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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, 1998
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. [X]
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 26, 1999: $148,317,600.
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 26, 1999
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Common Stock, $.01 par value 65,758,524
DOCUMENTS INCORPORATED BY REFERENCE
1. The registrant's annual report for the fiscal year ended December 31,
1998, 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 1999
annual meeting of shareholders to be held on April 20, 1999, are
incorporated by reference into Part III of this Form 10-K ("the
Company's proxy statement") and
3. The registrant's Income Statement and Notes to Quarterly Financial
Statements from the fourth quarter Fact Book for the three months ended
December 31, 1998, are incorporated by reference into Parts II and IV
of this Form 10-K.
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BOISE CASCADE OFFICE PRODUCTS CORPORATION
TABLE OF CONTENTS
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PART I
Item Page
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1. Business......................................................................... 3
2. Properties....................................................................... 12
3. Legal Proceedings................................................................ 13
4. Submission of Matters to a Vote of Security Holders.............................. 13
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters............ 13
6. Selected Financial Data.......................................................... 14
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................... 15
7A. Quantitative and Qualitative Disclosures About Market Risk....................... 15
8. Financial Statements and Supplementary Data...................................... 15
9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.......................................................... 15
PART III
10. Directors and Executive Officers of the Registrant............................... 16
11. Executive Compensation........................................................... 18
12. Security Ownership of Certain Beneficial Owners and Management................... 18
13. Certain Relationships and Related Transactions................................... 19
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................. 19
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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 developing business with new customers and of
cross-selling efforts to existing customers; the success of prospecting efforts;
the timing and amount of any paper price changes; the success of our
restructuring efforts; the pace of acquisitions and the success of integrating
acquisitions; continued same-location sales growth; the timing and success of
efforts to make systems year 2000 and Euro compliant; the success of new
initiatives; the availability of financing for future acquisitions; the mix of
our sales by product category and country; the pace of cost structure
improvements; 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, office furniture, paper,
computer consumables, and promotional products. We purchase most of our products
directly from manufacturers and distribute them directly to business customers.
Throughout our 35-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, expanded our array of products and services, and
entered several international office products distribution markets.
Until 1996, we operated only in the U.S., where we are one of the premier
distributors of office products. Since 1996, we have expanded into Australia,
Belgium (under the name JPG), Canada (under the name Grand & Toy), France (under
the names JPG and Boise Cascade Office Products France), Spain (under the name
Sistemas Kalamazoo), and the United Kingdom (under the names Neat Ideas and
Boise Cascade Office Products UK). In 1998, foreign operations accounted for
approximately 23% of our total net sales. For financial information about our
foreign operations, see Note 10, "Segment Information," of the Notes to
Financial Statements in our 1998 Annual Report, which is incorporated by
reference.
Our integrated network of 48 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 over 75% of orders to our small
business customers. In Canada we have a national network of eight distribution
centers. In Australia we have a national network of seven distribution centers.
In the U.K. and Western Europe we have five distribution centers which will form
the nucleus of our network in Europe.
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In the fourth quarter of 1998, we initiated a plan to restructure our operations
in the United Kingdom (the "restructuring"). The restructuring involves closing
seven small facilities and an administrative office and integrating selected
functions of our U.K. subsidiaries. These closures are expected to be completed
during the first half of 1999.
Also during December 1998, we terminated our joint venture with Otto Versand
("Otto"). As a result of the dissolution of the joint venture, Otto acquired our
50% interest in the joint venture. In addition, we repurchased Otto's 10%
ownership interest in Jean-Paul Guisset, S.A. ("JPG"), our French direct
marketing subsidiary. JPG is now 100% owned by the Company. For more information
about our restructuring and joint venture dissolution, see "Other operating
expense" in Footnote 1, "Summary of Significant Accounting Policies," of our
Notes to Financial Statements in our 1998 Annual Report, which is incorporated
by reference.
BUSINESS STRATEGY
We have grown rapidly due to both acquisitions and same-location sales
increases. 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
---------------------
Year Net Sales Same-Location Sales Operating Income
---- --------- ------------------- ----------------
1998 18% 11% 10% (1)
1997 31% 14% 18%
1996 51% 14% 46%
(1) Before charges related to European restructuring and
joint venture dissolution. See "Other operating expense" in
Footnote 1, "Summary of Significant Accounting Policies," of
the Notes to Financial Statements in our 1998 Annual Report,
which is incorporated by reference.
We believe that the distribution of office products to business customers
continues to present growth opportunities. Our business strategy for exploiting
these opportunities includes the following elements:
INCREASE SALES OF CORE PRODUCTS AND ADD NEW PRODUCTS AND SERVICES
We plan to increase sales of core products, such as computer
consumables, promotional products, office furniture, and office paper.
As part of our growth strategy, we offer customized procurement and
product-related support services to our customers. By broadening our
products 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.
In response to our customers' needs for computer consumables, we market
computer-related products from 28 of our U.S. distribution centers
under the name Boise Technology. Our sales of computer consumables
represented approximately 10 percent of our net sales in 1998. In our
U.S. promotional products business, Boise Marketing Services, Inc.
("BMSI"), we completed the systems integration of our two previous
acquisitions. We are
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positioned to take full advantage of the available cross-selling
opportunities. Our sales of promotional products represented
approximately four percent of our net sales in 1998. Our growth
strategy also targets increasing office furniture sales across the
system. Our office furniture sales in 1998 represented approximately 12
percent of our net sales. Office paper is also an important part of our
strategy. Our sales of office paper represented approximately 13
percent of our net sales in 1998.
In 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 SourceTM. This alliance allows 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, and one of the largest manufacturers and
distributors of information management products in the United States.
In January 1999, we acquired Wallace's office supplies business and
expect many of these new customers to join the Boise-Wallace alliance.
We expect this alliance will be the first of several such arrangements
created to serve our customers' needs.
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., our network of integrated distribution
centers 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 dedicated to
building and maintaining our business with national accounts. Our sales
to such customers have grown significantly.
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 middle-size customers. These
are businesses with 25 to 100 employees. Our Boise-Express initiative
is a custom-designed sales effort aimed specifically at middle-size
customers. We believe that the Boise-Express initiative provides the
most convenient and cost-effective way for middle-size customers to
purchase office products. An important element in our growth strategy
is to expand our business with middle-size customers, in both
geographic coverage and product offerings.
* We plan to increase our business with small business customers.
Starting with our April 1994 acquisition of the office products
distribution business of Reliable, we have expanded our direct
marketing capabilities, 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 1997, we began direct
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marketing in Canada. In July 1997, we purchased Jean-Paul Guisset S.A.
("JPG"), France's third largest office products direct marketer. 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. Also in 1998, we acquired
Sistemas Kalamazoo, a direct marketer of office products in Spain. We
also began direct marketing office products in Belgium in 1998. Our
sales to small business customers represented approximately 17 percent
of our net sales in 1998.
EXPAND OUR GEOGRAPHIC SCOPE
We have businesses in Australia, Belgium, Canada, France, Spain, and
the United Kingdom, as well as the United States. We intend to enter
the office products distribution business in other 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, start-ups, and
same-location growth.
Our growth strategy has both an acquisition and an internal growth component;
the mix for any given element will be different year to year because of business
opportunities, capital availability, and other priorities.
Acquisitions have been, and we expect them to continue to be, an important
element of our strategy. 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. The near-term focus of our
acquisition program is to increase our presence abroad as well as to expand our
offerings 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 distribution networks to the
extent it is appropriate and cost-effective.
In the U.S., we have opened new distribution centers in selected metropolitan
areas to establish or expand our presence 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 our recent start-ups in order to speed this process. In the next few
years, we expect to relocate certain existing distribution centers into new and
larger facilities to support our growth.
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. The management and integration risks of foreign acquisitions are
greater. Additional risks in foreign countries include those associated with
currency exchange rates, new and different legal and regulatory requirements,
and language and cultural differences.
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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. 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.
During 1998, we completed the implementation of a new order-entry
computer system in our integrated U.S. distribution centers. We can provide
consistent next-day delivery of virtually all products offered in our full-line
catalog, at agreed-upon prices and service levels, to all of our large business
customers. Over 75% of orders to our small business customers can be delivered
the next day. Our integrated system facilitates the delivery of consistent
products, pricing, service, and reporting to our national account customers. In
addition, it enables us to reduce operating costs by centralizing certain
administrative, logistical, and other management functions. 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 inventory turn rates. 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 a critical element
of our business model. We must maintain an appropriate balance between
centralization and local autonomy in serving our customers. Our integrated
computer system enables us to organize certain customer support functions in a
centralized, cost-effective manner without compromising customer focus. We
provide customer service at each distribution center to handle location-specific
matters, and operate centralized call centers which enter customer orders and
respond to customer inquiries about product alternatives, order 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
customers. In 1999, we are opening an inbound call center in Casper, Wyoming.
A substantial part of our internal capital spending is dedicated to
improving operating efficiency. 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 our order fulfillment operations. We have an
intercompany agreement under which nine of BCOP's distribution centers fill
orders for Reliable. Our steps to date have increased the next-day delivery
coverage of Reliable's operations and have reduced our overall occupancy and
delivery costs (as a percentage of net 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
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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 management team and sales representatives develop and offer
customized services, from stocking customer-unique products to special reporting
and delivery services, to meet the needs of their customers.
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 and replicated 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 the foreign countries where we have operations, we are
applying the major elements of our domestic business model: to take maximum
advantage of our centralized national capabilities and our local presence, to
link each of the facilities via computer, to offer similar products across the
entire system, to serve the full range of customers from each facility, and to
centralize a variety of functions where it is efficient and cost effective to do
so, while performing certain other functions locally.
PRODUCTS
Our net sales by product category, expressed as a percentage of our total net
sales, during each of the last three years were as follows:
Year Ended December 31
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1998 1997 1996
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Office Supplies (1) 61% 66% 68%
Office Paper 13% 13% 15%
Office Furniture (2) 12% 11% 11%
Computer Consumables 10% 7% 6%
Promotional Products 4% 3% --%
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100% 100% 100%
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(1) Includes, among many other products, pens, staplers, file
folders, binders, and calculators
(2) Includes desks, chairs, file cabinets, computer stations, and
furniture accessories
SALES AND MARKETING
Electronic Commerce. As part of our overall program for electronic data
interchange with our large business customers, we developed and offer an
Internet-based ordering system. This system allows customers to order our
complete range of products "on-line." It provides customers with customized
levels of security and authorizations to ensure that each order has the proper
approval. Features include multi-tiered approvals, user-customized security,
credit card capabilities, a variety of viewing options, and
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true electronic data interchange ("EDI") capabilities. To use it, customers only
need access to the Internet and browser software.
We also 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.
EDI between our mainframe computer and our large business customers' systems,
local-area-network-based electronic commerce systems, and the systems mentioned
above accounted for approximately 20% of our inbound order volume in 1998.
OPERATIONS
Logistics and systems support. Advanced information technology is critical in a
nationwide distribution business involving thousands of different products being
delivered 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. During 1998, we completed the implementation of a
new order-entry computer system in our integrated U.S. distribution centers.
Order entry. We offer a wide range of order entry options to our customers.
Customers wishing to place an order with us in the U.S. may (1) enter the order
by using a personal computer or other computer interface, including on-line
ordering; (2) convey the order by telephone or facsimile transmission to a
customer service representative at a local distribution center or toll-free to a
customer service facility; or (3) give the order in person to a sales associate.
Stocking, order fulfillment, and delivery. Our distribution centers receive and
store inventory and fill customer orders. Many 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 one of our nearby distribution centers
or a 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 logistical factors, the
next-day service area 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 are owned or
leased by us or operated by common or contract carriers, depending on the cost
effectiveness of each alternative. In 1998, we began converting a portion of our
dedicated delivery routes in the U.S. to our private delivery fleet. This
delivery strategy allows us to gain better efficiency on our routes and provides
our customers with better service.
Procurement. Our computer system monitors inventory levels and forecasts demand
for each item 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.
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To assist vendor selection decisions and reducing inventory cost,
we have developed and use a detailed vendor management and evaluation program.
This program enables our central purchasing staff to measure and evaluate the
performance of our vendors in a number of key areas.
Foreign operations. In Australia and Canada, our operations are structured
similarly to our domestic operations. Within those countries, most distribution
facilities are integrated on the same computer system. 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.
In the U.K., we are restructuring our warehouse and delivery network and are
installing a new order-management system with cross-border capabilities. In
France, our contract stationer subsidiary is benefiting from a reorganized sales
force and improved warehousing processes. These operations, along with our
strong JPG subsidiary in France, will provide a foundation for a successful
Pan-European business.
EMPLOYEES
At December 31, 1998, we had approximately 12,000 full-time and part-time
employees ("associates") worldwide. Of these, approximately 4,400 were employed
primarily in marketing and sales, order processing, and customer service;
approximately 4,000 were located at our distribution centers in inventory
receipt and storage, order filling, and as delivery vehicle drivers; and
approximately 3,600 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. Competition is based principally on
price, service, and customer relationships. We are one of the premier
distributors of products for the office with operations in Australia, Belgium,
Canada, France, Spain, the United Kingdom and the United States.
United States. During the last several years, a number of major, publicly held
participants have acquired many smaller participants in order to establish
national distribution networks similar to our own. A number of these major
participants have grown at rapid rates. During 1998, two large office products
companies acquired the two largest direct marketers of office products. Some of
our competitors have greater financial resources and potential purchasing
leverage than we do. The contract stationer and direct marketing efforts of the
office products superstores also benefit from their national advertising and
franchising programs. We also compete with numerous local and regional contract
stationers, many of which have long-standing customer relationships.
Our ability 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.
As indicated earlier, some companies are starting to use integrated procurement
systems and Internet-based 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, and
companies that provide Internet ordering
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functionality are providing some competition today and will likely provide
increased competition in the future. We have developed systems for multi-vendor,
integrated procurement. In addition, we continue to enhance electronic ordering
functionality for our customers and actively encourage our customers to expand
their use of electronic ordering with us.
International. In our operations in Australia, Belgium, Canada, France, Spain,
and the United Kingdom, we compete with many local distributors and with several
U.S.-based office products distribution companies. We compete through the
strength of our integrated systems, customer service, and competitive pricing.
In 1998, we acquired Sistemas Kalamazoo in Spain and entered Belgium with a
start-up direct marketing effort.
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ITEM 2. PROPERTIES
Our corporate headquarters and our Chicago metropolitan area distribution center
are 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 26, 1999, we
operated 68 distribution centers, including the suburban Chicago distribution
center, at the following locations:
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AUSTRALIA CANADA (4)
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Adelaide, South Australia Calgary, Alberta
Brisbane, Queensland Moncton, New Brunswick
Canberra, Australian Capital Territory Montreal, Quebec
Kalgoorlie, Western Australia Ottawa, Ontario
Melbourne, Victoria Toronto, Ontario
Perth, Western Australia Vancouver, British Columbia
Sydney, New South Wales Winnipeg, Manitoba (2)
FRANCE UNITED KINGDOM
------ --------------
Paris (2) Chorley, England
Doncaster, England (5)
SPAIN
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Madrid (Bilbao)
UNITED STATES
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Albuquerque, New Mexico Memphis (Southaven, Mississippi),
Atlanta (Smyrna), Georgia Tennessee
Boise, Idaho Miami, Florida
Boston (Billerica), Massachusetts Milwaukee (New Berlin), Wisconsin
Burlington, Vermont Minneapolis (Golden Valley), Minnesota
Charlotte, North Carolina Nashville, Tennessee
Chicago (Itasca), Illinois New Castle, Delaware
Cleveland (Independence), Ohio New York (Carlstadt, New Jersey),
Columbus, Ohio New York
Dallas (Garland), Texas Norfolk (Chesapeake), Virginia
Denver, Colorado Oklahoma City, Oklahoma
Detroit (Warren), Michigan Orlando, Florida
Grand Rapids, Michigan Philadelphia (Bristol), Pennsylvania
Hartford (Naugatuck), Connecticut Phoenix, Arizona
Honolulu, Hawaii (3) Pittsburgh, Pennsylvania
Houston, Texas Portland, Maine
Indianapolis, Indiana Portland, Oregon (2)
Jacksonville, Florida Reno, Nevada
Kalamazoo, Michigan Rochester, New York
Kansas City, Missouri St. Louis, Missouri
Las Vegas, Nevada Salt Lake City, Utah
Los Angeles (Garden Grove), California San Francisco (Menlo Park),
Louisville, Kentucky California
Maumee, Ohio Seattle (Kent), Washington (2)
Washington (Elkridge, Maryland), DC
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(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 three retail stores on the island of Oahu.
(4) We also operate approximately 70 retail stores throughout Canada.
(5) 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 1999 and 2006. We own facilities in Arizona, California, Florida,
Georgia, Hawaii, Illinois, Massachusetts, Michigan, Minnesota, Missouri, North
Carolina, Ohio, Pennsylvania, Texas, and Washington and in Australia, 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
1998.
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 1998
Annual Report and are incorporated by reference. At February 26, 1999, the
approximate number of holders of common shares was 9,000.
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.
