 1996 also reduced overall revenue growth,
negatively impacting our ability to leverage our operating expenses. Within
the operating expense category, selling and warehouse operating expense was
18.9% of net sales in 1996, compared with 18.2% in 1995. In addition to the
factors discussed above, in 1996 we added more than 40 associates to our
sales force dedicated to computer-related products; started up a centralized
call center in Peru, Illinois; and centralized the majority of our domestic
inventory rebuying function. These activities also contributed to the
increase in selling and warehouse operating expenses in 1996. Corporate
general and administrative expense declined to 1.7% of net sales in 1996 from
1.9% in 1995, because we were able to spread the cost of centralized
functions over our higher revenues. Goodwill amortization was 0.3% of net
sales in 1996, compared with 0.2% in 1995. The increase in goodwill
amortization between 1995 and 1996 resulted from our acquisition activity in
1995 and 1996.
As a result of the factors discussed above, income from operations was $101
million in 1996, a 46% increase over $69 million in 1995. Our operating
margin decreased to 5.1% from 5.3% of net sales.
Interest expense was $8 million in 1996, compared with $1 million in 1995.
The increase in interest expense resulted from debt incurred in conjunction
with our acquisition and capital spending programs.
Income tax expense was $38 million in 1996, compared with $28 million in
1995. The increase resulted from our higher taxable income in 1996. Our
effective tax rate also increased to 41% in 1996, from 39.5% in 1995,
primarily as a result of increased nondeductible goodwill and foreign income
taxed at a higher rate.
Net income increased 28% to $55 million, or 2.8% of net sales, compared with
$43 million, or 3.3% of net sales, in 1995.
PUBLIC OFFERING
On April 13, 1995, we completed the sale of 10,637,500 shares of common
stock, at a price of $12.50 per share, in an initial public offering. After
the offering, Boise Cascade Corporation owned 82.7% of our outstanding common
stock. Net proceeds were approximately $123 million, $102 million of which we
used to pay a dividend to Boise Cascade Corporation and to replace working
capital retained by Boise Cascade Corporation. The remainder of the
proceeds--approximately $21 million--was retained by the Company for general
corporate purposes.
In May 1996, we effected a two-for-one stock split of our common stock in the
form of a 100% stock dividend. Each shareholder of record at the close of
business on May 6, 1996, received one additional share for each share held on
that date. The new shares were distributed on May 20, 1996. All references in
this financial review to share amounts, earnings per share, average shares
outstanding, and common stock prices have been adjusted to reflect the stock
split.
On June 17, 1996, we filed a registration statement with the Securities and
Exchange Commission for 4.4 million shares of common stock to be offered by the
Company from time to time in connection with future acquisitions. At December
31, 1997, 3.5 million shares remained unissued under this registration
statement.
16 BOISE CASCADE OFFICE PRODUCTS
<PAGE> 3
FINANCIAL REVIEW
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
million. At December 31, 1997, Boise Cascade Corporation owned 81.4% of our
outstanding common stock.
ACQUISITIONS
Through February 1998, our direct marketing subsidiary, The Reliable
Corporation, acquired Fidelity Direct, a direct marketer of packing,
shipping, and graphic arts products in Minnesota, and Sistemas Kalamazoo, a
direct marketer of office supplies in Spain. The annualized sales of these
acquisitions were $14 million at the time of announcement.
In 1997, we acquired eight businesses and entered into a joint venture,
including two companies in France and one in the United Kingdom, for cash of
$254 million, acquisition liabilities of $13 million, debt assumed of $10
million, and issuance of our stock valued at $3 million at the time of
issuance. The annualized sales of the acquisitions completed in 1997 were
$340 million at the time of announcement.
In 1996, we acquired 19 businesses, including four companies in Canada and
three in Australia, for cash of $180 million, acquisition liabilities of $35
million, and issuance of our stock valued at $7 million at the time of
issuance. The annualized sales of the acquisitions completed in 1996 were
$460 million at the time of announcement.
In 1995, we acquired 10 office products businesses, including one in the
United Kingdom, for cash of $62 million, payables to the sellers of $11
million, and issuance of our stock and a stock note valued at $18 million at
the time of issuance. The annualized sales of the acquisitions completed in
1995 were $235 million at the time of announcement.
Goodwill, net of amortization, was $439 million at December 31, 1997, and
$262 million at December 31, 1996. The increase was the result of
acquisitions. We used purchase accounting to record our acquisitions. For
more information on our acquisitions, see Note 9 in our Notes to Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
Our principal requirements for cash have been to make acquisitions, fund
technology development and working capital needs, upgrade and expand
facilities at existing locations, and open new distribution centers. The
funding 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. We expect
total capital expenditures in 1998 of about $100 million, exclusive of amounts
attributable to acquisitions. In 1997, such capital expenditures were
approximately $67 million.
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. Amounts outstanding under this agreement totaled $340 million
at December 31, 1997. We may, subject to the covenants contained in the
revolving 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 $23 million at December 31, 1997. The
maximum amount of short-term notes payable outstanding during the year ended
December 31, 1997, was $95 million. The average amount of short-term notes
payable during the 12 months ended December 31, 1997, was $42 million. The
weighted average interest rate for these borrowings was 5.8%.
FINANCIAL CONDITION
Cash provided by operations in 1997 was $120 million. This was the result of
$98 million of net income, depreciation and amortization, and other noncash
items, and a $22 million net decrease in working capital. Net cash used
for investment was $350 million, which included $67 million for capital
expenditures
BOISE CASCADE OFFICE PRODUCTS 17
<PAGE> 4
FINANCIAL REVIEW
and $254 million for acquisitions. Net cash provided by financing was
$246 million, which included $212 million borrowed under the revolving credit
agreement and $48 million of proceeds from the issuance of our common stock,
offset by the payment of $13 million of short-term borrowings.
Cash provided by operations in 1996 was $60 million. This was the result of
$81 million of net income, depreciation and amortization, and other noncash
items, offset by a $21 million net increase in working capital. Net cash used
for investment was $239 million, which included $43 million for capital
expenditures and $180 million for acquisitions. Net cash provided by
financing was $177 million, which included $140 million borrowed under the
revolving credit agreement and $37 million borrowed through short-term
borrowing lines.
Cash provided by operations in 1995 was $50 million. This was the result of
$57 million of net income, depreciation and amortization, and other noncash
items, offset by a $7 million net increase in working capital. Net cash used
for investment was $80 million, which included $22 million for capital
expenditures and $62 million for acquisitions. Net cash provided by financing
was $44 million, which included $123 million from our sale of stock, offset in
part by a $78 million net equity transaction with Boise Cascade Corporation.
DISCLOSURES OF CERTAIN FINANCIAL 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 December 1997, we entered into agreements to hedge against a rise in
Treasury rates. We entered into the transactions in anticipation of our
issuance of debt securities in the first half of 1998. The hedge agreements
have a notional amount of $70 million and will be settled in late March 1998.
If the settlement rate, based on the yield on 10-year U.S. Treasury bonds, is
greater than the agreed upon initial rate, we will receive a cash payment. If
the difference is less, we will make a cash payment. The amount paid or
received will be recognized as an adjustment to interest expense over the
life of the debt securities to be issued. The settlement amount of $0.3
million as of December 31, 1997, was recorded as a deferred loss.
Approximately 20% of our 1997 revenues were generated from operations outside
the United States. Our operations in Australia, 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.
