UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934
For the Quarterly Period Ended June 30, 1999
( ) Transition Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934
For the Transition Period From ____________ to ____________
Commission File number 1-13662
BOISE CASCADE OFFICE PRODUCTS CORPORATION
State of Incorporation IRS Employer Identification No.
Delaware 82-0477390
800 West Bryn Mawr Avenue
Itasca, Illinois 60143
(630) 773 - 5000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding
Class as of July 31, 1999
Common Stock, $.01 par value 65,800,212
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BOISE CASCADE OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES
STATEMENTS OF INCOME
(expressed in thousands, except share information)
(unaudited)
Three Months Ended June 30
1999 1998
Net sales $ 801,559 $ 732,863
Cost of sales, including purchases
from Boise Cascade Corporation
of $75,447 and $67,958 588,420 544,554
___________ ___________
Gross profit 213,139 188,309
___________ ___________
Selling and warehouse operating
expense 163,640 141,674
Corporate general and administrative
expense, including amounts paid
to Boise Cascade Corporation
of $820 and $643 12,282 13,375
Goodwill amortization 3,798 3,025
Other operating income (3,195) -
___________ ___________
176,525 158,074
___________ ___________
Income from operations 36,614 30,235
___________ ___________
Interest expense 5,796 6,885
Other income, net 484 211
___________ ___________
Income before income taxes 31,302 23,561
Income tax expense 13,024 9,833
___________ ___________
Net income $ 18,278 $ 13,728
Earnings per share-basic $ .28 $ .21
Average common shares
outstanding-basic 65,795,849 65,742,883
Earnings per share-diluted $ .28 $ .21
Average common shares
outstanding-diluted 65,795,849 65,824,163
The accompanying notes are an integral part of these Financial Statements.
<PAGE>
BOISE CASCADE OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES
STATEMENTS OF INCOME
(expressed in thousands, except share information)
(unaudited)
Six Months Ended June 30
1999 1998
Net sales $1,649,948 $1,492,671
Cost of sales, including purchases
from Boise Cascade Corporation
of $144,324 and $135,202 1,217,681 1,108,784
___________ ___________
Gross profit 432,267 383,887
___________ ___________
Selling and warehouse operating
expense 327,543 285,609
Corporate general and administrative
expense, including amounts paid
to Boise Cascade Corporation
of $1,641 and $1,287 25,408 25,812
Goodwill amortization 7,424 6,195
Other operating income (3,195) -
___________ ___________
357,180 317,616
___________ ___________
Income from operations 75,087 66,271
___________ ___________
Interest expense 12,248 13,350
Other income, net 799 879
___________ ___________
Income before income taxes 63,638 53,800
Income tax expense 26,870 22,483
___________ ___________
Net income $ 36,768 $ 31,317
Earnings per share-basic $ .56 $ .48
Average common shares
outstanding-basic 65,790,495 65,695,176
Earnings per share-diluted $ .56 $ .48
Average common shares
outstanding-diluted 65,801,009 65,782,084
The accompanying notes are an integral part of these Financial Statements.
<PAGE>
BOISE CASCADE OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES
BALANCE SHEETS
(expressed in thousands)
(unaudited)
June 30 December 31
ASSETS 1999 1998 1998
Current
Cash and cash equivalents $ 21,113 $ 37,566 $ 31,838
Receivables, less allowances
of $9,644, $7,821, and $9,539 408,438 371,392 394,013
Inventories 188,228 191,267 226,955
Deferred income tax benefits 20,719 17,820 14,335
Other 38,044 22,509 31,532
___________ ___________ ___________
676,542 640,554 698,673
___________ ___________ ___________
Property
Land 27,813 27,321 28,572
Buildings and improvements 150,225 140,029 143,192
Furniture and equipment 228,910 195,784 214,611
Accumulated depreciation (166,043) (145,251) (149,071)
___________ ___________ ___________
240,905 217,883 237,304
___________ ___________ ___________
Goodwill, net of amortization
of $44,532, $30,886, and $37,108 485,233 437,742 494,883
Other assets 44,538 34,727 30,885
___________ ___________ ___________
Total assets $1,447,218 $1,330,906 $1,461,745
The accompanying notes are an integral part of these Financial Statements.