13
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data for the
Company for each of the five years 1998 through 1994. The selected historical
income statement data and balance sheet data as of December 31, 1998, 1997,
1996, 1995, and 1994, 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
---------------------------------------------------------------------
1998 (1) 1997 (2) 1996 (3) 1995 (4) 1994 (5)
---------- ---------- ------------ ----------- ------------
(in thousands, except share and operating data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net Sales $3,067,327 $2,596,732 $ 1,985,564 $ 1,315,953 $ 908,520
Income from operations 120,494 119,250 101,300 69,467 42,199
Net income 53,067 56,886 55,349 43,179 26,465
Basic and diluted earnings per share
(pro forma 1995 and 1994) (6): $ .81 $ .89 $ .88 $ .70 $ .43
BALANCE SHEET DATA
<CAPTION>
December 31
---------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Working capital $ 230,016 $ 231,357 $ 168,641 $ 145,824 $ 104,835
Total assets 1,461,745 1,291,488 905,362 544,124 352,369
Total long-term obligations 420,250 384,790 170,030 14,358 5,511
Shareholders' equity 562,914 505,635 404,785 339,417 233,432
</TABLE>
(1) During 1998, we initiated a plan to restructure our operations in the
United Kingdom and terminated our joint venture with Otto Versand. As a
result, we estimated and recorded charges of $11.1 million ($7.4 million,
or $0.11 per share-diluted, net of tax benefit). Information about the
restructuring and joint venture dissolution are included in "Other
operating expense" in Footnote 1, "Summary of Significant Accounting
Policies," of the Notes to Financial Statements included in our 1998 Annual
Report and is incorporated by reference. During 1998, we acquired six
businesses. The acquisitions were accounted for as purchases. Data for the
year ended December 31, 1998, include the results of operations of the
acquired businesses for the periods subsequent to their acquisitions.
(2) 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.
(3) 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.
14
<PAGE> 15
(4) 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.
(5) During 1994, we acquired three businesses. The acquisitions were accounted
for as purchases. Data for the year ended December 31, 1994, include the
results of operations of the acquired businesses subsequent to their
acquisitions.
(6) Information concerning basic and diluted earnings per share is included in
Note 1, "Summary of Significant Accounting Policies," of the Notes to
Financial Statements in our 1998 Annual Report and is incorporated 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 1998 Annual
Report and are incorporated 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 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 1998 Annual Report and are
incorporated by reference.
The unaudited Income Statement for the three months ended December 31, 1998, and
Notes to Quarterly Financial Statements are presented in our Fact Book for the
fourth quarter of 1998 and are incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
15
<PAGE> 16
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 "Board of Directors" in our proxy statement. This information is
incorporated by reference.
Executive Officers as of February 26, 1999:
- -------------------------------------------
<TABLE>
<CAPTION>
Date
First Elected
Name Age Position as an Officer
- ---- --- -------- -------------
<S> <C> <C> <C>
Christopher C. Milliken (1) 53 President and Chief
Executive Officer 4/1/95
A. James Balkins III (2) 46 Senior Vice President, Chief
Financial Officer, and Treasurer 4/1/95
Richard L. Black 53 Senior Vice President, Direct
Marketing and Europe 4/1/95
Kenneth W. Cupp 52 Senior Vice President and
Region Manager 4/22/97
Carol B. Moerdyk (2) 48 Senior Vice President, North
American and Australian
Contract Operations 4/1/95
Darrell R. Elfeldt 55 Vice President, Corporate Planning 4/1/95
David A. Goudge 51 Vice President, Marketing 4/22/97
William E. Gruber 53 Vice President and Region Manager 4/21/98
Larry L. Gunther 56 Vice President and
Chief Information Officer 7/29/97
Thomas J. Jaszka 37 Vice President and Controller 2/16/99
John A. Love 58 Vice President, Human Resources 4/1/95
Gary A. Massel 59 Vice President, Logistics 7/29/97
Michael F. Meehan 50 Vice President and Region Manager 4/22/97
Stephen M. Thompson 56 Vice President and Region Manager 4/1/95
Peter D. Vanexan 52 Vice President, Region Manager
and Canada 4/22/97
Matthew R. Broad 39 Corporate Secretary 4/21/98
</TABLE>
16
<PAGE> 17
(1) Senior Vice President, Boise Cascade Corporation.
(2) Vice President, Boise Cascade Corporation.
Christopher C. Milliken was elected President of the Company in February 1998
and assumed the role of Chief Executive Officer in April 1998 upon Pete Danis'
retirement. 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 (the
"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 since 1979 including
Corporate Secretary from 1991 to 1997 and Associate General Counsel from 1984 to
1996.
Richard L. Black was elected Senior Vice President, Direct Marketing 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.
Kenneth W. Cupp was elected Senior Vice President and Region Manager in 1998.
Mr. Cupp has served as Vice President and Region Manager since 1997. Previously,
Mr. Cupp served as a Region Manager of Boise Cascade Office Products Corporation
since 1995. Prior to 1995, Mr. Cupp has served in various positions with the
Division since 1967.
Carol B. Moerdyk was elected Senior Vice President, North American and
Australian 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
since 1981 including Vice President, Corporate Planning and Development from
1990 to 1992 and Corporate Planning and Development Director from 1986 to 1990.
Darrell R. Elfeldt has served as Vice President, Corporate Planning since 1998.
Previously, Mr. Elfeldt served as Vice President and Controller since 1995.
Prior to 1995, Mr. Elfeldt served as Finance and Distribution Director of Boise
Cascade Office Products Distribution Division since 1993 and in various
positions with the Division since 1980 and with Boise Cascade Corporation since
1970.
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. Prior to 1993, Mr. Goudge has served in various positions
with the Division since 1980.
17
<PAGE> 18
Prior to being elected an officer of the Company, William E. Gruber served as a
Region Manager of Boise Cascade Office Products since 1996. Prior to 1996, Mr.
Gruber has served in various positions with the Division since 1970.
Larry L. Gunther has served as the Chief Information Officer of Boise Cascade
Office Products Corporation since 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.
Thomas J. Jaszka was elected Vice President and Controller in February 1999.
Prior to being elected an officer of the Company, Mr. Jaszka served as Director
of Accounting since 1998. Previously, Mr. Jaszka has served in various positions
with the Division since 1986.
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. Previously, Mr. Love served as Human Resource Manager for the
Division since 1974.
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.
Previously, Mr. Meehan has served in various positions with the Division since
1978.
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 in various positions with the Division
since 1970.
Prior to being elected an officer of the Company, Peter D. Vanexan served as the
Managing Director of Grand & Toy since 1991. Prior to 1991, Mr. Vanexan served
as President of Innova Envelope since 1986.
Matthew R. Broad was elected Corporate Secretary in April 1998. Prior to 1998,
Mr. Broad has served as counsel for the Company since 1989 and in the legal
department of Boise Cascade Corporation since 1984.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning compensation of our executive officers for the year ended
December 31, 1998, 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, 1998, is set forth under the caption "Stock
Ownership-Ownership of More than 5% of Boise Cascade Office Products
Stock" in our proxy statement and is incorporated by reference.
18
<PAGE> 19
(b) Information concerning security ownership of management as of December
31, 1998, is set forth under the caption "Stock Ownership-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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions during
1998 is set forth under the caption "Related Party Transactions" in our proxy
statement and in Note 2, "Transactions With Boise Cascade Corporation," of the
Notes to Financial Statements in our 1998 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, 1998, and Notes to Quarterly Financial
Statements are incorporated by reference from our
Fact Book for the fourth quarter of 1998.
(ii) The Financial Statements, the Notes to Financial
Statements, the Report of Independent Public
Accountants, and the Report of Management listed
below are incorporated by reference from our 1998
Annual Report.
- Balance Sheets as of December 31, 1998 and 1997.
- Statements of Income for the years ended December
31, 1998, 1997, and 1996.
- Statements of Cash Flows for the years ended
December 31, 1998, 1997, and 1996.
- Statements of Shareholders' Equity for the years
ended December 31, 1998, 1997, and 1996.
- Notes to Financial Statements.
- Report of Independent Public Accountants
- Report of Management.
(2) Financial Statement Schedules
None required.
(3) Exhibits
Required exhibits are listed in the Index to Exhibits and
are incorporated by reference.
19
<PAGE> 20
(b) Reports on Form 8-K
On December 16, 1998, we filed a Form 8-K with the Securities
and Exchange Commission announcing the restructuring of
certain of our European operations. No other Form 8-K's were
filed during the fourth quarter of 1998.
(c) Exhibits.
See Index to Exhibits.
20
<PAGE> 21
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/ Christopher C. Milliken
-------------------------------------------------
Christopher C. Milliken, Chief Executive Officer
Dated: March 25, 1999
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 25, 1999.
SIGNATURE CAPACITY
(i) Principal Executive Officer:
/s/ Christopher C. Milliken Chief Executive Officer
-------------------------------
CHRISTOPHER C. MILLIKEN
(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/ Thomas J. Jaszka Vice President and Controller
-------------------------------
THOMAS J. JASZKA
(iv) Directors:
/s/ Christopher C. Milliken
-------------------------------
CHRISTOPHER C. MILLIKEN
/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/ Peter G. Danis Jr.
-------------------------------
PETER G. DANIS JR.
/s/ A. William Reynolds
-------------------------------
A. WILLIAM REYNOLDS
/s/ Donald E. Roller
-------------------------------
Donald E. Roller
21
<PAGE> 22
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated January 29, 1999, incorporated by reference in this Form 10-K for
the year ended December 31, 1998, into Boise Cascade Office Products
Corporation's previously filed 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);
post-effective amendment No. 1 to registration statement on Form S-1 (File No.
333-3660); and registration statement on Form S-3 (File No. 333-50131).
Arthur Andersen LLP
Boise, Idaho
March 25, 1999
22
<PAGE> 23
BOISE CASCADE OFFICE PRODUCTS CORPORATION
INDEX TO EXHIBITS
Filed With the Annual Report on Form 10-K
for the Year Ended December 31, 1998
<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 Form of Executive Officer Severance Agreement,
as amended through February 16, 1999 26
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 Key Executive Stock Option Plan, as amended
through February 16, 1999 42
10.8 (7) 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 (7) Supplemental Health Care Plan for Executive
Officers, revised July 31, 1996 --
10.16 (3) Executive Officer Severance Pay Policy, adopted
February 20, 1995 --
10.17 (3) Key Executive Performance Plan, adopted
February 20, 1995 --
</TABLE>
23
<PAGE> 24
<TABLE>
<S> <C> <C> <C>
10.18 1998 and 1999 Performance Criteria for the Key
Executive Performance Plan 52
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 (8) Form of Deferred Compensation and
Benefits Trust dated January 30, 1996 --
11 Computation of Per Share Earnings 54
12 Ratio of Earnings to Fixed Charges 55
13.1 Incorporated sections of the Boise Cascade Office
Products Corporation 1998 Annual Report 56
13.2 Incorporated sections of the Boise Cascade Office
Products Corporation Fact Book for the fourth
quarter of 1998 78
16 Inapplicable --
18 Inapplicable --
21 Significant subsidiaries of the registrant 80
22 Inapplicable --
23 Consent of Arthur Andersen LLP (see page 22)
24 Inapplicable --
27 Financial Data Schedule 81
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, 10.14, 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 reference. The Company has been granted an order of
confidential treatment with respect to a portion of Exhibit 10.3.
(7) 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.
24
<PAGE> 25
(8) 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.
25
<PAGE> 1
EXHIBIT 10.1
BOISE CASCADE OFFICE PRODUCTS CORPORATION
FORM OF EXECUTIVE OFFICER SEVERANCE AGREEMENT
(As Amended Through February 16, 1999)
<PAGE> 2
[As amended through February 16, 1999]
CONFIDENTIAL
(Date)
[ ]
Dear [ ]:
Boise Cascade Office Products Corporation (the "Company") considers it
essential to the best interests of its stockholders to foster the continuous
employment of key management personnel in the event there is, or is threatened,
a Change in Control (as defined in this Agreement) of Boise Cascade Corporation
("Boise Cascade"), the principal shareholder of the Company. In this connection,
the Board of Directors of the Company (the "Board") recognizes that the
possibility of a Change in Control may exist and that such possibility, and the
uncertainty and questions which it may raise among management, may result in the
departure or distraction of management personnel to the detriment of the Company
and its stockholders.
The Board has determined that appropriate steps should be taken to
reinforce and encourage the continued attention and dedication of members of the
Company's management, including yourself, to their assigned duties without
distraction in the face of potentially disturbing circumstances arising from the
possibility of a Change in Control, although no such change is now contemplated.
In order to induce you to remain in the employ of the Company in the
face of a Change in Control and in consideration of your agreement set forth in
Section 2.B hereof, the Company agrees that you shall receive the severance
benefits set forth in this letter agreement in the event your employment with
the Company is terminated subsequent to "Change in Control" under the
circumstances described below.
1. Term of Agreement. This Agreement shall commence on the date
hereof and shall continue in effect through [ ]; provided, however, that
commencing on [ ], and each January 1 thereafter, the term of this
Agreement shall automatically be extended so as to terminate on the third
anniversary of such date, unless, not later than September 30 of the preceding
year, the Company shall have given notice not to extend this Agreement;
provided, however, if a Change in Control (as defined in Section 2 hereof)
shall have occurred during the term of this
<PAGE> 3
Agreement, this Agreement shall continue in effect for a period of not less than
twenty-four months beyond the month in which such Change in Control occurred.
2. Change in Control.
A. No benefits shall be payable hereunder unless there shall have
been a Change in Control, as set forth below, and your employment by the Company
shall thereafter have been terminated in accordance with Section 3 below. A
"Change in Control" shall be deemed to have occurred if, at any time when Boise
Cascade owns more than 50% of the outstanding voting securities of the Company,
the event set forth in any one of the following paragraphs shall have occurred:
(1) Any Person is or becomes the Beneficial Owner,
directly or indirectly, of securities of Boise Cascade (not including in the
securities beneficially owned by such Person any securities acquired directly
from Boise Cascade or its affiliates other than in connection with the
acquisition by Boise Cascade or its affiliates of a business) representing 20%
or more of either the then outstanding shares of common stock of Boise Cascade
or the combined voting power of Boise Cascade's then outstanding securities; or
(2) The following individuals cease for any reason to
constitute at least 66 2/3% of the number of directors of Boise Cascade then
serving: individuals who, on the date hereof, constitute the board of directors
of Boise Cascade and any new director (other than a director whose initial
assumption of office is in connection with an actual or threatened election
contest, including but not limited to a consent solicitation, relating to the
election of directors of Boise Cascade) whose appointment or election by the
board of directors of Boise Cascade or nomination for election by Boise
Cascade's stockholders was approved by a vote of at least two-thirds (2/3) of
the directors of Boise Cascade then still in office who either were directors of
Boise Cascade on the date hereof or whose appointment, election or nomination
for election was previously so approved (the "Continuing Directors"); or
(3) The stockholders of Boise Cascade approve a merger
or consolidation of Boise Cascade with any other corporation or approve the
issuance of voting securities of Boise Cascade in connection with a merger or
consolidation of Boise Cascade (or any direct or indirect subsidiary of Boise
Cascade) pursuant to applicable stock exchange requirements, other than (i) a
merger or consolidation which would result in the voting securities of Boise
Cascade outstanding immediately prior to such merger or consolidation continuing
to represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity or any parent thereof), in combination with
the ownership of any trustee or other fiduciary holding securities under an
employee benefit plan of Boise Cascade, at least 66 2/3% of the combined voting
power of the voting securities of Boise Cascade or such surviving entity or any
parent thereof outstanding immediately after such merger or consolidation, or
(ii) a merger or consolidation effected to implement a recapitalization of Boise
Cascade (or similar transaction) in which no Person is or becomes the
<PAGE> 4
Beneficial Owner, directly or indirectly, of securities of Boise Cascade (not
including in the securities Beneficially Owned by such Person any securities
acquired directly from Boise Cascade or its subsidiaries other than in
connection with the acquisition by Boise Cascade or its subsidiaries of a
business) representing 20% or more of either the then outstanding shares of
common stock of Boise Cascade or the combined voting power of Boise Cascade's
then outstanding securities; or
(4) The stockholders of Boise Cascade approve a plan
of complete liquidation or dissolution of Boise Cascade or an agreement for the
sale or disposition by Boise Cascade of all or substantially all of Boise
Cascade's assets, other than a sale or disposition by Boise Cascade of all or
substantially all of Boise Cascade's assets to an entity, at least 66 2/3% of
the combined voting power of the voting securities of which are owned by Persons
in substantially the same proportions as their ownership of Boise Cascade
immediately prior to such sale.
