Item 1. Business - ------- --------
(a) General
BCT International, Inc. (the "Company") is a holding company with one direct wholly-owned subsidiary: Business Cards Tomorrow, Inc., a Florida corporation ("BCT"). BCT operates the Business Cards Tomorrow system, the world's largest wholesale printing chain. Since its founding in 1975, the system has grown to include 100 "Business Cards Tomorrow Plants" (the "Plants") specializing in trade thermography production in 38 states and Canada. Four of the Plants -- located in Delray Beach, Florida; Newbury Park, California; Riverside, California; and Marietta, Georgia -- are indirectly owned by BCT through wholly-owned subsidiaries. An indirect subsidiary of BCT owns 70% of the Louisville, Kentucky, Plant and the remaining 30% is owned by third parties.
BCT's operations also include the Pelican Paper Products Division ("PPP") which supplies paper products to the BCT Plants. The Company operates in a single industry segment: the franchising, ownership and operation of and sale of paper products to trade thermography production facilities, i.e., the BCT Plants.
(b) Narrative description of the business
Business Cards Tomorrow, Inc. - ----------------------------- General -------
The Plants typically operate through the placement of business card and stationery catalogs with commercial and retail "quick" printers, office superstores, forms brokers, office supply companies and stationers in the Plants' trade areas (collectively, "Dealers"). These catalogs are utilized by the Dealers to secure orders from their customers for thermographed printed products. Such orders are normally picked up daily by the Plants' route drivers, who also deliver products previously ordered. The Plants specialize in the "fast turnaround" of their products, delivering some items, such as business cards printed in black ink, in one business day, with most products being delivered within one week of the date of order. While most Plants receive at least some orders by mail and fax, this normally does not constitute a major portion of a Plant's business.
Thermography is a specialized printing process that gives a raised printing effect similar to engraving and requires specialized equipment and operating techniques. Most commercial and "quick" printers and office superstores and other Dealers choose not to invest in this specialized equipment, preferring to subcontract this type of work to wholesale "trade" printing companies such as Business Cards Tomorrow Plants that specialize in thermography.
BCT supplies business card, stationery, rubber stamp and wedding invitation and social stationery catalogs to its Plants and also sells them the paper products featured in the catalogs through PPP.
PPP is a supplier of paper products for the BCT Plants. PPP purchases raw paper directly from paper mills and paper brokers and utilizes the services of converters to convert the raw material to finished paper products. In November 1995, PPP purchased conversion equipment and began to perform certain conversion functions "in house". PPP utilizes three public storage facilities located strategically throughout the United States to house and ship out paper products to the Plants.
BCT markets its franchise operations to potential franchisees through major business newspapers as well as printing trade publications. The development of a specific market is determined by a number of different criteria, including resources available, customer base and operating efficiencies. In order for BCT to penetrate franchise markets, it has assembled an experienced staff, certain members of which have expertise in franchise development. BCT has developed the BCT network primarily through the sale of franchises to third parties. BCT indirectly owns and operates five Plants listed in Item 1(a) above (the "Company Plants"). BCT Plants are located throughout the Continental U.S., Hawaii and Canada. As demographics change and develop, the potential for new markets may expand. As of May 1996, BCT has identified approximately 20 franchise markets available for sale.
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During the second quarter of fiscal 1996, BCT began offering for sale to existing franchisees additional exclusive territories, known as "Facilities", which do not require the opening of a Plant. The franchisee purchasing a Facility is required to open a sales office in the territory and send all work orders to the franchisee's Plant located in a neighboring territory. Once the Facility's territory develops demographically to support approximately 500 Dealers, BCT has the right to require the franchisee to open a Plant in the territory. BCT is offering the Facilities at a price of $35,000 each. As of May 1, 1996, one Facility has been sold (in August 1995). As of May 1, 1996, BCT has identified approximately 10 Facilities available for sale.
Additionally, BCT may from time to time sell to existing franchisees additional territories which are not expected to become able to support a Plant, (each a "Territory"). The price of a Territory is currently set at $35,000. As of May 1, 1996, two Territories have been sold in Colorado and Massachusetts.
BCT derives revenues from six principal sources: (i) royalties, which are based on a percentage of sales from the BCT Plants; (ii) franchise fees from newly franchised Plants and resale fees from the resale of operating Plants; (iii) sales of paper products to franchisees; (iv) catalog and miscellaneous equipment and parts sales classified as printing sales; (v) gross revenue from the Company Plants; and (vi) sales of additional Territories and Facilities to existing franchisees.
As of May 1, 1996, 100 BCT Plants are in operation in 38 states and Canada. The current number of Plants compares with 98 and 97 Plants in operation on May 1, 1995 and 1994, respectively. Total BCT system sales reached approximately $84,000,000 for fiscal 1996, an average of $853,000 per franchise, compared to total and average sales of $80,000,000 and $824,000 for fiscal 1995 and $74,000,000 and $792,000 for fiscal 1994, respectively.
BCT receives either a 5% or 6% royalty fee based on gross BCT Plant sales for original 15 - 25 year contracts. The royalty fee is dependent on the initial franchise agreement date. Generally, agreements dated through mid-1986 carry 5% royalties. Thereafter, the 6% royalty applies. Certain franchise agreements are up for renewal. The Company has developed a renewal royalty scale for these Plants. See "Franchises" below for a detailed description. For fiscal years ended 1996, 1995 and 1994, continuing franchise royalties comprised approximately 27%, 34% and 31% of total revenue, respectively. Pelican Paper Products sales to the franchisees for fiscal years ended 1996, 1995 and 1994 were approximately 47%, 52% and 52% of total revenue, respectively.
Raw Materials -------------
The primary raw materials of the BCT Plants are paper products which are readily available from numerous industry suppliers. It is common practice within the paper industry to place minimum order levels when ordering specific materials. In addition, the need to maintain a complete stock of raw materials for all items listed in BCT's catalogs requires significant continuing inventory investment. Consequently, PPP frequently carries higher levels of inventory than what is required according to PPP's customer demands. While BCT, through PPP, sells paper products to its franchised Plants and the Company Plants, the Plants are under no obligation to purchase these products from BCT and all such products are available from other suppliers.
The paper industry does suffer periodic shortages of specific paper products as well as price fluctuations caused by supply and demand changes, but these shortages and price fluctuations typically affect all similar types of printers in an industry such as "trade" thermographers and can generally be mitigated through the use of alternate supply sources in the industry and substitution with similar products. Any increases in the cost of paper from the mills is generally passed on to the Plants. It is not considered by BCT as very likely that any of its Plants would be out of operation for any significant period of time due to an unavailability of raw materials resulting from major supply or price changes in the paper industry.
