-----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, PlSXk5Ep9GIOxxvsXRN5/HigDF/YWEqL1z+/yGxbSWfym7XP/xJ7EAPfqsIxkpND WNdCpELYNyp9kay3fbnS/w== 0000938839-99-000008.txt : 19990816 0000938839-99-000008.hdr.sgml : 19990816 ACCESSION NUMBER: 0000938839-99-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 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: 99686509 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 June 30, 1999 ( ) Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the Transition Period From ____________ to ____________ Commission File number 1-13662 BOISE CASCADE OFFICE PRODUCTS CORPORATION State of Incorporation IRS Employer Identification No. Delaware 82-0477390 800 West Bryn Mawr Avenue Itasca, Illinois 60143 (630) 773 - 5000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares Outstanding Class as of July 31, 1999 Common Stock, $.01 par value 65,800,212 PART I - FINANCIAL INFORMATION Item 1. Financial Statements BOISE CASCADE OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES STATEMENTS OF INCOME (expressed in thousands, except share information) (unaudited) Three Months Ended June 30 1999 1998 Net sales $ 801,559 $ 732,863 Cost of sales, including purchases from Boise Cascade Corporation of $75,447 and $67,958 588,420 544,554 ___________ ___________ Gross profit 213,139 188,309 ___________ ___________ Selling and warehouse operating expense 163,640 141,674 Corporate general and administrative expense, including amounts paid to Boise Cascade Corporation of $820 and $643 12,282 13,375 Goodwill amortization 3,798 3,025 Other operating income (3,195) - ___________ ___________ 176,525 158,074 ___________ ___________ Income from operations 36,614 30,235 ___________ ___________ Interest expense 5,796 6,885 Other income, net 484 211 ___________ ___________ Income before income taxes 31,302 23,561 Income tax expense 13,024 9,833 ___________ ___________ Net income $ 18,278 $ 13,728 Earnings per share-basic $ .28 $ .21 Average common shares outstanding-basic 65,795,849 65,742,883 Earnings per share-diluted $ .28 $ .21 Average common shares outstanding-diluted 65,795,849 65,824,163 The accompanying notes are an integral part of these Financial Statements. BOISE CASCADE OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES STATEMENTS OF INCOME (expressed in thousands, except share information) (unaudited) Six Months Ended June 30 1999 1998 Net sales $1,649,948 $1,492,671 Cost of sales, including purchases from Boise Cascade Corporation of $144,324 and $135,202 1,217,681 1,108,784 ___________ ___________ Gross profit 432,267 383,887 ___________ ___________ Selling and warehouse operating expense 327,543 285,609 Corporate general and administrative expense, including amounts paid to Boise Cascade Corporation of $1,641 and $1,287 25,408 25,812 Goodwill amortization 7,424 6,195 Other operating income (3,195) - ___________ ___________ 357,180 317,616 ___________ ___________ Income from operations 75,087 66,271 ___________ ___________ Interest expense 12,248 13,350 Other income, net 799 879 ___________ ___________ Income before income taxes 63,638 53,800 Income tax expense 26,870 22,483 ___________ ___________ Net income $ 36,768 $ 31,317 Earnings per share-basic $ .56 $ .48 Average common shares outstanding-basic 65,790,495 65,695,176 Earnings per share-diluted $ .56 $ .48 Average common shares outstanding-diluted 65,801,009 65,782,084 The accompanying notes are an integral part of these Financial Statements. BOISE CASCADE OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES BALANCE SHEETS (expressed in thousands) (unaudited) June 30 December 31 ASSETS 1999 1998 1998 Current Cash and cash equivalents $ 21,113 $ 37,566 $ 31,838 Receivables, less allowances of $9,644, $7,821, and $9,539 408,438 371,392 394,013 Inventories 188,228 191,267 226,955 Deferred income tax benefits 20,719 17,820 14,335 Other 38,044 22,509 31,532 ___________ ___________ ___________ 676,542 640,554 698,673 ___________ ___________ ___________ Property Land 27,813 27,321 28,572 Buildings and improvements 150,225 140,029 143,192 Furniture and equipment 228,910 195,784 214,611 Accumulated depreciation (166,043) (145,251) (149,071) ___________ ___________ ___________ 240,905 217,883 237,304 ___________ ___________ ___________ Goodwill, net of amortization of $44,532, $30,886, and $37,108 485,233 437,742 494,883 Other assets 44,538 34,727 30,885 ___________ ___________ ___________ Total assets $1,447,218 $1,330,906 $1,461,745 The accompanying notes are an integral part of these Financial Statements. BOISE CASCADE OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES BALANCE SHEETS (expressed in thousands, except share information) (unaudited) June 30 December 31 LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998 1998 Current Notes payable $ 60,411 $ 82,200 $ 72,100 Current portion of long-term debt 3,031 2,332 2,065 Accounts payable Trade and other 277,215 245,328 279,928 Boise Cascade Corporation 30,408 25,639 29,297 ___________ ___________ ___________ 307,623 270,967 309,225 ___________ ___________ ___________ Accrued liabilities Compensation and benefits 35,925 29,516 38,144 Income taxes payable 34,183 - 796 Taxes, other than income 11,261 18,751 9,466 Other 91,004 45,620 36,861 ___________ ___________ ___________ 172,373 93,887 85,267 ___________ ___________ ___________ 543,438 449,386 468,657 ___________ ___________ ___________ Other Long-term debt, less current portion 280,530 307,126 354,224 Other 31,068 33,493 75,950 ___________ ___________ ___________ 311,598 340,619 430,174 ___________ ___________ ___________ Shareholders' equity