Notwithstanding the foregoing, any event or transaction
which would otherwise constitute a Change in Control (a "Transaction") shall not
constitute a Change in Control for purposes of your benefits under this
Agreement if, in connection with the Transaction, you participate as an equity
investor in the acquiring entity or any of its affiliates (the "Acquiror"). For
purposes of the preceding sentence, you shall not be deemed to have participated
as an equity investor in the Acquiror by virtue of (a) obtaining beneficial
ownership of any equity interest in the Acquiror as a result of the grant to you
of an incentive compensation award under one or more incentive plans of the
Acquiror (including but not limited to the conversion in connection with the
Transaction of incentive compensation awards of the Company or Boise Cascade
into incentive compensation awards of the Acquiror), on terms and conditions
substantially equivalent to those applicable to other executives of the Company
or Boise Cascade immediately prior to the Transaction, after taking into account
normal differences attributable to job responsibilities, title and the like, (b)
obtaining beneficial ownership of any equity interest in the Acquiror on terms
and conditions substantially equivalent to those obtained in the Transaction by
all other stockholders of Boise Cascade, or (c) having obtained an incidental
equity ownership in the Acquiror prior to and not in anticipation of the
Transaction.
B. For purposes of this Agreement, a "Potential Change in
Control" shall be deemed to have occurred if (1) Boise Cascade enters into an
agreement, the consummation of which would result in the occurrence of a Change
in Control of Boise Cascade; (2) Boise Cascade or any Person publicly announces
an intention to take or to consider taking actions which if consummated would
constitute a Change in Control of Boise Cascade; (3) any Person becomes the
Beneficial Owner, directly or indirectly, of securities of Boise Cascade
representing 9.5% or more of either the then outstanding shares of common stock
of Boise Cascade or the combined voting power of Boise Cascade's then
outstanding securities; or (4) the Board adopts a resolution to the effect that
a potential Change in Control for purposes of this Agreement has occurred. You
agree that, subject to the terms and conditions of this Agreement, in the event
of a Potential Change in Control, you will at the option of the
<PAGE> 5
Company remain in the employ of the Company until the earlier of (a) the date
which is six months from the occurrence of the first such Potential Change in
Control, or (b) the date of a Change in Control.
C. For purposes of this Agreement, "Beneficial Owner" shall have
the meaning set forth in Rule 13d-3 under the Securities Exchange Act of 1934,
as amended (the "Exchange Act").
D. For purposes of this Agreement, "Person" shall have the
meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in
Sections 13(d) and 14(d) thereof, except that such term shall not include (1)
Boise Cascade or any of its subsidiaries, (2) a trustee or other fiduciary
holding securities under an employee benefit plan of Boise Cascade or any of its
subsidiaries, (3) an underwriter temporarily holding securities pursuant to an
offering of such securities, or (4) a corporation owned, directly or indirectly,
by the stockholders of Boise Cascade in substantially the same proportions as
their ownership of stock of Boise Cascade.
3. Termination Following Change in Control. If any of the events
described in Section 2 hereof constituting a Change in Control shall have
occurred and be continuing, you shall be entitled to the benefits provided in
Section 4 hereof upon the subsequent termination of your employment during the
term of this Agreement unless such termination is because of your death, by the
Company for Cause or Disability, or by you other than for Good Reason.
A. Disability. If, as a result of your incapacity due to physical
or mental illness, you shall have been absent from your duties with the Company
on a full-time basis for six consecutive months, and within thirty days after
written notice of termination is given you shall not have returned to the
full-time performance of your duties, the Company may terminate your employment
for "Disability."
B. Cause. Termination by the Company of your employment for
"Cause" shall mean termination upon (1) the willful and continued failure by you
to substantially perform your duties with the Company (other than any such
failure resulting from your incapacity due to physical or mental illness or any
such actual or anticipated failure resulting from your termination for Good
Reason), after a demand for substantial performance is delivered to you by the
Board which specifically identifies the manner in which the Board believes that
you have not substantially performed your duties, or (2) the willful engaging by
you in conduct which is demonstrably and materially injurious to the Company,
monetarily or otherwise. For purposes of this Subsection, no act, or failure to
act, on your part shall be considered "willful" unless done, or omitted to be
done, by you not in good faith and without reasonable belief that your action or
omission was in the best interest of the Company. Notwithstanding the foregoing,
you shall not be deemed to have been terminated for Cause unless and until there
shall have been delivered to you a copy of a resolution duly adopted by the
affirmative vote of not less than three-quarters of the entire membership of the
Board at a meeting of the Board called and held for the
<PAGE> 6
purpose (after reasonable notice to you and an opportunity for you, together
with your counsel, to be heard before the Board), finding that in the good faith
opinion of the Board you were guilty of conduct set forth above in clauses (1)
or (2) of the first sentence of this Subsection and specifying the particulars
thereof in detail.
C. Good Reason. You shall be entitled to terminate your
employment for Good Reason. For purposes of this Agreement, "Good Reason" shall,
without your express written consent, mean:
(1) The assignment to you of any duties inconsistent with
your status as an Executive Officer of the Company or an adverse alteration in
the nature or status of your responsibilities from those in effect immediately
prior to a Change in Control;
(2) The disposition by the Company of the business of the
Company for which your services are principally provided pursuant to a partial
or complete liquidation of the Company, a sale of assets (including stock of a
subsidiary) of the Company, or otherwise, unless such disposition has been
approved by the Board, two-thirds of the members of which were directors on the
date of this Agreement or whose appointment, election, or nomination for
election was previously approved by such directors;
(3) A reduction by the Company in your annual base salary
as in effect on the date hereof or as the same may be increased from time to
time, except for across-the-board salary reductions similarly affecting all
executives of the Company, all executives of any Person in control of the
Company, and all executives of any Person in control of Boise Cascade;
(4) The Company's requiring you to be based anywhere other
than in the metropolitan area in which you were based immediately prior to a
Change in Control, except for required travel on the Company's business to an
extent substantially consistent with your present business travel obligations;
(5) The failure by the Company to continue in effect any
compensation plan in which you were participating immediately prior to the
Change in Control, including but not limited to your participation, if any, in
the Company's Key Executive Performance Plan for Executive Officers (the
"KEPP"), the 1995 Executive Officer Deferred Compensation Plans, the 1995 Key
Executive Deferred Compensation Plans (the "Deferred Compensation Plans"), the
Key Executive Stock Option Plan, or any substitute or additional plans adopted
prior to the Change in Control, unless an equitable arrangement (embodied in an
ongoing substitute or alternative plan) has been made with respect to such plan
in connection with the Change in Control, or unless the plan has expired in
accordance with its terms in effect immediately prior to the Change in Control;
or the failure by the Company to continue your participation therein on a basis
not materially less favorable, both in terms of the amount of benefits provided
and the level of your participation relative to
<PAGE> 7
other participants, as existed immediately prior to the Change in Control;
(6) The failure by the Company to continue to provide you
with benefits substantially similar to those enjoyed by you under any of the
Company's pension, life insurance, medical, health and accident, or disability
plans, including, without limitation, the Company's Split-Dollar Life Insurance
Plan ("Split-Dollar Plan"), and the Supplemental Early Retirement Plan for
Executive Officers ("Early Retirement Plan"), the Pension Plan for Salaried
Employees (the "Qualified Plan"), the Savings and Supplemental Retirement Plan
(the "SSRP"), the Supplemental Retirement Programs (the "Excess Benefit Plans"),
and any other nonqualified pension agreement between you and the Company, in
which you may have been participating at the time of a Change in Control, the
taking of any action by the Company which would directly or indirectly
materially reduce any of such benefits or deprive you of any material fringe
benefit enjoyed by you at the time of the Change in Control, or the failure by
the Company to provide you with the number of paid vacation days to which you
are entitled on the basis of years of service with the Company in accordance
with the Company's normal vacation policy in effect at the time of the Change in
Control;
(7) The failure of the Company to obtain a satisfactory
agreement from any successor to assume and agree to perform this Agreement, as
contemplated in Section 7 hereof; or
(8) Any purported termination of your employment which is
not effected pursuant to a Notice of Termination satisfying the requirements of
Subsection D below (and, if applicable, Subsection B above). Furthermore, no
such purported termination of your employment shall be effective for purposes of
this Agreement.
Your right to terminate your employment pursuant to this
Subsection shall not be affected by your incapacity due to physical or mental
illness. Your continued employment shall not constitute consent to, or a waiver
of rights with respect to, any act or failure to act constituting Good Reason
hereunder.
D. Notice of Termination. Any purported termination by the
Company or by you shall be communicated by written Notice of Termination to the
other party hereto in accordance with Section 8 hereof. For purposes of this
Agreement, a "Notice of Termination" shall mean a notice which shall indicate
the specific termination provision in this Agreement relied upon and shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of your employment under the provision so indicated.
E. Date of Termination, Etc. "Date of Termination" shall mean (1)
if your employment is terminated for Disability, thirty days after Notice of
Termination is given (provided that you shall not have returned to the
performance of your duties on a full-time basis during such thirty-day period),
and (2) if your employment is
<PAGE> 8
terminated pursuant to Subsection B or C above or for any other reason, the date
specified in the Notice of Termination (which, in the case of a termination
pursuant to Subsection B above shall not be less than thirty days, and in the
case of a termination pursuant to Subsection C above shall not be more than
sixty days, respectively, from the date such Notice of Termination is given);
provided that if within thirty days after any Notice of Termination is given the
party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, the Date of Termination shall be the
date on which the dispute is finally determined, either by mutual written
agreement of the parties or by a final judgment, order or decree of a court of
competent jurisdiction (the time for appeal therefrom having expired and no
appeal having been perfected); and provided further that the Date of Termination
shall be extended by a notice of dispute only if such notice is given in good
faith and the party giving such notice pursues the resolution of such dispute
with reasonable diligence. Notwithstanding the pendency of any such dispute, the
Company will continue to pay you your full compensation in effect when the
notice giving rise to the dispute was given (including, but not limited to, base
salary) and continue you as a participant in all compensation, benefit and
insurance plans in which you were participating when the notice giving rise to
the dispute was given, until the dispute is finally resolved in accordance with
this Section. Amounts paid under this Section are in addition to all other
amounts due under this Agreement and shall not be offset against or reduce any
other amounts due under this Agreement.
4. Compensation Upon Termination or During Disability.
A. During any period that you fail to perform your duties
hereunder as a result of incapacity due to physical or mental illness, you shall
continue to receive your full base salary at the rate then in effect and all
compensation, including under the KEPP, paid during the period until your
employment is terminated pursuant to Section 3.A hereof. Thereafter, your
benefits shall be determined in accordance with the insurance programs then in
effect of the Company or subsidiary corporation by which you are employed, and
any qualified retirement plan and any executive supplemental retirement plan in
effect immediately prior to the Change in Control.
B. If your employment shall be terminated for Cause or by you
other than for Good Reason, the Company shall pay you only your full base salary
through the Date of Termination at the rate in effect at the time Notice of
Termination is given, plus all other amounts to which you are entitled under any
compensation plan of the Company at the time such payments are due, and the
Company shall have no further obligations to you under this Agreement.
C. If your employment shall be terminated by the Company other
than for Cause or Disability, or by you for Good Reason, then you shall be
entitled to the benefits provided below:
<PAGE> 9
(1) The Company shall pay you, not later than the
fifth day following the Date of Termination, your full base salary through the
Date of Termination at the rate in effect at the time Notice of Termination is
given, plus all other amounts to which you are entitled under any compensation
plan of the Company at the time such payments are due;
(2) The Company shall pay to you, not later than the
fifth day following the Date of Termination, a lump sum severance payment equal
to (a) three times the sum of (i) your annual base salary, plus (ii) your target
bonus payout under the Company's Key Executive Performance Plan for Executive
Officers (the "KEPP") (or any substitute plan) for the year in which occurs the
Date of Termination or Change in Control, whichever is greater, less (b) the
dollar amount, if any, which you are paid upon termination of employment,
without regard to the provisions of this Agreement, under the Company's
Severance Pay Policy for Executive Officers as in effect immediately prior to
the Date of Termination;
(3) The Company shall pay to you, not later than the
fifth day following the Date of Termination, a lump sum amount equal to the
greater of the value of your unused and accrued vacation entitlement in
accordance with the Company's Vacation Policy as in effect immediately prior to
the Change in Control or as in effect on Date of Termination;
(4) The Company shall pay to you, not later than the
fifth day following the Date of Termination, a lump sum amount equal to the sum
of (a) any unpaid bonus (excluding deferred awards, plus interest, credited to
your account, which shall be payable under the KEPP in accordance with its
terms) pursuant to the KEPP (or any substitute plan) allocable to you in respect
of the Plan year preceding that in which the Date of Termination occurs, and (b)
a KEPP award (or award under a substitute plan) for the year in which the Date
of Termination occurs, equal to the greater of (i) your target bonus payout
under such plan (determined without regard to any reduction in your base salary
constituting Good Reason), prorated through the month in which the Date of
Termination occurs, or (ii) the actual KEPP award (or award under such
substitute plan) as determined by actual year-to-date earnings per share through
the last day of the month prior to the month in which the Date of Termination
occurs in accordance with the KEPP award criteria (or criteria under such
substitute plan) in which you are participating as of the Date of Termination,
prorated through the month in which the Date of Termination occurs;
(5) All stock options granted under the Key Executive
Stock Option Plan held by you shall become immediately exercisable; and
(6) The Company shall also pay to you all legal fees
and expenses incurred by you as a result of such termination (including all such
fees and expenses, if any, incurred in contesting or disputing any such
termination or in seeking to obtain or enforce any right or benefit provided by
this Agreement).
<PAGE> 10
D. If your employment shall be terminated (1) by the Company or
subsidiary corporation by which you are employed other than for Cause or
Disability or (2) by you for Good Reason, then for a twelve-month period
following such termination, the Company shall maintain, in full force and effect
for your continued benefit, all life, disability, accident and health insurance
plans or arrangements, and financial counseling services in which you may have
been participating immediately prior to the Change in Control, provided your
continued participation (or a particular type of coverage) is possible under the
general terms and provisions of such plans and arrangements. In the event your
participation (or a particular type of coverage) under any such plan or
arrangement is barred, the Company shall arrange to provide you with benefits,
at substantially the same cost to you, which are substantially similar to those
which you are entitled to receive under such plans and arrangements.
Notwithstanding the foregoing, the Company shall continue to pay such amounts as
may be required to maintain any insurance you may have had in force pursuant to
the Split-Dollar Plan until the later of your sixty-fifth birthday or ten years
after the insurance policy is issued, after which the Company will release to
you its interest in each such policy.
E. If your employment shall be terminated (1) by the Company or
subsidiary corporation by which you are employed other than for Cause or
Disability or (2) by you for Good Reason, then in addition to the aggregate
retirement benefits to which you are entitled under the Company's Qualified
Plan, the Company's Excess Benefit Plans, any other nonqualified pension
agreement or arrangement, or any successor plans thereto, the Company shall pay
you amounts equal to (a), (b), (c), or (d), whichever is applicable:
(a) If you have satisfied the service, but not the
age, requirements of the Early Retirement Plan, as in effect immediately prior
to the Change in Control, you shall receive a monthly benefit, commencing on
your fifty-fifth birthday equal to the benefit to which you would have been
entitled under the Early Retirement Plan, as in effect immediately prior to the
Change in Control, had you satisfied the age and service requirements as of the
Date of Termination; or
(b) If you have satisfied the age, but not the
service requirement of the Early Retirement Plan, as in effect immediately
prior to the Change in Control, you shall receive a monthly benefit, commencing
as of the Date of Termination equal to the benefit to which you would have been
entitled under the Early Retirement Plan, as in effect immediately prior to the
Change in Control, had you satisfied the age and service requirements as of the
Date of Termination; or
(c) If you have satisfied neither the age nor the
service requirements of the Early Retirement Plan, as in effect immediately
prior to the Change in Control, you shall receive a monthly benefit, commencing
on your fifty-fifth birthday equal to the benefit to which you would have been
entitled under the Early Retirement Plan, as in effect immediately prior to the
Change in Control, had you satisfied the age and service requirements as of the
Date of Termination; or
<PAGE> 11
(d) If you have satisfied both the age and the service
requirements of the Early Retirement Plan, as in effect immediately before the
Change in Control, you shall receive the benefits to which you are entitled
under the Early Retirement Plan.
The benefits under this Paragraph E shall be paid in the same manner as, and
shall otherwise possess the same rights and privileges as were available with
respect to, benefits under the terms of the Early Retirement Plan as in effect
immediately prior to the Change in Control.
F. If your employment shall be terminated (1) by the Company or
subsidiary corporation by which you are employed other than for Cause or
Disability or (2) by you for Good Reason, then you shall not be required to
mitigate the amount of any payment provided for in this Section 4 by seeking
other employment or otherwise, nor shall the amount of any payment or benefit
provided for in this Section 4 (except as otherwise provided in the immediately
succeeding sentence) be reduced by any compensation earned by you as the result
of employment by another employer or by retirement benefits after the Date of
Termination, or otherwise. Benefits otherwise receivable by you pursuant to
Section 4.D shall be reduced to the extent comparable benefits are actually
received by you during the twelve-month period following your termination, and
any such benefits actually received by you shall be reported to the Company.
