-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JxUqQlSdlh8sCR5DSo1HgKR2RB5Ah+kTVf8kMozLeJZoIq6kBGBJL2s9SeuBvrKD Yuok07hcxheVV1TgvfC24g== 0000938839-98-000013.txt : 19981113 0000938839-98-000013.hdr.sgml : 19981113 ACCESSION NUMBER: 0000938839-98-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOISE CASCADE OFFICE PRODUCTS CORP CENTRAL INDEX KEY: 0000938839 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PAPER AND PAPER PRODUCTS [5110] IRS NUMBER: 820477390 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13662 FILM NUMBER: 98744664 BUSINESS ADDRESS: STREET 1: 800 WEST BRYN MAWR AVE CITY: ITASCA STATE: IL ZIP: 60143 BUSINESS PHONE: 7087735000 MAIL ADDRESS: STREET 1: 800 WEST BRYN MAWR AVE STREET 2: 1111 WEST JEFFERSON STREET CITY: ITASCA STATE: IL ZIP: 60143 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 F O R M 10-Q (X) Quarterly Report Pursuant To Section 13 or 15(d) Of The Securities Exchange Act Of 1934 For the quarterly period ended September 30, 1998 ( ) Transition Report Pursuant To Section 13 or 15(d) Of The Securities Exchange Act Of 1934 For the transition period from ________________ to ________________ Commission File Number: 1-13662 BOISE CASCADE OFFICE PRODUCTS CORPORATION State of Incorporation IRS Employer Identification No. Delaware 82-0477390 800 West Bryn Mawr Avenue Itasca, Illinois 60143 (630) 773 - 5000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares Outstanding Class as of October 31, 1998 Common Stock, $.01 par value 65,728,524 PART I - FINANCIAL INFORMATION Item 1. Financial Statements BOISE CASCADE OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES STATEMENTS OF INCOME (expressed in thousands, except share information) (unaudited) Three Months Ended September 30 1998 1997 Net sales $ 760,437 $ 679,877 Cost of sales, including purchases from Boise Cascade Corporation of $71,731 and $57,231 571,978 509,557 __________ __________ Gross profit 188,459 170,320 __________ __________ Selling and warehouse operating expense 145,554 127,373 Corporate general and administrative expense, including amounts paid to Boise Cascade Corporation of $657 and $653 11,985 11,307 Goodwill amortization 3,162 3,159 __________ __________ 160,701 141,839 __________ __________ Income from operations 27,758 28,481 __________ __________ Interest expense 6,553 6,749 Other income, net 422 257 __________ __________ Income before income taxes 21,627 21,989 Income tax expense 9,800 9,457 __________ __________ Net income $ 11,827 $ 12,532 Earnings per share-basic $ .18 $ .20 Earnings per share-diluted $ .18 $ .20 The accompanying notes are an integral part of these Financial Statements. BOISE CASCADE OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES STATEMENTS OF INCOME (expressed in thousands, except share information) (unaudited) Nine Months Ended September 30 1998 1997 Net sales $ 2,253,108 $ 1,878,218 Cost of sales, including purchases from Boise Cascade Corporation of $206,932 and $163,437 1,680,762 1,408,311 ____________ ____________ Gross profit 572,346 469,907 ____________ ____________ Selling and warehouse operating expense 431,163 351,352 Corporate general and administrative expense, including amounts paid to Boise Cascade Corporation of $1,944 and $1,947 37,797 29,886 Goodwill amortization 9,357 7,686 ____________ ___________ 478,317 388,924 ____________ ___________ Income from operations 94,029 80,983 ____________ ___________ Interest expense 19,903 13,895 Other income, net 1,301 390 ____________ ___________ Income before income taxes 75,427 67,478 Income tax expense 32,283 28,325 ____________ ___________ Net income $ 43,144 $ 39,153 Earnings per share-basic $ .66 $ .62 Earnings per share-diluted $ .66 $ .62 The accompanying notes are an integral part of these Financial Statements. BOISE CASCADE OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES BALANCE SHEETS (expressed in thousands) (unaudited) September 30 December 31 1998 1997 1997 ASSETS Current Cash and cash equivalents $ 39,729 $ 12,598 $ 28,755 Receivables, less allowances of $8,730, $7,055, and $7,591 396,045 374,484 357,321 Inventories 213,170 186,571 197,990 Deferred income tax benefits 16,313 13,995 14,223 Other 19,860 24,994 23,808 ___________ ___________ ___________ 685,117 612,642 622,097 ___________ ___________ ___________ Property Land 27,586 27,900 28,913 Buildings and improvements 142,037 111,981 127,430 Furniture and equipment 199,902 180,154 175,778 Accumulated depreciation (143,603) (129,447) (129,951) ___________ ___________ ___________ 225,922 190,588 202,170 ___________ ___________ ___________ Goodwill, net of amortization of $33,927, $20,450, and $24,019 442,657 433,497 438,830 Other assets 39,677 24,804 28,391 ___________ ___________ ___________ Total assets $1,393,373 $1,261,531 $1,291,488 The accompanying notes are an integral part of these Financial Statements. BOISE CASCADE OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES BALANCE SHEETS (expressed in thousands, except share information) (unaudited) September 30 December 31 1998 1997 1997 LIABILITIES AND SHAREHOLDERS' EQUITY Current Notes payable $ 74,000 $ 1,200 $ 23,300 Current portion of long-term debt 2,531 2,997 2,917 Accounts payable Trade and other 288,198 235,880 238,773 Boise Cascade Corporation 28,387 34,530 42,097 ___________ ___________ ___________ 316,585 270,410 280,870 ___________ ___________ ___________ Accrued liabilities Compensation and benefits 32,154 30,496 30,717 Income taxes payable - 4,662 3,370 Taxes, other than income 16,973 15,821 18,718 Other 45,062 39,896 30,848 ___________ ___________ ___________ 94,189 90,875 83,653 ___________ ___________ ___________ 487,305 365,482 390,740 ___________ ___________ ___________ Other Deferred income taxes - 371 - Long-term debt, less current portion 317,480 366,731 357,595 Other 33,225 36,043 37,518 ___________ ___________ ___________ 350,705 403,145 395,113 ___________ ___________ ___________ Shareholders' equity Common stock, $.01 par value, 200,000,000 shares authorized; 65,758,524, 65,586,125, and 65,588,258 shares issued and outstanding at each period 658 656 656 Additional paid-in capital 359,224 356,565 356,599 Retained earnings 198,558 137,680 155,412 Accumulated other comprehensive income (loss) (3,077) (1,997) (7,032) ___________ ___________ ___________ Total shareholders' equity 555,363 492,904 505,635 ___________ ___________ ___________ Total liabilities and shareholders' equity $1,393,373 $1,261,531 $1,291,488 The accompanying notes are an integral part of these Financial Statements. BOISE CASCADE OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES STATEMENTS OF CASH FLOWS (expressed in thousands) (unaudited) Nine Months Ended September 30 1998 1997 Cash provided by (used for) operations Net income $ 43,144 $ 39,153 Items in income not using (providing) cash Depreciation and amortization 37,106 29,291 Deferred income taxes (3,392) (1,754) Receivables (37,185) (14,933) Inventories (13,991) 9,743 Accounts payable and accrued liabilities 53,824 28,675 Current and deferred income taxes (6,808) (7,430) Other, net 8,304 (7,614) __________ __________ Cash provided by operations 81,002 75,131 __________ __________ Cash used for investment Expenditures for property and equipment (47,710) (44,182) Acquisitions (4,042) (243,984) Other, net (28,479) (20,504) __________ __________ Cash used for investment (80,231) (308,670) __________ __________ Cash provided by (used for) financing Additions to long-term debt 159,645 219,999 Payments of long-term debt (201,740) - Notes payable 50,700 (35,500) Sale of stock - 48,463 Other, net 1,598 413 __________ __________ Cash provided by financing 10,203 233,375 __________ __________ Increase (decrease) in cash and cash equivalents 10,974 (164) Balance at beginning of the period 28,755 12,762 __________ __________ Balance at September 30 $ 39,729 $ 12,598 The accompanying notes are an integral part of these Financial Statements. BOISE CASCADE OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (unaudited) (1) ORGANIZATION AND BASIS OF PRESENTATION. Boise Cascade Office Products Corporation (together with its subsidiaries, "the Company" or "we"), headquartered in Itasca, Illinois, is a distributor of products for the office through its contract stationer and direct marketing channels. At September 30, 1998, Boise Cascade Corporation owned approximately 81% of our outstanding common stock. The quarterly financial statements of the Company and its subsidiaries have not been audited by independent public accountants, but in the opinion of management, all adjustments necessary to present fairly the results for the periods have been included. Except as may be disclosed in the notes to the Financial Statements, the adjustments made were of a normal, recurring nature. Quarterly results are not necessarily indicative of results that may be expected for the year. We have prepared the statements pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These quarterly financial statements should be read together with the statements and the accompanying notes included in our 1997 Annual Report. (2) EARNINGS PER SHARE. Basic earnings per share for the three and nine months ended September 30, 1998 and 1997, were computed by dividing net income by the weighted average number of shares of common stock outstanding for the periods. Diluted earnings per share for the three and nine months ended September 30, 1998 and 1997, include the weighted average impact of stock options assumed exercised using the treasury method. Earnings per share is computed independently for each period. As a result, the total of the per share results for the first three quarters of 1997 does not equal the per share results for the nine months ended September 30, 1997. In 1997, we