Franchises ----------
BCT's franchise agreements with individual franchised Plants are typically for a 15-to-25 year period and are renewable for additional 10-year periods. The right to renew is contingent upon the franchisee not being in default under any material term of the franchise agreement. BCT may terminate a franchise agreement under certain circumstances where the franchisee is in material default under the franchise agreement and has not cured such default(s) after notice from BCT. BCT's existing franchise agreements with individual Plants have an average remaining term of approximately 18 years.
Franchise agreements for 16 Plants come up for renewal in fiscal years 1996 - 98, and in the subsequent 10 years, three Plants come up for renewal. As of May 1, 1996, six of these Plants have renewed their franchise agreements for 10-year terms and two Plants scheduled for renewal elected not to renew. In fiscal 1995, management established a program to induce early renewal of its franchise agreements. The Company began negotiating with each renewal candidate as to the terms of its renewed franchise agreement. The renewal royalty scale that the Company initiated is as follows:
The renewal royalty scale is based on total sales, not incremental sales. For example, if a Plant increases quarterly sales from $350,000 to $380,000, its aggregate royalty will decrease from $17,500 ($350,000 x .05) to $17,100 ($380,000 x .045). This renewal scale is designed to provide a strong incentive for growth of Plant revenues beyond the $1.5 million annual level. For the fiscal year ended 1996, average Plant sales were $853,000. It is not anticipated that this renewal royalty scale will have an adverse effect on the Company's royalty revenues.
As of February 29, 1996, a new franchisee is required to pay an initial fee of $85,000, which consists of a $35,000 franchise fee and a $50,000 opening package fee, and an ongoing royalty of 6% of the gross sales of the franchised Plant. Additionally, a new franchisee must obtain an initial equipment and furnishings package at a cost of approximately $175,000. This package may be purchased from BCT or from other sources as long as it meets the standards of performance established by BCT. Each franchisee is typically expected to obtain his own financing, but BCT may aid the franchisee in obtaining such financing. In fiscal 1993, BCT began accepting interest-bearing term notes from franchisees as a condition of the purchase of their franchises. BCT financed one sale in fiscal 1996 and none in fiscal 1995 or 1994.
Each new BCT franchisee is required to attend a two week training session at BCT's National Training Center in Fort Lauderdale, Florida. This training consists of equipment orientation and business management, marketing and sales techniques required to operate a successful Plant. Upon completion of the initial training, BCT furnishes a qualified field representative for a period of ten days to instruct the franchisee in the operation of his Plant, advise in the hiring of personnel and assist in the establishment of standard operating procedures.
BCT also provides ongoing support to its franchisees through periodic regional seminars, annual conventions, and visits from Company management and field representatives. Operational visits at its franchise plants are scheduled on a priority basis depending on the relative needs of the franchisees. An operational visit consists of an overview of the Plant's production, sales and marketing efforts and financial performance.
To expedite the sale of the approximately 20 franchise markets available for sale, BCT has developed its Guaranteed Sales Program ("GSP"). The GSP program is designed to convey BCT's confidence in the profitability and soundness of owning a BCT franchise. Within the first six months after execution of a franchise agreement, a dissatisfied franchisee may notify BCT of its intent to sell the Plant's assets back to BCT. The franchisee must pay all of its outstanding obligations to third parties, exclusive of the leases on equipment and the premises, and pay all monies owed to BCT for royalties, PPP paper and miscellaneous items. BCT will acquire the equipment under lease, all inventory, all accounts receivable and all customer files, books, records, and other documents pertaining to all transactions. In the asset purchase transaction, BCT will pay the fair market value of the equipment and fixtures, or if leased, assume the lease, and will assume the lease of the Plant's premises. Revenue from a GSP sale will not be recognized until the six month period lapses and all conditions relating to the sale have been substantially performed.
Wedding Invitations and Social Stationery Catalog -------------------------------------------------
BCT introduced its Wedding Invitations and Social Stationery Catalog in February 1993. The introduction of this product line enables the BCT franchise system to directly compete, product line by product line, with its two major national competitors. See "Competition". BCT is utilizing its Company Plants and four franchised Plants in an attempt to refine the implementation of this product line. Due to disappointing results thus far, BCT is re-evaluating the long term potential of this product line.
Company Plants --------------
BCT, through its wholly-owned subsidiary BCT Delray, acquired its first Company Plant in June 1993, in Delray Beach, Florida. In December 1994, BCT acquired another Company Plant in Honolulu, Hawaii. The Honolulu Plant was sold in fiscal 1996. During fiscal 1996, BCT, through its wholly-owned subsidiaries, acquired or repossessed five Company Plants in the following locations: Boston, Massachusetts; Marietta, Georgia; Louisville, Kentucky; Newbury Park, California; and Riverside, California. The Boston Plant was sold in February 1996; however, due to active continuing involvement by management of BCT, the recognition of this sale has been deferred. BCT intends to make additional acquisitions of franchised Plants as appropriate opportunities arise. BCT utilizes its Company Plants as its test sites for the improvement of the BCT operating system, as well as the testing of new products.
In addition to the testing function, BCT uses its Company Plant subsidiaries for three basic purposes which are designed to enhance the Company's long term growth and profitability: (i) to acquire and manage well- run, profitable or potentially profitable Plants situated in strategic locations; (ii) to acquire independent thermographers and convert their businesses into Plants for resale; and (iii) to repossess underperforming Plants which are in default under their franchise agreements and upgrade them for resale.
As of May 1, 1996, BCT has acquired two Company Plants which it intends to hold for long-term growth: the Delray Beach and Louisville Plants. In addition, as of May 1, 1996, BCT, acting jointly with two BCT franchisees, has acquired one independent thermography business. Portions of the acquired business' assets and customer base were allocated to the BCT franchisees, and the balance was utilized to create the Marietta, Georgia, Company Plant, which is currently held for sale. Also, BCT acquired an existing Plant in Riverside, California, which is currently held for sale.
BCT has identified underperforming Plants throughout the network. As of May 1, 1996, BCT has repossessed three underperforming Plants. Since the Plants' repossessions, BCT has sold two of these Plants: Honolulu, Hawaii, and Boston, Massachusetts. BCT presently holds for sale and operates a repossessed Company Plant in Newbury Park, California.
Rubber Stamps Tomorrow ----------------------
In January 1990 BCT determined that "Rubber Stamps Tomorrow" ("RST") was a valuable additional product line for the BCT system. As a result, BCT entered into an agreement with the company that initially developed and test marketed the RST concept to purchase all tradename, trademark, service mark and related rights as they pertain to the Rubber Stamps Tomorrow name. Effective September 1, 1994, BCT incorporated the RST program into the BCT operating system, requiring all franchised Plants to implement the RST program as part of their franchise. Each participating BCT Plant is required to pay an ongoing royalty of 5% to 6% of the gross sales of rubber stamp products depending upon the initial franchise agreement date.