5. Protective Limitation.
A. Notwithstanding any provision hereof to the contrary, in the
event you (1) would receive payments under this Agreement or under any other
plan, program, or policy sponsored by the Company (the "Total Payments"); and
(2) which Total Payments relate to a change in control of the Company and which
are determined (as described below) by your legal counsel to be subject to
excise tax under Section 4999 of the Code (the "Excise Tax"); then (3) the
Company shall pay to you an additional amount (the "Gross-up Payment") such that
the net amount retained by you, after deduction of any Excise Tax on the Total
Payments and any federal, state and local income and employment taxes, and
Excise Tax upon the Gross-up Payment, shall be equal to the Total Payments.
B. For purposes of determining whether any of the Total Payments
will be subject to the Excise Tax and the amount of such Excise Tax, (1) all of
the Total Payments shall be treated as "parachute payments" (within the meaning
of Section 280G(b)(2) of the Code) unless, in the opinion of your legal counsel
(who shall be reasonably acceptable to the Company), such payments or benefits
(in whole or in part) do not constitute parachute payments, including by reason
of Section 280G(b)(4)(A) of the Code, and (2) all "excess parachute payments"
within the meaning of Section 280G(b)(1) of the Code shall be treated as subject
to the Excise Tax unless, in the opinion of your legal counsel, such excess
parachute payments (in
<PAGE> 12
whole or in part) represent reasonable compensation for services actually
rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of
the base amount allocable to such reasonable compensation, or are otherwise not
subject to the Excise Tax. For purposes of determining the amount of the
Gross-up Payment, you will be deemed to pay federal income tax at the highest
marginal rate of federal income taxation in the calendar year in which the
Gross-up Payment is to be made and state and local income taxes at the highest
marginal rate of taxation in the state and locality of your residence on the
Date of Termination, net of the maximum reduction in federal income taxes which
could be obtained from deduction of such state and local taxes.
C. The payments provided in subsection 5(A) shall be made not
later than the fifth day following the Date of Termination; provided, however,
if the amount of such payment cannot be finally determined on or before such
day, the Company shall pay to you on such day an estimate, as determined in good
faith by the Company of the minimum amount of such payments to which you are
clearly entitled and shall pay the remainder of such payments (together with
interest on the unpaid remainder (or on all such payments to the extent the
Company fails to make such payments when due) at 120% of the rate provided in
Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be
determined but in no event later than the thirtieth (30th) day after the Date of
Termination. In the event that the amount of the estimated payments exceeds the
amount subsequently determined to have been due, such excess shall constitute a
loan by the Company to you, payable on the fifth (5th) business day after demand
by the Company (together with interest at 120% of the rate provided in Section
1274(b)(2)(B) of the Code). At the time that payments are made under this
Agreement, the Company shall provide you with a written statement setting forth
the manner in which such payments were calculated and the basis for such
calculations including, without limitation, any opinions or other advice the
Company has received from Tax Counsel, its auditor, or other advisors or
consultants (and any such opinions or advice which are in writing shall be
attached to the statement).
D. In the event that the Excise Tax is finally determined to be
less than the amount taken into account hereunder in calculating the Gross-up
Payment, you shall repay to the Company, within five (5) business days following
the time that the amount of such reduction in Excise Tax is finally determined,
the portion of the Gross-up Payment attributable to such reduction (plus that
portion of the Gross-up Payment attributable to the Excise Tax and federal,
state, and local income and employment taxes imposed on the Gross-up Payment
being repaid by you, to the extent that such repayment results in a reduction in
the Excise Tax and a dollar-for-dollar reduction in your taxable income and
wages for purposes of federal, state, and local income and employment taxes)
plus interest on the amount of such repayment at 120% of the rate provided in
Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is
determined, for any reason, to exceed the amount taken into account hereunder in
calculating the Gross-up Payment, the Company shall make an additional Gross-up
Payment in respect of such excess (plus any interest, penalties,
<PAGE> 13
or additions payable by you with respect to such excess and such portion) within
five (5) business days following the time that the amount of such excess is
finally determined. You and the Company shall reasonable cooperate with the
other in connection with any administrative or judicial proceedings concerning
the existence or amount of liability for Excise Tax with respect to the Total
Payments.
6. Deferred Compensation and Benefits Trust. The Company will establish
a Deferred Compensation and Benefits Trust, and shall comply with the terms of
that Trust. Upon the occurrence of any Potential Change in Control, the Company
shall transfer to the Trust an amount of cash, marketable securities, or other
property acceptable to the trustee(s) equal in value to 105% of the amount
necessary, on an actuarial basis and calculated in accordance with the terms of
the Trust, to pay the Company's obligations under this Agreement (the "Funding
Amount"). The cash, marketable securities, and other property so transferred
shall be held, managed, and disbursed by the trustee(s) subject to and in
accordance with the terms of the Trust. In addition, from time to time, the
Company shall make any and all additional transfers of cash, marketable
securities, or other property acceptable to the trustee(s) as may be necessary
in order to maintain the Funding Amount with respect to this Agreement. The
determination of the amount required to be transferred by the Company to the
Trust shall include any amounts that could in any circumstances be payable in
the future under Section 4 hereof, calculated in accordance with the following
rules: (A) Upon a Potential Change in Control, the Company will calculate the
amount required to be transferred to the Trust based on the assumption that your
employment, if not previously terminated, will be terminated by the Company
other than for Cause or Disability on the second anniversary of the Potential
Change in Control; and (B) Upon any subsequent recalculation, your employment
will be deemed to have been terminated by the Company other than for Cause or
Disability on the later of the date of actual termination or the date of such
recalculation.
For this purpose, the term Deferred Compensation and Benefits
Trust shall mean an irrevocable trust or trusts established or to be established
by the Company with an independent trustee or trustees for the benefit of
persons entitled to receive payments or benefits hereunder, the assets of which
nevertheless will be subject to claims of the Company's creditors in the event
of bankruptcy or insolvency and with respect to which the Company shall have
received a ruling from the Internal Revenue Service that the trust is a "grantor
trust" for federal income tax purposes.
The Deferred Compensation and Benefits Trust shall contain the
following additional provisions:
(a) If a Change in Control does not occur within one year after
the Potential Change in Control, the Company may reclaim the assets transferred
to the trustee or trustees subject to the requirement that it be again funded
upon the occurrence of another Potential Change in Control.
<PAGE> 14
(b) Upon a Change in Control, the assets of the Deferred
Compensation and Benefits Trust shall be used to pay benefits under this
Agreement, except to the extent such benefits are paid by the Company, and the
Company and any successor shall continue to be liable for the ultimate payment
of those benefits.
(c) The Deferred Compensation and Benefits Trust will be
terminated upon the exhaustion of the trust assets or upon payment of all the
Company's obligations.
(d) The Deferred Compensation and Benefits Trust shall contain
other appropriate terms and conditions consistent with the purposes sought to be
accomplished by it. Prior to a Change in Control, the Deferred Compensation and
Benefits Trust may be amended from time to time by the Company, but no such
amendment may substantially alter any of the provisions set out in the preceding
paragraphs.
7. Successors; Binding Agreement.
A. The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such assumption and agreement
prior to the effectiveness of any such succession shall be a breach of this
Agreement and shall entitle you to compensation from the Company in the same
amount and on the same terms as you would be entitled hereunder if you terminate
your employment for Good Reason, except that for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination. As used in this Agreement, "Company" shall mean
the Company as hereinbefore defined and any successor to its business and/or
assets as aforesaid which assumes and agrees to perform this Agreement by
operation of law, or otherwise.
B. This Agreement shall inure to the benefit of and be
enforceable by your personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If you
should die while any amount would still be payable to you hereunder if you had
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to your devisee, legatee or
other designee or if there is no such designee, to your estate.
C. Any dispute between you and the Company regarding this
Agreement may be resolved either by binding arbitration or by judicial
proceedings at your sole election, and the Company agrees to be bound by your
election in that regard.
<PAGE> 15
8. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth on the first page of this Agreement, provided
that all notices to the Company shall be directed to the attention of the Board
with a copy to the Secretary of the Company, or to such other address as either
party may have furnished to the other in writing in accordance herewith, except
that notice of change of address shall be effective only upon receipt.
9. Miscellaneous. No provision of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to in
writing and signed by you and such officer as may be designated by the Board. No
waiver by either party hereto at any time of any breach by the other party
hereto of, or compliance with, any condition or provision of this Agreement to
be performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time. No agreements or representations, oral or otherwise, express or implied,
with respect to the subject matter hereof have been made by either party which
are not expressly set forth in this Agreement. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the state of Delaware (regardless of the law which may be applicable under
principles of conflicts of law). All references to sections of the Exchange Act
or the Code shall be deemed also to refer to any successor provisions to such
sections. If the obligations of the Company under Section 4 arise prior to the
expiration of the term of this Agreement, such obligations shall survive the
expiration of the term.
10. Validity. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
11. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
12. No Guaranty of Employment. Neither this contract nor any action
taken hereunder shall be construed as giving you a right to be retained as an
employee or an executive officer of the Company.
13. Governing Law. This Agreement shall be governed by and construed in
accordance with Delaware law.
<PAGE> 16
14. Other Benefits. Any payments due to you as provided herein are in
addition to, and not in lieu of, any amounts to which you may be entitled under
any other employee benefit plan, program or policy of the Company.
If this letter correctly sets forth our agreement on the subject matter
hereof, kindly sign and return to the Company the enclosed copy of this letter
which will then constitute our agreement on this subject.
Sincerely,
BOISE CASCADE OFFICE PRODUCTS CORPORATION
By
----------------------------
George J. Harad
Chairman of the Board
of Directors
Agreed to this [ ] day of [ ],
- ------------------------------
[Name of Officer]
Enclosure
<PAGE> 1
Exhibit 10.7
BOISE CASCADE OFFICE PRODUCTS CORPORATION
KEY EXECUTIVE STOCK OPTION PLAN
(As Amended Through February 16, 1999)
<PAGE> 2
SECTION 1
PURPOSE
1.1 Establishment and Purpose. Boise Cascade Office Products
Corporation, a Delaware corporation (the "Company"), hereby establishes the
Boise Cascade Office Products Corporation Key Executive Stock Option Plan (the
"Plan") as a vehicle by which a portion of the compensation of certain employees
of the Company may be provided in the form of long-term, equity-based incentives
that are designed to attract, retain, and motivate key employees of the Company
and to focus the employee's attention on the long-term growth of the Company.
Each Option issued under this Plan is issued solely in respect of the
Participant's employment with the Company.
SECTION 2
DEFINITIONS
2.1 Act. "Act" means the Securities Exchange Act of 1934, as amended,
and any rules and regulations thereunder.
2.2 Board. "Board" means the Board of Directors of the Company as the
same may be constituted from time to time.
2.3 Company. "Company" means Boise Cascade Office Products Corporation,
a Delaware corporation, and its subsidiaries and their respective successors and
assigns.
2.4 Compensation Committee. "Compensation Committee" means the
committee composed of members of the Board, or any successor to such committee,
who have been appointed by the Board to such position from time to time with the
purpose of making recommendations concerning executive compensation.
2.5 Competitor. "Competitor" means any business, foreign or domestic,
which is engaged at any time relevant to the provisions of this Plan, in the
distribution of products or in the providing of services in competition with
products sold or distributed, or services provided by the Company. The
determination of whether a business is a Competitor shall be made by the
Company's General Counsel, in his/her sole discretion.
2.6 Disability. "Disability" means a physical or mental impairment that
prevents the Participant from performing the duties of the employment in which
the Participant was engaged before the commencement of impairment, subject to
the written certification of a medical doctor.
2.7 Eligible Individual. "Eligible Individual" means an employee of the
Company who, by virtue of his or her position with the Company or the nature of
the
<PAGE> 3
services he or she provides to the Company, has been identified by the senior
management of the Company and selected by the Compensation Committee as being
eligible for consideration to receive grant(s) of Options under this Plan.
2.8 Employment with any Competitor. "Employment with any Competitor"
means providing significant services as an employee or consultant, or otherwise
rendering services of a significant nature for remuneration, to a Competitor.
2.9 Exercise Price. "Exercise Price" means, for any Option, the Fair
Market Value of the Shares on the Grant Date of such Option.
2.10 Fair Market Value. "Fair Market Value" means, until the Shares are
listed on the New York Stock Exchange, the fair value of the Shares on the Grant
Date as determined by the Compensation Committee. Once the Shares are so listed,
"Fair Market Value" shall mean the closing price of a Share as reported on the
consolidated tape of the New York Stock Exchange on the date with respect to
which the Fair Market Value is being determined. In the event there are no
transactions in Shares on the date in question, the Fair Market Value shall be
determined as of the next immediately preceding date on which there were
transactions in Shares on the New York Stock Exchange.
2.11 Grant Date. "Grant Date" means the date on which an Option is
granted under this Plan.
2.12 Internal Revenue Code or Code. "Internal Revenue Code" or "Code"
means the Internal Revenue Code of 1986, as amended from time to time, and the
regulations thereunder.
2.13 Option. "Option" means an option to purchase Shares granted in
accordance with the terms of the Plan, as described more fully in Section 4.
2.14 Participant. "Participant" means an Eligible Individual to whom
the Compensation Committee has granted an Option under this Plan, provided such
Eligible Individual has elected to participate in the Plan by completing and
submitting a stock option agreement as contemplated by Section 3.1 hereof.
2.15 Retirement. "Retirement" means an Employee's termination of
employment with the Company, other than as a result of death, total and
permanent disability, or for disciplinary reasons (as defined for purposes of
the Company's Corporate Policy Manual) at any time after the Employee has
reached age 55 with ten or more Years of Service with the Company as defined in
the Company's Pension Plan for Salaried Employees.
2.16 Share. "Share" means a share, duly authorized, of the Company's
common stock, $.01 par value.
<PAGE> 4
SECTION 3
ELIGIBILITY
3.1 Eligibility. An individual who is an Eligible Individual shall be
eligible to receive grant(s) of Options provided he or she signs a stock option
agreement in such form as is prescribed by the Compensation Committee from time
to time for such purposes.
SECTION 4
OPTIONS
4.1 Shares Subject to the Plan. Options may be granted to Participants
by the Company under this Plan, pursuant to Section 4.2, in respect of
authorized and unissued Shares, provided that the aggregate number of Shares
reserved for issuance under this Plan, subject to adjustment or increase of such
number, pursuant to the provisions of Section 4.11, shall not exceed 6,500,000
Shares. If any Shares are subject to an Option which expires or is terminated
unexercised, such Shares shall be available for issuance with respect to
subsequent Options granted under the Plan. No fractional shares may be purchased
or issued under the Plan.
4.2 Grant of Options. An Eligible Individual may be granted, by the
Compensation Committee, an Option to purchase a number of Shares from the
Company at the Exercise Price per Share. The number of Shares subject to an
Option, those Eligible Individuals chosen to receive Options, and the Grant Date
for an Option are matters solely within the discretion of the Compensation
Committee. The Compensation Committee shall determine whether an Option is to be
an Incentive Stock Option (within the meaning of Section 422A of the Code) or a
nonstatutory Option. In no event shall any grant of an Incentive Stock Option
provide for such Option to be or become exercisable in amounts in excess of
$100,000 per calendar year.
4.3 Option Agreement. As determined by the Compensation Committee, each
Option shall be evidenced by a stock option agreement that specifies:
(a) Grant price;
(b) Duration of the Option;
(c) Number of shares of Stock to which the Option pertains;
(d) Vesting requirements, if any;
(e) Whether the Option is an incentive stock option or a
nonstatutory option;
<PAGE> 5
(f) Restrictions on exercisability, if any;
(g) Rights of the Optionees upon termination of employment with the
Company, provided that the termination rights for Optionees receiving incentive
stock options shall conform with Section 422A of the Code;
(h) The terms of the loan, if any, that will be made available
in connection with the exercise of an Option; and
(i) Such other information as the Committee deems desirable.
No Option shall have an expiration date later than the first day
following the tenth anniversary of the date of its grant.
4.4 Exercise of Options. Subject to any restrictions set out in any
policy of the Company that may be adopted to provide guidelines as to when
Participants and others may engage in transactions involving securities of the
Company, an Option may be exercised by delivery to the Company of a completed
stock option exercise form, in the form approved by the Company from time to
time, specifying the number of Shares with respect to which the Option is being
exercised and accompanied by payment in full of the Exercise Price of the Shares
then being purchased in (i) cash, (ii) Shares, (iii) a loan from the Company, or
(iv) delivery of an irrevocable written notice instructing the Company to
deliver the Shares being purchased to a broker selected by the Company, subject
to the broker's written guarantee to deliver cash to the Company, in each case
equal to the full consideration of the Exercise Price for the Shares being
purchased. Options may be exercised in whole or in part. Certificates for such
Shares, or such other proof of purchase as is appropriate, shall be delivered to
the Participant within a reasonable time following the receipt of such notice
and payment.
4.5 Vesting of Options. The vesting of any Option shall be determined
by the Compensation Committee at the time that the Option is granted and shall
be specified in the applicable stock option agreement.
4.6 Exercise Price. Options shall be exercised under this Plan only at
the Exercise Price.
4.7 Limit on Options to any Person. The total number of Options to be
granted to any one Participant under the Plan shall not exceed 20% of the total
number of shares authorized for issuance pursuant to the Plan.