<PAGE>
BOISE CASCADE OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES
BALANCE SHEETS
(expressed in thousands, except share information)
(unaudited)
June 30 December 31
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998 1998
Current
Notes payable $ 60,411 $ 82,200 $ 72,100
Current portion of long-term debt 3,031 2,332 2,065
Accounts payable
Trade and other 277,215 245,328 279,928
Boise Cascade Corporation 30,408 25,639 29,297
___________ ___________ ___________
307,623 270,967 309,225
___________ ___________ ___________
Accrued liabilities
Compensation and benefits 35,925 29,516 38,144
Income taxes payable 34,183 - 796
Taxes, other than income 11,261 18,751 9,466
Other 91,004 45,620 36,861
___________ ___________ ___________
172,373 93,887 85,267
___________ ___________ ___________
543,438 449,386 468,657
___________ ___________ ___________
Other
Long-term debt, less current portion 280,530 307,126 354,224
Other 31,068 33,493 75,950
___________ ___________ ___________
311,598 340,619 430,174
___________ ___________ ___________
Shareholders' equity
Common stock, $.01 par value,
200,000,000 shares authorized;
65,800,212, 65,757,558, and
65,758,524 shares issued and
outstanding at each period 658 658 658
Additional paid-in capital 359,557 359,311 359,224
Retained earnings 245,248 186,729 208,480
Accumulated other comprehensive
income (13,281) (5,797) (5,448)
___________ ___________ ___________
Total shareholders' equity 592,182 540,901 562,914
___________ ___________ ___________
Total liabilities and
shareholders' equity $1,447,218 $1,330,906 $1,461,745
The accompanying notes are an integral part of these Financial Statements.
<PAGE>
BOISE CASCADE OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(expressed in thousands)
(unaudited)
Six Months Ended June 30
1999 1998
Cash provided by (used for) operations
Net income $ 36,768 $ 31,317
Items in income not using (providing) cash
Depreciation and amortization 30,188 23,791
Deferred income taxes (7,843) (5,698)
Restructuring reserve (3,988) -
Receivables (14,425) (12,532)
Inventories 40,142 7,912
Accounts payable and accrued liabilities 11,113 506
Current and deferred income taxes 28,070 (3,333)
Other, net (3,730) 3,259
__________ __________
Cash provided by operations 116,295 45,242
__________ __________
Cash used for investment
Expenditures for property and equipment (26,222) (32,401)
Acquisitions (6,328) (4,042)
Other, net (10,074) (10,119)
__________ __________
Cash used for investment (42,624) (46,562)
__________ __________
Cash provided by (used for) financing
Payments of long-term debt (72,728) (51,043)
Notes payable (11,689) 58,900
Other, net 21 2,274
__________ __________
Cash provided by (used for) financing (84,396) 10,131
__________ __________
Increase (decrease) in cash and
cash equivalents (10,725) 8,811
Balance at beginning of the period 31,838 28,755
__________ __________
Balance at June 30 $ 21,113 $ 37,566
The accompanying notes are an integral part of these Financial Statements.
<PAGE>
BOISE CASCADE OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(unaudited)
(1) ORGANIZATION AND BASIS OF PRESENTATION. Boise Cascade Office Products
Corporation (together with its subsidiaries, "the Company" or "we"),
headquartered in Itasca, Illinois, is one of the world's premier
business-to-business distributors of products for the office.
At June 30, 1999, Boise Cascade Corporation owned approximately
81% of our outstanding common stock.
The quarterly financial statements of the Company and its subsidiaries
have not been audited by independent public accountants, but in the
opinion of management, all adjustments necessary to present fairly the
results for the periods have been included. Except as may be disclosed
in the notes to the Financial Statements, the adjustments made were of a
normal, recurring nature. Quarterly results are not necessarily
indicative of results that may be expected for the year. We have
prepared the statements pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. These
quarterly financial statements should be read together with the
statements and the accompanying notes included in our 1998 Annual
Report.
(2) NEW ACCOUNTING STANDARDS. In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This Statement establishes accounting and reporting standards requiring
that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet
as either an asset or liability measured at its fair value. In
July 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137 that delayed the effective date of
Statement 133 until fiscal years beginning after June 15, 2000. We plan
to adopt this Statement in the first quarter of 2001. We are in the
process of reviewing this Statement. Adoption of this Statement is not
expected to have a significant impact on our results of operations or
financial position.
(3) RESTRUCTURING RESERVE. During the second quarter of 1999, we
revised the amount of a restructuring reserve that we established
in the fourth quarter of 1998 for our U.K. operations. The
restructuring program was less costly than originally anticipated.
As a result, we recorded an increase to operating income of approximately
$4.0 million ($2.7 million or $.04 per share - diluted, net of tax
benefit) in the second quarter of 1999. The increase to income included
$0.5 million for termination payments to employees; $0.6 million for
legal and professional fees related to facility closings and work force
reductions; $1.6 million for facility, automobile, and delivery truck
leasehold terminations; and $0.5 million of other costs. These amounts
were included in "Other operating income" in the Statements of Income.
The increase to income also included a favorable adjustment to "Cost of
sales" in the Statements of Income of about $0.8 million, which resulted
from a lower than expected inventory write-down.