Competition -----------
The Company and its franchisees compete with other franchisors, franchisees and independent operators in the graphic arts industry, some of whom may be better established and/or have greater resources than the Company and its franchisees. While the Company believes that its BCT franchise system is the leading supplier of thermographed business cards to printers throughout the United States (supported by the May 1993 Quick Print Magazine "Supply and Services Survey," indicating a 23% market share in the brokered printing category for business cards), there can be no assurance that competitors will not imitate or improve upon the Company's business strategy. BCT's major national competitors are Regency Thermographers and Carlson Craft; however, BCT's franchisees also compete with numerous local and regional operations. BCT's franchisees compete primarily on the basis of turnaround time, quality and close customer contact.
Trade and Service Marks -----------------------
The Company has received federal registration of the names "Business Cards Tomorrow" and "BCT International, Inc." and the BCT commercial logo, as well as the names and commercial marks for "Typesetting Express", "Engraving Tomorrow", "Thrift-T-Cards", "Thermo-Rite", and "Rubber Stamps Tomorrow".
Research and Development ------------------------
The Company performs ongoing research and development, seeking improvements in the operating procedures and products of its franchises. These activities are primarily done at the Company Plants and at the Company's corporate headquarters. Also, the Company often requests individual franchisees to perform tests of various equipment, materials or techniques in an actual production environment.
In fiscal 1993, the Company began a new research and development project known as Advanced Management Operating System ("AMOS"). The Company believes that, in order for individual BCT Plants to expand to a multi-million dollar sales level, a system must be created to provide control over the expanded production, thus resulting in increased profitability. The integral components of the AMOS system are as follows: composition; verification; computer generated grouping; job tracking; integration of accounts receivable and collections; and generation of advanced management reports. The Company utilized the services of experienced computer system design consultants to expedite the completion of the test phase and make AMOS operational. In March 1995, the AMOS test phase was completed, and AMOS is fully operational. The BCT Plants lease the AMOS software at a nominal monthly rate from the computer system design consultants. To date, the Company has incurred expenses totalling $540,000 for the research and development of AMOS. During fiscal 1996, 1995 and 1994, the Company spent approximately $421,000, $279,000, and $367,000 on research and development, respectively.
Government Regulation ---------------------
The Federal Trade Commission has adopted rules relating to the sales of franchises and disclosure requirements to potential franchise purchasers. Additionally, various states have adopted laws regulating franchise sales and operations. As a franchisor, the Company is required to comply with these federal and state regulations and believes that it is not operating in violation of any of these regulations.
Employees ---------
The Company has 136 employees, all of whom are located at either (i) the Company's corporate headquarters in Fort Lauderdale, Florida, (ii) the Company's printing facility in Fort Lauderdale, Florida, or (iii) the Company Plants in Delray Beach, Florida; Newbury Park, California; Riverside, California; Louisville, Kentucky and Marietta, Georgia.
Financial Information Relating to Foreign and Domestic Operations -----------------------------------------------------------------
Item 2.
Item 2. Properties - ------- ----------
The Company's corporate headquarters are located at 3000 NE 30th Place, Fifth Floor, Fort Lauderdale, Florida, and occupy approximately 8,200 square feet. The lease on this facility continues to October 1997 at a monthly rental of approximately $9,000. In May 1995, PPP leased 1,200 square feet of space on the Fourth Floor of the same building. The lease on this facility continues to October 1997 at a monthly rental of approximately $1,300.
The Company leases approximately 7,600 square feet of space in Fort Lauderdale, at a monthly rental of approximately $5,200, for use as a Company printing and training facility. The lease on this facility continues through February 1997.
The Delray Beach, Florida, Company Plant utilizes a 6,000 square foot facility, which is leased for a monthly rental of $3,500. The lease on this facility continues through April 2000.
The Louisville, Kentucky, Company Plant utilizes a 5,000 square foot facility, which is leased for a monthly rental of $1,200. The lease on this facility continues through September 1999.
The Marietta, Georgia, Company Plant occupies a 5,700 square foot facility, which is leased for a monthly rental of $2,700. The lease on this facility continues through October 2000.
The Riverside, California, Company Plant rents a 3,400 square foot facility, which is leased for a monthly rental of $1,800. The lease on this facility continues through November 2000.
The Newbury Park, California, Company Plant leases a 4,000 square foot facility, which is leased for a monthly rental of $2,700. The lease on this facility continues through November 1996.
Management is working with a real estate broker to obtain additional space for the Company's corporate facilities. Management believes that an expansion to approximately 14,000 square feet will be needed by fiscal 1998. All other existing facilities are adequate for the foreseeable future. Management believes that additional suitable facilities will be available at commercially reasonable rates.
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Item 3.
Item 3. Legal Proceedings - ------- -----------------
Varrieur v. BCT International, Inc.
On April 28, 1989, Douglas B. Varrieur, a former officer and director of the Company, filed suit against the Company in the Circuit Court for Hillsborough County, Florida. Varrieur's complaint was based on the Company's April 19, 1989 termination for cause of his five-year employment agreement with the Company dated August 4, 1988 (the "Employment Agreement"). The Employment Agreement provided for an annual salary of $104,000 together with certain other benefits and was entered into in connection with the Company's acquisition on that date of a controlling interest in Print Shack International, Inc. ("Print Shack"), from Varrieur and certain other Print Shack shareholders. Pursuant to the Employment Agreement, Varrieur served as an executive officer of the Company and Print Shack. Print Shack generated massive losses for the Company and was shut down in fiscal 1991.
Varrieur's complaint is based on his allegation that the Company did not have good cause to terminate his employment and therefore breached the Employment Agreement. The original complaint contained four counts: Count I sought unspecified money damages based on the alleged breach of the Employment Agreement; Count II sought specific performance of the Employment Agreement, i.e., that Varrieur be reinstated; Count III sought cancellation and rescission of the August 4, 1988, agreement pursuant to which the Company acquired Varrieur's 44% interest in Print Shack (the "Stock Purchase Agreement"); and Count IV sought a declaratory judgment to the effect that the three-year non- competition covenant of the Employment Agreement is unenforceable.
The court dismissed with prejudice all of Varrieur's initial claims, except for Count I. In the fall of 1993, Varrieur amended his complaint to assert a claim (new Count III) for an alleged breach by the Company of its agreement to indemnify him and his wife against personal liability arising from debts of Print Shack. This claim was based on a suit filed by a Print Shack creditor against the Company, the Varrieurs as guarantors and others based on a promissory note issued by Print Shack. The Company assumed full responsibility for defending this action and settled it in January 1994, thereby extinguishing the subject debt. Varrieur is seeking, pursuant to his indemnification claim, to recover damages in excess of $1,750 in the form of legal fees, together with unspecified damages allegedly arising from damage to his credit.
Discovery proceedings began in May 1990 and have continued on a sporadic basis. In November 1994, Varrieur moved to set the case for jury trial. In March 1995, the court denied Varrieur's motion, finding that he had previously waived his right to jury trial. In April 1995, Varrieur appealed the court's decision denying him a jury trial. In July 1995, the appellate court affirmed the trial courts decision denying Varrieur's motion. A non-jury trial has been set for September 1996.