4.8 Options Nonassignable. Each Option is personal to the Participant
and shall not be transferable by the Participant other than by will or the laws
of descent and distribution. No Option granted under this Plan, nor any interest
therein, may be otherwise transferred, assigned, pledged, or hypothecated by the
Participant to whom the Option was granted in such Participant's lifetime,
whether by operation of law or
<PAGE> 6
otherwise, or be made subject to execution, attachment, levy, or similar
process. A Participant, by written notice to the Company, may designate one or
more persons (and from time to time change such designation), including his or
her legal representative, who, by reason of the Participant's death, shall
acquire the right to exercise all or a portion of an Option granted under this
Plan. Any exercise by a representative shall be subject to the provisions of
this Plan.
4.9 Change of Employment. Notwithstanding any other provisions of the
Plan, Options already granted shall not be affected by any change of employment
of the Participant where the Participant continues to be employed by the
Company. For purposes of the Plan, neither (i) a transfer of a Participant to or
from the Company or to or from a subsidiary or parent or from one subsidiary to
another, or (ii) a leave of absence duly authorized by the Company shall be
deemed a termination of employment. However, a Participant may not exercise an
Option or any applicable stock appreciation right during any leave of absence
unless authorized to do so by the Committee.
4.10 Conditions Precedent to Issuance of Shares. Notwithstanding any of
the provisions contained in the Plan or in any Option, the Company's obligation
to issue Shares to a Participant pursuant to the exercise of an Option under the
Plan shall be subject to:
(a) Completion of such registration or other qualification of
such Shares or obtaining approval of such governmental authority as shall be
determined to be necessary or advisable in connection with the authorization,
issuance, or sale thereof;
(b) The listing of such Shares on the New York Stock Exchange
and, if required, the preclearance of the Plan with such Exchange;
(c) The receipt from the Participant of such representations,
agreements, and undertakings as to future dealings in such Shares as the Company
determines to be necessary or advisable; and
(d) Such shareholder approval as may be required under the Act,
other applicable securities laws, the Code, and the New York Stock Exchange.
In this connection, the Company shall, to the extent necessary,
take all reasonable steps to obtain such approvals, registrations, and
qualifications as may be necessary for issuance of such Shares in compliance
with applicable laws and for the listing of such Shares on the New York Stock
Exchange.
4.11 Adjustments. Subsequent to the adoption of the Plan by the
Compensation Committee, appropriate adjustments in the number of Shares subject
to the Plan, Options granted or to be granted, Shares subject to an Option, and
Exercise Price shall be made by the Compensation Committee to give effect to
adjustments in
<PAGE> 7
the number of Shares resulting from subdivision, split, consolidation, exchange,
merger, recapitalization, or reclassification of the Shares, the payment of
stock dividends by the Company (other than dividends in the ordinary course) or
other similar changes in the capital stock of the Company. The purpose of such
adjustments shall be to ensure that any Participant exercising an Option after
such change in the capital stock of the Company shall be in the same position as
he or she would have been if he or she had exercised the Option prior to such
change, except with respect to the receipt of income on the Shares. Fractional
shares resulting from such adjustment shall be rounded up to the nearest whole
number. No adjustment shall be made in connection with the issuance by the
Company of any warrants, rights, or options to acquire additional shares or of
securities convertible into Shares.
4.12 Acceleration of Stock Options. Notwithstanding any other provision
of this Plan, in the event of a dissolution or a liquidation of the Company or a
merger and consolidation in which the Company is not the surviving corporation,
any unexercised Options granted prior to the date of the merger or consolidation
shall become exercisable on the day immediately preceding the date of the merger
or consolidation.
SECTION 5
EVENTS AFFECTING ENTITLEMENT
5.1 Events Affecting Entitlement to Options. If the Participant dies,
terminates employment, retires, or suffers a Disability before Options granted
to such Participant are exercised, such Options shall expire on the date
specified in the governing stock option agreement, unless the Compensation
Committee extends, in whole or in part, the expiration date.
SECTION 6
DURATION OF THE PLAN
6.1 Duration. The Plan shall remain in effect until all Shares subject
to Options granted pursuant to the Plan have been purchased pursuant to exercise
of such Options. Notwithstanding the foregoing, no Options may be granted
pursuant to the Plan after the tenth anniversary of the Plan's effective date.
SECTION 7
PARTICIPANTS' RIGHTS
7.1 Employment. Nothing in this Plan shall interfere with or limit in
any way the right to the Company to terminate the employment of an any Eligible
Employee or Participant at any time. Nothing in this Plan shall confer upon any
employee, any Eligible Employee, or any Participant any right to continue in the
employ of the
<PAGE> 8
Company, the employment of such individuals being expressly "at will" and
subject to termination at any time in the Company's sole discretion.
7.2 Rights as Shareholders. Prior to the exercise of their Options,
Participants shall have no rights whatsoever as shareholders in respect of any
of the Shares (including, without limitation, any right to receive dividends or
other distribution therefrom, voting rights, warrants, or rights under any
rights offering). Following the exercise of their Options, Participants shall
have the same rights with respect to the Shares as other shareholders of like
Shares.
7.3 No Extension of Rights. Participation in this Plan shall not give
any Participant any right or claim to any benefit except to the extent provided
in the Plan.
SECTION 8
VALUATION
8.1 Method of Valuation. Options granted under this Plan shall be
valued at Fair Market Value or, should it not be possible to determine Fair
Market Value as provided hereunder, in accordance with such other valuation
methodology as is determined by the Compensation Committee from time to time to
be appropriate and which is acceptable to applicable regulatory authorities.
SECTION 9
NOTICES
9.1 Delivery. Any notice or other document to be delivered to a
Participant shall be validly sent, given, or delivered if it is delivered by
hand to the Participant or it is mailed by first class prepaid mail to the
latest address shown on the records of the Company for the Participant.
SECTION 10
ADMINISTRATION AND TERMINATION
10.1 Administration. This Plan shall be administered by the
Compensation Committee of the Board of Directors of the Company. The
Compensation Committee shall have full authority to administer this Plan,
including authority to interpret and construe any provision of this Plan, to
adopt such rules for administration of this Plan as it may deem necessary or
appropriate, and to delegate duties hereunder to such persons or entities as it
deems appropriate. Decisions of the Compensation Committee shall be final and
binding on all persons who have an interest in this Plan.
10.2 Amendment. The Compensation Committee may amend the Plan at any
time, with or without notice to the Participants, provided, however, that no
amendment
<PAGE> 9
shall reduce the interests of the Participants under any Options earlier granted
to a Participant under the Plan without the written consent of the Participants.
Without approval of a majority of the Company's shareholders, no revision or
amendment shall (i) change the number of Shares subject to this Plan (except as
provided in Section 4.11), (ii) change the designation of the class of employees
eligible to participate in the Plan, (iii) change the Exercise Price of the
Options, or (iv) materially increase the benefits accruing to Participants under
the Plan or the cost of this Plan to the Company. Moreover, in no event may Plan
provisions be amended more than once every six months other than to comport with
changes in the Internal Revenue Code, the Employee Retirement Income Security
Act, or the rules and regulations thereunder. No amendment, modification, or
termination of this Plan shall in any manner adversely affect the rights of any
Participant holding Options granted under this Plan without his or her consent.
10.3 Termination. The Company may terminate the Plan at any time, with
or without notice to the Participants, in which case all Options granted to
Participants shall vest fully in those Participants.
10.4 Shareholder Approval and Registration Statement. This Plan shall
be approved by the Compensation Committee and submitted to the Company's
shareholders for approval. Any Options granted under this Plan, prior to
effectiveness of a registration statement filed with the Securities and Exchange
Commission covering the Shares to be issued hereunder, shall not be exercisable
until, and are expressly conditional upon, the effectiveness of a registration
statement covering the Shares.
10.5 Expenses. The Company shall pay all costs of administering and
operating the Plan.
10.6 Records. The Company shall maintain, or cause to be maintained,
records indicating the amount credited to the Participant's account under the
Plan, from time to time, and the number of Options granted to each Participant.
Such records shall be conclusive as to all matters involved in the
administration of the Plan.
10.7 Statements. The Company shall furnish, or cause to be furnished,
to each Participant periodical statements indicating the vested status of his or
her Options and any other information which the Company considers to be relevant
to the Participant. Such statements shall be given at times determined by the
Company.
10.8 Tax Information Returns. The Company will issue, or cause to be
issued, to each Participant all tax information required to be delivered under
United States tax laws within the time periods specified in those laws.
10.9 Withholding Taxes. Whenever Shares are issued on the exercise of
an Option under the Plan, the Company shall (a) require the recipient of the
Shares to remit to the Company an amount sufficient to satisfy all withholding
taxes, (b) deduct from any cash payment pursuant to any broker-assisted option
exercise (net to
<PAGE> 10
optionee in cash or shares) an amount sufficient to satisfy any withholding tax
requirements, or (c) withhold from or require surrender by the recipient, as
appropriate, Shares otherwise issuable or issued upon exercise of the Option,
the number of Shares sufficient to satisfy, to the extent permitted under
applicable law, federal and state withholding tax requirements resulting from
the exercise, provided, however, that the Company shall not withhold or accept
surrender of Shares under this paragraph unless the recipient of the Shares has
made an irrevocable election to have Shares withheld or surrendered for this
purpose at least six months after the date of grant of the Option and either (i)
six months or (ii) within a window period prior to the date the amount of
withholding tax is determined. The Committee may, at any time subsequent to an
election under this paragraph, disapprove the election and require satisfaction
of withholding taxes by other means permitted under the Plan. Shares withheld or
surrendered under this paragraph shall be valued at their Fair Market Value on
the date the amount of withholding tax is determined.
10.10 Effective Date of This Plan. This Plan shall be effective
February 20, 1995, subject to approval by the shareholder of the Company.
10.11 Law of Delaware. The Plan shall be governed by and construed in
accordance with the laws of the state of Delaware.
<PAGE> 1
Exhibit 10.18
BOISE CASCADE OFFICE PRODUCTS CORPORATION
KEY EXECUTIVE PERFORMANCE PLAN
1998 Payout Criteria
--------------------
PAYOUT AS A PERCENT OF SALARY
Financial
Improvement CEO SVP VP
----------- --- --- --
($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%
o For Financial Improvement in excess of $35 million, the payout increases
proportionally to the increase from $0 million to $35 million.
o The payout is interpolated on a straight line for Financial Improvement
not shown in the table.
o 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
1999 Payout Criteria
--------------------
PAYOUT AS A PERCENT OF SALARY
Financial
Improvement CEO SVP VP
----------- --- --- --
($57,988,000) 0.0% 0.0% 0.0%
($23,037,000) 13.4% 10.0% 7.8%
$11,963,000 73.4% 55.0% 42.8%
$11,963,001 101.1% 75.8% 59.0%
$46,963,000 121.1% 90.8% 70.6%
o For Financial Improvement in excess of $47 million, the payout increases
proportionally to the increase from $12 million to $47 million.
o The payout is interpolated on a straight line for Financial Improvement not
shown in the table.
o 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
------------------------------
1998 1997 1996
--------------- ----------------- ---------------
(in thousands, except share information)
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net income $ 53,067 $ 56,886 $ 55,349
=============== ================= ===============
Shares of Common Stock:
Weighted average shares outstanding 65,715,120 63,788,448 62,444,170
Effect of contingent shares 26,452 345,541 475,828
--------------- ----------------- ---------------
65,741,572 64,133,989 62,919,998
=============== ================= ===============
Basic earnings per share (1) $ .81 $ .89 $ .88
=============== ================= ===============
DILUTED EARNINGS PER SHARE
Net income $ 53,067 $ 56,886 $ 55,349
=============== ================= ===============
Shares of Common Stock:
Weighted average shares outstanding 65,715,120 63,788,448 62,444,170
Effect of contingent shares 26,452 345,541 475,828
Effect of options 50,268 118,370 216,286
--------------- ----------------- ---------------
65,791,840 64,252,359 63,136,284
=============== ================= ===============
Diluted earnings per share (1) $ .81 $ .89 $ .88
=============== ================= ===============
</TABLE>
(1) Information concerning earnings per share is included in Note 1, "Summary
of Significant Accounting Policies," of the Notes to Financial Statements
in our 1998 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
------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest costs and amortization
of debt costs $ 26,273 $ 20,308 $ 7,868 $ 725 $ --
Interest costs capitalized
during the period 1,025 -- -- -- --
Interest factor related to
noncapitalized leases (1) 5,207 4,456 4,839 2,203 1,632
----------- ----------- ----------- ----------- -----------
Total fixed charges $ 32,505 $ 24,764 $ 12,707 $ 2,928 $ 1,632
=========== =========== =========== =========== ===========
Income before income taxes 95,911 $ 99,784 $ 93,812 $ 71,370 $ 43,194
Total fixed charges 32,505 24,764 12,707 2,928 1,632
Less: Interest capitalized (1,025) -- -- -- --
----------- ----------- ----------- ----------- -----------
Total earnings before
fixed charges $ 127,391 $ 124,548 $ 106,519 $ 74,298 $ 44,826
=========== =========== =========== =========== ===========
Ratio of earnings to fixed charges 3.9 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
<TABLE>
<CAPTION>
Excluding
Non-
recurring
Charge
1998 1998(1) 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $3,067.3 $3,067.3 $2,596.7 $1,985.6
Percent increase 18% 18% 31% 51%
Cost of sales 2,278.8 2,277.9 1,941.7 1,467.4
Percent of net sales 74.3% 74.3% 74.8% 73.9%
Gross profit 788.5 789.4 655.0 518.2
Percent of net sales 25.7% 25.7% 25.2% 26.1%
Operating expenses 668.0 657.9 535.8 416.9
Percent of net sales 21.8% 21.4% 20.6% 21.0%
Income from operations 120.5 131.6 119.3 101.3
Percent of net sales 3.9% 4.3% 4.6% 5.1%
Interest expense 25.9 25.9 20.2 7.8
Income tax expense 42.8 46.5 42.9 38.5
Tax provision rate 44.8% 43.5% 43.0% 41.0%
Net income $ 53.1 $ 60.5 $ 56.9 $ 55.3
Percent of net sales 1.7% 2.0% 2.2% 2.8%
- -----------------------------------------------------------------------------
</TABLE>
(1)Before charges related to European restructuring and joint venture
dissolution (see "Restructuring Charge" section)
Net Sales Our business strategy over the past three years has included
aggressive sales growth. This has been accomplished principally by increasing
sales in existing operations and completing acquisitions. Same-location sales
growth was 11% for 1998 compared to 1997 and 14% for 1997 compared to 1996. Both
paper price changes and foreign currency fluctuations impact same-location sales
growth. Paper represents approximately 13% of net sales. Revenues from
operations outside the United States represent about 23% of net sales. Holding
paper prices constant and excluding the impact of foreign currency changes, our
same-location sales growth would have been 12% for 1998 and 17% for 1997. We
completed six acquisitions in 1998, eight acquisitions in 1997, and 19
acquisitions in 1996 (see "Acquisitions" section). Businesses acquired during
1997 contributed approximately $167 million to our 1997 net sales and
approximately $356 million to our 1998 net sales. Businesses acquired during
1996 contributed approximately $332 million to our 1996 net sales and
approximately $524 million to our 1997 net sales. The increases are primarily
due to a full calendar year of ownership in the second year.
Cost of Sales and Gross Profit Cost of sales includes the cost of merchandise
sold, the cost to deliver products to customers, and the occupancy costs of our
facilities. The 1998 increase in gross profit as a percent of net sales over
1997 was due, in part, to having a full calendar year of results of our French
direct marketing subsidiary, Jean-Paul Guisset S.A. ("JPG"), included in 1998
(see "Acquisitions" section). JPG has higher gross margins and higher operating
expenses than our other operations. The 1998 increase in gross profit was also
due to lower procurement costs and to leveraging our fixed occupancy costs over
a higher sales volume.
The 1997 decrease in gross profit as a percent of net sales from 1996 resulted,
in part, from competitive pressures on gross margins. 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 profit in the first half of 1996. In 1997,
paper costs were more stable but significantly lower, constraining our 1997
margins.
<PAGE> 2
Operating Expenses Operating expenses primarily include selling, warehouse, and
administrative payroll; prospecting for direct marketing customers; systems
expenses and software amortization; travel and entertainment; and goodwill. The
1998 increase in operating expenses as a percent of net sales over 1997 was
partly due to having a full year of operating expenses for JPG. JPG has higher
gross margins and higher operating expenses than our other operations. The
increase was also due to higher operating cost structures, relative to revenues,
for several of our European operations; additional costs as a result of
operational challenges associated with the move into a new Toronto warehouse;
and costs for customer prospecting as part of our entry into the Belgium direct
marketing business. In addition, operating expenses were negatively impacted by
costs related to our European restructuring and joint venture dissolution (see
"Restructuring Charge" section). Goodwill amortization was 0.4% of net sales in
both 1998 and 1997.
The 1997 decrease in operating expenses as a percent of net sales from 1996
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. The decrease also
resulted from efficiencies gained from our centralized call centers and
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 higher
revenues. Goodwill amortization was 0.4% of net sales in 1997 compared to 0.3%
in 1996. This increase resulted from our acquisition activities during 1996 and
1997.