adopted Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share." Earnings per share for 1997 have been restated to reflect SFAS 128. (3) COMPREHENSIVE INCOME (LOSS). Comprehensive income (loss) for the periods include the following: Three Months Ended Nine Months Ended September 30 September 30 1998 1997 1998 1997 (expressed in thousands) Net income $11,827 $12,532 $43,144 $39,153 Other comprehensive income (loss) Cumulative foreign currency translation adjustment, net of income taxes 2,720 (1,931) 3,955 (3,493) ________ ________ ________ ________ Comprehensive income, net of income taxes $14,547 $10,601 $47,099 $35,660 Accumulated other comprehensive income (loss) for each period was as follows: September 30 December 31 1998 1997 1997 (expressed in thousands) Balance at beginning of period: Minimum pension liability adjustment, net of income taxes $ (417) $ (24) $ (24) Cumulative foreign currency translation adjustment, net of income taxes (6,615) 1,520 1,520 Changes within periods: Minimum pension liability adjustment, net of income taxes - - (393) Cumulative foreign currency translation adjustment, net of income taxes 3,955 (3,493) (8,135) ________ ________ ________ Balance at end of period $(3,077) $(1,997) $(7,032) (4) DEFERRED SOFTWARE COSTS. We defer purchased and internally developed software and related installation costs for computer systems that are used in our business. Deferral of costs begins when technological feasibility of the project has been established and it is determined that the software will benefit future years. These costs are amortized on the straight-line method over a maximum of five years or the useful life of the product, whichever is less. If the useful life of the product is shortened, the amortization period is adjusted. "Other assets" in the Balance Sheets includes deferred software costs of $24.9 million, $15.0 million, and $17.5 million at September 30, 1998 and 1997, and December 31, 1997. (5) DEBT. On June 26, 1997, we entered into a $450.0 million revolving credit agreement with a group of banks that expires in 2001 and provides for variable rates of interest based on customary indices. In October 1998, we entered into an interest rate swap with a notional amount of $25.0 million that expires in 2000. The swap results in an effective fixed interest rate with respect to $25.0 million of our revolving credit agreement borrowings. The revolving credit agreement contains customary restrictive financial and other covenants, including a negative pledge and covenants specifying a minimum fixed charge coverage ratio and a maximum leverage ratio. We may, subject to the covenants contained in the credit agreement and to market conditions, refinance existing debt or raise additional funds through the agreement and through other external debt or equity financings in the future. At September 30, 1998, borrowing under the revolving credit agreement was $150.0 million. In addition to the amount outstanding under the revolving credit agreement, we had $74.0 million and $1.2 million of short-term notes payable at September 30, 1998 and 1997. The maximum amount of short- term notes payable during the nine months ended September 30, 1998 and 1997, was $116.6 million and $294.8 million. The average amount of short-term notes payable during the nine months ended September 30, 1998 and 1997, was $64.7 million and $39.5 million. The weighted average interest rate for the short-term notes payable was 5.9% and 5.8% for the periods. We filed a registration statement with the Securities and Exchange Commission to register $300.0 million of shelf capacity for debt securities. The effective date of the filing was April 22, 1998. On May 12, 1998, we issued $150.0 million of 7.05% Notes under this registration statement. The Notes are due May 15, 2005. Proceeds from the issuance were used to repay borrowings under our revolving credit agreement. We have $150.0 million of borrowing capacity remaining under this registration statement. Cash payments for interest were $16.5 million and $13.0 million for the nine months ended September 30, 1998 and 1997. (6) TAXES. The estimated tax provision rate for the first nine months of 1998 was 43.0%, compared with an estimated tax provision rate of 42.0% for the same period in the prior year. The increase is primarily due to a shift in expected income and losses among our foreign operations and the decrease in anticipated total income. For the nine months ended September 30, 1998 and 1997, we paid income taxes, net of refunds received, of $39.9 million and $30.7 million. (7) ACQUISITIONS. During the first nine months of 1998, we completed two acquisitions, and during the first nine months of 1997, we completed seven acquisitions, all of which were accounted for under the purchase method of accounting. Accordingly, the purchase prices were allocated to the assets acquired and liabilities assumed based