The Company intends to vigorously contest Varrieur's claim. Based on the facts available to it and the advice of counsel, the Company believes that it had good cause for terminating Varrieur and that Varrieur's claim is without merit.
It is the opinion of the Company's management and counsel that the likelihood that Varrieur's claim will have a material adverse effect on the consolidated financial position and results of operations of the Company is remote.
Item 4.
Item 4. Submission of Matters to a Vote of Securities Holders - ------- -----------------------------------------------------
No matters were submitted to a vote of securities holders, through the solicitation of proxies or otherwise, during the fiscal quarter ended February 29, 1996.
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Item 5.
Item 5. Market for Registrant's Common Stock and Related Security --------------------------------------------------------- Holder Matters --------------
The Company's Common Stock is traded on the National Market tier of the Nasdaq Stock Market under the symbol "BCTI".
The following table sets forth, for the quarters indicated, the high and low closing bid prices in the Nasdaq Small Cap Market for a share of Common Stock through February 15, 1995, and the closing price for the Common Stock as reported on the Nasdaq National Market since February 15, 1995. The quotations through February 15, 1995, represent prices between dealers, do not include retail markups, markdowns or commissions, and may not represent actual transactions.
On May 17, 1996, the closing price per share of common stock, as reported by NASDAQ, was $3.38.
There is currently no established public trading market for any securities of the Company other than the common stock.
The approximate number of holders of record of the Company's common stock as of May 17, 1996 was 917.
During the fiscal years ended February 29, 1996, February 28, 1995, and 1994, no cash dividends were declared on the outstanding Common Stock. The declaration of dividends on Common Stock was prohibited by the loan covenants with the Company's bank. The Company's loan with the bank was satisfied in February 1994. The Company has no plans to pay any dividends on the common stock.
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Item 6.
Item 6. Selected Financial Data (continued) 000's omitted - ------- ------------------------------------------------- (except for per share data)
(1) During the five fiscal years ended February 29, 1996, no cash dividends have been declared on the common stock outstanding.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results - ------- ----------------------------------------------------------------------- of Operations -------------
Fiscal 1996 Compared to Fiscal 1995 - -----------------------------------
Total revenue for fiscal 1996 increased by $4,017,000 or 30% over the prior fiscal year. Royalty revenue increased by $280,000 or 6%; paper sales increased by $1,164,000 or 16%; revenue from Company Plants increased by $294,000 or 39%; revenue from Company Plants held for sale increased by $1,159,000 or 1,260%; revenue from printing sales increased by $410,000 or 81%; revenue from the sales of franchises increased by $404,000 or 87% and interest and other income increased by $306,000 or 235%. The revenue growth reflects the use of the new business card catalog by 95% of the franchisees and the sales of two franchises, a Facility, two Territories and a Company Plant. Also, revenue from Company Plants held for sale includes revenue from five Plants in fiscal 1996 versus one in the prior year.
Cost of goods sold as a percentage of revenue was 47% and 51%, respectively, for fiscal years ended 1996 and 1995. Although the percentage generally remains stable, it does fluctuate due to periodic changes in the revenue mix. Selling, general and administrative expenses represented 25% and 29% of gross revenues in fiscal 1996 and 1995, respectively. In fiscal 1996, management focused on cost containment as it related to BCT operations.
In fiscal 1996, significant losses were incurred by both the Company Plants and the Company Plants held for sale of $509,000 and $483,000, respectively. The majority of the Company Plants' losses have been generated by the Delray Beach, Florida, and Newbury Park, California, Plants. Due to the continuing operating losses and negative cash flow of the Delray Beach Plant, the goodwill associated with the acquisition of this Plant was accelerated and fully amortized in the amount of $155,000 during fiscal 1996.
The Company had net income of $1,141,000 for fiscal 1996, compared to net income of $1,155,000 for fiscal 1995.
Fiscal 1995 Compared to Fiscal 1994 - -----------------------------------
Total revenue for fiscal 1995 increased by $452,000 or 3% over the prior fiscal year. Royalty revenue increased by $536,000 or 13%; paper sales increased by $191,000 or 3%; revenue from the Company Plants increased by $109,000 or 17%; and revenue from franchise Plant sales decreased by $491,000 or 51%, reflecting the sale of two franchises. The decline in franchise Plant sales is not indicative of a lack of marketable territories. The Company is aggressively seeking experienced franchise sales staff to strengthen its franchise sales department.
Cost of goods sold as a percentage of revenues for fiscal 1995, at 51%, was consistent with the comparable percentage for fiscal 1994. Cost of goods sold includes a $100,000 reserve for slow-moving inventory related to the Wedding and Social Stationery Catalog. The Company has engaged a marketing consultant to assist management in the repositioning of its Wedding and Social Stationery Catalog and product line. Selling, general, and administrative expenses represented 29% and 27% of gross revenues in fiscal 1995 and 1994, respectively. The primary cause of the increase in selling, general and administrative expenses as a percentage of revenues was the increased expenses associated with the Company's formalization of its marketing department. The costs associated with the marketing department in fiscal 1995 increased by $153,000 (58%) from the prior year's level.
With the retirement of the Company's convertible subordinated debentures and various notes payable, interest expense decreased by $231,000 or 79%, during fiscal 1995.
The Company had net income of $1,155,000 for fiscal 1995, which compared favorably to net income of $861,000 for fiscal 1994.
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Liquidity and Capital Resources - -------------------------------
As of May 1, 1996, the Company has utilized $852,000 of the $1,938,000 net proceeds from the fiscal 1995 exercise of the Series B preferred stock warrants, to fund operating losses of its Company Plants. As previously discussed, the Company Plants incurred aggregate operating losses of $992,000 during fiscal 1996. These operating losses stem from two principal sources: the Delray Beach, Florida, Plant and the Newbury Park, California, Plant.
The Delray Beach Plant, which is held for long-term growth, was responsible for $456,000 of the losses. This location had two business purposes: to operate and earn income as a traditional Plant and to be the alpha site for all research and development products for the BCT network. Management believes that these dual functions significantly impaired the Plant's ability to actively seek out traditional business for this location and operate in accordance with the franchise system. Due to its operating losses and negative cash flow, the goodwill associated with the acquisition of this Plant was accelerated by $108,000 and fully amortized at February 29, 1996 in the amount of $155,000. In an attempt to cut this Plant's operating losses, its research and development function was significantly curtailed and its manager was replaced in the fourth quarter of fiscal 1996.
In fiscal 1996, operating losses of $483,000 were generated by the Company Plants held for sale, $232,000 of which was generated by the Newbury Park Plant. Upon repossession and/or acquisition of each of these plants, the Company must refurbish the actual facility as well as rebuild its customer base. Consequently, the Company incurs substantial losses initially. Once a repossessed and/or acquired Plant is satisfactorily upgraded, usually six months after repossession and/or acquisition, the Plant is sold. Due to the adverse results thus far from the Company Plants held for sale, management is evaluating alternatives to repossession of troubled Plants.