Income from Operations As a result of the factors discussed above, income from
operations for 1998 was relatively flat compared to 1997, but both years'
operating income increased approximately 18% over 1996. As a percent of net
sales, operating income has trended downward since 1996 due to the operating
issues discussed above.
Interest Expense Interest expense increased in 1998 and 1997 over 1996 primarily
from debt incurred in conjunction with our acquisition and capital spending
programs. The increase in 1998 was also due to our issuance of $150.0 million of
7.05% Notes in May 1998 which have a slightly higher interest rate than the
debt, which was displaced, under our revolving credit agreement.
Income Tax Expense The increase in our tax rate in both 1998 and 1997 resulted
primarily from a shift in earnings among our foreign operations and the impact
of nondeductible goodwill. The 1998 tax rate was also significantly increased by
the European restructuring and joint venture dissolution (see "Restructuring
Charge" section).
Net Income As a result of the factors discussed above, our net income for 1998
declined 6.7% from 1997. Excluding the impact of the European restructuring and
joint venture dissolution, net income would have increased 6.4% over net income
for 1997. Net income was relatively flat between 1997 and 1996.
BUSINESS OUTLOOK
Our core domestic operations continue their strong performance. These
operations, which comprise about 75% of our revenues, delivered low double-digit
sales growth on a same-location basis and solid operating profits in 1998. We
expect our cross-selling initiatives in furniture, computer consumables,
promotional products, and office paper to result in additional sales to our
existing customers. In addition, we see excellent opportunities in serving
middle-market customers. These are businesses with 25 to 100 employees that in
the past have not been target customers for us. Our initiative, Boise Express,
is a custom-designed sales effort aimed specifically at this market. We also
expect to grow sales by serving new customers through a larger sales force and
through expanded catalog prospecting efforts. The pace of our revenue growth
will depend, in part, on the success of these initiatives. In addition,
continued same-location sales growth will depend, in part, on conditions outside
our control such as economic conditions and the competitive environment in which
we operate.
Our sales growth success also depends, in part, on our ability to identify
appropriate acquisition candidates in the United States and internationally.
Acquisitions remain an important part of our growth strategy. We will continue
to pursue acquisitions of businesses that fit our business model.
<PAGE> 3
JPG, our direct marketing subsidiary in France, is continuing its outstanding
performance. It posted strong sales growth and excellent earnings growth during
the year. Also, the results of our 1998 direct marketing acquisition in Spain
and our 1998 direct marketing entry into Belgium are ahead of plan and the early
signs are very encouraging.
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, which represents 13% of our net sales, has historically impacted our
gross margins as paper prices rise or fall. We are uncertain as to the timing or
magnitude of any future changes in paper prices. Also, it is difficult to
accurately predict what favorable or adverse impact changes in paper prices
might have on our future gross margins or financial results. However, we believe
our office paper business can be managed to maintain acceptable margins and cost
effectively provide our customers with this important product. To a lesser
extent our gross margins will be impacted by our ability to lower our delivery
costs and leverage our fixed occupancy costs. Gross margins and operating
expense ratios generally vary among product categories, distribution channels,
and geographic locations. As a result, we expect some fluctuation in these
ratios over time as our sales mix evolves.
We are addressing the increases in operating expenses at our Canadian and
European operations. To this point, during the fourth quarter of 1998, we
announced a restructuring in certain of our European operations (see
"Restructuring Charge" section).
We believe inflation has not had a material impact on our financial conditions
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.
RESTRUCTURING CHARGE
In the fourth quarter of 1998, we initiated a plan to restructure our operations
in the United Kingdom (the "restructuring"). The restructuring involves closing
seven small facilities and an administrative office and integrating selected
functions of our U.K. subsidiaries. These closures are expected to be completed
during the first half of 1999 and will result in work force reductions of
approximately 140 warehouse and administrative support associates.
Also during December 1998, we terminated our joint venture with Otto Versand
("Otto"). As a result of the dissolution of the joint venture, Otto acquired our
50% interest in the joint venture. In addition, we repurchased Otto's 10%
ownership interest in JPG. Now JPG is 100% owned by the Company.
As a result of the restructuring and joint venture dissolution, we estimated and
recorded charges of $11.1 million ($7.4 million or $.11 per share--diluted, net
of tax benefit) in the fourth quarter. The charges consist of $1.4 million for
termination payments to employees; $0.9 million for legal and professional fees
related to facility closings and work force reductions; $3.4 million for
facility, automobile, and delivery truck leasehold terminations; and $4.4
million of other costs, primarily costs to dissolve the joint venture with Otto.
These amounts are included in "Other operating expense" in the Statements of
Income. The charges also include $1.0 million for the write-down of primarily
customer-unique inventory in the market areas we are exiting. The inventory
write-down is reflected in "Cost of sales" in the Statements of Income.
As of December 31, 1998, $0.2 million had been charged against the reserve,
primarily for termination payments to employees.
ACQUISITIONS
In January 1999, we acquired the contract stationer business of Wallace Computer
Services, with annualized sales of about $40 million at the time of
announcement.
<PAGE> 4
In 1998, we acquired six businesses, including one in Spain and two in Canada,
for cash of $20 million. The annualized sales of the acquisitions completed in
1998 were approximately $62 million at the time of announcement. In December
1998, the Company and Otto Versand dissolved the joint venture that we entered
into in 1997. Otto acquired our 50% interest in the joint venture. In addition,
we repurchased Otto's 10% interest in JPG. JPG is now 100% owned by the Company.
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.
Goodwill, net of amortization, was $495 million at December 31, 1998, and $439
million at December 31, 1997. The increase was due to recording an estimated
price supplement of about $45 million, payable in connection with our 1997
acquisition of JPG, and to acquisitions. We used purchase accounting to record
our acquisitions. For more information on our acquisitions, see Note 8 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, expand our facilities at
existing locations, and open new distribution centers. The execution of our
strategy for growth, including acquisitions, technology developments, expansion
at existing locations, the relocation of several existing distribution centers
into new and larger facilities, and increasing our number of delivery trucks, is
expected to require capital outlays over the next several years. In 1998,
capital expenditures, excluding acquisitions, were approximately $14 million for
capitalized software and approximately $66 million for facility expansions and
relocations and equipment. We expect total capital expenditures in 1999 to be
similar to the level in 1998.
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. The amount outstanding under this agreement totaled $200 million
at December 31, 1998. The weighted average interest rate for these borrowings
was 5.9% at December 31, 1998. We may, subject to the covenants contained in the
credit agreement and to market conditions, refinance existing debt or raise
additional funds through the agreement and through other external debt or equity
financings in the future. In October 1998, we entered into an interest rate swap
with a notional amount of $25 million that expires in 2000. The swap results in
an effective fixed interest rate of 5.0% with respect to $25 million of our
revolving credit agreement borrowings.
We filed a registration statement with the Securities and Exchange Commission to
register $300 million of shelf capacity for debt securities. The effective date
of the filing was April 22, 1998. On May 12, 1998, we issued $150 million of
7.05% Notes ("Notes") under this registration statement. The Notes are due May
15, 2005. Proceeds from the issuance were used to repay borrowings under our
revolving credit agreement. We have $150 million of borrowing capacity remaining
under this registration statement.
In addition to the amount outstanding under the revolving credit agreement and
Notes, we had short-term notes payable of $72.1 million at December 31, 1998.
The maximum amount of short-term notes payable outstanding during the year ended
December 31, 1998, was $117.0 million. The average amount of short-term notes
payable during the 12 months ended December 31, 1998, was $68.0 million. The
weighted average interest rate for these borrowings was 5.8%. For more
information about our debt, see Note 4 in our Notes to Financial Statements.
<PAGE> 5
In addition to borrowings under the revolving credit agreement, Notes, and
short-term borrowings, debt related to acquisitions was $6.1 million and $20.5
million at December 31, 1998 and 1997. As a result of our acquisition activity,
we also had short-term acquisition liabilities of $5.7 million and $14.6 million
at December 31, 1998 and 1997, which were included in "Other current
liabilities." Additionally, we had long-term acquisition liabilities of $51.6
million, primarily for the JPG price supplement, and $15.9 million at December
31, 1998 and 1997, which were included in "Other long-term liabilities."
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, 1998, 3.9 million shares remain unissued under this registration statement.
On September 25, 1997, we issued 2.25 million shares of common stock at $21.55
per share to Boise Cascade Corporation for total proceeds of $48 million. At
December 31, 1998, Boise Cascade Corporation owned 81.2% of our outstanding
common stock.
FINANCIAL CONDITION
Cash provided by operations in 1998 was $73 million. This was the result of $107
million of net income, depreciation and amortization, and other noncash items,
offset by a $34 million net increase in certain components of working capital.
Net cash used for investment was $115 million, which included $66 million for
capital expenditures and $27 million for acquisitions. Net cash provided by
financing was $44 million, which included a $49 million increase in short-term
borrowings, offset by a $4 million net decrease in long-term debt.
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 certain components of working capital. Net
cash used for investment was $350 million, which included $67 million for
capital expenditures 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 certain components of 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.
DISCLOSURES OF CERTAIN FINANCIAL MARKET RISKS
Changes in interest rates and currency rates expose the company 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. Approximately 23% of our 1998 revenues were
generated from operations outside the United States. 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 December 31, 1998. We do not use derivative financial instruments for trading
purposes.
<PAGE> 6
The following table provides information about our derivative financial
instruments and other financial instruments that are sensitive to changes in
interest rates, including interest rate swaps and debt obligations. For debt
obligations, the table presents principal cash flows and related weighted
average interest rates by expected maturity dates. For interest rate swaps, the
table presents notional amounts and weighted average interest rates by expected
(contractual) maturity dates. Notional amounts are used to calculate the
contractual payments to be exchanged under the contract. For obligations with
variable interest rates, the table sets forth payout amounts based on the
current rates and does not attempt to project future interest rates.
<TABLE>
<CAPTION>
December 31 December 31
1998 1997
Fair Fair
(in millions) 1999 2000 2001 2002 2003 Thereafter Total Value Total Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DEBT
Short-term
borrowings $ 72.1 -- -- -- -- -- $ 72.1 $ 72.1 $ 23.3 $ 23.3
Average
interest rates 6.3% -- -- -- -- -- 6.3% -- 7.1% --
Long-term debt
Fixed rate debt $ 1.2 $ 1.2 $ 25.0 -- -- $150.3 $177.7 $173.8 $ 4.6 $ 4.7
Average
interest rates 6.1% 6.1% 5.0% -- -- 7.0% 6.7% -- 6.3% --
Variable rate debt $ 0.8 $ 0.8 $175.8 $ 0.8 $ 0.4 -- $178.6 $178.6 $355.9 $ 355.9
Average
interest rates 3.7% 3.7% 5.8% 3.6% 3.6% -- 5.8% -- 6.4% --
INTEREST RATE SWAPS
Notional principal
amount of
interest rate
exchange
agreements
(variable to fixed) -- $ 25.0 -- -- -- -- $ 25.0 $ 0.2 -- --
Average pay rate -- 4.6% -- -- -- -- 4.6% -- -- --
Average
receive rate -- 5.2% -- -- -- -- 5.2% -- -- --
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 had a notional amount
of $70 million. The settlement rate, based on the yield on 10-year U.S. Treasury
bonds, was less than the agreed upon initial rate, and we made a cash payment of
$0.6 million. We will recognize the amount paid as an increase in interest
expense over the life of the $150 million of debt securities issued in May 1998.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. This Statement
is effective for fiscal years beginning after June 15, 1999. We plan to adopt
this Statement in the first quarter of 2000. We are in the process of reviewing
this new standard. Adoption of this Statement is not expected to have a
significant impact on our results of operations or financial position.
YEAR 2000 ISSUE
We have undertaken a comprehensive review of our operations worldwide to
identify our preparedness for the year 2000 issue and have developed a plan for
our operations to address this issue. The status of our continued year 2000
progress is as follows: All of the computer systems we use to service our U.S.
contract stationer customers are year 2000 compliant. The computer systems we
use to service our U.S. direct
<PAGE> 7
marketing customers are scheduled to be year 2000 compliant by April of 1999,
with the exception of the accounts receivable system, which is scheduled to be
compliant by June of 1999. All of our promotional products operation's computer
systems are scheduled to be compliant by April of 1999. All of our foreign
operations' computer systems are year 2000 compliant, with the exception of our
Canadian operation, which is scheduled to be compliant by April of 1999. In
conclusion, all of our computer systems are either currently year 2000 compliant
or are scheduled to be compliant by June of 1999.
We have also been reviewing our year 2000 compliance in our infrastructure
(e.g., telecommunication, HVAC, security systems, utilities, warehouse
equipment, voice mail systems, desktop and portable personal computers). We
expect to complete most remediation and certification testing in the first half
of 1999, with extended remediation and certification scheduled throughout 1999.
We have discussed the year 2000 issue with our critical suppliers to determine
the extent to which we could be affected if their systems are not year 2000
compliant. Most of our critical suppliers have confirmed to us 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 our critical systems, suppliers, or
customers encounter year 2000 problems.
The overall incremental costs to make our systems compliant are expected to be
less than $5 million. Approximately $4 million has been spent through December
31, 1998. These costs are being expensed as incurred. We have also incurred
costs over the last several years for year 2000 compliant computer system
additions, replacements, and upgrades in order to realize efficiencies and
process improvements. These costs are generally capitalized and amortized over a
period of three to five years.
Our discussion of the year 2000 computer issue contains forward looking
information. We believe that our critical computer systems will be year 2000
compliant and that the costs to achieve compliance will not materially impact
our financial condition, operating results, or cash flows. Nevertheless, factors
that could cause actual results to differ from our expectations include the
successful implementation of year 2000 initiatives by our customers and
suppliers, changes in the availability and costs of resources to implement year
2000 changes, and our ability to successfully identify and correct all systems
affected by the year 2000 issue.
THE EURO CONVERSION
On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
and the Euro. The participating countries adopted the Euro as their common legal
currency on that date. The conversion to the Euro required certain changes to
our information systems to accommodate Euro-denominated transactions. The cost
of these changes was not material to the Company. All of our affected European
operations were Euro compliant by the end of 1998.
While the competitive impact of the Euro conversion remains uncertain, we
currently do not anticipate a negative impact on our European operations.
Alternatively, the conversion to the Euro may provide additional marketing
opportunities for our European operations.
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 developing business with new
customers and of cross-selling efforts to existing customers; the success of
prospecting efforts; the timing and amount of any paper price changes; the
success of our restructuring efforts; the pace of acquisitions and the success
of integrating acquisitions; continued same-location sales growth; the timing
and success of efforts to make systems year 2000 and Euro compliant; and the
other risks set forth in our filings with the Securities and Exchange
Commission.
<PAGE> 8
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31 (in thousands, except share information) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $3,067,327 $2,596,732 $1,985,564
Cost of sales, including inventory purchased from Boise Cascade
Corporation of $278,720, $228,189, and $189,429 2,278,845 1,941,702 1,467,368
- -----------------------------------------------------------------------------------------------------------
Gross profit 788,482 655,030 518,196
- -----------------------------------------------------------------------------------------------------------
Selling and warehouse operating expense 593,672 483,241 375,700
Corporate general and administrative expense, including amounts
paid to Boise Cascade Corporation of $2,578, $2,578, and $2,362 51,505 41,606 34,409
Goodwill amortization 12,673 10,933 6,787
Other operating expense 10,138 -- --
- -----------------------------------------------------------------------------------------------------------
667,988 535,780 416,896
- -----------------------------------------------------------------------------------------------------------
Income from operations 120,494 119,250 101,300
Interest expense 25,914 20,165 7,766
Other income, net 1,331 699 278
- -----------------------------------------------------------------------------------------------------------
Income before income taxes 95,911 99,784 93,812
Income tax expense 42,844 42,898 38,463
- -----------------------------------------------------------------------------------------------------------
Net income $ 53,067 $ 56,886 $ 55,349
Earnings per share--basic and diluted $ .81 $ .89 $ .88
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these Financial Statements.