The restructuring liability is included in "Accrued liabilities, other"
in the Balance Sheets. Changes in the reserve balance through June 30,
1999, were as follows:
Termination Legal and
payments to professional Leasehold Other Inventory
employees fees terminations costs writedown
(expressed in thousands)
Beginning balance $ 1,400 $ 900 $ 3,400 $ 4,400 $ 1,000
Charges against
reserve (800) (100) (400) (3,900) (200)
Reserves credited
to income (500) (600) (1,600) (500) (800)
________ _______ ________ ________ ________
Balance at
June 30, 1999 $ 100 $ 200 $ 1,400 $ - $ -
Reserves credited to income reflect lower legal and professional fees,
a sublease on one of the facilities, a decision to retain a small
printing portion of the business, and fewer terminations of employees.
Termination payments to employees are the result of workforce reductions
of about 90 warehouse and administrative support associates as
of June 30, 1999. We expect the restructuring to result in total
workforce reductions of approximately 100 warehouse and administrative
support associates.
(4) EARNINGS PER SHARE. Basic earnings per share for the three and six
months ended June 30, 1999 and 1998, were computed by dividing
net income by the weighted average number of shares of common stock
outstanding for the periods. Diluted earnings per share for the
three and six months ended June 30, 1999 and 1998, include the
weighted average impact of stock options assumed exercised using the
treasury method. Earnings per share is computed independently for
each period.
For the three months For the six months
ended June 30 ended June 30
1999 1998 1999 1998
BASIC EARNINGS PER SHARE
Net income $ 18,278 $ 13,728 $ 36,768 $ 31,317
Shares of common stock:
Weighted average
shares outstanding 65,765,854 65,723,455 65,762,209 65,671,396
Effect of contingent
shares 29,995 19,428 28,286 23,780
65,795,849 65,742,883 65,790,495 65,695,176
Basic earnings per share $ .28 $ .21 $ .56 $ .48
DILUTED EARNINGS PER SHARE
Net income $ 18,278 $ 13,728 $ 36,768 $ 31,317
Shares of common stock:
Weighted average
shares outstanding 65,765,854 65,723,455 65,762,209 65,671,396
Effect of options - 81,280 10,514 86,908
Effect of contingent
shares 29,995 19,428 28,286 23,780
__________ __________ __________ __________
65,795,849 65,824,163 65,801,009 65,782,084
Diluted earnings per share $ .28 $ .21 $ .56 $ .48
(5) COMPREHENSIVE INCOME (LOSS). Comprehensive income (loss) for the
periods include the following:
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
(expressed in thousands)
Net income $18,278 $13,728 $36,768 $31,317
Other comprehensive
income (loss)
Cumulative foreign
currency translation
adjustment, net of
income taxes (902) (479) (7,833) 1,235
________ ________ ________ ________
Comprehensive income,
net of income taxes $17,376 $13,249 $28,935 $32,552
(6) DEFERRED SOFTWARE COSTS. We defer purchased and internally developed
software and related installation costs for computer systems that are
used in our business. Deferral of costs begins when technological
feasibility of the project has been established and it is determined
that the software will benefit future years. These costs are amortized
on the straight-line method over the expected useful life of the product.
If the useful life of the product is changed, the amortization period is
adjusted. "Other assets" in the Balance Sheets includes deferred
software costs of $29.7 million, $21.9 million, and $26.9 million at
June 30, 1999 and 1998, and December 31, 1998.
(7) DEBT. On June 26, 1997, we entered into a $450 million revolving credit
agreement with a group of banks that expires in June 2001 and
provides for variable rates of interest based on customary indices. The
revolving credit agreement is available for acquisitions and general
corporate purposes. It contains financial and other covenants, including
a negative pledge and covenants specifying a minimum fixed charge
coverage ratio and a maximum leverage ratio. At June 30, 1999,
borrowings under the agreement totaled $125 million. We may, subject
to the covenants contained in the credit agreement and to market
conditions, refinance existing debt or raise additional funds through the
agreement and through other external debt or equity financings in the
future. In October 1998, we entered into an interest swap with a
notional amount of $25 million that expires in 2000. The swap results in
an effective fixed interest rate of 5.1% with respect to $25 million of
our revolving credit agreement borrowings. We are exposed to credit-
related gains or losses in the event of nonperformance by the
counterparty to the swap; however, we do not expect the counterparty
to fail to meet their obligations.
We have filed a registration statement with the Securities and Exchange
Commission to register $300 million of shelf capacity for debt
securities. In May 1998, we issued $150 million of 7.05% Notes ("Notes")
under this registration statement. The Notes are due May 15, 2005.
We have $150 million of borrowing capacity remaining under this
registration statement.
In addition to the amount outstanding under the revolving credit
agreement and Notes, we had $60.4 million and $82.2 million of short-term
notes payable at June 30, 1999 and 1998. The maximum amount of short-
term notes payable during the six months ended June 30, 1999 and 1998,
was $93.3 million and $116.6 million. The average amount of short-term
notes payable during the six months ended June 30, 1999 and 1998,
was $69.3 million and $75.7 million. The weighted average interest
rates for these borrowings was 5.4% and 5.9% for the periods.