NEW ACCOUNTING STANDARDS
In 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." This Statement establishes standards for
reporting and display of comprehensive income and its components in a full
set of financial statements. We will adopt this Statement in the first quarter
of 1998. Also issued was 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 these Statements will have no impact on net income.
18 BOISE CASCADE OFFICE PRODUCTS
<PAGE> 5
FINANCIAL REVEIW
YEAR 2000 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 may
recognize a date of "00" as the year 1900 instead of the year 2000. 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 have plans to implement, several computer system
replacements or upgrades to allow our systems to properly recognize dates
after December 31, 1999. We have reviewed what actions will be necessary to
make our remaining computer systems year 2000 compliant. The expense
associated with these actions is not expected to be material to the Company.
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 corrected on a timely basis, we do not
expect any material adverse effects to the Company.
IMPACT OF INFLATION, SEASONALITY, AND BUSINESS CYCLES
Management believes inflation has not had a material effect on our financial
condition or results of operations. However, there can be no assurance that
our business will not be affected by inflation in the future.
Although particular items we sell are seasonal (e.g., calendars and specialty
gift items), our sales overall are not subject to significant seasonal
variations.
A significant portion of our sales mix is represented by office papers. In
early 1995, our gross margin was adversely affected by our inability to
immediately adjust prices to our customers to reflect rapid increases in the
cost of paper during that time period. We subsequently revised our contracts
with customers to improve our ability to pass on cost increases. In 1996,
paper prices were lower than in 1995, negatively impacting our revenue growth
and operating expense leverage. In 1997, paper prices were more stable but
lower than in 1996, constraining our revenue growth. Looking to the future,
it is uncertain to what extent or when paper prices might significantly rise
or fall and what favorable or adverse impact those changes might have on our
sales and margins.
Our multifaceted growth strategy, including our acquisition program, was
successful during 1997. We believe that this growth strategy will continue to
be successful, but the year-to-year results of this strategy will depend in
part on market conditions outside our control. In addition, the pace of our
acquisition program will reflect the extent of opportunities available to us.
CHANGES IN MANAGEMENT
On February 10, 1998, we announced that Peter G. Danis Jr., President and
Chief Executive Officer, will retire following our annual meeting on April
21, 1998. Mr. Danis will continue to serve on our Board of Directors. It was
also announced that Christopher C. Milliken, Senior Vice President, Operations,
was elected to succeed Mr. Danis as President, effective immediately, and as
Chief Executive Officer on April 21, 1998. Mr. Milliken was also elected as a
director.
We also announced that Carol B. Moerdyk, previously Senior Vice President,
Chief Financial Officer, and Treasurer, will become Senior Vice President,
U.S. Contract Operations. Also, A. James Balkins III, Corporate Secretary,
was elected Senior Vice President, Chief Financial Officer, and Treasurer. In
addition, Richard L. Black, Senior Vice President, The Reliable Corporation,
will assume responsibility for our European and Canadian operations.
FORWARD LOOKING STATEMENTS
This annual report includes "forward looking statements" which involve
uncertainties and risks. There can be no assurance that actual results will
not differ from our expectations. Factors which could cause materially
different results include, among others, the success of new initiatives; the
pace of acquisitions, same-location sales, and cost structure improvements;
the changing mix of products sold to our customers; competitive and general
economic conditions; and the other risks set forth in our filings with the
Securities and Exchange Commission.
BOISE CASCADE OFFICE PRODUCTS 19
<PAGE> 6
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31 (in thousands, except share information) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $2,596,732 $1,985,564 $1,315,953
Cost of sales, including inventory purchased from
Boise Cascade Corporation of $228,189, $189,429,
and $158,512 1,941,702 1,467,368 980,564
----------------------------------
Gross profit 655,030 518,196 335,389
----------------------------------
Selling and warehouse operating expense 483,241 375,700 238,885
Corporate general and administrative expense,
including amounts paid to Boise Cascade Corporation
of $2,578, $2,362, and $2,382 41,606 34,409 24,750
Goodwill amortization 10,933 6,787 2,287
----------------------------------
535,780 416,896 265,922
----------------------------------
Income from operations 119,250 101,300 69,467
Interest expense 20,165 7,766 685
Other income, net 699 278 2,588
----------------------------------
Income before income taxes 99,784 93,812 71,370
Income tax expense 42,898 38,463 28,191
----------------------------------
Net income $ 56,886 $ 55,349 $ 43,179
- ------------------------------------------------------------------------------------------------------------
Earnings per share--basic and diluted
(pro forma 1995) $ .89 $ .88 $ .70
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these Financial Statements.
20 BOISE CASCADE OFFICE PRODUCTS
<PAGE> 7
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 (in thousands, except share information) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current
Cash and cash equivalents $ 28,755 $ 12,762
Receivables, less allowances of $7,591 and $3,887 357,321 285,337
Inventories 197,990 171,748
Deferred income tax benefits 14,223 13,963
Other 23,808 15,378
----------------------
622,097 499,188
----------------------
Property
Land 28,913 13,488
Buildings and improvements 127,430 72,917
Furniture and equipment 175,778 137,137
Accumulated depreciation (129,951) (90,980)
----------------------
202,170 132,562
----------------------
Goodwill, net of amortization of $24,019 and $13,138 438,830 261,706
Other assets 28,391 11,906
----------------------
Total assets $1,291,488 $ 905,362
- -------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Notes payable $ 23,300 $ 36,700
Current portion of long-term debt 2,917 180
Accounts payable
Trade and other 238,773 185,370
Boise Cascade Corporation 42,097 21,926
----------------------
280,870 207,296
----------------------
Accrued liabilities
Compensation and benefits 30,717 31,120
Income taxes payable 3,370 7,100
Taxes, other than income 18,718 8,351
Other 30,848 39,800
----------------------
83,653 86,371
----------------------
390,740 330,547
----------------------
Other
Deferred income taxes - 4,470
Long-term debt, less current portion 357,595 140,024
Other 37,518 25,536
----------------------
395,113 170,030
----------------------
Commitments and contingent liabilities
Shareholders' equity
Common stock, $.01 par value, 200,000,000 shares
authorized; 65,588,258 and 62,750,318 shares issued
and outstanding at December 31, 1997 and 1996 656 628
Additional paid-in capital 356,599 304,134
Retained earnings 148,380 100,023
----------------------
Total shareholders' equity 505,635 404,785
----------------------
Total liabilities and shareholders' equity $1,291,488 $ 905,362
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these Financial Statements.
BOISE CASCADE OFFICE PRODUCTS 21
<PAGE> 8
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31 (in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH PROVIDED BY (USED FOR) OPERATIONS
Net income $ 56,886 $ 55,349 $ 43,179
Items in income not using (providing) cash
Depreciation and amortization 41,088 27,198 15,355
Deferred income taxes (167) (1,635) (1,914)
Receivables 2,230 (39,036) (34,006)
Inventories 555 (25,111) (14,529)
Accounts payable and accrued liabilities 35,912 40,688 45,579
Current and deferred income taxes (9,039) (1,419) 1,463
Other, net (7,558) 4,312 (5,405)
---------------------------------
Cash provided by operations 119,907 60,346 49,722
---------------------------------
CASH PROVIDED BY (USED FOR) INVESTMENT
Expenditures for property and equipment (66,876) (42,711) (22,246)
Acquisitions (254,025) (180,139) (61,638)
Other, net (29,047) (16,080) 4,309
---------------------------------
Cash used for investment (349,948) (238,930) (79,575)
---------------------------------
CASH PROVIDED BY (USED FOR) FINANCING
Additions to long-term debt 211,988 140,000 -
Notes payable (13,400) 36,700 -
Sale of stock 48,463 - 123,076
Net equity transactions with
Boise Cascade Corporation - - (78,447)
Other, net (1,017) 564 (717)
---------------------------------
Cash provided by financing 246,034 177,264 43,912
---------------------------------
Increase (decrease) in cash and
cash equivalents 15,993 (1,320) 14,059
Balance at beginning of the year 12,762 14,082 23
---------------------------------
Balance at end of the year $ 28,755 $ 12,762 $ 14,082
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these Financial Statements.