<PAGE> 9
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 (in thousands, except share information) 1998 1997
- ---------------------------------------------------------------------------------------------------------------
ASSETS
Current
<S> <C> <C>
Cash and cash equivalents $ 31,838 $ 28,755
Receivables, less allowances of $9,539 and $7,591 394,013 357,321
Inventories 226,955 197,990
Deferred income tax benefits 14,335 14,223
Other 31,532 23,808
- ---------------------------------------------------------------------------------------------------------------
698,673 622,097
- ---------------------------------------------------------------------------------------------------------------
Property
Land 28,572 28,913
Buildings and improvements 143,192 127,430
Furniture and equipment 214,611 175,778
Accumulated depreciation (149,071) (129,951)
- ---------------------------------------------------------------------------------------------------------------
237,304 202,170
- ---------------------------------------------------------------------------------------------------------------
Goodwill, net of amortization of $37,108 and $24,019 494,883 438,830
Other assets 30,885 28,391
- ---------------------------------------------------------------------------------------------------------------
Total assets $ 1,461,745 $ 1,291,488
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Notes payable $ 72,100 $ 23,300
Current portion of long-term debt 2,065 2,917
Accounts payable
Trade and other 279,928 238,773
Boise Cascade Corporation 29,297 42,097
- ---------------------------------------------------------------------------------------------------------------
309,225 280,870
- ---------------------------------------------------------------------------------------------------------------
Accrued liabilities
Compensation and benefits 38,144 30,717
Income taxes payable 796 3,370
Taxes, other than income 9,466 18,718
Other 36,861 30,848
- ---------------------------------------------------------------------------------------------------------------
85,267 83,653
- ---------------------------------------------------------------------------------------------------------------
468,657 390,740
- ---------------------------------------------------------------------------------------------------------------
Other
Long-term debt, less current portion 354,224 357,595
Other 75,950 37,518
- ---------------------------------------------------------------------------------------------------------------
430,174 395,113
- ---------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities
Shareholders' equity
Common stock, $.01 par value, 200,000,000 shares authorized; 65,758,524
and 65,588,258 shares issued and outstanding at December 31, 1998 and 1997 658 656
Additional paid-in capital 359,224 356,599
Retained earnings 208,480 155,413
Accumulated other comprehensive loss (5,448) (7,033)
- ---------------------------------------------------------------------------------------------------------------
Total shareholders' equity 562,914 505,635
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,461,745 $ 1,291,488
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these Financial Statements.
<PAGE> 10
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31 (in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH PROVIDED BY (USED FOR) OPERATIONS
Net income $ 53,067 $ 56,886 $ 55,349
Items in income not using (providing) cash
Depreciation and amortization 50,911 41,088 27,198
Deferred income taxes (5,087) (167) (1,635)
Restructuring charge and writedown of assets 7,981 -- --
Receivables (30,398) 2,230 (39,036)
Inventories (26,007) 555 (25,111)
Accounts payable and accrued liabilities 28,250 35,912 40,688
Current and deferred income taxes 896 (9,039) (1,419)
Other, net (6,243) (7,558) 4,312
- ----------------------------------------------------------------------------------------
Cash provided by operations 73,370 119,907 60,346
- ----------------------------------------------------------------------------------------
CASH USED FOR INVESTMENT
Expenditures for property and equipment (65,974) (66,876) (42,711)
Acquisitions (27,282) (254,025) (180,139)
Other, net (21,488) (29,047) (16,080)
- ----------------------------------------------------------------------------------------
Cash used for investment (114,744) (349,948) (238,930)
- ----------------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR) FINANCING
Additions to long-term debt 210,000 211,988 140,000
Payments of long-term debt (214,385) -- --
Notes payable 48,800 (13,400) 36,700
Sale of stock -- 48,463 --
Other, net 42 (1,017) 564
- ----------------------------------------------------------------------------------------
Cash provided by financing 44,457 246,034 177,264
- ----------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 3,083 15,993 (1,320)
Balance at beginning of the year 28,755 12,762 14,082
- ----------------------------------------------------------------------------------------
Balance at end of the year $ 31,838 $ 28,755 $ 12,762
- ----------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these Financial Statements.
<PAGE> 11
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(in thousands, except share information)
- ------------------------------------------------------------------------------------------------------------------
Accumulated
Total Additional Other
Shares For the years ended Shareholders' Common Paid-In Retained Comprehensive
Outstanding December 31, 1996, 1997, and 1998 Equity Stock Capital Earnings Income (Loss)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
62,292,776 Balance at December 31, 1995 $339,417 $623 $295,615 $ 43,187 $ (8)
- ------------------------------------------------------------------------------------------------------------------
Comprehensive income
Net income 55,349 55,349
Other comprehensive income (loss),
net of tax
Cumulative foreign currency
translation adjustment 1,520
Minimum pension liability adjustment (16)
-------
Other comprehensive income 1,504 1,504
-------
Comprehensive income 56,853
-------
382,317 Stock issued for acquisitions 7,235 4 7,231
75,225 Stock options exercised 1,576 1 1,575
Other (296) (287) (9)
- ------------------------------------------------------------------------------------------------------------------
62,750,318 Balance at December 31, 1996 404,785 628 304,134 98,527 1,496
- ------------------------------------------------------------------------------------------------------------------
Comprehensive income
Net income 56,886 56,886
Other comprehensive income (loss),
net of tax
Cumulative foreign currency
translation adjustment (8,135)
Minimum pension liability adjustment (394)
-------
Other comprehensive loss (8,529) (8,529)
-------
Comprehensive income 48,357
-------
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
- ------------------------------------------------------------------------------------------------------------------
65,588,258 Balance at December 31,1997 505,635 656 356,599 155,413 (7,033)
- ------------------------------------------------------------------------------------------------------------------
Comprehensive income
Net income 53,067 53,067
Other comprehensive income (loss),
net of tax
Cumulative foreign currency
translation adjustment,
net of reclassification 2,218
Minimum pension liability adjustment (633)
-------
Other comprehensive income 1,585 1,585
-------
Comprehensive income 54,652
-------
17,932 Stock issued for acquisitions 20 20
152,334 Stock options exercised 2,607 2 2,605
- ------------------------------------------------------------------------------------------------------------------
65,758,524 Balance at December 31, 1998 $562,914 $658 $359,224 $208,480 $(5,448)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these Financial Statements.
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation and use of estimates The financial statements include the accounts
of the company and all subsidiaries after elimination of intercompany balances
and transactions. 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.
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. Capitalized interest was $1,025,000 in 1998.
No interest was capitalized in 1997 or 1996. Gains and losses from sales and
retirements are included in income as they occur. Depreciation is computed using
the straight-line method over the following estimated useful lives:
Buildings and improvements 5 to 40 years
Furniture and fixtures 3 to 5 years
Machinery, equipment, and delivery trucks 5 to 10 years
Leasehold improvements 5 to 10 years
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, 1998.
Deferred software costs We defer certain software costs that benefit future
years. These costs are amortized on the straight-line method over five years or
the expected life of the product, whichever is less. "Other assets" in the
Balance Sheets include deferred software costs of $26,932,000 and $17,511,000 at
December 31, 1998 and 1997. Amortization of deferred software costs totaled
$6,542,000, $3,596,000, and $1,685,000 in 1998, 1997, and 1996 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 costs 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 the cost to deliver
products to customers and the occupancy costs of our facilities.
Other operating expense In the fourth quarter of 1998, we initiated a plan to
restructure our operations in the United Kingdom (the "restructuring"). The
restructuring involves closing seven small facilities and an administrative
office and integrating selected functions of our U.K. subsidiaries. These
closures are expected to be completed during the first half of 1999 and will
result in work force reductions of approximately 140 warehouse and
administrative support associates.
<PAGE> 13
Also during December 1998, the Company terminated its joint venture with Otto
Versand ("Otto"). As a result of the dissolution of the joint venture, Otto
acquired our 50% interest in the joint venture. In addition, we have repurchased
Otto's 10% ownership interest in Jean-Paul Guisset S.A. ("JPG"), our direct
marketing subsidiary in France. JPG is now 100% owned by the Company.
As a result of the restructuring and joint venture dissolution, we estimated and
recorded charges of $11,098,000 ($7,446,000 or $.11 per share--diluted, net of
tax benefit) in the fourth quarter. The charges consist of $1,354,000 for
termination payments to employees; $919,000 for legal and professional fees
related to facility closings and work force reductions; $3,446,000 for facility,
automobile, and delivery truck leasehold terminations; and $4,419,000 of other
costs, primarily costs to dissolve the joint venture with Otto. These amounts
are included in "Other operating expense" in the Statements of Income. The
charges also include $960,000 for the write-down of primarily customer-unique
inventory in the market areas we are exiting. The inventory write-down is
reflected in "Cost of sales" in the Statements of Income. As of December 31,
1998, $222,000 had been charged against the reserve, primarily for termination
payments to employees.
Earnings per share Basic earnings per share was computed by dividing net income
by the weighted average number of shares of common stock outstanding during the
year. Diluted earnings per share includes the weighted average impact of stock
options assumed exercised using the treasury method.
<TABLE>
<CAPTION>
Year ended December 31
(in thousands, except share data) 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC
Net income $ 53,067 $ 56,886 $ 55,349
Weighted average shares outstanding 65,715,120 63,788,448 62,444,170
Effect of contingent shares 26,452 345,541 475,828
- -------------------------------------------------------------------------------
65,741,572 64,133,989 62,919,998
Basic earnings per share $ .81 $ .89 $ .88
DILUTED
Net income $ 53,067 $ 56,886 $ 55,349
Weighted average shares outstanding 65,715,120 63,788,448 62,444,170
Effect of contingent shares 26,452 345,541 475,828
Effect of options 50,268 118,370 216,286
- -------------------------------------------------------------------------------
65,791,840 64,252,359 63,136,284
Diluted earnings per share $ .81 $ .89 $ .88
- -------------------------------------------------------------------------------
</TABLE>
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.
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 included in "Accumulated other comprehensive income (loss)" in
the Balance Sheets.
Pre-opening costs Costs associated with opening new locations are expensed as
incurred.
Financial instruments At December 31, 1998, the estimated current market value
of our debt, based on then current interest rates for similar obligations with
like maturities, was approximately $4,000,000 less than the amount of debt
reported on the Balance Sheet. At December 31, 1998, we had an interest rate
swap. The liquidation value of the swap, based on interest rates available for
instruments with similar characteristics, would have been approximately
$200,000. The estimated fair values of our other financial instruments, cash and
cash equivalents, and short-term borrowings are the same as their carrying
values. 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
<PAGE> 14
interest rate swaps, rate hedge agreements, and forward exchange contracts are
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 swap 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 June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This Statement establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the Balance Sheet as either an asset or liability measured at its
fair value. This Statement is effective for fiscal years beginning after June
15, 1999. We plan to adopt this Statement in the first quarter of 2000. We are
in the process of reviewing this new standard. Adoption of this Statement is not
expected to have a significant impact on our results of operations or financial
position.
2. TRANSACTIONS WITH BOISE CASCADE CORPORATION
The Company was incorporated on January 3, 1995, and until April 13, 1995, was a
wholly-owned subsidiary of Boise Cascade Corporation ("BCC"). On April 13, 1995,
we completed an initial public offering in the U.S. and a concurrent
international offering (the "Offerings"). After the Offerings, BCC owned 82.7%
of our outstanding common stock. At December 31, 1998, BCC owned 81.2% of our
outstanding common stock.
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. We have also entered
into a tax matters agreement with BCC (see Note 3).
Under the Administrative Services Agreement ("Admin Agreement"), BCC provides
various services to us. 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. For the years
ended December 31, 1998, 1997, and 1996, charged costs amounted to $2,578,000,
$2,578,000, and $2,362,000 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, 1998, our sales to BCC
were $1,077,000, and our purchases from BCC were $281,914,000. Sales and
purchases during the same period of 1997 were $1,589,000 and $231,188,000 and in
1996 were $2,047,000 and $192,837,000.
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,
1998, 1997, and 1996, include expenses of $9,788,000, $7,995,000, and $6,079,000
attributable to participation by our employees in these plans. Postretirement
expenses attributable to participation in BCC's postretirement
<PAGE> 15
plans included in the Statements of Income totaled $68,000, $88,000, and $92,000
for the years ended December 31, 1998, 1997, and 1996.
3. INCOME TAXES
Pursuant to a tax matters agreement entered into with BCC, income taxes are
provided based on a pro forma calculation of the income tax expense that we
would incur as a non-affiliated taxpayer. 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, we remit to
BCC amounts representing the current tax liability that we would incur if we
were a non-affiliated taxpayer. Pursuant to this agreement, we paid BCC
$32,729,000 in 1998, $40,610,000 in 1997, and $37,633,000 in 1996.
Income tax expense includes the following:
<TABLE>
<CAPTION>
Year ended December 31 (in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Current income tax expense:
Federal $ 33,433 $ 28,519 $ 31,507
State 6,288 5,355 5,850
Foreign 8,210 9,191 2,741
- ----------------------------------------------------------------------------
Total current income tax expense 47,931 43,065 40,098
Deferred income tax expense (benefit):
Federal 2,018 2,976 (2,326)
State 185 561 (430)
Foreign (7,290) (3,704) 1,121
- ----------------------------------------------------------------------------
Total deferred income tax benefit (5,087) (167) (1,635)
- ----------------------------------------------------------------------------
Total income tax expense $ 42,844 $ 42,898 $ 38,463
- ----------------------------------------------------------------------------
</TABLE>
A reconciliation of the statutory U.S. federal tax expense and our actual tax
expense is as follows:
<TABLE>
<CAPTION>
Year ended December 31 (in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
Percentage Percentage Percentage
of Pretax of Pretax of Pretax
Amount Income Amount Income Amount Income
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Statutory expense $33,570 35.0% $34,917 35.0% $32,834 35.0%
Increases in taxes resulting from:
Foreign income taxed at
rate higher than U.S. rate 2,680 2.8 3,141 3.1 1,362 1.4
State tax expense 4,207 4.4 3,846 3.9 3,522 3.8
All other, net 2,387 2.6 994 1.0 745 .8
- ------------------------------------------------------------------------------------------------------------------------
Actual tax expense $42,844 44.8% $42,898 43.0% $38,463 41.0%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The components of the deferred tax assets and liabilities on the Balance Sheets
are as follows:
<TABLE>
<CAPTION>
December 31 (in thousands) 1998 1997
- --------------------------------------------------------------------------------------------------
Assets Liabilities Assets Liabilities
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Property and equipment $ 1,104 $ 4,701 $ 35 $ 3,474
Accounts receivable and unearned revenue 3,817 -- 4,247 --
Deferred charges 2 3,735 3 1,124
Inventories 2,074 -- 2,006 --
Accrued liabilities 3,163 -- 3,179 --
Compensation 8,894 325 8,620 256
Goodwill -- 9,711 -- 9,524
State taxes 138 -- 419 --
Foreign net operating losses 10,666 -- 3,970 --
Cumulative translation adjustment 2,842 -- 4,297 --
Other 4,382 3,753 6,634 1,565
- --------------------------------------------------------------------------------------------------
$37,082 $22,225 $33,410 $15,943
- --------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 16
At December 31, 1998, our foreign subsidiaries had approximately $8,081,000 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 (loss) from domestic and foreign sources is as follows:
<TABLE>
<CAPTION>
Year ended December 31 (in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $112,890 $98,368 $88,295
Foreign (16,979) 1,416 5,517
- --------------------------------------------------------------------------------
Pretax income $ 95,911 $99,784 $93,812
- --------------------------------------------------------------------------------
</TABLE>
4. 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. As of December 31, 1998,
borrowings under the agreement totaled $200,000,000. The weighted average
interest rate of borrowings under the agreement was 5.9% at December 31, 1998.
In October 1998, we entered into an interest rate swap with a notional amount of
$25,000,000 that expires in 2000. The swap results in an effective fixed
interest rate of 5.0% with respect to $25,000,000 of our revolving credit
agreement borrowings. We are exposed to credit-related gains or losses in the
event of nonperformance by the counterparty to this swap; however, we do not
expect the counterparty to fail to meet their obligations.
In addition to the amount outstanding under the revolving credit agreement,
short-term borrowings at December 31, 1998 and 1997, totaled $72,100,000 and
$23,300,000. The maximum amount of short-term notes payable outstanding during
the year ended December 31, 1998 and 1997, was $116,600,000 and $294,800,000.
The average amount of short-term notes payable during the 12 months ended
December 31, 1998 and 1997, was $68,000,000 and $42,000,000. The average
interest rate of these short-term borrowings was 5.8% at December 31, 1998 and
1997. Substantially all of our debt is unsecured.
We filed a registration statement with the Securities and Exchange Commission to
register $300,000,000 of shelf capacity for debt securities. The effective date
of the filing was April 22, 1998. On May 12, 1998, we issued $150,000,000 of
7.05% Notes under this registration statement. The Notes are due May 15, 2005.
Proceeds from the issuance were used to repay borrowings under our revolving
credit agreement. We have $150,000,000 of borrowing capacity remaining under
this registration statement. 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 these debt securities. The hedge agreements had
a notional amount of $70,000,000. The settlement rate, based on the yield on
10-year U.S. Treasury bonds, was less than the agreed upon initial rate, and we
made a cash payment of approximately $600,000. We will recognize the amount paid
as an increase in interest expense over the life of the debt securities issued.
In addition to borrowings under the revolving credit agreement, short-term
borrowings, and Notes, debt assumed through acquisitions was $6,100,000 and
$20,500,000 at December 31, 1998 and 1997. Scheduled payments of long-term debt,
excluding our revolving credit agreement and Notes, are $2,086,000 in 1999,
$2,101,000 in 2000, $802,000 in 2001, $765,000 in 2002, and $384,000 in 2003.
Cash paid for interest, net of interest capitalized, for the years ended
December 31, 1998, 1997, and 1996, was $27,808,000, $19,487,000, and $7,382,000.
5. SHAREHOLDERS' EQUITY
Common stock We are authorized to issue 200,000,000 shares of common stock, of
which 65,758,524 shares were issued and outstanding at December 31, 1998. 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, 1998, we had 3,869,000 unissued shares remaining under this
registration statement.