Cash payments for interest were $12.4 million and $14.1 million for the
six months ended June 30, 1999 and 1998.
(8) TAXES. The estimated tax provision rate for the first six months of
1999 was 43.0%, before the impact of the increase to income associated
with our restructuring program. The tax provision rate for the
same period in the prior year was 42.0%. The increase is
primarily due to a shift in earnings among our foreign operations
and the impact of nondeductible goodwill.
For the six months ended June 30, 1999 and 1998, we paid income
taxes, net of refunds received, of $5.6 million and $28.5 million.
(9) ACQUISITIONS. During the first six months of 1999 we completed one
acquisition, and during the first six months of 1998 we completed
two acquisitions, all of which were accounted for under the purchase
method of accounting. Accordingly, the purchase prices were allocated
to the assets acquired and liabilities assumed based upon their estimated
fair values. The initial purchase price allocations may be adjusted
within one year of the date of purchase for changes in estimates of the
fair values of assets and liabilities. Such adjustments are not expected
to be significant to results of operations or the financial position of
the Company. The excess of the purchase price over the estimated fair
value of the net assets acquired was recorded as goodwill and is
generally being amortized over 40 years. The results of operations of
the acquired businesses are included in our operations subsequent to the
dates of acquisition.
On January 11, 1999, we acquired the office supply business of Wallace
Computer Services, based in Lisle, Illinois. The transaction was
completed for cash of $6.3 million and the recording of $0.2 milion of
acquisition liabilities.
In January 1998, we acquired the direct marketing business of Fidelity
Direct, based in Minneapolis, Minnesota. In February 1998, we acquired
the direct marketing business of Sistemas Kalamazoo, based in Spain.
These transactions were completed for cash of $4.0 million, debt assumed
of $0.2 million, and the recording of $3.8 million of acquisition
liabilities.
Unaudited pro forma results of operations reflecting the acquisitions
would have been as follows. If the 1999 acquisition had occurred on
January 1, 1999, there would have been no significant change in the
results of operations for the first six months of 1999.
If the 1999 and 1998 acquisitions had occurred January 1, 1998, sales for
the first six months of 1998 would have remained $1.5 billion,
net income would have decreased to $31.1 million, and basic and diluted
earnings per share would have decreased to $.47. This unaudited pro
forma financial information does not necessarily represent the actual
results of operations that would have occurred if the acquisitions had
taken place on the dates assumed.
In 1997, we acquired 100% of the shares of Jean-Paul Guisset S.A.
("JPG"). JPG is a direct marketer of office products in France. The
negotiated purchase price was approximately FF850.0 million
(US$144.0 million) plus a price supplement payable in the year 2000,
if certain earnings and sales growth targets are reached.
The maximum amount of the price supplement is FF300.0 million.
In 1998, we made a partial payment of the price supplement of
FF27.0 million (US$4.4 million). At June 30, 1999, we have a liability
for the maximum remaining amount of the price supplement, FF273.0 million
(US$43.1 million), which is included in "Other current liabilities" in
the Balance Sheets.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Three Months Ended June 30, 1999, Compared with Three Months Ended
June 30, 1998
Results of Operations
Net sales in the second quarter of 1999 increased 9% to $801.6 million,
compared with $732.9 million in the second quarter of 1998. The growth in
sales resulted primarily from same-location sales growth. Same-location sales
increased 7% in the second quarter of 1999, compared with sales in the second
quarter of 1998. Excluding the negative impact of paper price changes and
foreign currency changes, same-location sales increased 8%.
Cost of sales, which includes the cost of merchandise sold, the cost to
deliver products to customers, and the occupancy costs of our facilities,
increased to $588.4 million in the second quarter of 1999, which was 73.4% of
net sales. Excluding the impact of nonroutine items associated with
restructuring, cost of sales in the second quarter of 1999 was 73.5% of net
sales (see "Restructuring Reserve" section for detailed information). This
compares with $544.6 million reported in the same period of the prior year,
which represented 74.3% of net sales. Excluding the impact of nonroutine
items, gross profit as a percentage of net sales was 26.5% and 25.7% for the
second quarters of 1999 and 1998. Gross profit increased in the second
quarter of 1999 primarily because of higher margins in many of our businesses,
particularly in our domestic operations. Our higher margins were primarily
the result of lower procurement costs.
Operating expense was 22.0% of net sales in the second quarter of 1999,
compared with 21.6% in the second quarter of 1998. Excluding the impact of
nonroutine items associated with restructuring, operating expense for the
second quarter of 1999 was 22.4% of net sales (see "Restructuring Reserve"
section for detailed information). Within the operating expense category,
selling and warehouse operating expense was 20.4% of net sales in the second
quarter of 1999, compared with 19.3% in the second quarter of 1998. This
increase resulted, in part, from higher payroll and benefits as a percent of
sales, increased investment in our growth initiatives, start-up operating
costs associated with our Casper, Wyoming, customer service center, and a
modest employee-wide bonus program implemented during the last half of 1998.