22 BOISE CASCADE OFFICE PRODUCTS
<PAGE> 9
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(in thousands, except share information)
- ---------------------------------------------------------------------------------------------------------
Total Additional
Shares For the years ended Shareholders' Common Paid-In Retained
Outstanding December 31, 1995, 1996, and 1997 Equity Stock Capital Earnings
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $233,432 $ - $233,432 $ -
- ---------------------------------------------------------------------------------------------------------
Net income 43,179 43,179
Net equity transactions with
Boise Cascade Corporation (78,447) (78,447)
62,292,776 Issuance of stock 135,262 623 134,639
Other 5,991 5,991
- ---------------------------------------------------------------------------------------------------------
62,292,776 Balance at December 31, 1995 339,417 623 295,615 43,179
- ---------------------------------------------------------------------------------------------------------
Net income 55,349 55,349
382,317 Stock issued for acquisitions 7,235 4 7,231
75,225 Stock options exercised 1,576 1 1,575
Translation adjustments 1,520 1,520
Other (312) (287) (25)
- ---------------------------------------------------------------------------------------------------------
62,750,318 Balance at December 31, 1996 404,785 628 304,134 100,023
- ---------------------------------------------------------------------------------------------------------
Net income 56,886 56,886
563,472 Stock issued for acquisitions 3,632 5 3,627
24,468 Stock options exercised 374 374
2,250,000 Issuance of stock 48,487 23 48,464
Translation adjustments (8,135) (8,135)
Other (394) (394)
- ---------------------------------------------------------------------------------------------------------
65,588,258 Balance at December 31, 1997 $505,635 $656 $356,599 $148,380
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these Financial Statements.
BOISE CASCADE OFFICE PRODUCTS 23
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS
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. The Company was incorporated on January 3, 1995, and
until April 13, 1995, was a wholly-owned subsidiary of Boise Cascade
Corporation ("BCC"). The Company consists of the former Boise Cascade Office
Products Distribution Division (the "Division") whose assets (including the
stock of two wholly-owned subsidiaries of BCC but excluding certain accounts
receivable) and liabilities (see Note 6) were transferred to the Company (the
"Transfer of Assets") effective April 1, 1995 (the "Transfer Date"), and
subsequent acquisitions made by the Company.
The accompanying historical financial statements include the financial
position and results of operations of the Division prior to the Transfer
Date. BCC's net investment in the Company prior to the Transfer Date,
including net cash transfers of the Division, has been reflected in
"Additional paid-in capital" in the financial statements. Results of
operations of the Company prior to 1995 are also included in "Additional
paid-in capital." All significant intercompany transactions have been
eliminated. These financial statements may not necessarily be representative
of results that would have been attained if the above entities had operated
within a separate consolidated entity.
The following table summarizes the results of our foreign operations:
<TABLE>
<CAPTION>
(in thousands) Canada France Other(1)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
1997
Net sales $298,587 $ 74,675 $143,940
Operating income 15,352 6,274 1,500
Identifiable assets 163,240 204,395 100,333
- -------------------------------------------------------------------------------
1996
Net sales $225,162 $ - $ 71,234
Operating income 10,896 - 1,614
Identifiable assets 148,036 - 73,707
- -------------------------------------------------------------------------------
</TABLE>
(1)1997 amounts reflect operations in Australia, Germany, and the United
Kingdom. 1996 amounts reflect operations in Australia and the United Kingdom.
We did not have any significant foreign operations prior to 1996. Export
sales to foreign unaffiliated customers are immaterial. No single customer
accounts for 10% or more of net sales.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS Cash and cash equivalents include time deposits and
highly liquid investments with original maturities of three months or less.
INVENTORIES Inventories consist of finished goods and are valued at the lower
of cost or market, with cost based on an approximation of the first-in,
first-out valuation method.
CATALOGS Costs of producing and distributing sales catalogs are capitalized
and charged to expense in the periods in which the related sales occur.
PROPERTY Property and equipment are recorded at cost. Cost consists of
expenditures for major improvements and replacements including interest cost
associated with capital additions. No interest was capitalized in 1997, 1996,
or 1995. Depreciation is computed using the straight-line method. Gains and
losses from sales and retirements are included in income as they occur.
Estimated service lives of principal items of property and equipment range
from 3 to 40 years.
24 BOISE CASCADE OFFICE PRODUCTS
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS
DEFERRED SOFTWARE COSTS We defer certain software costs that benefit future
years. These costs are amortized on the straight-line method over a maximum
of five years or the expected life of the product, whichever is less. "Other
assets" in the Balance Sheets include deferred software costs of $17,511,000
and $9,420,000 at December 31, 1997 and 1996. Amortization of deferred
software costs totaled $3,596,000, $1,685,000, and $907,000 in 1997, 1996,
and 1995 and is included in "Selling and warehouse operating expense."
REVENUE RECOGNITION Revenues are recorded at the time of shipment of products
or performance of services.
COST OF SALES Cost of sales related to merchandise inventory is primarily
determined using estimated product costs and adjusted to actual at the time
of physical inventories, which are taken at all locations at least annually.
Additional adjustments to reflect actual experience are recognized as
appropriate throughout the year. Cost of sales also includes delivery and
occupancy expenses.
EARNINGS PER SHARE In May 1996, we effected a two-for-one split of our common
stock in the form of a 100% stock dividend. Each shareholder of record at the
close of business on May 6, 1996, received one additional share for each
share held on that date. The new shares were distributed on May 20, 1996. All
references in these financial statements and notes to share amounts, earnings
per share, average shares outstanding, and common stock prices have been
adjusted to reflect the stock split.
Basic and diluted earnings per share were calculated as follows:
<TABLE>
<CAPTION>
Year ended December 31 (in thousands, except share data): 1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC
Net income $ 56,886 $ 55,349 $ 43,179
Weighted average shares outstanding 63,788,448 62,444,170 61,660,100
Effect of contingent shares 345,541 475,828 139,340
-------------------------------------
64,133,989 62,919,998 61,799,440
Basic earnings per share $ .89 $ .88 $ .70
DILUTED
Net income $ 56,886 $ 55,349 $ 43,179
Weighted average shares outstanding 63,788,448 62,444,170 61,660,100
Effect of contingent shares 345,541 475,828 139,340
Effect of options 118,370 216,286 33,842
-------------------------------------
64,252,359 63,136,284 61,833,282
Diluted earnings per share $ .89 $ .88 $ .70
- -------------------------------------------------------------------------------------------------
</TABLE>
Basic earnings per share for the years ended December 31, 1997 and 1996, were
computed by dividing net income by the weighted average number of shares of
common stock outstanding during the year. Diluted earnings per share for the
years ended December 31, 1997 and 1996, include the weighted average impact
of stock options assumed exercised using the treasury method. Basic and
diluted earnings per share for the year ended December 31, 1995, has been
presented assuming the 50,750,000 common shares issued to BCC and the
10,637,500 common shares issued in the Offerings (see Note 6) had taken place
on January 1, 1995. In 1997, we adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share." The only impact of the adoption was
to reduce EPS for 1996 by $.01.