Common stock, $.01 par value, 200,000,000 shares authorized; 65,800,212, 65,757,558, and 65,758,524 shares issued and outstanding at each period 658 658 658 Additional paid-in capital 359,557 359,311 359,224 Retained earnings 245,248 186,729 208,480 Accumulated other comprehensive income (13,281) (5,797) (5,448) ___________ ___________ ___________ Total shareholders' equity 592,182 540,901 562,914 ___________ ___________ ___________ Total liabilities and shareholders' equity $1,447,218 $1,330,906 $1,461,745 The accompanying notes are an integral part of these Financial Statements. BOISE CASCADE OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES STATEMENTS OF CASH FLOWS (expressed in thousands) (unaudited) Six Months Ended June 30 1999 1998 Cash provided by (used for) operations Net income $ 36,768 $ 31,317 Items in income not using (providing) cash Depreciation and amortization 30,188 23,791 Deferred income taxes (7,843) (5,698) Restructuring reserve (3,988) - Receivables (14,425) (12,532) Inventories 40,142 7,912 Accounts payable and accrued liabilities 11,113 506 Current and deferred income taxes 28,070 (3,333) Other, net (3,730) 3,259 __________ __________ Cash provided by operations 116,295 45,242 __________ __________ Cash used for investment Expenditures for property and equipment (26,222) (32,401) Acquisitions (6,328) (4,042) Other, net (10,074) (10,119) __________ __________ Cash used for investment (42,624) (46,562) __________ __________ Cash provided by (used for) financing Payments of long-term debt (72,728) (51,043) Notes payable (11,689) 58,900 Other, net 21 2,274 __________ __________ Cash provided by (used for) financing (84,396) 10,131 __________ __________ Increase (decrease) in cash and cash equivalents (10,725) 8,811 Balance at beginning of the period 31,838 28,755 __________ __________ Balance at June 30 $ 21,113 $ 37,566 The accompanying notes are an integral part of these Financial Statements. BOISE CASCADE OFFICE PRODUCTS CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (unaudited) (1) ORGANIZATION AND BASIS OF PRESENTATION. Boise Cascade Office Products Corporation (together with its subsidiaries, "the Company" or "we"), headquartered in Itasca, Illinois, is one of the world's premier business-to-business distributors of products for the office. At June 30, 1999, Boise Cascade Corporation owned approximately 81% of our outstanding common stock. The quarterly financial statements of the Company and its subsidiaries have not been audited by independent public accountants, but in the opinion of management, all adjustments necessary to present fairly the results for the periods have been included. Except as may be disclosed in the notes to the Financial Statements, the adjustments made were of a normal, recurring nature. Quarterly results are not necessarily indicative of results that may be expected for the year. We have prepared the statements pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These quarterly financial statements should be read together with the statements and the accompanying notes included in our 1998 Annual Report. (2) NEW ACCOUNTING STANDARDS. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. In July 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137 that delayed the effective date of Statement 133 until fiscal years beginning after June 15, 2000. We plan to adopt this Statement in the first quarter of 2001. We are in the process of reviewing this Statement. Adoption of this Statement is not expected to have a significant impact on our results of operations or financial position. (3) RESTRUCTURING RESERVE. During the second quarter of 1999, we revised the amount of a restructuring reserve that we established in the fourth quarter of 1998 for our U.K. operations. The restructuring program was less costly than originally anticipated. As a result, we recorded an increase to operating income of approximately $4.0 million ($2.7 million or $.04 per share - diluted, net of tax benefit) in the second quarter of 1999. The increase to income included $0.5 million for termination payments to employees; $0.6 million for legal and professional fees related to facility closings and work force reductions; $1.6 million for facility, automobile, and delivery truck leasehold terminations; and $0.5 million of other costs. These amounts were included in "Other operating income" in the Statements of Income. The increase to income also included a favorable adjustment to "Cost of sales" in the Statements of Income of about $0.8 million, which resulted from a lower than expected inventory write-down. The restructuring liability is included in "Accrued liabilities, other" in the Balance Sheets. Changes in the reserve balance through June 30, 1999, were as follows: Termination Legal and payments to professional Leasehold Other Inventory employees fees terminations costs writedown (expressed in thousands) Beginning balance $ 1,400 $ 900 $ 3,400 $ 4,400 $ 1,000 Charges against reserve (800) (100) (400) (3,900) (200) Reserves credited to income (500) (600) (1,600) (500) (800) ________ _______ ________ ________ ________ Balance at June 30, 1999 $ 100 $ 200 $ 1,400 $ - $ - Reserves credited to income reflect lower legal and professional fees, a sublease on one of the facilities, a decision to retain a small printing portion of the business, and fewer terminations of employees. Termination payments to employees are the result of workforce reductions of about 90 warehouse and administrative support associates as of June 30, 1999. We expect the restructuring to result in total workforce reductions of approximately 100 