Corporate general and administrative expense was 1.5% of net sales in the
second quarter of 1999, compared with 1.8% in 1998. Goodwill amortization
increased to $3.8 million in the second quarter of 1999, compared with $3.0
million in the second quarter of 1998. The increase in goodwill amortization
was the result of additional goodwill arising from our acquisitions.
Excluding the impact of nonroutine items, income from operations in the second
quarter of 1999 increased to $32.6 million, or 4.1% of net sales, compared to
our second quarter 1998 operating income of $30.2 million, or 4.1% of net
sales. Compared to second quarter 1998, our second quarter 1999 operating
income includes an improvement of approximately $0.9 million in our European
operations affected by our restructuring efforts. This improvement is
primarily non-cash and mainly represents the 1998 losses incurred in our joint
venture with Otto Versand.
Interest expense was $5.8 million in the second quarter of 1999, compared with
$6.9 million in the second quarter of 1998. The decrease in interest expense
is due to lower debt balances compared with the prior period.
Excluding nonroutine items associated with restructuring, net income in the
second quarter of 1999 was $15.6 million, or 1.9% of net sales, compared with
$13.7 million, or 1.9% of net sales in the same period of the prior year.
Six Months Ended June 30, 1999, Compared with Six Months Ended June 30, 1998
Net sales for the six months ended June 30, 1999, increased 11% to $1.6
billion, compared with $1.5 billion a year ago. The increase was due
primarily to same-location sales growth. Same-location sales increased 7%
year to year. Excluding the negative impact of paper price changes and
foreign currency changes, same-location sales grew 9%.
Cost of sales, which includes the cost of merchandise sold, the cost to
deliver products to the customers, and the occupancy costs of our facilities,
increased to $1.2 billion for the six months ended June 30, 1999, which was
73.8% of net sales. This compares with $1.1 billion reported in the same
period of the prior year, which represented 74.3% of net sales. Gross profit
as a percentage of net sales was 26.2% and 25.7% for the first six months of
1999 and 1998. The increase was due to higher gross margins in many of our
businesses, with particular strength in our domestic operations. Our higher
margins were primarily the result of lower procurement costs.
Operating expense was 21.6% of net sales for the first six months of 1999,
compared with 21.3% in the same period of the prior year. Excluding the
impact of nonroutine items associated with restructuring, operating expense
for the first six months of 1999 was 21.8% (see "Restructuring Reserve"
section for detailed information). Within the operating expense category,
selling and warehouse operating expense was 19.9% of net sales for the first
six months of 1999, compared with 19.1% in 1998. The increase is due, in
part, from higher payroll and benefits as a percent of sales, increased
investment in our growth initiatives, start-up operating costs associated with
our Casper, Wyoming, customer service center, and a modest employee-wide bonus
program implemented during the last half of 1998. Corporate general and
administrative expense was 1.5% of net sales for the first six months of 1999,
compared with 1.7% in 1998. Goodwill amortization increased to $7.4 million
for the first six months of 1999, compared with $6.2 million in 1998. The
increase in goodwill amortization was the result of additional goodwill
arising from our acquisitions.
Excluding the impact of nonroutine items, income from operations for the first
six months of 1999 was $71.1 million, or 4.3% of net sales, compared with 1998
operating income of $66.3 million, or 4.4% of net sales. Compared to the
first six months of 1998, our operating income for the first six months of
1999 includes an improvement of approximately $2.2 million in our European
operations affected by our restructuring efforts. This improvement is
primarily non-cash and mainly represents the 1998 losses incurred in our joint
venture with Otto Versand.
Interest expense was $12.2 million for the first six months of 1999, compared
with $13.4 million in 1998. The decrease in interest expense is due to lower
debt balances compared with the prior period.
Excluding nonroutine items associated with restructuring, net income for the
first six months of 1999 was $34.1 million, or 2.1% of net sales, compared
with $31.3 million, or 2.1% of net sales, in the same period of the prior
year.
Restructuring Reserve
During the second quarter of 1999, we revised the amount of a restructuring
reserve that we established in the fourth quarter of 1998 for our U.K.
operations. The restructuring program was less costly than originally
anticipated. As a result, we recorded an increase to operating income of
approximately $4.0 million ($2.7 million or $.04 per share - diluted, net of
tax benefit) in the second quarter of 1999. The increase to income included
$0.5 million for termination payments to employees; $0.6 million for legal and
professional fees related to facility closings and work force reductions; $1.6
million for facility, automobile, and delivery truck leasehold terminations;
and $0.5 million of other costs. These amounts were included in "Other
operating income" in the Statements of Income. The increase to income also
included a favorable adjustment to "Cost of sales" in the Statements of Income
of about $0.8 million, which resulted from a lower than expected inventory
write-down.