GOODWILL Costs in excess of values assigned to the underlying net assets of
acquired companies are being amortized on the straight-line method over 40
years. Annually, we review the recoverability of goodwill. The measurement of
possible impairment is based primarily on the ability to recover the balance
of the goodwill from expected future operating cash flows of the businesses
acquired on an undiscounted basis. In management's opinion, no material
impairment exists at December 31, 1997.
BOISE CASCADE OFFICE PRODUCTS 25
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS
FOREIGN CURRENCY TRANSLATION Local currencies are considered the functional
currencies for our operations outside the United States. Assets and
liabilities are translated into U.S. dollars at the rate of exchange in
effect at the balance sheet date. Revenues and expenses are translated into U.S.
dollars at average monthly exchange rates prevailing during the year. Resulting
translation adjustments are reflected in Shareholders' equity. As a result of
these translation adjustments, "Retained earnings" were decreased by $8,135,000
at December 31, 1997, and increased by $1,520,000 at December 31, 1996.
PRE-OPENING COSTS Costs associated with opening new locations are expensed as
incurred.
FINANCIAL INSTRUMENTS The recorded value of our financial instruments, which
include accounts receivable, accounts payable, and debt approximates market
value. In the opinion of management, we do not have any significant
concentration of credit risks. Concentration of credit risks with respect to
trade receivables is limited due to the wide variety of customers and
channels to and through which our products are sold, as well as their
dispersion across many geographic areas. We have only limited involvement
with derivative financial instruments and do not use them for trading
purposes. Financial instruments such as interest rate swaps, rate hedge
agreements, and forward exchange contracts may be used periodically to manage
well-defined risks. Interest swaps and rate hedge agreements are used to
hedge underlying debt obligations or anticipated transactions. For qualifying
hedges, the interest rate differential is reflected as an adjustment to
interest expense over the life of the swaps or underlying debt. Gains and
losses related to qualifying hedges of foreign currency firm commitments and
anticipated transactions are deferred and are recognized in income or as
adjustments of carrying amounts when the hedged transaction occurs. All other
forward exchange contracts are marked-to-market, and unrealized gains and
losses are included in current period net income.
NEW ACCOUNTING STANDARDS In 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income." This Statement establishes standards for reporting and
display of comprehensive income and its components in a full set of financial
statements. We will adopt this Statement in the first quarter of 1998. Also
issued was Statement of Financial Accounting Standards 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 these Statements will have no
impact on net income.
3. INCOME TAXES
We account for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS
109 requires that deferred taxes be provided on temporary differences between
the book and tax bases of assets and liabilities. In addition, the Statement
requires adjustment of deferred tax liabilities to reflect enacted changes in
statutory income tax rates.
Income taxes are provided based on a calculation of the income tax expense
that would be incurred if we operated as an independent entity. However, as
long as BCC owns at least 80% of our outstanding common stock, we will be
included in the consolidated federal income tax return of the BCC affiliated
group. Accordingly, the Company and BCC have entered into a tax matters
agreement whereby we remit to BCC amounts representing the current tax
liability that we would incur if we were an independent taxpayer. Pursuant to
this agreement, we paid BCC $40,610,000 in 1997 and $37,633,000 in 1996. In
1995, we paid BCC $20,453,000, representing current tax liabilities incurred
after the Transfer Date. The amount for the period before the Transfer Date
was included in "Net equity transactions with Boise Cascade Corporation" and
was $6,550,000.
26 BOISE CASCADE OFFICE PRODUCTS
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS
The income tax expense included the following:
<TABLE>
<CAPTION>
Year ended December 31 (in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current income tax expense:
Federal $28,519 $31,507 $25,462
State 5,355 5,850 4,643
Foreign 9,191 2,741 -
-----------------------------------------------------
Total current income tax expense 43,065 40,098 30,105
Deferred income tax expense (benefit):
Federal 2,976 (2,326) (1,592)
State 561 (430) (322)
Foreign (3,704) 1,121 -
-----------------------------------------------------
Total deferred income tax benefit (167) (1,635) (1,914)
-----------------------------------------------------
Total income tax expense $42,898 $38,463 $28,191
- --------------------------------------------------------------------------------------------------------------
A reconciliation of the statutory U.S. federal tax expense and our actual tax expense was as follows:
<CAPTION>
Year ended December 31 (in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
Percentage Percentage Percentage
of Pretax of Pretax of Pretax
Amount Income Amount Income Amount Income
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Statutory expense $34,917 35.0% $32,834 35.0% $24,980 35.0%
Increases in taxes
resulting from:
Foreign income taxed at
rate higher than U.S. rate 3,141 3.1 1,362 1.4 - -
State tax expense 3,846 3.9 3,522 3.8 2,809 3.9
All other, net 994 1.0 745 .8 402 .6
----------------------------------------------------------------------------
Actual tax expense $42,898 43.0% $38,463 41.0% $28,191 39.5%
- ------------------------------------------------------------------------------------------------------------
The components of the deferred tax assets and liabilities on the Balance Sheets at December 31,
1997 and 1996, were as follows:
<CAPTION>
December 31 (in thousands) 1997 1996
- ------------------------------------------------------------------------------------------------------------
Assets Liabilities Assets Liabilities
<S> <C> <C> <C> <C>
Property and equipment $ 35 $ 3,474 $ - $ 4,420
Accounts receivable and unearned revenue 4,247 - 6,167 -
Deferred charges 3 1,124 67 12
Inventories 2,006 - 1,712 -
Accrued liabilities 3,179 - 5,555 -
Compensation 8,620 256 7,366 281
Goodwill - 9,524 - 10,741
State taxes 419 - 788 -
Foreign net operating losses 3,970 - - -
Cumulative translation adjustment 4,297 - - -
Other 6,634 1,565 4,770 1,478
-------------------------------------------------------------------
$33,410 $15,943 $26,425 $16,932
- ------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1997, our foreign subsidiaries had approximately $30,508,000
of undistributed earnings which are intended to be indefinitely reinvested.
If these earnings were distributed, foreign tax credits should become
available under current law to reduce or eliminate the resulting U.S. income
tax liability.
Our pretax income from domestic and foreign sources was as follows:
<TABLE>
<CAPTION>
Year ended December 31 (in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $98,368 $88,295 $71,370
Foreign 1,416 5,517 -
--------------------------------------
Pretax income $99,784 $93,812 $71,370
- --------------------------------------------------------------------------------------------------------------
</TABLE>
BOISE CASCADE OFFICE PRODUCTS 27
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
4. DEBT
On June 26, 1997, we entered into a $450 million revolving credit agreement with
a group of banks that expires on June 29, 2001, and provides for variable rates
of interest based on customary indices. Cash paid for interest for the years
ended December 31, 1997 and 1996, was $19,487,000 and $7,382,000. For the year
ended December 31, 1995, cash paid for interest was not material. 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. As of December 31, 1997, borrowings under the agreement totaled
$340,000,000. The weighted average interest rate of borrowings under the
agreement was 6.3% at December 31, 1997. In addition to the amount outstanding
under the revolving credit agreement, short-term notes payable at December 31,
1997 and 1996, totaled $23,300,000 and $36,700,000. The maximum amount of
short-term notes payable outstanding during the year ended December 31, 1997,
was $95,000,000. The average amount of short-term notes payable during the 12
months ended December 31, 1997, was $42,000,000. The weighted average interest
rate of these short-term borrowings was 5.8% and 7.7% at December 31, 1997 and
1996. Substantially all of our debt is unsecured.
In addition to borrowings under the revolving credit agreement and short-term
notes payable, debt related to acquisitions was $20,500,000 at December 31,
1997. The scheduled payments of long-term debt, excluding our revolving
credit agreement, are $2,905,000 in 1998, $1,905,000 in 1999, $1,905,000 in
2000, $714,000 in 2001, and $12,741,000 in 2002.