warehouse and administrative support associates. (4) EARNINGS PER SHARE. Basic earnings per share for the three and six months ended June 30, 1999 and 1998, were computed by dividing net income by the weighted average number of shares of common stock outstanding for the periods. Diluted earnings per share for the three and six months ended June 30, 1999 and 1998, include the weighted average impact of stock options assumed exercised using the treasury method. Earnings per share is computed independently for each period. For the three months For the six months ended June 30 ended June 30 1999 1998 1999 1998 BASIC EARNINGS PER SHARE Net income $ 18,278 $ 13,728 $ 36,768 $ 31,317 Shares of common stock: Weighted average shares outstanding 65,765,854 65,723,455 65,762,209 65,671,396 Effect of contingent shares 29,995 19,428 28,286 23,780 65,795,849 65,742,883 65,790,495 65,695,176 Basic earnings per share $ .28 $ .21 $ .56 $ .48 DILUTED EARNINGS PER SHARE Net income $ 18,278 $ 13,728 $ 36,768 $ 31,317 Shares of common stock: Weighted average shares outstanding 65,765,854 65,723,455 65,762,209 65,671,396 Effect of options - 81,280 10,514 86,908 Effect of contingent shares 29,995 19,428 28,286 23,780 __________ __________ __________ __________ 65,795,849 65,824,163 65,801,009 65,782,084 Diluted earnings per share $ .28 $ .21 $ .56 $ .48 (5) COMPREHENSIVE INCOME (LOSS). Comprehensive income (loss) for the periods include the following: Three Months Ended Six Months Ended June 30 June 30 1999 1998 1999 1998 (expressed in thousands) Net income $18,278 $13,728 $36,768 $31,317 Other comprehensive income (loss) Cumulative foreign currency translation adjustment, net of income taxes (902) (479) (7,833) 1,235 ________ ________ ________ ________ Comprehensive income, net of income taxes $17,376 $13,249 $28,935 $32,552 (6) DEFERRED SOFTWARE COSTS. We defer purchased and internally developed software and related installation costs for computer systems that are used in our business. Deferral of costs begins when technological feasibility of the project has been established and it is determined that the software will benefit future years. These costs are amortized on the straight-line method over the expected useful life of the product. If the useful life of the product is changed, the amortization period is adjusted. "Other assets" in the Balance Sheets includes deferred software costs of $29.7 million, $21.9 million, and $26.9 million at June 30, 1999 and 1998, and December 31, 1998. (7) DEBT. On June 26, 1997, we entered into a $450 million revolving credit agreement with a group of banks that expires in June 2001 and provides for variable rates of interest based on customary indices. The revolving credit agreement is available for acquisitions and general corporate purposes. It contains financial and other covenants, including a negative pledge and covenants specifying a minimum fixed charge coverage ratio and a maximum leverage ratio. At June 30, 1999, borrowings under the agreement totaled $125 million. We may, subject to the covenants contained in the credit agreement and to market conditions, refinance existing debt or raise additional funds through the agreement and through other external debt or equity financings in the future. In October 1998, we entered into an interest swap with a notional amount of $25 million that expires in 2000. The swap results in an effective fixed interest rate of 5.1% with respect to $25 million of our revolving credit agreement borrowings. We are exposed to credit- related gains or losses in the event of nonperformance by the counterparty to the swap; however, we do not expect the counterparty to fail to meet their obligations. We have filed a registration statement with the Securities and Exchange Commission to register $300 million of shelf capacity for debt securities. In May 1998, we issued $150 million of 7.05% Notes ("Notes") under this registration statement. The Notes are due May 15, 2005. We have $150 million of borrowing capacity remaining under this registration statement. In addition to the amount outstanding under the revolving credit agreement and Notes, we had $60.4 million and $82.2 million of short-term notes payable at June 30, 1999 and 1998. The maximum amount of short- term notes payable during the six months ended June 30, 1999 and 1998, was $93.3 million and $116.6 million. The average amount of short-term notes payable during the six months ended June 30, 1999 and 1998, was $69.3 million and $75.7 million. The weighted average interest rates for these borrowings was 5.4% and 5.9% for the periods. Cash payments for interest were $12.4 million and $14.1 million for the six months ended June 30, 1999 and 1998. (8) TAXES. The estimated tax provision rate for the first six months of 1999 was 43.0%, before the impact of the increase to income associated with our restructuring program. The tax provision rate for the same period in the prior year was 42.0%. The increase is primarily due to a shift in earnings among our foreign operations and the impact of nondeductible goodwill. For the six months ended June 30, 1999 and 1998, we paid income taxes, net of refunds received, of $5.6 million and $28.5 million. (9) ACQUISITIONS. During the first six months of 1999 we completed one acquisition, and during the first six months of 1998 we completed two acquisitions, all of which were accounted for under the purchase method of accounting. Accordingly, the purchase prices were allocated to the assets acquired and liabilities assumed based upon their estimated fair values. The initial purchase price allocations may be adjusted within