upon their estimated fair values. The initial purchase price allocations may be adjusted within one year of the date of purchase for changes in estimates of the fair values of assets and liabilities. Such adjustments are not expected to be significant to results of operations or the financial position of the Company. The excess of the purchase price over the estimated fair value of the net assets acquired was recorded as goodwill and is being amortized over 40 years. The results of operations of the acquired businesses are included in our operations subsequent to the dates of acquisition. On January 12, 1998, we acquired the direct marketing business of Fidelity Direct, based in Minneapolis, Minnesota. On February 28, 1998, we acquired the direct marketing business of Sistemas Kalamazoo, based in Spain. These transactions were completed for cash of $4.0 million, debt assumed of $0.2 million, and the recording of $3.8 million of acquisition liabilities. On January 31, February 28, and April 17, 1997, we acquired contract stationer businesses in Montana, Florida, and the United Kingdom. On April 30 and May 30, 1997, we acquired computer consumables businesses in North Carolina and Canada. On May 31, 1997, we acquired the promotional products business of OstermanAPI, Inc., based in Maumee, Ohio. In conjunction with the acquisition of Osterman, we formed a majority-owned subsidiary, Boise Marketing Services, Inc. ("BMSI"), of which we own 88%. Our previously acquired promotional products company, OWNCO, also became part of BMSI. Also in January 1997, we completed a joint venture with Otto Versand to direct market office products in Europe. These transactions, including the joint venture and the formation of the majority-owned promotional products subsidiary, were completed for cash of $99.7 million, $2.9 million of our common stock, and the recording of $14.2 million of acquisition liabilities. On July 7, 1997, we acquired 100% of the shares of Jean-Paul Guisset S.A. ("JPG"), a French corporation. JPG is a direct marketer of office products in France. The negotiated purchase price was FF850.0 million (US$144.0 million) plus a price supplement payable in the year 2000, if certain earnings and sales growth targets are reached. No liability has been recorded for the price supplement as the amount of payment, if any, is not assured beyond a reasonable doubt. If 1998 results are duplicated in 1999, the price supplement to be paid would be approximately US$29.0 million. In addition to the cash paid, we recorded US$5.8 million of acquisition liabilities and assumed US$10.1 million of long-term debt. In December 1997, Otto purchased a 10% interest in JPG, with an option to purchase an additional 40% interest before January 15, 1999. Unaudited pro forma results of operations reflecting the acquisitions would have been as follows. If the 1998 acquisitions had occurred January 1, 1998, sales for the first nine months of 1998 would have remained $2.3 billion, net income would have increased to $43.2 million, and basic earnings per share would have remained $.66. If the 1998 and 1997 acquisitions had occurred January 1, 1997, sales for the first nine months of 1997 would have increased to $2.0 billion, net income would have increased to $39.8 million, and basic earnings per share would have increased to $.63. The unaudited pro forma financial information does not necessarily represent the actual results of operations that would have occurred if the acquisitions had taken place on the dates assumed. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended September 30, 1998, Compared with Three Months Ended September 30, 1997 Results of Operations Net sales in the third quarter of 1998 increased 12% to $760.4 million, compared with $679.9 million in the third quarter of 1997. The growth in sales resulted primarily from same-location sales growth. Same-location sales increased 10% in the third quarter of 1998, compared with the third quarter of 1997. Cost of sales, which includes the cost of merchandise sold and delivery and occupancy costs, increased to $572.0 million in the third quarter of 1998, which was 75.2% of net sales. This compares with $509.6 million reported in the same period of the prior year, which represented 74.9% of net sales. Gross profit as a percentage of net sales was 24.8% and 25.1% for the third quarters of 1998 and 1997. Gross profit decreased in the third quarter of 1998 partly because of increased delivery and occupancy costs at our Canadian operations, as a result of operational challenges associated with the move into a new distribution center in Toronto. Operating expense was 21.1% of net sales in the third quarter of 1998, compared with 20.9% in the third quarter of 1997. The increase was due, in part, to our direct marketing acquisitions, which have both higher gross margins and higher operating expenses. The increase