During fiscal 1996, the Company utilized working capital to make debt payments totalling $214,000.
Through February 29, 1996, the Company made capital expenditures of approximately $917,000, most of which were dedicated to office equipment, computer software and equipment, furniture and fixtures, and other machinery and equipment.
The Company intends to improve its working capital and cash positions during fiscal 1997 by focusing its efforts on the turnaround of the Company Plant subsidiaries, on increasing cash collections and on developing new product lines while containing capital expenditures and keeping inventories at their current levels.
The Company believes that internally generated funds will be sufficient to satisfy the Company's working capital and capital expenditure requirements for the foreseeable future; however, there can be no assurance that external financing will not be needed or that, if needed, it will be available on commercially reasonable terms.
Item 8.
Item 8. Financial Statements and Supplementary Data - ------- -------------------------------------------
The financial statements and schedules listed in the accompanying Index to consolidated financial statements and schedules on page are filed as a part of this report.
Item 9.
Item 9. Disagreements on Accounting and Financial Disclosure - ------- ----------------------------------------------------
None
William Wilkerson has been Chairman of the Board and a Director of the Company since January 1986. In May 1988, he accepted the additional responsibility of Chief Executive Officer. He was President and Chief Executive Officer of Business Cards Tomorrow, Inc. (a Florida corporation) from January 1978 to January 1982 and Chairman from January 1982 to January 1986.
A. George Cann was appointed as President of Business Cards Tomorrow, Inc. in April 1995. Previously, Mr. Cann worked in the Kinko's organization for 13 years in various capacities. Since December 1987, he has been President and a principal shareholder of Kinko's Grand Rapids, Inc., and the owner and operator of three Kinko's copy center stores in Michigan. Mr. Cann's role with Kinko's Grand Rapids, Inc., has been limited to that of a passive investor since he joined the Company. From February 1991 through September 1994, Mr. Cann held the position of Vice President of Operations and Product Development at Kinko's Service Corporation, Ventura, California. From June 1990 through February 1991, he was a Director of Kinko's Service Corporation. From May 1990 through February 1991, he was Regional Manager in Michigan for K-Graphics, Inc., a multi-state owner and operator of Kinko's stores.
Donna M. Pagano-Leo joined the Company in August 1992 and became Vice President/Chief Financial Officer and Treasurer of the Company in October 1992. In May 1995, Ms. Leo was elected as the Company's secretary. Ms. Leo is a certified public accountant, a member of the Florida Institute of Certified Public Accountants and the American Institute of Certified Public Accountants, and has worked in public accounting since 1983. Prior to joining the Company, Ms. Leo served as an audit manager with the accounting firm of Price Waterhouse LLP for seven years and as a staff accountant with the accounting firm of Arthur Young & Co. for two years. Ms. Leo has resigned from the Company effective May 30, 1996; however, she has informed the Company that she will remain available to provide financial consulting services as requested by the Company.
Michael R. Hull joined the Company in May 1996 and will serve as Vice President/Chief Financial Officer and Treasurer beginning May 31, 1996 . Mr. Hull is a certified public accountant, a member of the Florida Institute of Certified Public Accountants and the American Institute of Certified Public Accountants and has worked in public accounting since 1985. Prior to joining the Company, Mr. Hull served as an audit senior manager with the accounting firm of Price Waterhouse LLP for three years.
Thomas J. Cassady became a Director of the Company in April 1988 and has been a Director of Photo Control Corporation, Minneapolis, Minnesota, since February 1978. Mr. Cassady is a veteran of more than 30 years in the financial and securities field, having served as President and Chief Administrative Officer of Merrill, Lynch, Pierce, Fenner and Smith, Inc., until his retirement in 1978.
Robert F. Bond has been a Director of the Company since May 1980 and was Secretary/Treasurer from February 1981 to August 1988 and Chairman of the Board from January 1985 to January 1986. Since 1985, Mr. Bond has been a principal in First Madison Group, an investment banking firm in Montville, New Jersey.
Raymond J. Kiernan has been a Director of the Company since December 1983 and has been a Director of Fleet Trust Company and Fleet Trust Company of Florida since 1983. In 1979, Mr. Kiernan retired from his position as a Vice President and Division Director of Merrill, Lynch, Pierce, Fenner & Smith, Inc. He is a former Governor of the National Association of Securities Dealers.
Henry A. Johnson, founder of BCT, has been a Director of the Company since January 1986. From January 1986 until October 1988, he was Senior Vice President/Operations of the Company. In October 1988, he resigned his position with the Company and became Senior Vice President/Operations of BCT. In February 1989, he accepted the additional responsibilities of Executive Vice President of BCT. Previously, he was Senior Vice President/Operations for Business Cards Tomorrow, Inc. (a Florida corporation), from January 1978. In March 1990, he retired from his position with BCT; however, he has continued to provide consulting services to BCT. Since March 1991, Mr. Johnson has owned and operated a private printing business, Colorful Copies, located in Las Vegas, Nevada.
Bill LeVine became a Director of the Company in May 1992. Mr. LeVine is the pioneer of the quick printing industry. He founded Postal Instant Press (PIP Printing) in 1967 and served as its Chairman, Chief Executive Officer and President until January 1988. Since that time, he has focused on private investments. Since 1992, Mr. LeVine has been a Director of Fast Frame, Inc. Mr. LeVine has been a Director of First Business Bank, Los Angeles, California, since 1982, and Rentrak Corporation, formerly National Video, Portland, Oregon, since 1987.
Compliance with Section 16 (a) of the Exchange Act
The Company has reviewed the Forms 3 and 4 and amendments thereto furnished to it pursuant to SEC Rule 16a-3(e) during its most recent fiscal year and Form 5 and amendments thereto furnished to the Company with respect to its most recent fiscal year. Based solely on such review, the Company has identified each person who, at any time during the fiscal year, was a director, officer or beneficial owner of more than 10% of the Company's Common Stock and failed to file on a timely basis, as disclosed in the above-described Forms, reports required by the Securities Exchange Act of 1934 during the most recent fiscal year or prior fiscal years. The following table sets forth for each such person the number of late reports and the number of transactions that were not reported on a timely basis. The Company is not aware of any failure to file a required Form, as all known delinquencies were cured.
NUMBER OF LATE NAME POSITION NUMBER OF LATE REPORTS REPORTED TRANSACTIONS - ---- -------- ---------------------- ---------------------
Bronson 10% Beneficial Owner 5 9
Item 11.