one year of the date of purchase for changes in estimates of the fair values of assets and liabilities. Such adjustments are not expected to be significant to results of operations or the financial position of the Company. The excess of the purchase price over the estimated fair value of the net assets acquired was recorded as goodwill and is generally being amortized over 40 years. The results of operations of the acquired businesses are included in our operations subsequent to the dates of acquisition. On January 11, 1999, we acquired the office supply business of Wallace Computer Services, based in Lisle, Illinois. The transaction was completed for cash of $6.3 million and the recording of $0.2 milion of acquisition liabilities. In January 1998, we acquired the direct marketing business of Fidelity Direct, based in Minneapolis, Minnesota. In February 1998, we acquired the direct marketing business of Sistemas Kalamazoo, based in Spain. These transactions were completed for cash of $4.0 million, debt assumed of $0.2 million, and the recording of $3.8 million of acquisition liabilities. Unaudited pro forma results of operations reflecting the acquisitions would have been as follows. If the 1999 acquisition had occurred on January 1, 1999, there would have been no significant change in the results of operations for the first six months of 1999. If the 1999 and 1998 acquisitions had occurred January 1, 1998, sales for the first six months of 1998 would have remained $1.5 billion, net income would have decreased to $31.1 million, and basic and diluted earnings per share would have decreased to $.47. This unaudited pro forma financial information does not necessarily represent the actual results of operations that would have occurred if the acquisitions had taken place on the dates assumed. In 1997, we acquired 100% of the shares of Jean-Paul Guisset S.A. ("JPG"). JPG is a direct marketer of office products in France. The negotiated purchase price was approximately FF850.0 million (US$144.0 million) plus a price supplement payable in the year 2000, if certain earnings and sales growth targets are reached. The maximum amount of the price supplement is FF300.0 million. In 1998, we made a partial payment of the price supplement of FF27.0 million (US$4.4 million). At June 30, 1999, we have a liability for the maximum remaining amount of the price supplement, FF273.0 million (US$43.1 million), which is included in "Other current liabilities" in the Balance Sheets. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended June 30, 1999, Compared with Three Months Ended June 30, 1998 Results of Operations Net sales in the second quarter of 1999 increased 9% to $801.6 million, compared with $732.9 million in the second quarter of 1998. The growth in sales resulted primarily from same-location sales growth. Same-location sales increased 7% in the second quarter of 1999, compared with sales in the second quarter of 1998. Excluding the negative impact of paper price changes and foreign currency changes, same-location sales increased 8%. Cost of sales, which includes the cost of merchandise sold, the cost to deliver products to customers, and the occupancy costs of our facilities, increased to $588.4 million in the second quarter of 1999, which was 73.4% of net sales. Excluding the impact of nonroutine items associated with restructuring, cost of sales in the second quarter of 1999 was 73.5% of net sales (see "Restructuring Reserve" section for detailed information). This compares with $544.6 million reported in the same period of the prior year, which represented 74.3% of net sales. Excluding the impact of nonroutine items, gross profit as a percentage of net sales was 26.5% and 25.7% for the second quarters of 1999 and 1998. Gross profit increased in the second quarter of 1999 primarily because of higher margins in many of our businesses, particularly in our domestic operations. Our higher margins were primarily the result of lower procurement costs. Operating expense was 22.0% of net sales in the second quarter of 1999, compared with 21.6% in the second quarter of 1998. Excluding the impact of nonroutine items associated with restructuring, operating expense for the second quarter of 1999 was 22.4% of net sales (see "Restructuring Reserve" section for detailed information). Within the operating expense category, selling and warehouse operating expense was 20.4% of net sales in the second quarter of 1999, compared with 19.3% in the second quarter of 1998. This increase resulted, in part, from higher payroll and benefits as a percent of sales, increased investment in our growth initiatives, start-up operating costs associated with our Casper, Wyoming, customer service center, and a modest employee-wide bonus program implemented during the last half of 1998. Corporate general and administrative expense was 1.5% of net sales in the second quarter of 1999, compared with 1.8% in 1998. Goodwill amortization increased to $3.8 million in the second quarter of 1999, compared with $3.0 million in the second quarter of 1998. The increase in goodwill amortization was the result of additional goodwill arising from our acquisitions. Excluding the impact of nonroutine items, income from operations in the second quarter of 1999 increased to $32.6 million, or 4.1% of net sales, compared to our second quarter 1998 operating income of $30.2 million, or 4.1% of net sales. Compared to second quarter 1998, our second quarter 1999 operating income includes an improvement of approximately $0.9 million in our European operations affected by our restructuring efforts. This improvement is