The restructuring liability is included in "Accrued liabilities, other" in the
Balance Sheets. Changes in the reserve balance through June 30, 1999, were as
follows:
Termination Legal and
payments to professional Leasehold Other Inventory
employees fees terminations costs writedown
(expressed in thousands)
Beginning balance $ 1,400 $ 900 $ 3,400 $ 4,400 $ 1,000
Charges against
reserve (800) (100) (400) (3,900) (200)
Reserves credited
to income (500) (600) (1,600) (500) (800)
________ _______ ________ ________ ________
Balance at
June 30, 1999 $ 100 $ 200 $ 1,400 $ - $ -
Reserves credited to income reflect lower legal and professional fees, a
sublease on one of the facilities, a decision to retain a small printing
portion of the business, and fewer terminations of employees. Termination
payments to employees are the result of workforce reductions of about 90
warehouse and administrative support associates as of June 30, 1999. We
expect the restructuring to result in total workforce reductions of
approximately 100 warehouse and administrative support associates.
Liquidity and Capital Resources
Our principal requirements for cash have been to make acquisitions, fund
technology development and working capital needs, expand our facilities at
existing locations, and open new distribution centers. The execution of our
strategy for growth, including acquisitions and the relocation of several
existing distribution centers into new and larger facilities, is expected to
require capital outlays over the next several years. Our restructuring
efforts (see "Restructuring Reserve" section) are not expected to have a
material impact on our liquidity.
To finance our capital requirements, we expect to rely upon funds from a
combination of sources. In addition to cash flow from operations, we have a
$450 million revolving credit agreement that expires in 2001 and provides for
variable rates of interest based on customary indices. The revolving credit
agreement is available for acquisitions and general corporate purposes. It
contains financial and other covenants, including a negative pledge and
covenants specifying a minimum fixed charge coverage ratio and a maximum
leverage ratio. At June 30, 1999, $125 million was outstanding under this
agreement. We may, subject to the covenants contained in the credit agreement
and to market conditions, refinance existing debt or raise additional funds
through the agreement and through other external debt or equity financings in
the future. In October 1998, we entered into an interest swap with a notional
amount of $25 million that expires in 2000. The swap results in an effective
fixed interest rate of 5.1% with respect to the $25 million of our revolving
credit agreement borrowings.
We have filed a registration statement with the Securities and Exchange
Commission to register $300.0 million of shelf capacity for debt securities.
In May 1998, we issued $150.0 million of 7.05% Notes ("Notes") under this
registration statement. The Notes are due May 15, 2005. We have $150.0
million of borrowing capacity remaining under this registration statement.
In addition to the amount outstanding under the revolving credit agreement and
Notes, we had short-term notes payable of $60.4 million at June 30, 1999. The
maximum amount of short-term notes payable during the six months ended June
30, 1999, was $93.3 million. The average amount of short-term notes payable
during the six months ended June 30, 1999, was $69.3 million. The weighted
average interest rate for these borrowings was 5.4%
As a result of our acquisition activity, we also had short-term acquisition
liabilities of $49.3 million, primarily for the JPG price supplement, at June
30, 1999, which were included in "Accrued liabilities, other." Additionally,
we had long-term acquisition liabilities of $5.2 million at June 30, 1999,
which were included in "Other long-term liabilities" (see Note 9,
"Acquisitions," in the Notes to Financial Statements for more information on
our acquisition activity.)
In June 1996, we filed a registration statement with the Securities and
Exchange Commission for 4.4 million shares of common stock to be offered from
time to time in connection with future acquisitions. As of June 30, 1999, 3.8
million shares remained unissued under this registration statement.
Net cash provided by operations in the first six months of 1999 was $116.3
million. This was the result of $55.1 million of net income, depreciation and
amortization, and other noncash items, and a $61.2 million decrease in certain
components of working capital. Net cash used for investment in the first six
months of 1999 was $42.6 million, which included $26.2 million of expenditures
for property and equipment, and $6.3 million for acquisitions. Net cash used
for financing was $84.4 million for the first six months of 1999, resulting
from reductions in our total debt outstanding.
Net cash provided by operations in the first six months of 1998 was $45.2
million. This was primarily the result of $49.4 million of net income,
depreciation and amortization, and other noncash items, offset by a $4.2
million increase in certain components of working capital. Net cash used for
investment in the first six months of 1998 was $46.6 million, which included
$32.4 million of expenditures for property and equipment, and $4.0 million for
acquisitions. Net cash provided by financing was $10.1 million for the first
six months of 1998, resulting primarily from borrowings we made to fund
acquisitions.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. In July
1999, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 137 that delayed the effective date of Statement 133
until fiscal years beginning after June 15, 2000. We plan to adopt this
Statement in the first quarter of 2001. We are in the process of reviewing
this Statement. Adoption of this Statement is not expected to have a
significant impact on our results of operations or financial position.