In December 1997, we entered into agreements to hedge against a rise in
Treasury rates. We entered into the transactions in anticipation of our
issuance of debt securities in the first half of 1998. The hedge agreements
have a notional amount of $70,000,000 and will be settled in late March 1998.
If the settlement rate, based on the yield on 10-year U.S. Treasury bonds, is
greater than the agreed upon initial rate, we will receive a cash payment. If
the difference is less, we will make a cash payment. The amount paid or
received will be recognized as an adjustment to interest expense over the
life of the debt securities to be issued. The settlement amount of $259,000 as
of December 31, 1997, was recorded as a deferred loss.
5. TRANSACTIONS WITH BOISE CASCADE CORPORATION
We participated in BCC's centralized cash management system prior to the
Transfer Date. Cash receipts attributable to our operations were collected by
BCC, and most cash disbursements, including those attributable to capital
improvements and acquisitions and expansion, were funded by BCC. The net
effect of these transactions prior to April 13, 1995, has been reflected in
our financial statements as "Net equity transactions with Boise Cascade
Corporation" and is included in "Additional paid-in capital" in the Balance
Sheets, as no common shares were issued to BCC.
A summarization of net equity transactions by type is as follows:
<TABLE>
<CAPTION>
Period Ended
(in thousands) April 13, 1995
- -----------------------------------------------------------------------------------------------
<S> <C>
Cash collections $ (287,313)
Working capital retained by Boise Cascade Corporation in the transfer of assets (100,000)
Payment of accounts payable 293,592
Capital expenditures and acquisitions 9,186
Income taxes 6,550
Cash dividend to Boise Cascade Corporation (1,859)
Corporate general and administrative allocation 698
Other 699
Net equity transactions with Boise Cascade Corporation $ (78,447)
Average balance for the period $ 84,506
- -----------------------------------------------------------------------------------------------
</TABLE>
28 BOISE CASCADE OFFICE PRODUCTS
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
In conjunction with the Offerings (see Note 6), the Company and BCC have
entered into intercompany agreements under which BCC, among other things,
provides to us certain administrative support functions, certain paper and
paper products under a long-term sales agreement, and use (without charge) of
the trade names and trademark of BCC.
Under the Administrative Services Agreement ("Admin Agreement"), BCC provides
various services to us that had been previously performed by BCC for the
Division. The services will be provided for varying periods, from one to five
years, as identified in the Admin Agreement, subject to renewal or
termination in accordance with the terms of that agreement. We will pay for
each of these services at rates set forth in the agreement. These rates are
generally consistent with amounts that have been charged by BCC in the past.
Prior to the Admin Agreement, the costs of similar services were allocated to
us by BCC based on estimations of BCC's costs for these services. For the
years ended December 31, 1997, 1996, and 1995, charged or allocated costs
amounted to $2,578,000, $2,362,000, and $2,382,000 and have been included in
"Corporate general and administrative expense" in the Statements of Income.
Under the Paper Sales Agreement, we agreed to purchase, and BCC agreed to
sell, subject to certain exceptions, all of our cut-size paper requirements.
The price we pay is based upon a formula meant to approximate prevailing
market prices for the paper. The agreement has an initial term of 20 years,
and will be automatically renewed for five-year periods thereafter, subject
to certain conditions.
We supplied office products to BCC and purchased certain paper and paper
products from BCC. During the year ended December 31, 1997, our sales to BCC
were $1,589,000, and our purchases from BCC were $231,188,000. Sales and
purchases during the same period of 1996 were $2,047,000 and $192,837,000 and
in 1995 were $2,046,000 and $164,417,000.
We are included as a participating employer in certain broad-based employee
benefit plans sponsored by BCC which cover our work force. Most assets and
liabilities under BCC's employee benefit plans for retirement and
postretirement costs arising out of service with the Company were not
transferred to us by BCC. Accordingly, no significant assets or liabilities
related to retirement and postretirement benefits are included in these
financial statements.
During each of the years presented, most of our employees participated in a
defined benefit pension plan sponsored by BCC. In addition, certain of our
employees were eligible for participation in defined contribution plans
sponsored by BCC. The Statements of Income for the years ended December 31,
1997, 1996, and 1995, include expenses of $7,995,000, $6,079,000, and
$4,159,000 attributable to participation by our employees in these plans.
Postretirement expenses attributable to participation in BCC's postretirement
plans included in the Statements of Income totaled $88,000, $92,000, and
$140,000 for the years ended December 31, 1997, 1996, and 1995.
6. SHAREHOLDERS' EQUITY
BCC's net investment in the Company prior to the Transfer Date, including
results of operations and net cash transfers of the Division, has been
reflected as "Additional paid-in capital" in the financial statements. On
January 3, 1995, the Company was incorporated and has authorized capital
consisting of 200,000,000 shares of common stock, $.01 par value, and
20,000,000 shares of preferred stock, $.01 par value. BCC was issued
50,750,000 shares of common stock in connection with the incorporation of the
Company and Transfer of Assets on April 1, 1995.
On April 13, 1995, we completed the sale of 10,637,500 shares of common stock
at a price of $12.50 per share in an initial public offering in the United
States and in a concurrent international offering (the "Offerings"). After
the Offerings, BCC owned 82.7% of our outstanding common stock. The net
proceeds to the Company were approximately $123,076,000. A total of
$100,000,000 of the net proceeds were used by the Company to replace the
working capital retained by BCC in the Transfer of Assets. Of the remaining
proceeds, we retained $21,217,000 for general corporate purposes, and
$1,859,000 was paid as a dividend to BCC.
BOISE CASCADE PRODUCTS 29
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
On June 17, 1996, we filed a registration statement with the Securities and
Exchange Commission covering approximately 4,400,000 shares of common stock
to be offered by the Company from time to time in connection with
acquisitions. As of December 31, 1997, we had 3,489,000 unissued shares
remaining under this registration statement.
On September 25, 1997, we issued 2,250,000 shares of common stock to BCC at
the price of $21.55 per share for proceeds of approximately $48,500,000. At
December 31, 1997, BCC owned 81.4% of our outstanding common stock.
7. ACCOUNTING FOR STOCK-BASED COMPENSATION
We have two stock option plans, the Key Executive Stock Option Plan (KESOP)
and the Director Stock Option Plan (DSOP). We account for these plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Under this opinion, no compensation cost has been recognized.
If we had determined compensation cost for these plans consistent with
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," 1997 net income would have been reduced pro forma
by $2,464,000, and earnings per share would have been reduced pro forma by
$.04. Our 1996 net income would have been reduced pro forma by $2,064,000,
and earnings per share would have been reduced pro forma by $.03. Our
1995 net income would have been reduced pro forma by $914,000 and earnings
per share would have been reduced pro forma by $.01. The pro forma
compensation cost may not be representative of that to be expected in future
years.
The KESOP provides for the granting of options to purchase shares of our
common stock to key employees of the Company. The exercise price of the
options is equal to the fair market value of our common stock on the date the
options are granted. The options are vested upon grant; however, except under
unusual circumstances, only one-third of the options become exercisable in
each of the three years following the grant date. The options expire, at the
latest, 10 years after the grant date. As of December 31, 1997, a total of
3,000,000 shares of our common stock was authorized for issuance under the
KESOP.