primarily non-cash and mainly represents the 1998 losses incurred in our joint venture with Otto Versand. Interest expense was $5.8 million in the second quarter of 1999, compared with $6.9 million in the second quarter of 1998. The decrease in interest expense is due to lower debt balances compared with the prior period. Excluding nonroutine items associated with restructuring, net income in the second quarter of 1999 was $15.6 million, or 1.9% of net sales, compared with $13.7 million, or 1.9% of net sales in the same period of the prior year. Six Months Ended June 30, 1999, Compared with Six Months Ended June 30, 1998 Net sales for the six months ended June 30, 1999, increased 11% to $1.6 billion, compared with $1.5 billion a year ago. The increase was due primarily to same-location sales growth. Same-location sales increased 7% year to year. Excluding the negative impact of paper price changes and foreign currency changes, same-location sales grew 9%. Cost of sales, which includes the cost of merchandise sold, the cost to deliver products to the customers, and the occupancy costs of our facilities, increased to $1.2 billion for the six months ended June 30, 1999, which was 73.8% of net sales. This compares with $1.1 billion reported in the same period of the prior year, which represented 74.3% of net sales. Gross profit as a percentage of net sales was 26.2% and 25.7% for the first six months of 1999 and 1998. The increase was due to higher gross margins in many of our businesses, with particular strength in our domestic operations. Our higher margins were primarily the result of lower procurement costs. Operating expense was 21.6% of net sales for the first six months of 1999, compared with 21.3% in the same period of the prior year. Excluding the impact of nonroutine items associated with restructuring, operating expense for the first six months of 1999 was 21.8% (see "Restructuring Reserve" section for detailed information). Within the operating expense category, selling and warehouse operating expense was 19.9% of net sales for the first six months of 1999, compared with 19.1% in 1998. The increase is due, in part, from higher payroll and benefits as a percent of sales, increased investment in our growth initiatives, start-up operating costs associated with our Casper, Wyoming, customer service center, and a modest employee-wide bonus program implemented during the last half of 1998. Corporate general and administrative expense was 1.5% of net sales for the first six months of 1999, compared with 1.7% in 1998. Goodwill amortization increased to $7.4 million for the first six months of 1999, compared with $6.2 million in 1998. The increase in goodwill amortization was the result of additional goodwill arising from our acquisitions. Excluding the impact of nonroutine items, income from operations for the first six months of 1999 was $71.1 million, or 4.3% of net sales, compared with 1998 operating income of $66.3 million, or 4.4% of net sales. Compared to the first six months of 1998, our operating income for the first six months of 1999 includes an improvement of approximately $2.2 million in our European operations affected by our restructuring efforts. This improvement is primarily non-cash and mainly represents the 1998 losses incurred in our joint venture with Otto Versand. Interest expense was $12.2 million for the first six months of 1999, compared with $13.4 million in 1998. The decrease in interest expense is due to lower debt balances compared with the prior period. Excluding nonroutine items associated with restructuring, net income for the first six months of 1999 was $34.1 million, or 2.1% of net sales, compared with $31.3 million, or 2.1% of net sales, in the same period of the prior year. Restructuring Reserve During the second quarter of 1999, we revised the amount of a restructuring reserve that we established in the fourth quarter of 1998 for our U.K. operations. The restructuring program was less costly than originally anticipated. As a result, we recorded an increase to operating income of approximately $4.0 million ($2.7 million or $.04 per share - diluted, net of tax benefit) in the second quarter of 1999. The increase to income included $0.5 million for termination payments to employees; $0.6 million for legal and professional fees related to facility closings and work force reductions; $1.6 million for facility, automobile, and delivery truck leasehold terminations; and $0.5 million of other costs. These amounts were included in "Other operating income" in the Statements of Income. The increase to income also included a favorable adjustment to "Cost of sales" in the Statements of Income of about $0.8 million, which resulted from a lower than expected inventory write-down. The restructuring liability is included in "Accrued liabilities, other" in the Balance Sheets. Changes in the reserve balance through June 30, 1999, were as follows: Termination Legal and payments to professional Leasehold Other Inventory employees fees terminations costs writedown (expressed in thousands) Beginning balance $ 1,400 $ 900 $ 3,400 $ 4,400 $ 1,000 Charges against reserve (800) (100) (400) (3,900) (200) Reserves credited to income (500) (600) (1,600) (500) (800) ________ _______ ________ ________ ________ Balance at June 30, 1999 $ 100 $ 200 $ 1,400 $ - $ - Reserves credited to income reflect lower legal and professional fees, a sublease on one of the facilities, a decision to retain a small printing portion of the business, and fewer terminations of employees. Termination payments to employees are the result of workforce reductions of about 