Year 2000 Computer Issue
We have undertaken a comprehensive review of our operations worldwide to
identify our preparedness for the year 2000 issue and are executing a plan for
our operations to address this issue. We believe that all of the computer
systems we use to service our customers in all of our domestic and foreign
locations are now year 2000 compliant. A personnel scheduling system, not
directly related to servicing our customers, is scheduled for a vendor-
supplied release upgrade in August to make it year 2000 compliant.
We have also been reviewing the year 2000 compliance in our infrastructure
(e.g. telecommunication; heating, ventilation, and air conditioning; security
systems; utilities; warehouse equipment; voice mail systems; desktop and
portable personal computers). We believe that all of our data communications
infrastructure is now compliant and that nearly all of our voice
communications infrastructure (switches, automatic call distribution systems,
and voice mail systems) are compliant with the few exceptions scheduled for
vendor-supplied software release upgrades in August. We believe that all
other infrastructure critical to customer service is now compliant. We are
continuing to perform compliance testing on all residual infrastructure
components.
We have discussed the year 2000 issue with our critical suppliers to determine
the extent to which we could be affected if their systems are not year 2000
compliant. Most of our critical suppliers have confirmed that they already
are, or specifically when they expect to be, compliant. Throughout 1999, we
intend to continue monitoring this compliance.
The most reasonably likely worst case scenario of failure by us or our
suppliers or customers to be year 2000 compliant would be a temporary
inability to process orders, to obtain or deliver products and services to our
customers, or to collect amounts due to us from customers. We are currently
developing contingency plans in the event that critical systems, suppliers, or
customers encounter year 2000 problems.
The overall incremental costs to make our systems year 2000 compliant are
expected to be less than $5 million. Approximately $4.4 million has been
spent through June 30, 1999. These costs are being expensed as incurred. We
have also incurred costs over the last several years for year 2000 compliant
computer system additions, replacements, and upgrades in order to realize
efficiencies and process improvements. These costs are generally capitalized
and amortized over a period of three to five years.
Our discussion of the year 2000 computer issue contains forward-looking
information. We believe that our critical computer systems will be year 2000
compliant and that the costs to achieve compliance will not materially impact
our financial condition, operating results, or cash flows. Nevertheless,
factors that could cause actual results to differ from our expectations
include the successful implementation of year 2000 initiatives by our
customers and suppliers, changes in the availability and costs of resources to
implement year 2000 changes, and our ability to successfully identify and
correct all systems affected by the year 2000 issue.
Business Outlook
Our core North American operations remain strong. We continue to expect our
cross-selling efforts in furniture, computer consumables, promotional
products, and office paper to result in additional sales to our existing
customers. Also, we see excellent opportunities in serving the middle-market,
which represents businesses of 25 to 100 employees. Our custom-designed sales
effort, Boise Express, is aimed specifically at this market. Our integrated
supply program offers another growth opportunity. We are looking for ways to
broaden our integrated supply offering by developing strategic alliances with
other suppliers. We also expect to grow sales by serving middle-market
customers through a larger sales force. The pace of our revenue growth will
partially depend on the success of these initiatives. We are also seeing
merger-driven consolidations among not only some of our large customers but
also among some of our key competitors. As a result, continued same-location
sales growth will depend, in part, on conditions outside our control such as
economic conditions and the competitive environment in which we operate.
Our sales growth also depends, in part, on our ability to identify appropriate
acquisition candidates in the U.S. and internationally. Over the past several
years, acquisitions have contributed significantly to our revenue growth.
Although our acquisition pace has slowed, acquisitions remain an important
part of our growth strategy. We will continue to pursue acquisitions of
businesses that fit our business model.
Our French and Australian operations are performing well, posting double-digit
sales growth and operating income improvement. We are continuing to develop
our direct marketing operations in Spain and Belgium, both of which are
progressing nicely.
We believe our gross margins will continue to be impacted principally by the
competitive environment in which we operate, including the pricing strategies
established by our competitors. While we believe that our efforts to lower
our procurement costs will be successful over time, there is no assurance that
our gross margins may not decline under competitive pressure. In addition,
office paper has historically impacted our gross margins and operating margins
as paper prices rise or fall. We are uncertain as to the timing or magnitude
of any future changes in paper prices. Also, it is difficult to accurately
predict what favorable or adverse impact changes in paper prices might have on
our future gross margins or financial results. However, we believe our office
paper business can be managed to maintain acceptable margins and cost
effectively provide our customers with this important product. To a lesser
extent our gross margins will be impacted by our ability to lower our delivery
costs and leverage our fixed occupancy costs. Gross margins and operating
expense ratios generally vary among product categories, distribution channels,
and geographic locations. As a result, we expect some fluctuation in these
ratios over time as our sales mix evolves.