Item 11. Executive Compensation - -------- ----------------------
(a) Board Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors, which is comprised of non-employee directors, has overall responsibility to review and recommend broad-based compensation plans for executive officers of the Company and its BCT subsidiary to the Board of Directors. One of the members of the Compensation Committee, Mr. LeVine, has invested significant sums of money in the Company. (See Item 13. "Certain Relationships and Related Transactions"). Pursuant to recently adopted rules designed to enhance disclosure of companies' policies toward executive compensation, set forth below is a report submitted by Messrs. Kiernan, and LeVine in their capacity as the Board's Compensation Committee addressing the Company's compensation policies for fiscal 1996 as they affected Mr. William A. Wilkerson, Chairman of the Board and Chief Executive Officer, and Mr. A. George Cann, President of BCT and Chief Operating Officer.
Compensation Policies For Executive Officers
The executive compensation program is based on a philosophy which aligns compensation with business strategy, Company values and management initiatives. The principles underlying this compensation philosophy are: the linkage of executive compensation to the enhancement of shareholder value; maintenance of a compensation program that will attract, motivate and retain key executives critical to the long-term success of the Company; creation of a performance oriented environment by rewarding performance leading to the attainment of the Company's goals; evaluation of competitiveness of salary and equity incentive opportunities; and determination of the adequacy and propriety of the annual bonus plan, including structure and performance measures.
Relationship of Performance Under Compensation Plans
Compensation paid Messrs. Wilkerson and Cann in fiscal 1996, as reflected in the following Tables, consisted of base salary. The Compensation Committee is awaiting the audited results for fiscal 1996 prior to determining any annual bonus to Messrs. Wilkerson and Cann. In addition, as indicated in the Tables, in fiscal 1996 the Compensation Committee awarded stock options to Mr. Cann.
The Company's executive compensation policies are oriented toward utilization of objective performance criteria. The principal measures of performance that are utilized by the Compensation Committee are targeted versus actual operating budget and income growth. Subjective performance criteria are utilized to only a limited degree.
Annual Bonus Arrangements
The Company's annual bonuses to its executive officers, as indicated above, are based on both objective and subjective performance criteria. Objective criteria include actual versus target annual operating budget performance and actual versus target annual income growth. Target annual income growth and target annual operating budgets utilized for purposes of evaluating annual bonuses are based on business plans which have been approved by the Board of Directors. Subjective performance criteria encompass evaluation of each officer's initiative and contribution to overall corporate performance, the officer's managerial ability, and the officer's performance in any special projects that the officer may have undertaken. Performance under the subjective criteria was determined at the end of fiscal 1996 after informal discussions with other members of the Board.
Mr. Wilkerson's Fiscal 1996 Compensation
During fiscal 1993, the Compensation Committee approved a seven year employment contract for Mr. Wilkerson for fiscal years beginning in fiscal 1994. All of Mr. Wilkerson's fiscal 1996 compensation was paid pursuant to this contract. The agreement calls for minimum annual remaining salary amounts during the employment term as follows:
In the event that Mr. Wilkerson is substantially incapacitated during the term of his employment for a period of 90 days in the aggregate during any twelve month period, the Company has the right to terminate his employment. Under such termination, Mr. Wilkerson will receive one-half of his salary in effect on the date of termination for the remaining term of the agreement. Additionally, in the event of Mr. Wilkerson's death during his employment, his designated beneficiary or his estate shall be paid one-half of his salary in effect on the date of his death for the remaining term of the agreement.
The performance considerations utilized by the Compensation Committee in determining the terms of Mr. Wilkerson's employment contract were as follows:
. His hiring of a new and successful management team. . His ability to lead the Company to substantial and increasing profitability. . His implementation of a new franchisee credit and collection policy achieving maximum collectibility. . His development of new and positive investment banking and market maker relationships. . His success in maintaining the Company's NASDAQ listing under difficult circumstances through conversion of subordinated debentures, a preferred stock offering and increased profitability. . The Company's overall performance in fiscal 1993 yielding substantial revenue and income growth and substantially surpassing goals set forth in the targeted operating budget.
Mr. Wilkerson's fiscal 1996 and 1997 salary was kept at $275,000 and $300,000 respectively, which is the minimum level prescribed for those years in his employment contract.
Mr. Cann's Fiscal 1996 Compensation
During fiscal 1996, the Compensation Committee approved the terms of Mr. Cann's employment. Mr. Cann may be terminated by the Company at will; however, under his agreement with the Company, if he is terminated during the first three years of his employment, he is entitled to receive six months of severance pay.
Mr. Cann's fiscal 1997 compensation reflects a cost of living salary increase of 5%.
SUBMITTED BY THE COMPENSATION COMMITTEE OF THE COMPANY'S BOARD OF DIRECTORS:
RAYMOND J. KIERNAN BILL LEVINE
Page 16
(c) Compensation Tables
The following tables set forth the compensation received for services in all capacities to the Company during its fiscal years ended February 29, 1996, and February 28, 1995, and 1994, by the two executive officers of the Company as to whom the total salary and bonus in the most recent year exceeded $100,000.
Page 17
BCT INTERNATIONAL, INC. ----------------------- SUMMARY COMPENSATION TABLE -------------------------- FISCAL YEARS 1996, 1995 AND 1994 -------------------------------- 000'S OMITTED -------------
(1) Salary for fiscal 1996, 1995 and 1994 includes a $12 car allowance. (2) Bonus for fiscal 1994 of $25 was determined in July 1993, of which $2 was paid in fiscal 1994 and the remainder was paid in fiscal 1995. (3) Options granted in fiscal 1996 were 40 of which 10 immediately vested and the remainder are scheduled to vest over a three year period ending in fiscal 1999.
BCT INTERNATIONAL, INC. ----------------------- AGGREGATED OPTION EXERCISES AND YEAR-END ---------------------------------------- OPTION VALUES FOR FISCAL 1996 ----------------------------- 000'S OMITTED -------------
BCT INTERNATIONAL, INC. ----------------------- EXECUTIVE MANAGEMENT COMPENSATION --------------------------------- OPTION GRANTS IN FISCAL YEAR 1996 --------------------------------- 000'S OMITTED -------------
(d) Other Compensation Arrangements
Outside directors of the Company receive director's fees of $750 per month plus $750 for each Board of Directors meeting attended and $500 for each committee meeting attended.
Item 12.
Item 12. (a) Security Ownership of Certain Beneficial Owners and Management - ------------ --------------------------------------------------------------
The following table sets forth as of May 17, 1996, information with respect to the only persons known to the Company to be beneficial owners of more than 5% of the Company's outstanding Common Stock (excluding treasury stock), as well as the beneficial ownership of all directors and officers of the Company individually and all directors and officers as a group. Based on the information available to the Company, except as set forth in the accompanying footnotes, each person has sole investment and voting power with respect to the shares of common stock indicated. At May 17, 1996, 4,975,385 shares of Common Stock were outstanding.
Page 21
- --------------------------------- (1) This column sets forth shares of Common Stock which are deemed to be "beneficially owned" by the persons named in the table under Rule 13D-3 of the Securities and Exchange Commission ("SEC").