90 warehouse and administrative support associates as of June 30, 1999. We expect the restructuring to result in total workforce reductions of approximately 100 warehouse and administrative support associates. Liquidity and Capital Resources Our principal requirements for cash have been to make acquisitions, fund technology development and working capital needs, expand our facilities at existing locations, and open new distribution centers. The execution of our strategy for growth, including acquisitions and the relocation of several existing distribution centers into new and larger facilities, is expected to require capital outlays over the next several years. Our restructuring efforts (see "Restructuring Reserve" section) are not expected to have a material impact on our liquidity. To finance our capital requirements, we expect to rely upon funds from a combination of sources. In addition to cash flow from operations, we have a $450 million revolving credit agreement that expires in 2001 and provides for variable rates of interest based on customary indices. The revolving credit agreement is available for acquisitions and general corporate purposes. It contains financial and other covenants, including a negative pledge and covenants specifying a minimum fixed charge coverage ratio and a maximum leverage ratio. At June 30, 1999, $125 million was outstanding under this agreement. We may, subject to the covenants contained in the credit agreement and to market conditions, refinance existing debt or raise additional funds through the agreement and through other external debt or equity financings in the future. In October 1998, we entered into an interest swap with a notional amount of $25 million that expires in 2000. The swap results in an effective fixed interest rate of 5.1% with respect to the $25 million of our revolving credit agreement borrowings. We have filed a registration statement with the Securities and Exchange Commission to register $300.0 million of shelf capacity for debt securities. In May 1998, we issued $150.0 million of 7.05% Notes ("Notes") under this registration statement. The Notes are due May 15, 2005. We have $150.0 million of borrowing capacity remaining under this registration statement. In addition to the amount outstanding under the revolving credit agreement and Notes, we had short-term notes payable of $60.4 million at June 30, 1999. The maximum amount of short-term notes payable during the six months ended June 30, 1999, was $93.3 million. The average amount of short-term notes payable during the six months ended June 30, 1999, was $69.3 million. The weighted average interest rate for these borrowings was 5.4% As a result of our acquisition activity, we also had short-term acquisition liabilities of $49.3 million, primarily for the JPG price supplement, at June 30, 1999, which were included in "Accrued liabilities, other." Additionally, we had long-term acquisition liabilities of $5.2 million at June 30, 1999, which were included in "Other long-term liabilities" (see Note 9, "Acquisitions," in the Notes to Financial Statements for more information on our acquisition activity.) In June 1996, we filed a registration statement with the Securities and Exchange Commission for 4.4 million shares of common stock to be offered from time to time in connection with future acquisitions. As of June 30, 1999, 3.8 million shares remained unissued under this registration statement. Net cash provided by operations in the first six months of 1999 was $116.3 million. This was the result of $55.1 million of net income, depreciation and amortization, and other noncash items, and a $61.2 million decrease in certain components of working capital. Net cash used for investment in the first six months of 1999 was $42.6 million, which included $26.2 million of expenditures for property and equipment, and $6.3 million for acquisitions. Net cash used for financing was $84.4 million for the first six months of 1999, resulting from reductions in our total debt outstanding. Net cash provided by operations in the first six months of 1998 was $45.2 million. This was primarily the result of $49.4 million of net income, depreciation and amortization, and other noncash items, offset by a $4.2 million increase in certain components of working capital. Net cash used for investment in the first six months of 1998 was $46.6 million, which included $32.4 million of expenditures for property and equipment, and $4.0 million for acquisitions. Net cash provided by financing was $10.1 million for the first six months of 1998, resulting primarily from borrowings we made to fund acquisitions. New Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. In July 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137 that delayed the effective date of Statement 133 until fiscal years beginning after June 15, 2000. We plan to adopt this Statement in the first quarter of 2001. We are in the process of reviewing this Statement. Adoption of this Statement is not expected to have a significant impact on our results of operations or financial position. Year 2000 Computer Issue We have undertaken a comprehensive review of our operations worldwide to identify our preparedness for the year 2000 issue and are executing a plan for our operations to address this issue. We believe that all of the computer systems we use to service our customers in all of our domestic and foreign locations are now year 2000 compliant. A personnel scheduling system, not directly related to servicing our customers, is scheduled for a vendor- supplied release upgrade in August to make it year 2000 compliant. We