A summary of the status of the KESOP at December 31, 1997, 1996, and 1995,
and changes during the years then ended is presented in the table and
narrative below.
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning
of the year 1,059,442 $18.66 647,400 $12.57 - $ -
Options granted 495,700 23.08 501,200 25.54 647,400 12.57
Options exercised (24,468) 12.50 (75,225) 12.50 - -
Options expired (40,535) 22.38 (13,933) 19.78 - -
----------- --------- -------
Balance at end
of the year 1,490,139 20.10 1,059,442 18.66 647,400 12.57
Exercisable at end
of the year 483,039 16.72 140,569 12.60 - -
Weighted average
fair value of
options granted
(Black-Scholes) $8.61 $9.14 $4.87
- ------------------------------------------------------------------------------------
</TABLE>
The 1,490,139 options outstanding at December 31, 1997, have exercise prices
between $12.50 and $26.63 and a weighted average remaining contractual life
of nine years.
30 BOISE CASCADE OFFICE PRODUCTS
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
Beginning in 1995, the fair value of each option grant is estimated on the
date of grant using the Black-Scholes option pricing model, with the
following weighted average assumptions used for grants in 1997, 1996, and
1995: risk-free interest rates of 6.1%, 5.2%, and 7.3%; no expected
dividends; expected lives of 4.2 years for all years; and expected stock
price volatility of 35% for all years.
The DSOP, available only to our nonemployee directors, provides for annual
grants of options. The exercise price of options under this plan is equal to
the fair market value of our common stock on the date the options are
granted. The options are vested upon grant, and except under unusual
circumstances may not be exercised until one year following the date of
grant, and expire the earlier of three years after the director ceases to be
a director or 10 years after the grant date. Total shares outstanding at
December 31, 1997, 1996, and 1995, were 39,000, 24,000, and 12,000 with
weighted average exercise prices of $18.58, $17.50, and $12.50. As of
December 31, 1997, a total of 150,000 shares of our common stock was
authorized for issuance under the DSOP.
8. LEASES
Rental expenses for operating leases, net of sublease rentals, were
$29,920,000 in 1997, $22,698,000 in 1996, and $10,682,000 in 1995.
We have various operating leases with remaining terms of more than one year.
These leases have minimum lease payment requirements, net of sublease
rentals, of $16,692,000 for 1998, $9,284,000 for 1999, $6,526,000 for 2000,
$5,072,000 for 2001, and $3,301,000 for 2002, with total payments thereafter
of $13,506,000.
Substantially all lease agreements have fixed payment terms based upon the
lapse of time. Certain lease agreements provide us with the option to
purchase the leased property. In addition, certain lease agreements contain
renewal options exercisable by the Company ranging up to 15 years, with fixed
payment terms similar to those in the original lease agreements.
We also lease certain equipment and buildings under capital leases; aggregate
obligations under capital leases were not material at December 31, 1997 and
1996.
9. ACQUISITIONS
In 1997, 1996, and 1995, we made various acquisitions, all of which were
accounted for under the purchase method of accounting. Accordingly, the
purchase prices were allocated to the assets acquired and liabilities assumed
based upon their estimated fair values. The initial purchase price
allocations may be adjusted within one year of the date of purchase for
changes in estimates of the fair values of assets and liabilities. Such
adjustments are not expected to be significant to our results of operations
or financial position. The excess of the purchase price over the estimated
fair value of the net assets acquired was recorded as goodwill and is being
amortized over 40 years. The results of operations of the acquired businesses
are included in our operations subsequent to the dates of acquisitions.
We acquired eight businesses and entered into a joint venture during 1997, 19
businesses during 1996, and 10 businesses during 1995. Amounts paid,
acquisition liabilities recorded, debt assumed, and stock issued for these
transactions were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid $254,025,000 $180,139,000 $62,138,000
Acquisition liabilities recorded $ 12,674,000 $ 35,346,000 $ 8,571,000
Debt assumed $ 10,137,000 $ - $ -
Stock issued
shares 135,842 321,652 1,339,666
value $ 2,882,000 $ 6,886,000 $18,185,000
- ----------------------------------------------------------------------------
</TABLE>
The 1997 amounts include the acquisition of 100% of the shares of Jean-Paul
Guisset S.A. ("JPG") for approximately FF850,000,000 (US$144,000,000) plus a
price supplement payable in the year 2000, if
BOISE CASCADE OFFICE PRODUCTS 31
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
certain earnings and sales growth targets are reached. If 1997 results are
duplicated in 1998 and 1999, the price supplement to be paid would be
approximately US$16,000,000. No liability has been recorded for the price
supplement as the amount of payment, if any, is not assured beyond a reasonable
doubt. Approximately FF128,500,000 (US$20,500,000) was repatriated to us from
JPG during the third quarter of 1997. In addition to the cash paid, we recorded
approximately US$5,800,000 of acquisition liabilities and assumed US$10,100,000
million of long-term debt. JPG is a direct marketer of office products in
France.
Also included in the 1997 amounts is the purchase of 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.
The 1996 amounts include the acquisition of 100% of the shares of Grand & Toy
Limited ("Grand & Toy") from Cara Operations Limited (Toronto) for
approximately C$140,000,000 (US$102,084,000). In addition, we recorded
acquisition liabilities of approximately US$9,907,000. Grand & Toy owns and
operates office products distribution centers and approximately 70 retail
stores across Canada.
The 1995 amounts include $21,747,000 of cash paid; the issuance of 431,352
shares of common stock and the equivalent of 434,390 shares of common stock
in a stock note, payable by issuing the shares at the end of two years; and
the recording of $2,999,000 of acquisition liabilities. These were part of
the purchase of the net assets of office supply and computer distribution
businesses in New York and Missouri. In 1997, we issued 427,630 shares to
satisfy the stock note and a portion of the acquisition liabilities related
to these acquisitions.
Unaudited pro forma results of operations reflecting the acquisitions would
have been as follows. If the 1997 acquisitions had occurred January 1, 1997,
sales for the year ended December 31, 1997, would have increased to
$2,749,000,000, net income would have decreased to $56,387,000, and earnings
per share would have decreased to $.88. If the 1997 and 1996 acquisitions had
occurred January 1, 1996, sales for the year ended December 31, 1996, would
have increased to $2,403,000,000, net income would have increased to
$56,780,000, and earnings per share would have increased to $.90. If the 1996
and 1995 acquisitions had occurred January 1, 1995, sales for the year ended
December 31, 1995, would have increased to $1,895,000,000, net income would
have decreased to $43,082,000, and earnings per share would have decreased to
$.69. Prior to its acquisition by the Company, Grand & Toy recorded a
restructuring charge. Excluding the impact of this charge, our pro forma net
income for the year ended December 31, 1995, would have been $45,624,000, and
earnings per share would have been $.73. 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 January 1997, we formed a joint venture with Otto Versand ("Otto"), of
which we own 50%, to direct market office products in Europe, initially in
Germany. In December 1997, Otto purchased a 10% interest in JPG for
approximately FF72,200,000 (US$13,000,000). Additionally, Otto has the option
to purchase an additional 40% interest in JPG, for a total of 50%. The option
may be excercised at any time between December 15, 1998, and January 15,
1999. If Otto elects not to exercise the option, we will re-acquire the 10%
interest from Otto.