<PAGE> 17
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, 1998, BCC owned 81.2% of our outstanding common stock.
Accumulated other comprehensive income (loss) At December 31, 1998, the balance
shown on the Statements of Shareholders' Equity for Accumulated Other
Comprehensive Income (Loss) consisted of a minimum pension liability adjustment
of ($1,051,000) and a cumulative foreign currency translation adjustment of
($4,397,000). The change in foreign currency translation adjustment during 1998
is shown net of a reclassification adjustment for $336,000 of losses realized in
income upon the dissolution of the joint venture with Otto. These amounts are
net of income taxes calculated at a rate of approximately 39%.
6. 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," 1998 net income would have been reduced pro forma by $2,840,000,
and earnings per share would have been reduced pro forma by $.04. Our 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. The pro forma compensation cost may not be representative of
that to be expected in future years.
The KESOP provides for the grant 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. One-third of the options become exercisable in each of the three years
following the grant date and expire, at the latest, 10 years following the grant
date.
A summary of the status of the KESOP at December 31, 1998, 1997, and 1996, and
changes during the years then ended is presented in the table and narrative
below.
<TABLE>
<CAPTION>
1998 1997 1996
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 1,490,139 $20.10 1,059,442 $18.66 647,400 $12.57
Options granted 782,200 18.22 495,700 23.08 501,200 25.54
Options exercised (152,334) 12.50 (24,468) 12.50 (75,225) 12.50
Options expired (98,900) 21.92 (40,535) 22.38 (13,933) 19.78
- --------------------------------------------- --------- ---------
Balance at end of the year 2,021,105 19.86 1,490,139 20.10 1,059,442 18.66
- --------------------------------------------- --------- ---------
Exercisable at end of the year 826,305 19.13 483,039 16.72 140,569 12.60
Weighted average fair value of
options granted (Black-Scholes) $6.78 $8.61 $9.14
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The 2,021,105 options outstanding at December 31, 1998, have exercise prices
between $12.50 and $26.625 and a weighted average remaining contractual life of
nine years.
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 1998, 1997, and 1996: risk-free interest rates of
5.5%, 6.1%, and 5.2%; no expected dividends; expected lives of 4.2 years for
each year; and expected stock price volatility of 35% for each year.
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 expire the earlier of three years after the director ceases to be a
director
<PAGE> 18
or 10 years after the grant date. Total shares outstanding at December 31, 1998,
1997, and 1996, were 64,000, 39,000, and 24,000 with weighted average exercise
prices of $16.99, $18.58, and $17.50.
Under both of the plans, options may not, except under unusual circumstances, be
exercised until one year following the grant date.
7. LEASES
Rental expenses for operating leases, net of sublease rentals, were $33,898,000
in 1998, $29,920,000 in 1997, and $22,698,000 in 1996.
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 $11,887,000 for 1999, $9,086,000 for 2000, $5,746,000 for 2001, $4,446,000
for 2002, and $3,500,000 for 2003, with total payments thereafter of
$13,039,000.
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, 1998 and
1997.
8. ACQUISITIONS
In 1998, 1997, and 1996, 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 operations subsequent to
the dates of acquisitions.
We acquired six businesses during 1998, eight businesses and entered into a
joint venture during 1997, and 19 businesses during 1996. Amounts paid,
acquisition liabilities recorded, debt assumed, and stock issued for these
acquisitions were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid $27,282,000 $254,025,000 $180,139,000
Acquisition liabilities recorded $49,062,000 $ 12,674,000 $ 35,346,000
Debt assumed $ 162,000 $ 10,137,000 $ --
Stock issued
shares -- 135,842 321,652
value $ -- $ 2,882,000 $ 6,886,000
- ----------------------------------------------------------------------------------------------
</TABLE>
On January 12, 1998, we acquired the direct marketing business of Fidelity
Direct, based in Minneapolis, Minnesota. On February 28, 1998, we acquired the
direct marketing business of Sistemas Kalamazoo, based in Spain. On August 14,
1998, we acquired the contract stationer business of Wilson's, based in Canada.
On October 1, 1998, we acquired the contract stationer business of Atlas Office
Supplies, based in Indianapolis, Indiana. On November 2, 1998, we acquired the
contract stationer business of Midesha Enterprises, based in Memphis, Tennessee.
On November 27, 1998, we acquired the computer consumables business of Canadisc,
based in Canada. These transactions were completed for cash of $19,897,000, debt
assumed of $162,000, and the recording of $8,062,000 of acquisition liabilities.
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 certain earnings and sales growth
targets are reached. The maximum amount of the price supplement is
<PAGE> 19
FF300,000,000 or approximately US$51,000,000. At the time of purchase, no
liability was recorded for the price supplement as the amount of payment, if
any, was not assured beyond a reasonable doubt. In 1998, we made a payment of
US$4,430,000 and we recorded a US$41,000,000 liability based on results in 1998
and 1997. The liability is included in "Other long-term liabilities" in the
Balance Sheets. Approximately FF128,500,000 (US$20,500,000) was repatriated to
us from JPG during the third quarter of 1997. In 1997, in addition to the cash
paid, we recorded approximately US$5,800,000 of acquisition liabilities and
assumed US$10,137,000 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.
Unaudited pro forma results of operations reflecting the acquisitions would have
been as follows. If the 1998 acquisitions had occurred January 1, 1998, sales
for the year ended December 31, 1998, would have increased to $3,106,000,000,
net income would have increased to $53,670,000, and earnings per share would
have increased to $.82. If the 1998 and 1997 acquisitions had occurred January
1, 1997, sales for the year ended December 31, 1997, would have increased to
$2,814,000,000, net income would have decreased to $56,869,000, and earnings per
share would have remained $.89. 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. 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 owned 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). In December 1998, the Company and Otto dissolved
the joint venture. Otto acquired our 50% interest in the joint venture. In
addition, we repurchased Otto's 10% interest in JPG for $2,955,000 plus the
repayment of a loan, plus accrued interest, from Otto of approximately
$13,700,000. JPG is now 100% owned by the Company (see "Other operating expense"
in Note 1).
As a result of our acquisition activity, we had short-term acquisition
liabilities of $5,710,000 and $14,642,000 at December 31, 1998 and 1997, which
were included in "Other current liabilities." Additionally, we had long-term
acquisition liabilities of $51,621,000, primarily for the JPG price supplement,
and $15,869,000 at December 31, 1998 and 1997, which were included in "Other
long-term liabilities."
9. 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.
10. SEGMENT INFORMATION
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131 ("SFAS 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 adopted this statement at December 31, 1998.
The Statement defines operating segments as components of an enterprise about
which separate financial information is available which is evaluated regularly
by the chief operating decision maker to assess performance and to decide how to
allocate resources. Our chief operating decision maker is the group that
consists of the Chief Executive Officer, Senior Vice Presidents of each of our
operating segments, Chief Financial Officer,
<PAGE> 20
Chief Information Officer, Controller, and Vice Presidents of Logistics and
Human Resources. This group of executives works together to allocate resources
and assess the performance of the various business areas of the Company. Our
senior vice presidents responsible for operations have broad responsibility for
multiple operating segments.
While we have multiple operating segments, SFAS 131 provides for aggregation of
operating segments when they have similar economic characteristics and if they
are similar in the areas of products/services, production processes, types of
customers, distribution methods, and regulatory environment. Our businesses have
historically had similar operating income, as a percent of net sales, which is
the ultimate measure of performance used by our chief operating decision maker.
Our businesses provide substantially similar products and services for the
office. We do not manufacture products, but we procure products for sale to
business customers. Our businesses procure products directly from similar
manufacturers and wholesalers. The target customer group for our businesses is
business customers. Our order fulfillment and distribution processes are
essentially the same for our businesses. To the extent applicable, the
regulatory environment is the same for our businesses. Because our operating
segments are similar in the areas outlined in the Statement, we have aggregated
our operating segments into one reportable segment.
The following table summarizes our geographic information:
<TABLE>
<CAPTION>
(in thousands) United States Canada France Other(1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Net sales $2,371,639 $ 322,855 $ 220,102 $ 152,731
Long-lived assets 418,973 98,488 190,947 54,664
1997
Net sales $2,079,530 $ 298,587 $ 74,675 $ 143,940
Long-lived assets 378,425 93,771 142,618 54,577
1996
Net sales $1,689,168 $ 225,162 $ -- $ 71,234
Long-lived assets 275,211 89,235 -- 41,728
- --------------------------------------------------------------------------------
</TABLE>
(1)1998 amounts include operations in Australia, Belgium, Spain, and the United
Kingdom. 1997 amounts include operations in Australia, Germany, and the United
Kingdom. 1996 amounts include operations in Australia and the United Kingdom.
Revenues are attributed to geographic areas based on the location of the
distribution centers producing the revenue. Export sales to foreign unaffiliated
customers are immaterial. No single customer accounts for 10% or more of net
sales.
Our revenues from external customers by product category were:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Office supplies $1,875,400 $1,723,100 $1,353,100
Office paper 394,700 334,400 286,000
Office furniture 378,300 284,200 215,100
Computer consumables 313,500 180,900 126,500
Promotional products 105,400 74,100 4,800
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 21
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
1998
(in thousands, except share information) 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $814,219 $760,437 $ 732,863 $759,808
Cost of sales 598,083 571,978 544,554 564,230
- --------------------------------------------------------------------------------------------------------------
Gross profit 216,136 188,459 188,309 195,578
- --------------------------------------------------------------------------------------------------------------
Operating expenses 189,671 160,701 158,074 159,542
- --------------------------------------------------------------------------------------------------------------
Income from operations 26,465 27,758 30,235 36,036
- --------------------------------------------------------------------------------------------------------------
Interest expense 6,011 6,553 6,885 6,465
Other income, net 30 422 211 668
- --------------------------------------------------------------------------------------------------------------
Income before income taxes 20,484 21,627 23,561 30,239
Income tax expense 10,561 9,800 9,833 12,650
- --------------------------------------------------------------------------------------------------------------
Net income $ 9,923 $ 11,827 $ 13,728 $ 17,589
Net income before nonroutine items $ 17,369 $ 11,827 $ 13,728 $ 17,589
Earnings per share--basic and diluted $ .15 $ .18 $ .21 $ .27
Earnings per share--basic and diluted before nonroutine items $ .26 $ .18 $ .21 $ .27
Common stock prices(1)
High $ 13 7/16 $ 16 9/16 $ 20 1/2 $ 20 1/4
Low $ 8 9/16 $ 7 3/8 $ 15 1/2 $ 14 7/8
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1997
(in thousands, except share information) 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
Earnings per share--basic $ .27 $ .20 $ .18 $ .24
Earnings per share--diluted $ .27 $ .20 $ .18 $ .23
Common stock prices(1)
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
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1)The Company's common stock is traded principally on the New York Stock
Exchange.
<PAGE> 22
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, 1998
and 1997, and the related statements of income, cash flows, and shareholders'
equity for the years ended December 31, 1998, 1997, and 1996. 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, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Boise, Idaho
January 29, 1999
<PAGE> 23
REPORTS
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.
<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
---------------------------- ----------------------------
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
(expressed in thousands,
except share information)
<S> <C> <C> <C> <C>
Net sales........................................................... $ 814,219 $ 718,514 $ 3,067,327 $ 2,596,732
Cost of sales....................................................... 598,083 533,391 2,278,845 1,941,702
-------------- -------------- -------------- ------------
Gross profit........................................................ 216,136 185,123 788,482 655,030
-------------- -------------- -------------- ------------
Selling and warehouse operating expense............................. 162,509 131,888 593,672 483,241
Corporate general and administrative expense........................ 13,708 11,721 51,505 41,606
Goodwill amortization............................................... 3,316 3,247 12,673 10,933
Other operating expense............................................. 10,138 -- 10,138 --
-------------- -------------- -------------- ------------
189,671 146,856 667,988 535,780
-------------- -------------- -------------- ------------
Income from operations.............................................. 26,465 38,267 120,494 119,250
Interest expense.................................................... 6,011 6,270 25,914 20,165
Other income, net................................................... 30 309 1,331 699
-------------- ------------ ---------------- ------------
Income before income taxes.......................................... 20,484 32,306 95,911 99,784
Income tax expense.................................................. 10,561 14,573 42,844 42,898
-------------- -------------- -------------- ------------
Net income.......................................................... $ 9,923 $ 17,733 $ 53,067 $ 56,886
============== ============== ============== ============
Net income before nonroutine items (1).............................. $ 17,369 $ 17,733 $ 60,513 $ 56,886
============== ============== ============== ============
Earnings per share--basic and diluted............................... $ .15 $ .27 $ .81 $ .89
============== ============== ============== ============
Earnings per share--basic and diluted before nonroutine items (1)... $ .26 $ .27 $ .92 $ .89
============== ============== ============== ============
</TABLE>
(1) See 'Restructuring Charge' in Notes to Quarterly Financial Statements.
<PAGE> 2
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,
1998, 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 1998 Annual Report. The 1998 Annual Report will be available in March 1999.
RESTRUCTURING CHARGE. In the fourth quarter of 1998, we initiated a plan to
restructure our operations in the United Kingdom (the "restructuring"). The
restructuring involves closing seven small facilities and an administrative
office and integrating selected functions of our U.K. subsidiaries. These
closures are expected to be completed during the first half of 1999 and will
result in work force reductions of approximately 140 warehouse and
administrative support associates.
Also during December 1998, we terminated our joint venture with Otto Versand
("Otto"). As a result of the dissolution of the joint venture, Otto acquired our
50% interest in the joint venture. In addition, we repurchased Otto's 10%
ownership interest in JPG. Now JPG is 100% owned by the Company.
As a result of the restructuring and joint venture dissolution, we estimated and
recorded charges of $11.1 million in the fourth quarter ($7.5 million or $.11
per share-diluted, net of tax benefit). The charge includes $1.0 million for the
write-down of primarily customer-unique inventory in the market areas we are
exiting. The inventory write-down is reflected in "Cost of sales" in the
Statements of Income. The remaining $10.1 million of charges are included in
"Other operating expenses" in the Statements of Income.
EARNINGS PER SHARE. Unaudited basic earnings per share for the three months and
year ended December 31, 1998 and 1997, 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 months and year
ended December 31, 1998 and 1997, 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. Earnings per share is computed independently
for each period. As a result, the total of the per share results for the four
quarters of 1997 does not equal the per share results for the year ended
December 31, 1997.
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. On January 12, 1998, we acquired the direct marketing business of
Fidelity Direct, based in Minneapolis, Minnesota. On February 28, 1998, we
acquired the direct marketing business of Sistemas Kalamazoo, based in Spain. On
August 14, 1998, we acquired the contract stationer business of Wilson's, based
in Halifax, Canada. On October 1, 1998, we acquired the contract stationer
business of Atlas Office Supplies, based in Indianapolis, Indiana. On November
2, 1998, we acquired the contract stationer business of Midesha Enterprises,
based in Southaven, Mississippi. On November 27, 1998, we acquired the computer
supply business of Canadisc, based in Toronto, Canada. The combined annual sales
of these acquisitions at the time of announcement were approximately
$62,000,000. The results of operations of the acquired businesses are included
in our operations subsequent to the dates of acquisition.
INCOME TAXES. The tax provision rate for 1998 was 44.75%, compared with a tax
provision rate of 43.0% for the same period in the prior year. The increase is
primarily due to a shift in earnings among our foreign operations, the impact of
nondeductible goodwill, and our European restructuring charge and joint venture
dissolution.
<PAGE> 1
EXHIBIT 21
BOISE CASCADE OFFICE PRODUCTS CORPORATION
SIGNIFICANT SUBSIDIARIES
State or Other
Jurisdiction Percentage of
of Incorporation Voting Securities
or Organization Owned
---------------- -----------------
BCOP Nevada Company Nevada 100.0
Boise Marketing Services, Inc. Delaware 88.0
Grand & Toy Limited Ontario, Canada 100.0
Jean-Paul Guisset-JPG S.A. France 100.0
The Reliable Corporation Delaware 100.0
Reliable Deutschland GmbH Hamburg, Germany 100.0
Reliable France S.A. France 100.0
<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, 1998, AND
FROM ITS STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1998, 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 31,838
<SECURITIES> 0
<RECEIVABLES> 403,552
<ALLOWANCES> 9,539
<INVENTORY> 226,955
<CURRENT-ASSETS> 698,673
<PP&E> 386,375
<DEPRECIATION> (149,071)
<TOTAL-ASSETS> 1,461,745
<CURRENT-LIABILITIES> 468,657
<BONDS> 354,224
0
0
<COMMON> 658
<OTHER-SE> 562,256
<TOTAL-LIABILITY-AND-EQUITY> 1,461,745
<SALES> 3,067,327
<TOTAL-REVENUES> 3,067,327
<CGS> 2,278,845
<TOTAL-COSTS> 2,278,845
<OTHER-EXPENSES> 667,988
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,914
<INCOME-PRETAX> 95,911
<INCOME-TAX> 42,844
<INCOME-CONTINUING> 53,067
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 53,067
<EPS-PRIMARY> .81
<EPS-DILUTED> .81
</TABLE>