(2) Includes 228,750 shares covered by currently exercisable warrants.
(3) Includes 346,250 shares covered by currently exercisable stock options and warrants.
(4) Includes 61,250 shares covered by currently exercisable stock options.
(5) Includes 43,750 shares covered by currently exercisable stock options.
(6) Includes 101,250 shares covered by currently exercisable stock options.
(7) Includes 80,000 shares covered by currently exercisable stock options.
(8) Includes 23,750 shares covered by currently exercisable stock options.
(9) Includes 10,000 shares covered by currently exercisable stock options.
(10) Includes 3,667 shares covered by currently exercisable stock options.
(11) Includes 669,917 shares covered by currently exercisable stock options and warrants.
Item 13.
Item 13. Certain Relationships and Related Transactions - -------- ----------------------------------------------
In February 1996, a company of which Mr. Wilkerson, the Chairman of the Board, is a 50% shareholder, purchased the Honolulu, Hawaii, Company Plant for a total purchase price of $400,000 plus accounts receivable and inventory. The purchase price is payable pursuant to a $325,000 promissory note, representing an assumption of the prior franchisee's debt to the Company, and a $108,000 promissory note representing the value of the inventory and accounts receivable acquired. The $325,000 note bears interest at 8% per year and requires equal monthly payments of principal and interest for 10 years based on a 15-year amortization, with a balloon payment due at the end of 10 years. The $108,000 note bears interest at 8% per year and is payable in five years pursuant to equal monthly payments of principal and interest. These notes are secured by pledges of substantially all of the assets of the Hawaii Plant.
On May 7, 1992, Mr. LeVine was appointed to the Company's Board of Directors. On that date, he purchased 550,000 shares of the Company's Series A convertible preferred stock at a price of $1 per share. The Series A preferred stock carried a cumulative annual dividend of 12%, was scheduled to be redeemed in five years (May 1997), and was convertible into common stock at a ratio of 1.48 shares of preferred stock per share of common stock. The conversion ratio was based on the market price of the common stock at the time of the transaction. In connection with his appointment to the Board and his purchase of the Series A preferred stock, Mr. LeVine was granted 10-year options to purchase 51,250 shares of common stock at a price of $1.48 per share (the market price on the date of grant). On October 1, 1995, Mr. LeVine voluntarily converted his 550,000 shares of the Series A preferred stock into 371,622 shares of the Company's Common Stock.
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K - ------- ---------------------------------------------------------------
(a) Financial Statements and Financial Statement Schedules
(1) Financial Statements - beginning on page;
Report of Independent Certified Public Accountants - page
Consolidated Balance Sheets at February 29, 1996 and February 28, 1995- page
Consolidated Statements of Operations for the fiscal years ended February 29, 1996, February 28, 1995, and February 28, 1994 - pages and.
Consolidated Statements of Changes in Stockholders' Equity for the fiscal years ended February 29, 1996, February 28, 1995, and February 28, 1994 - pages through
Consolidated Statements of Cash Flows for the fiscal years ended February 29, 1996, February 28, 1995, and February 28, 1994 - pages through
(2) Notes to Consolidated Financial Statements - pages through Financial Statement Schedules
For the Years Ended February 29, 1996, February 28, 1995, and February 28, 1994:
Schedule VIII - Valuation and Qualifying Accounts - page
Schedule X - Supplementary Income Statement Information page
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
(b) Reports of Form 8-K
The Company did not file any report on Form 8-K during the last quarter of fiscal 1996.
(c) Exhibits
3.1 Certificate of Incorporation of the Company, as amended, as filed with the SEC as Exhibit 3.1 to the Company's Report on Form 10-K for the fiscal year ended February 28, 1995, is incorporated herein by reference.
3.2 By-Laws of the Company, as filed with the SEC as Exhibit 3.2 to the Company's report on Form 10-K for the fiscal year ended February 28, incorporated herein by reference.
4.1 Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock, as filed with the SEC as Exhibit 4.1 to the Company's report on Form 10-K for the fiscal year ended February 29, 1995, is incorporated reference.
4.2 Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock, as filed with the SEC as Exhibit 4.2 to the Company's report on Form 10-K for the fiscal year ended February 28, 1995, is incorporated herein by reference.
10.1 Agreement dated May 7, 1992, between the Company and Bill LeVine, as filed with the SEC as Exhibit 10.1 to the Company's report on Form 10-K for the fiscal year ended February 28, 1995, is incorporated herein by reference.
10.2 Consulting Agreement dated March 1, 1992, between the Company and Henry A. Johnson, as filed with the SEC as Exhibit 10.3 to the Company's report on Form 10-K for the fiscal year ended February 28, 1995, is incorporated herein by reference .
10.3 Employment Agreement dated March 1, 1993 between the Company and William A. Wilkerson, as filed with the SEC as Exhibit 10.4 to the Company's report on Form 10-K for the fiscal year ended February 28, 1995, is incorporated herein by reference.
10.4 Agreement dated January 1, 1993 between Business Cards Tomorrow, filed with the SEC as Exhibit Inc. and Hence/EDP, as 10.5 to the Company's report on Form 10-K for the fiscal year ended February 28, 1995, is incorporated herein by reference .
10.5 Agreement dated February 1, 1994 between the Company and Barber & Bronson, Inc. as filed with the SEC as Exhibit 10.11 to the Company's report on Form 10-K for the fiscal year ended February 28, 1995, is incorporated herein by reference.
10.6 Agreement dated May 24, 1993 between the Company and American Equipment Leasing, Inc. as filed with the SEC as Exhibit 10.12 to the Company's report on Form 10-K for the fiscal year ended February 28, 1995, is incorporated herein by reference.
10.7 Line of Credit Agreement dated October 5, 1994 between the Company and Intercontinental Bank, as filed with the SEC as Exhibit 10.13 to the Company's report on Form 10-K for the year ended February 28, 1995, is incorporated herein by reference.
10.8 Employment letter dated March 2, 1995 between the Company and A. George Cann, as filed with the SEC as Exhibit 10.14 to the Company's report on Form 10-K for the year ended February 28, 1995 is incorporated herein by reference.
10.9 Asset Purchase Agreement dated February 23, 1996, between BCT and E.V. Antrim, Rosemary R. Antrim and William A. Wilkerson.
27 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BCT INTERNATIONAL, INC. (Registrant)
DATE: MAY 23, 1996 By: WILLIAM WILKERSON ------------------------- --------------------------- William Wilkerson Chairman of the Board & Chief Executive Officer
DATE: MAY 23, 1996 By: DONNA M. PAGANO-LEO ------------------------- --------------------------- Donna M. Pagano-Leo Vice President, Treasurer & Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of Registrant and in the capacities and on the dates indicated.