As a result of our acquisition activity, we had short-term acquisition
liabilities of $14,642,000 and $21,538,000 at December 31, 1997 and 1996,
which were included in "Other current liabilities." Additionally, we had
long-term acquisition liabilities of $15,869,000 and $15,192,000 at December
31, 1997 and 1996, which were included in "Other long-term liabilities."
10. LITIGATION AND LEGAL MATTERS
We are not currently involved in any legal or administrative proceedings that
we believe could have, either individually or in the aggregate, a material
adverse effect on our business or financial condition.
32 BOISE CASCADE OFFICE PRODUCTS
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
(in thousands, except share information) 1997
- --------------------------------------------------------------------------------
4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 718,514 $679,877 $600,470 $597,871
Cost of sales 533,391 509,557 451,755 446,999
-------------------------------------------
Gross profit 185,123 170,320 148,715 150,872
-------------------------------------------
Operating expenses 146,856 141,839 124,508 122,577
-------------------------------------------
Income from operations 38,267 28,481 24,207 28,295
-------------------------------------------
Interest expense 6,270 6,749 4,071 3,075
Other income, net 309 257 84 49
-------------------------------------------
Income before income taxes 32,306 21,989 20,220 25,269
Income tax expense 14,573 9,457 8,508 10,360
-------------------------------------------
Net income $ 17,733 $ 12,532 $ 11,712 $ 14,909
Basic earnings per share(1) $ .27 $ .20 $ .18 $ .24
Common stock prices(2)
High $ 21 1/2 $ 21 3/4 $ 19 3/4 $ 24 5/8
Low $14 13/16 $ 15 7/8 $ 16 1/4 $ 16 1/4
- --------------------------------------------------------------------------------
<CAPTION>
(in thousands, except share information) 1996
- --------------------------------------------------------------------------------
4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $556,680 $506,694 $460,767 $461,423
Cost of sales 412,220 379,193 337,429 338,526
-------------------------------------------
Gross profit 144,460 127,501 123,338 122,897
-------------------------------------------
Operating expenses 117,833 105,369 98,365 95,329
-------------------------------------------
Income from operations 26,627 22,132 24,973 27,568
-------------------------------------------
Interest expense 2,476 2,126 1,875 1,289
Other income (expense), net 378 (142) (6) 48
-------------------------------------------
Income before income taxes 24,529 19,864 23,092 26,327
Income tax expense 10,057 8,144 9,498 10,764
-------------------------------------------
Net income $ 14,472 $ 11,720 $ 13,594 $ 15,563
Basic earnings per share(1) $ .23 $ .19 $ .22 $ .25
Common stock prices(2)
High $ 21 1/4 $ 35 1/4 $ 48 $ 35 1/4
Low $ 17 5/8 $ 17 1/8 $31 1/16 $ 21 1/8
- --------------------------------------------------------------------------------
</TABLE>
(1)Restated to conform with SFAS 128, "Earnings Per Share."
(2)The Company's common stock is traded principally on the New York Stock
Exchange.
BOISE CASCADE OFFICE PRODUCTS 33
<PAGE> 20
REPORTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Boise Cascade Office Products Corporation:
We have audited the accompanying balance sheets of Boise Cascade Office
Products Corporation (a Delaware corporation) and subsidiaries as of December
31, 1997 and 1996, and the related statements of income, cash flows, and
shareholders' equity for the years ended December 31, 1997, 1996, and 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Boise Cascade Office Products
Corporation as of December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Boise, Idaho
January 29, 1998
REPORT OF MANAGEMENT
The management of Boise Cascade Office Products Corporation is primarily
responsible for the information and representations contained in this annual
report. The financial statements and related notes were prepared in conformity
with generally accepted accounting principles appropriate in the circumstances.
In preparing the financial statements, management has, when necessary, made
judgments and estimates based on currently available information.
Management maintains a comprehensive system of internal controls based on
written policies and procedures and the careful selection and training of
employees. The system is designed to provide reasonable assurance that assets
are safeguarded against loss or unauthorized use and that transactions are
executed in accordance with management's authorization. The concept of
reasonable assurance is based on recognition that the cost of a particular
accounting control should not exceed the benefit expected to be derived.
The Internal Audit staff of Boise Cascade Corporation monitors the Company's
financial reporting system and the related internal accounting controls, which
are also selectively tested by Arthur Andersen LLP, Boise Cascade Office
Products' independent public accountants, for purposes of planning and
performing their audit of the Company's financial statements.
The Audit Committee of the board of directors, which is composed solely of
nonemployee directors, meets periodically with management, representatives of
the Internal Audit Department, and Arthur Andersen LLP representatives to
assure that each group is carrying out its responsibilities. The Internal Audit
staff and the independent public accountants have access to the Audit
Committee, without the presence of management, to discuss the results of their
audits, recommendations concerning the system of internal accounting controls,
and the quality of financial reporting.
34 BOISE CASCADE OFFICE PRODUCTS
<PAGE> 1
Exhibit 13.2
STATEMENTS OF INCOME (Unaudited) Boise Cascade Office Products Corporation
================================================================================
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31
---------------------- -----------------
1997 1996 1997 1996
===========================================================================================
(expressed in thousands,
except share information)
<S> <C> <C> <C> <C>
Net sales ..................................... $718,514 $556,680 $2,596,732 $1,985,564
Cost of sales ................................. 533,391 412,220 1,941,702 1,467,368
-------- -------- ---------- ----------
Gross profit .................................. 185,123 144,460 655,030 518,196
-------- -------- ---------- ----------
Selling and warehouse operating expense ....... 131,888 105,175 483,241 375,700
Corporate general and administrative expense .. 11,721 10,686 41,606 34,409
Goodwill amortization ......................... 3,247 1,972 10,933 6,787
-------- -------- ---------- ----------
146,856 117,833 535,780 416,896
-------- -------- ---------- ----------
Income from operations ........................ 38,267 26,627 119,250 101,300
Interest expense .............................. 6,270 2,476 20,165 7,766
Other income, net ............................. 309 378 699 278
-------- -------- ---------- ----------
Income before income taxes .................... 32,306 24,529 99,784 93,812
Income tax expense ............................ 14,573 10,057 42,898 38,463
-------- -------- ---------- ----------
Net income .................................... $17,733 $14,472 $56,886 $55,349
======== ======== ========== ==========
Earnings per share--basic and diluted ......... $.27 $.23 $.89 $.88
======== ======== ========== ==========
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
BALANCE SHEETS Boise Cascade Office Products Corporation
===========================================================================================
(Unaudited)
DECEMBER 31
---------------------------
ASSETS 1997 1996
- -------------------------------------------------------------------------------------------
(expressed in thousands,
except share information)
<S> <C> <C>
CURRENT
Cash and cash equivalents .................................. $28,755 $12,762
Receivables, less allowances of $7,591 and $3,887 .......... 357,321 285,337
Inventories ................................................ 197,990 171,748
Deferred income tax benefits ............................... 14,223 13,963
Other ...................................................... 23,808 15,378
------------- -------------
622,097 499,188
------------- -------------
PROPERTY
Land ....................................................... 28,913 13,488
Buildings and improvements ................................. 127,430 72,917
Furniture and equipment .................................... 175,778 137,137
Accumulated depreciation ................................... (129,951) (90,980)
------------- -------------
202,170 132,562
------------- -------------