was also due to higher operating costs at our Canadian operations, as a result of operational challenges associated with the move into a new Toronto distribution center. Within the operating expense category, selling and warehouse operating expense was 19.1% of net sales in the third quarter of 1998, compared with 18.7% in the third quarter of 1997. Corporate general and administrative expense was 1.6% of net sales in the third quarter of 1998, compared with 1.7% in 1997. Goodwill amortization was $3.2 million for both the third quarters of 1998 and 1997. As a result of the factors discussed above, income from operations in the third quarter of 1998 decreased to $27.8 million, or 3.7% of net sales, compared with third quarter 1997 operating income of $28.5 million, or 4.2% of net sales. Interest expense was $6.6 million in the third quarter of 1998, compared with $6.7 million in the third quarter of 1997. The decrease in interest expense resulted from capitalization of interest during the third quarter of 1998 in connection with several facility expansions; lower outstanding principal, on average; and some fluctuation in variable interest rates, offset by the higher interest rate on our 7.05% Notes issued in May 1998. Net income in the third quarter of 1998 decreased to $11.8 million, or 1.6% of net sales, compared with $12.5 million, or 1.8% of net sales in the same period of the prior year. Nine Months Ended September 30, 1998, Compared with Nine Months Ended September 30, 1997 Net sales for the nine months ended September 30, 1998, increased 20% to $2.3 billion, compared with $1.9 billion a year ago. The increase was due to a combination of acquisitions and same-location sales growth. Same- location sales increased 11% year to year. Cost of sales, which includes the cost of merchandise sold and delivery and occupancy costs, increased to $1.7 billion for the nine months ended September 30, 1998, which was 74.6% of net sales. This compares with $1.4 billion reported in the same period of the prior year, which represented 75.0% of net sales. Gross profit as a percentage of net sales was 25.4% and 25.0% for the first nine months of 1998 and 1997. The increase was primarily due to increases in our domestic contract stationer and direct marketing gross margins. The increase was offset slightly by higher delivery and occupancy costs at our Canadian operations that resulted from operational challenges as we moved into a new distribution center in Toronto.. Operating expense was 21.2% of net sales for the first nine months of 1998, compared with 20.7% in the same period of the prior year. This increase resulted, in part, from our direct marketing acquisitions, which have both higher gross margins and higher operating expenses. Direct marketing acquisitions made in the last half of 1997 increased our cost average compared to the prior year. Operating expense for the first nine months of 1998 also increased due to higher operating costs at our Canadian operations that resulted from operational challenges associated with the move into a new Toronto distribution center. Within the operating expense category, selling and warehouse operating expense was 19.1% of net sales for the first nine months of 1998, compared with 18.7% in 1997. Corporate general and administrative expense was 1.7% of net sales for the first nine months of 1998, compared with 1.6% in 1997. Goodwill amortization increased to $9.4 million for the first nine months of 1998, compared with $7.7 million in 1997. The increase in goodwill amortization was the result of recording goodwill arising from our acquisitions. As a result of the factors discussed above, income from operations for the first nine months of 1998 increased to $94.0 million, or 4.2% of net sales, compared with 1997 operating income of $81.0 million, or 4.3% of net sales. Interest expense was $19.9 million for the first nine months of 1998, compared with $13.9 million in 1997. The increase in interest expense resulted primarily from debt incurred in conjunction with our acquisition and capital spending programs. The increase also was due to our issuance of $150.0 million of 7.05% Notes in May 1998, which have a slightly higher interest rate than our revolving credit agreement and short-term notes payable. Net income for the first nine months of 1998 increased to $43.1 million, or 1.9% of net sales, compared with $39.2 million, or 2.1% of net sales in the same period of the prior year. Liquidity and Capital Resources Our principal requirements for cash have been to make acquisitions, fund technology development and working capital needs, upgrade and expand our facilities at existing locations, and open new distribution centers. The execution of our strategy for growth, including acquisitions, technology developments, and the relocation of several existing distribution centers into new and larger facilities, is