have also been reviewing the year 2000 compliance in our infrastructure (e.g. telecommunication; heating, ventilation, and air conditioning; security systems; utilities; warehouse equipment; voice mail systems; desktop and portable personal computers). We believe that all of our data communications infrastructure is now compliant and that nearly all of our voice communications infrastructure (switches, automatic call distribution systems, and voice mail systems) are compliant with the few exceptions scheduled for vendor-supplied software release upgrades in August. We believe that all other infrastructure critical to customer service is now compliant. We are continuing to perform compliance testing on all residual infrastructure components. We have discussed the year 2000 issue with our critical suppliers to determine the extent to which we could be affected if their systems are not year 2000 compliant. Most of our critical suppliers have confirmed that they already are, or specifically when they expect to be, compliant. Throughout 1999, we intend to continue monitoring this compliance. The most reasonably likely worst case scenario of failure by us or our suppliers or customers to be year 2000 compliant would be a temporary inability to process orders, to obtain or deliver products and services to our customers, or to collect amounts due to us from customers. We are currently developing contingency plans in the event that critical systems, suppliers, or customers encounter year 2000 problems. The overall incremental costs to make our systems year 2000 compliant are expected to be less than $5 million. Approximately $4.4 million has been spent through June 30, 1999. These costs are being expensed as incurred. We have also incurred costs over the last several years for year 2000 compliant computer system additions, replacements, and upgrades in order to realize efficiencies and process improvements. These costs are generally capitalized and amortized over a period of three to five years. Our discussion of the year 2000 computer issue contains forward-looking information. We believe that our critical computer systems will be year 2000 compliant and that the costs to achieve compliance will not materially impact our financial condition, operating results, or cash flows. Nevertheless, factors that could cause actual results to differ from our expectations include the successful implementation of year 2000 initiatives by our customers and suppliers, changes in the availability and costs of resources to implement year 2000 changes, and our ability to successfully identify and correct all systems affected by the year 2000 issue. Business Outlook Our core North American operations remain strong. We continue to expect our cross-selling efforts in furniture, computer consumables, promotional products, and office paper to result in additional sales to our existing customers. Also, we see excellent opportunities in serving the middle-market, which represents businesses of 25 to 100 employees. Our custom-designed sales effort, Boise Express, is aimed specifically at this market. Our integrated supply program offers another growth opportunity. We are looking for ways to broaden our integrated supply offering by developing strategic alliances with other suppliers. We also expect to grow sales by serving middle-market customers through a larger sales force. The pace of our revenue growth will partially depend on the success of these initiatives. We are also seeing merger-driven consolidations among not only some of our large customers but also among some of our key competitors. As a result, continued same-location sales growth will depend, in part, on conditions outside our control such as economic conditions and the competitive environment in which we operate. Our sales growth also depends, in part, on our ability to identify appropriate acquisition candidates in the U.S. and internationally. Over the past several years, acquisitions have contributed significantly to our revenue growth. Although our acquisition pace has slowed, acquisitions remain an important part of our growth strategy. We will continue to pursue acquisitions of businesses that fit our business model. Our French and Australian operations are performing well, posting double-digit sales growth and operating income improvement. We are continuing to develop our direct marketing operations in Spain and Belgium, both of which are progressing nicely. We believe our gross margins will continue to be impacted principally by the competitive environment in which we operate, including the pricing strategies established by our competitors. While we believe that our efforts to lower our procurement costs will be successful over time, there is no assurance that our gross margins may not decline under competitive pressure. In addition, office paper has historically impacted our gross margins and operating margins as paper prices rise or fall. We are uncertain as to the timing or magnitude of any future changes in paper prices. Also, it is difficult to accurately predict what favorable or adverse impact changes in paper prices might have on our future gross margins or financial results. However, we believe our office paper business can be managed to maintain acceptable margins and cost effectively provide our customers with this important product. To a lesser extent our gross margins will be impacted by our ability to lower our delivery costs and leverage our fixed occupancy costs. Gross margins and operating expense ratios generally vary among product categories, distribution channels, and geographic locations. As