Risk Factors Associated With Forward Looking Statements
The Management's Discussion and Analysis of Financial Condition and Results of
Operations includes "forward looking statements" which involve uncertainties
and risks. There can be no assurance that actual results will not differ from
the Company's expectations. Factors which could cause materially different
results include, among others, our ability to implement our operating
strategies, integration, and restructuring plans and to realize cost savings
and efficiencies; the timing and amount of any paper price changes; continued
same-location sales growth; the changing mix of products sold to our
customers; the pace and success of our acquisition program; the success of new
product line introductions; the uncertainties of expansion into international
markets, including currency exchange rates, legal and regulatory requirements,
and other factors; changes in the competitive environment brought about by
consolidation of customers and competitors, and other competitive and general
economic conditions.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
Changes in interest rates and currency rates expose us to financial market
risk. Our debt is a combination of variable-rate and fixed-rate debt. We
experience only modest changes in interest expense when market interest rates
change. Consequently, our market risk-sensitive instruments do not subject us
to material market risk exposure. Our operations in Australia, Belgium,
Canada, France, Spain, and the United Kingdom are denominated in currencies
other than U.S. dollars. Most foreign currency transactions have been
conducted in the local currency, with minimal cross-border product movement,
limiting our exposure to changes in currency rates. Changes in our debt and
our continued international expansion could increase these risks. To manage
volatility relating to these exposures, we may enter into various derivative
transactions such as interest rate swaps, rate hedge agreements, and forward
exchange contracts. We use interest rate swaps and rate hedge agreements to
hedge underlying debt obligations or anticipated transactions. For qualifying
hedges, our financial statements reflect interest rate differentials as
adjustments to interest expense over the life of the swap or underlying debt.
We defer gains and losses related to qualifying hedges of foreign currency
firm commitments and anticipated transactions, and we recognize such gains and
losses in income or as adjustments of carrying amounts when the hedged
transaction occurs. We mark to market all other forward exchange contracts
and include unrealized gains and losses in current period net income. We had
no material exposure to losses from derivative financial instruments held at
June 30, 1999. We do not use derivative financial instruments for trading
purposes.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not currently involved in any legal or administrative
proceedings that it believes could have, either individually or in the
aggregate, a material adverse effect on its business or financial condition.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual shareholders meeting on April 20, 1999. A total
of 65,758,524 shares of common stock were outstanding and entitled to vote at
the meeting. Of the total outstanding, 64,337,715 shares were represented at
the meeting and 1,420,809 shares were not voted.
Shareholders cast votes for the election of the following directors whose
terms expire in 2002:
In Favor Withheld
Theodore Crumley 64,068,712 269,003
A. William Reynolds 64,052,420 285,295
Donald E.Roller 64,094,425 243,290
Continuing in office are James G. Connelly III and Peter G. Danis Jr., whose
terms expire in 2000, and John B. Carley, George J. Harad, and Christopher C.
Milliken, whose terms expire in 2001.
The shareholders also ratified the appointment of Arthur Andersen LLP, as the
Company's independent auditors for the year 1999 with votes cast 64,112,465
for, 165,913 against, and 59,337 abstained.
The shareholders also ratified the amendment of the Key Executive Stock Option
Plan. The votes for the amendment were 61,031,411 for, 810,493 against, and
204,890 abstained.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Required exhibits are listed in the Index to Exhibits and are
incorporated by reference.
(b) No Form 8-K's were filed during the quarter covered by this
report.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BOISE CASCADE
OFFICE PRODUCTS CORPORATION
As Duly Authorized Officer and
Chief Accounting Officer: /s/Thomas J. Jaszka
_____________________________
Thomas J. Jaszka
Vice President and Controller
Date: August 12, 1999
<PAGE>
BOISE CASCADE OFFICE PRODUCTS CORPORATION
INDEX TO EXHIBITS
Filed With the Quarterly Report on Form 10-Q
for the Quarter Ended June 30, 1999
Number Description Page
27 Financial Data Schedule
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The data schedule contains summary financial information extracted from
Boise Cascade Office Products Corporation's Balance Sheet at June 30,
1999, and from its Statement of Income for the six months ended June 30,
1999. The information presented is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 21,113
<SECURITIES> 0
<RECEIVABLES> 418,082
<ALLOWANCES> 9,644
<INVENTORY> 188,228
<CURRENT-ASSETS> 676,542
<PP&E> 406,948
<DEPRECIATION> 166,043
<TOTAL-ASSETS> 1,447,218
<CURRENT-LIABILITIES> 543,438
<BONDS> 280,530
0
0
<COMMON> 658
<OTHER-SE> 591,524
<TOTAL-LIABILITY-AND-EQUITY> 1,447,218
<SALES> 1,649,948
<TOTAL-REVENUES> 1,649,948
<CGS> 1,217,681
<TOTAL-COSTS> 1,217,681
<OTHER-EXPENSES> 357,180
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,248
<INCOME-PRETAX> 63,638
<INCOME-TAX> 26,870
<INCOME-CONTINUING> 36,768
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,768
<EPS-BASIC> 0.56
<EPS-DILUTED> 0.56
</TABLE>