expected to require capital outlays over the next several years. To finance our capital requirements, we expect to rely upon funds from a combination of sources. In addition to cash flow from operations, we have a $450.0 million revolving credit agreement that expires in 2001 and provides for variable rates of interest based on customary indices. In October 1998, we entered into an interest rate swap with a notional amount of $25.0 million that expires in 2000. The swap results in an effective fixed interest rate with respect to $25.0 million of our revolving credit agreement borrowings. The credit agreement is available for acquisitions and general corporate purposes. It contains customary restrictive financial and other covenants, including a negative pledge and covenants specifying a minimum fixed charge coverage ratio and a maximum leverage ratio. At September 30, 1998, $150.0 million was outstanding under this agreement. We may, subject to the covenants contained in the credit agreement and to market conditions, refinance existing debt or raise additional funds through the agreement and through other external debt or equity financings in the future. In addition to the amount outstanding under the revolving credit agreement, we had short-term notes payable of $74.0 million at September 30, 1998. The maximum amount of short-term notes payable during the nine months ended September 30, 1998, was $116.6 million. The average amount of short-term notes payable during the nine months ended September 30, 1998, was $64.7 million. The weighted average interest rate for the short-term notes payable was 5.9%. We filed a registration statement with the Securities and Exchange Commission to register $300.0 million of shelf capacity for debt securities. The effective date of the filing was April 22, 1998. On May 12, 1998, we issued $150.0 million of 7.05% Notes under this registration statement. The Notes are due May 15, 2005. Proceeds from the issuance were used to repay borrowings under our revolving credit agreement. We have $150.0 million of borrowing capacity remaining under this registration statement. In June 1996, we filed a registration statement with the Securities and Exchange Commission for 4.4 million shares of common stock to be offered from time to time in connection with future acquisitions. As of September 30, 1998, 3.5 million shares remained unissued under this registration statement. On September 25, 1997, we issued 2.25 million shares of common stock at $21.55 per share to Boise Cascade Corporation for total proceeds of $48.5 million. At September 30, 1998, Boise Cascade Corporation owned 81.2% of our outstanding common stock. Net cash provided by operations in the first nine months of 1998 was $81.0 million. This was the result of $76.9 million of net income, depreciation and amortization, and other noncash items; and a $4.1 million decrease in working capital. Net cash used for investment in the first nine months of 1998 was $80.2 million, which included $47.7 million of expenditures for property and equipment and $4.0 million for acquisitions. Net cash provided by financing was $10.2 million for the first nine months of 1998, resulting primarily from borrowings we made to fund technology developments and facility relocations. Net cash provided by operations in the first nine months of 1997 was $75.1 million. This was the result of $66.7 million of net income, depreciation and amortization, and other noncash items; and an $8.4 million decrease in working capital. Net cash used for investment in the first nine months of 1997 was $308.7 million, which included $44.2 million of expenditures for property and equipment and $244.0 million for acquisitions. Net cash provided by financing was $233.4 million for the first nine months of 1997, resulting primarily from borrowings we made to fund acquisitions. The majority of our 1998 and 1997 acquisitions have been completed for cash, resulting in higher outstanding balances under our credit agreement and short-term borrowing capacity. The increase in borrowings has caused interest expense to increase for the first nine months of 1998 compared with the same period of 1997. New Accounting Standards In 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." This Statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. We are still evaluating what impact, if any, this Statement will have on us. We will adopt this Statement at year-end 1998. Adoption of this Statement will have no impact on net income. In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This SOP is effective for financial statements for fiscal years beginning after December 31, 1998, with earlier adoption encouraged. We currently account for software costs generally in accordance with this SOP. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. This Statement is effective for fiscal quarters of fiscal years beginning after June 15, 1999. We plan to adopt this Statement in the first quarter of 2000. We are in the process of reviewing this Statement. As our international operations expand, we continue to evaluate the related foreign currency risks; but at this time, adoption of this Statement is not expected to have a significant impact on our results of operations or financial position. Year 2000 Computer Issue Many computer systems in use today were designed and developed using two digits, rather than four, to specify the year. As a result, such systems will recognize the year 2000 as "00." This could cause many computer applications to fail completely or to create erroneous results unless corrective measures are taken. We utilize software and related computer technologies that will be affected by this issue. We are currently implementing, or planning to implement, several computer system replacements or upgrades before the year 2000, all of which will be year 2000 compliant. Most of the costs associated with these replacements and upgrades have been or will be deferred. (See Note 4 in "Notes to Quarterly Financial Statements.") We have evaluated what actions will be necessary to make our remaining computer systems year 2000 compliant and expect to complete all necessary changes by year-end 1999. The expense associated with these actions is expected to total $4.0 to $5.0 million, with the majority being spent during 1997 and 1998. We have discussed this issue with our significant suppliers and large customers to determine the extent to which we could be affected if their systems are not year 2000 compliant. While there can be no guarantee that systems of other companies will be year 2000 compliant before the year 2000, we currently do not expect any material adverse effects to the Company. The Euro Conversion On January 1, 1999, 11 of the 15 member countries of the European Union are scheduled to establish fixed conversion rates between their existing sovereign currencies and the Euro. The participating countries have agreed to adopt the Euro as their common legal currency on that date. The conversion to the Euro will require certain changes to our information technology and other systems to accommodate Euro-denominated transactions. The cost of these changes is not expected to be material to the Company. We currently expect all of our European operations to be Euro compliant by the end of 1998. While the competitive impact of the Euro conversion remains uncertain, we currently do not anticipate a negative impact on our European operations. Alternatively, the conversion to the Euro may provide additional marketing opportunities for our European operations. Business Outlook We expect our cross-selling efforts in furniture, computer-related consumables, promotional products, and office papers to result in additional sales to our existing customers. We also expect to grow sales by developing business with new customers. The pace of our revenue growth will partially depend on the success of these initiatives and the strength of the U.S. economy. It will also depend, in part, on our plans to make further acquisitions in the U.S. and internationally. Our level of future acquisition activity will reflect the extent of economically acceptable opportunities available to us. Several of our recent acquisitions have presented significant challenges. Those operations that have underperformed our expectations are being seriously addressed. In all cases, these businesses will be restructured to an acceptable level of profitability, or exited, as is appropriate in each case. Our gross margins and operating expense ratios vary among our product categories, distribution channels, and geographic locations. As a result, we expect fluctuations in these ratios as our sales mix evolves over time. Office papers and converted paper products represent a significant portion of our sales. It is unclear to what extent or when prices might significantly rise or fall and what favorable or adverse impact those changes might have on our future financial results. Risk Factors Associated with Forward Looking Statements The Management's Discussion and Analysis of Financial Condition and Results of Operations includes "forward looking statements" which involve uncertainties and risks. There can be no assurance that actual results will not differ from the Company's expectations. Factors which could cause materially different results include, among others, continued same-location sales growth; the timing and amount of any paper price changes; the changing mix of products sold to our customers; the pace and success of our acquisition program; the timing and success of efforts to make systems year 2000 and Euro compliant; the success of cost structure improvements; the success of new product line introductions; the uncertainties of expansion into international