a result, we expect some fluctuation in these ratios over time as our sales mix evolves. Risk Factors Associated With Forward Looking Statements The Management's Discussion and Analysis of Financial Condition and Results of Operations includes "forward looking statements" which involve uncertainties and risks. There can be no assurance that actual results will not differ from the Company's expectations. Factors which could cause materially different results include, among others, our ability to implement our operating strategies, integration, and restructuring plans and to realize cost savings and efficiencies; the timing and amount of any paper price changes; continued same-location sales growth; the changing mix of products sold to our customers; the pace and success of our acquisition program; the success of new product line introductions; the uncertainties of expansion into international markets, including currency exchange rates, legal and regulatory requirements, and other factors; changes in the competitive environment brought about by consolidation of customers and competitors, and other competitive and general economic conditions. Item 3. Quantitative and Qualitative Disclosures About Market Risks Changes in interest rates and currency rates expose us to financial market risk. Our debt is a combination of variable-rate and fixed-rate debt. We experience only modest changes in interest expense when market interest rates change. Consequently, our market risk-sensitive instruments do not subject us to material market risk exposure. Our operations in Australia, Belgium, Canada, France, Spain, and the United Kingdom are denominated in currencies other than U.S. dollars. Most foreign currency transactions have been conducted in the local currency, with minimal cross-border product movement, limiting our exposure to changes in currency rates. Changes in our debt and our continued international expansion could increase these risks. To manage volatility relating to these exposures, we may enter into various derivative transactions such as interest rate swaps, rate hedge agreements, and forward exchange contracts. We use interest rate swaps and rate hedge agreements to hedge underlying debt obligations or anticipated transactions. For qualifying hedges, our financial statements reflect interest rate differentials as adjustments to interest expense over the life of the swap or underlying debt. We defer gains and losses related to qualifying hedges of foreign currency firm commitments and anticipated transactions, and we recognize such gains and losses in income or as adjustments of carrying amounts when the hedged transaction occurs. We mark to market all other forward exchange contracts and include unrealized gains and losses in current period net income. We had no material exposure to losses from derivative financial instruments held at June 30, 1999. We do not use derivative financial instruments for trading purposes. PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is not currently involved in any legal or administrative proceedings that it believes could have, either individually or in the aggregate, a material adverse effect on its business or financial condition. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders The Company held its annual shareholders meeting on April 20, 1999. A total of 65,758,524 shares of common stock were outstanding and entitled to vote at the meeting. Of the total outstanding, 64,337,715 shares were represented at the meeting and 1,420,809 shares were not voted. Shareholders cast votes for the election of the following directors whose terms expire in 2002: In Favor Withheld Theodore Crumley 64,068,712 269,003 A. William Reynolds 64,052,420 285,295 Donald E.Roller 64,094,425 243,290 Continuing in office are James G. Connelly III and Peter G. Danis Jr., whose terms expire in 2000, and John B. Carley, George J. Harad, and Christopher C. Milliken, whose terms expire in 2001. The shareholders also ratified the appointment of Arthur Andersen LLP, as the Company's independent auditors for the year 1999 with votes cast 64,112,465 for, 165,913 against, and 59,337 abstained. The shareholders also ratified the amendment of the Key Executive Stock Option Plan. The votes for the amendment were 61,031,411 for, 810,493 against, and 204,890 abstained. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. Required exhibits are listed in the Index to Exhibits and are incorporated by reference. (b) No Form 8-K's were filed during the quarter covered by this report. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BOISE CASCADE OFFICE PRODUCTS CORPORATION As Duly Authorized Officer and Chief Accounting Officer: /s/Thomas J. Jaszka _____________________________ Thomas J. Jaszka Vice President and Controller Date: August 12, 1999 BOISE CASCADE OFFICE PRODUCTS CORPORATION INDEX TO EXHIBITS Filed With the Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1999 Number Description Page 27 Financial Data Schedule EX-27 2
5 The data schedule contains summary financial information extracted from Boise Cascade Office Products Corporation's Balance Sheet at June 30, 1999, and from its Statement of Income for the six months ended June 30, 1999. The information presented is qualified in its entirety by reference to such financial statements. 1,000 6-MOS DEC-31-1999 JUN-30-1999 21,113 0 418,082 9,644 188,228 676,542 406,948 166,043 1,447,218 543,438 280,530 0 0 658 591,524 1,447,218 1,649,948 1,649,948 1,217,681 1,217,681 357,180 0 12,248 63,638 26,870 36,768 0 0 0 36,768 0.56 0.56
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