GOODWILL, NET OF AMORTIZATION OF $24,019 AND $13,138 ........ 438,830 261,706
OTHER ASSETS ................................................ 28,391 11,906
------------- -------------
TOTAL ASSETS ................................................ $1,291,488 $905,362
============= =============
===========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
===========================================================================================
CURRENT
Notes payable .............................................. $23,300 $36,700
Current portion of long-term debt .......................... 2,917 180
------------- -------------
Accounts payable
Trade and other ........................................... 238,773 185,370
Boise Cascade Corporation ................................. 42,097 21,926
------------- -------------
280,870 207,296
------------- -------------
Accrued liabilities
Compensation and benefits ................................. 30,717 31,120
Income taxes payable ...................................... 3,370 7,100
Taxes, other than income .................................. 18,718 8,351
Other ..................................................... 30,848 39,800
------------- -------------
83,653 86,371
------------- -------------
390,740 330,547
------------- -------------
OTHER
Deferred income taxes ...................................... -- 4,470
Long-term debt, less current portion ....................... 357,595 140,024
Other ...................................................... 37,518 25,536
------------- -------------
395,113 170,030
------------- -------------
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 200,000,000 shares authorized;
65,588,258 and 62,750,318 shares issued and outstanding ... 656 628
Additional paid-in capital ................................. 356,599 304,134
Retained earnings .......................................... 148,380 100,023
------------- -------------
Total shareholders' equity ................................ 505,635 404,785
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .................. $1,291,488 $905,362
============= =============
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS (Unaudited) Boise Cascade Office Products Corporation
================================================================================
YEAR ENDED DECEMBER 31
--------------------------
1997 1996
- --------------------------------------------------------------------------------
(expressed in thousands)
<S> <C> <C>
CASH PROVIDED BY (USED FOR) OPERATIONS
Net income ........................................ $56,886 $55,349
Items in income not using (providing) cash
Depreciation and amortization .................... 41,088 27,198
Deferred income taxes ............................ (167) (1,635)
Receivables ....................................... 2,230 (39,036)
Inventories ....................................... 555 (25,111)
Accounts payable and accrued liabilities .......... 35,912 40,688
Current and deferred income taxes ................. (9,039) (1,419)
Other, net ........................................ (7,558) 4,312
------------ ------------
Cash provided by operations ...................... 119,907 60,346
------------ ------------
CASH USED FOR INVESTMENT
Expenditures for property and equipment ........... (66,876) (42,711)
Acquisitions ...................................... (254,025) (180,139)
Other, net ........................................ (29,047) (16,080)
------------ ------------
Cash used for investment ......................... (349,948) (238,930)
------------ ------------
CASH PROVIDED BY (USED FOR) FINANCING
Additions to long-term debt ....................... 211,988 140,000
Notes payable ..................................... (13,400) 36,700
Sale of stock ..................................... 48,463 --
Other, net ........................................ (1,017) 564
------------ ------------
Cash provided by financing ....................... 246,034 177,264
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .. 15,993 (1,320)
BALANCE AT BEGINNING OF THE PERIOD ................ 12,762 14,082
------------ ------------
BALANCE AT DECEMBER 31 ............................ $28,755 $12,762
============ ============
</TABLE>
<PAGE> 4
NOTES TO QUARTERLY FINANCIAL STATEMENTS Boise Cascade Office Products
Corporation
================================================================================
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 December 31,
1997, Boise Cascade Corporation owned approximately 81% of our outstanding
common stock. These financial statements are unaudited statements which do not
include all Notes to Financial Statements and should be read in conjunction
with our 1997 Annual Report. The 1997 Annual Report will be available in March
1998.
EARNINGS PER SHARE. Unaudited basic earnings per share for the three and 12
months ended December 31, 1997 and 1996, were computed by dividing net income
by the weighted average number of shares of common stock outstanding during the
periods. Unaudited diluted earnings per share for the three and 12 months
ended December 31, 1997 and 1996, include the weighted average impact of stock
options assumed exercised using the treasury method. In 1997, we adopted
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
128), effective December 15, 1997. The only impact of the adoption was to
reduce earnings per share for the 12 months ended December 31, 1996, by $.01.
COMMON STOCK. On September 25, 1997, we issued 2,250,000 shares of common
stock at $21.55 per share to Boise Cascade Corporation.
ACQUISITIONS AND JOINT VENTURES. On January 31, 1997, we acquired the contract
stationer business of The Office Stop, based in Butte, Montana. On February
28, 1997, we acquired the contract stationer business of Florida Ribbon and
Carbon, based in Jacksonville, Florida. On April 17, 1997, we acquired the
contract stationer business of Winterbulk Business Supplies, Ltd., based in
Bolton, England. On April 30, 1997, we acquired the computer consumables
business of TDI, based in Raleigh-Durham, North Carolina. On May 30, 1997, we
acquired the computer consumables business of Carlyle Computer Products Ltd.,
based in Winnipeg, Manitoba, Canada. On May 31, we acquired the promotional
products business of OstermanAPI Inc., based in Maumee, Ohio. On July 7, 1997,
we acquired the direct marketing business of Jean-Paul Guisset, S.A., based in
Paris, France. On November 28, 1997, we acquired the contract stationer
business of Society Europa, based in Paris, France. The combined annual sales
of these acquisitions at the time of announcement were approximately
$340,000,000. The results of operations of the acquired businesses are
included in our operations subsequent to the dates of acquisition. In
conjunction with the acquisition of Osterman, we formed a majority-owned
subsidiary, Boise Marketing Services, Inc., ("BMSI"). Our previously acquired
promotional products company, OWNCO, also became part of BMSI. In January
1997, we also completed a joint venture with Otto Versand to direct market
office products in Europe, initially in Germany.
INCOME TAXES. The effective annual tax provision rate for the year ended
December 31, 1997, was 43.0%, compared with a tax provision rate of 41.0% for
the same period in the prior year. The increase is primarily due to increased
nondeductible goodwill and foreign income taxed at a higher rate.
<PAGE> 1
EXHIBIT 21
BOISE CASCADE OFFICE PRODUCTS CORPORATION
SIGNIFICANT SUBSIDIARIES
<TABLE>
<CAPTION>
State or Other
Jurisdiction Percentage of
of Incorporation Voting Securities
or Organization Owned
---------------- -----------------
<S> <C> <C>
BCOP Nevada Company Nevada 100.0
Grand & Toy Limited Ontario, Canada 100.0
Jean-Paul Guisset-JPG S.A. France 90.0
The Reliable Corporation Delaware 100.0
Reliable Deutschland GmbH Hamburg, Germany 100.0
Reliable France S.A. France 90.0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BOISE
CASCADE OFFICE PRODUCTS CORPORATION'S BALANCE SHEET AT DECEMBER 31, 1997, AND
FROM ITS STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1997, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 28,755
<SECURITIES> 0
<RECEIVABLES> 364,912
<ALLOWANCES> 7,591
<INVENTORY> 197,990
<CURRENT-ASSETS> 622,097
<PP&E> 332,121
<DEPRECIATION> (129,951)
<TOTAL-ASSETS> 1,291,488
<CURRENT-LIABILITIES> 390,740
<BONDS> 357,595
0
0
<COMMON> 656
<OTHER-SE> 504,979
<TOTAL-LIABILITY-AND-EQUITY> 1,291,488
<SALES> 2,596,732
<TOTAL-REVENUES> 2,596,732
<CGS> 1,941,702
<TOTAL-COSTS> 1,941,702
<OTHER-EXPENSES> 535,780
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,165
<INCOME-PRETAX> 99,784
<INCOME-TAX> 42,898
<INCOME-CONTINUING> 56,886
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 56,886
<EPS-PRIMARY> .89
<EPS-DILUTED> .89
</TABLE>