markets, including currency exchange rates, legal and regulatory requirements, and other factors; and competitive and general economic conditions. Item 3. Quantitative and Qualitative Disclosures About Market Risks Changes in interest rates and currency rates expose us to financial market risks. To date, these risks have not been significant and are not expected to be so in the near term. Changes in our debt and our continued international expansion could increase these risks. To manage volatility relating to these risks, we may enter into various derivative transactions such as interest rate swaps, rate hedge agreements, and forward exchange contracts. We do not use derivative financial instruments for trading purposes. In October 1998, we entered into an interest rate swap with a notional amount of $25.0 million that expires in 2000. The swap results in an effective fixed interest rate with respect to $25.0 million of our revolving credit agreement borrowings. Our operations in Australia, Belgium, Canada, France, Germany, Spain, and the United Kingdom are denominated in currencies other than U.S. dollars. Each of our operations conducts substantially all of its business in its local currency with minimal cross-border product movement. As a result, these operations are not subject to material operational risks associated with fluctuations in exchange rates. Furthermore, our results of operations were not materially impacted by the translation of our other operations' currencies into U.S. dollars. Because we intend to expand the size and scope of our international operations, this exposure to fluctuations in exchange rates may increase. Accordingly, no assurance can be given that our future results of operations will not be adversely affected by fluctuations in foreign currency exchange rates. Although we currently are not engaged in any foreign currency hedging activities, we may consider doing so in the future. Such future hedges would be intended to minimize the effects of foreign exchange rate fluctuations on our investment and would not be done for speculative purposes. PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is not currently involved in any legal or administrative proceedings that it believes could have, either individually or in the aggregate, a material adverse effect on its business or financial condition. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. Required exhibits are listed in the Index to Exhibits and are incorporated by reference. (b) No Form 8-K's were filed during the quarter covered by this report. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BOISE CASCADE OFFICE PRODUCTS CORPORATION As Duly Authorized Officer and Chief Accounting Officer: /s/Darrell R. Elfeldt Darrell R. Elfeldt Vice President and Controller Date: November 11, 1998 BOISE CASCADE OFFICE PRODUCTS CORPORATION INDEX TO EXHIBITS Filed With the Quarterly Report on Form 10-Q for the Quarter Ended September 30, 1998 Number Description Page 11 Computation of Per Share Earnings 27 Financial Data Schedule EX-11 2 EXHIBIT 11 BOISE CASCADE OFFICE PRODUCTS CORPORATION COMPUTATION OF PER SHARE EARNINGS (in thousands, except share information) For the Three Months For the Nine Months Ended September 30 Ended September 30 1998 1997 1998 1997 BASIC EARNINGS PER SHARE Net income $ 11,827 $ 12,532 $ 43,144 $ 39,153 Shares of Common Stock: Weighted average shares outstanding 65,757,737 63,086,894 65,700,493 62,951,608 Effect of contingent shares 27,836 430,207 25,147 447,267 __________ __________ __________ __________ 65,785,573 63,517,101 65,725,640 63,398,875 Basic earnings per share (1) $ .18 $ .20 $ .66 $ .62 DILUTED EARNINGS PER SHARE Net income $ 11,827 $ 12,532 $ 43,144 $ 39,153 Shares of Common Stock: Weighted average shares outstanding 65,757,737 63,086,894 65,700,493 62,951,608 Effect of options 27,258 123,285 67,025 122,620 Effect of contingent shares 27,836 430,207 25,147 447,267 __________ __________ __________ __________ 65,812,831 63,640,386 65,792,665 63,521,495 Diluted earnings per share (1) $ .18 $ .20 $ .66 $ .62 (1) In 1997, we adopted Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share." Earnings per share for 1997 have been restated to reflect SFAS 128. The impact of the adoption was to reduce basic earnings per share by $.01. EX-27 3
5 The data schedule contains summary financial information extracted from Boise Cascade Office Products Corporation's Balance Sheet at September 30, 1998, and from its Statement of Income for the nine months ended September 30, 1998. The information presented is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-1998 SEP-30-1998 39,729 0 404,775 8,730 213,170 685,117 369,525 143,603 1,393,373 487,305 317,480 0 0 658 554,705 1,393,373 2,253,108 2,253,108 1,680,762 1,680,762 478,317 0 19,903 75,427 32,283 43,144 0 0 0 43,144 .66 .66
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