WILLIAM WILKERSON HENRY A. JOHNSON - -------------------------------- -------------------------------- William Wilkerson Henry A. Johnson Chairman of the Board & Director Director
Date: May 23, 1996 Date: May 23, 1996
ROBERT F. BOND RAYMOND J. KIERNAN - -------------------------------- -------------------------------- Robert F. Bond Raymond J. Kiernan Director Director
Date: May 23, 1996 Date: May 23, 1996
THOMAS J. CASSADY BILL LeVINE - -------------------------------- -------------------------------- Thomas J. Cassady Bill LeVine Director Director
Date: May 23, 1996 Date: May 23, 1996
BCT INTERNATIONAL, INC. -----------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES --------------------------------------------------------
All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS --------------------------------------------------
To the Board of Directors and Stockholders of BCT International, Inc.
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of BCT International, Inc. and its subsidiaries at February 29, 1996 and February 28, 1995, and the results of their operations and their cash flows for each of the three years in the period ended February 29, 1996, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP Fort Lauderdale, Florida May 23, 1996
The accompanying notes are an integral part of these consolidated financial statements.
BCT INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements.
Page 30
BCT INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
The accompanying notes are an integral part of these consolidated financial statements.
BCT INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these consolidated financial statements.
BCT INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued)
The accompanying notes are an integral part of these consolidated financial statements.
BCT INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued)
BCT INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Page 35
BCT INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) 000's omitted -------------
Noncash activities: - ------------------
In fiscal 1996, $550 of convertible Series A preferred stock was converted into 372 shares of common stock.
In fiscal 1996, the Company repossessed two existing franchisee plants and acquired $50 in tangible assets in exchange for funds owed the Company.
In fiscal 1996, 9 warrants were exercised by the warrant holder for 3 shares of the Company's common stock.
In fiscal 1995, $252 and $150 of subordinated convertible debentures were converted into 84 and 66 shares of common stock, respectively.
In fiscal 1995, a note receivable due from an employee in the amount of $17 was satisfied through the return of 5 shares of common stock of the Company which collateralized this note.
In fiscal 1995, the Chairman of the Board exchanged $100 of convertible debentures for 100 shares of Series B convertible preferred stock together with 44 additional warrants.
In fiscal 1995, 2,225 shares of Series B convertible preferred stock were converted into 989 shares of the Company's common stock.
In fiscal 1994, 60 shares of Series A convertible preferred stock were issued in exchange for assets purchased.
In fiscal 1994, $175 of convertible debentures were converted into 58 shares of common stock.
In fiscal 1994, notes receivable due from employees in the amount of $25 were satisfied through the cancellation of 8 shares of common stock of the Company that collateralized these notes receivable. The value ascribed to the common stock and additional paid in capital is $0 and $25, respectively.
In fiscal 1994, the Company issued debt of $300 relating to the acquisition of BCT Delray and the Canadian Area Master Franchise Agreement.
In fiscal 1994, the Chairman of the Board exchanged $73 of notes payable into Series B convertible preferred stock.
The accompanying notes are an integral part of these consolidated financial statements.
BCT INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000's omitted)
NOTE 1: BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - ------- -------------------------------------------------------
Business
BCT International Inc. (the Company), franchises wholesale thermography printing Plants through its wholly-owned subsidiary, Business Cards Tomorrow, Inc. (BCT), for which it receives initial franchise fees and continuing royalties. At February 29, 1996, BCT, through its wholly-owned subsidiary BCT Enterprises, Inc. and subsidiaries of BCT Enterprises, Inc., owns five Company Plants of which three are held for sale. BCT's ownership interest in one of the Company Plants is 70%. The Company also sells paper stock and catalogs to its franchisees and the Company Plants. At February 29, 1996, the Company has 100 thermography printing Plants in operation, 95 of which are franchised. The total number of Plants was 98 at February 28, 1995 and 97 at February 28, 1994.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and its 70% owned subsidiary. All significant intercompany transactions have been eliminated. The minority interest held by third parties in the majority owned subsidiary is separately stated.
Management Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates made by management in the accompanying financial statements relate to accounts receivable allowances and the tax valuation allowance. Actual results could differ from those estimates.
Short-Term Investments
Short-term interest bearing investments are those with maturities of less than one year but greater than three months when purchased and are readily convertible to cash. The short-term investments are classified as held to maturity and are stated at amortized cost, which approximates fair value.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, short-term investments, trade receivables, accounts payable, and notes payable approximate fair value as of February 29, 1996.
Inventory
Inventory, consisting primarily of paper products, printing supplies and catalogs for sale to its franchisees and the Company Plants, is stated at the lower of cost (first in, first out method) or market.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is provided on the straight-line method over the estimated useful life of the asset. Leasehold improvements are amortized over the lives of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Costs of major additions and improvements are capitalized and expenditures for maintenance and repairs which do not extend the life of the assets are expensed. Upon the sale or disposition of property and equipment, the cost and related accumulated depreciation is eliminated from the accounts, and any resultant gain or loss is credited or charged to operations.
Repossessions of Franchises
Franchises are repossessed when management determines that the franchisees are in default under their franchise agreements and are unable to properly operate the business, meet their financial obligations, and their business actions are detrimental to the franchise network. Prior to repossession, amounts due to the Company are fully secured and fully reserved in the allowance for doubtful accounts. Upon takeover, the Company owns all assets of the Plant in forgiveness of the amounts due to it. The receivables owed to the Company are written off through the allowance for doubtful accounts. All assets acquired and the lease obligations assumed are recorded at fair value. The Company does not value any of the existing revenue stream of the repossessed Plants. The Company repossessed two Plants in 1996 (one in 1995).
Acquisitions of Plants
All acquisitions of Company Plants have been accounted for as purchases; operations of the businesses acquired have been included in the accompanying consolidated statements of operations from their respective dates of acquisition. The excess of the purchase price over fair value of the net assets acquired is included in goodwill. The Company acquired three Plants in 1996 (none in 1995).
Assets Held for Sale
Assets held for sale consist of the net assets of the Company Plants in Marietta, Georgia; Newbury Park, California and Riverside, California, and are carried at the lower of cost or market value.
Trademark
The trademark is amortized using the straight-line method over 40 years.
Intangible Assets
Intangible assets consist of the excess purchase price over the fair value of the net assets acquired relating primarily to the acquisition of Company Plants in fiscal 1994 and 1996, and the Canadian franchise rights in fiscal 1994. The amortization period for the Company Plants is 5 years and the Canadian acquisition intangible asset is being amortized over 19 years, which represents the remaining life of the franchise agreement acquired.
Impairment of Long-Lived Assets and Identifiable Intangibles
On March 1, 1995, the Company adopted Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long Lived Assets and for Long-Lived Assets To Be Disposed Of". Upon adoption, the goodwill associated with the Delray Beach, Florida Company Plant was accelerated by $108 and fully amortized at February 29, 1996. The Company reviews long-lived assets, identifiable intangibles and goodwill and will reserve for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be fully recoverable.
Sales of Franchises
Revenue from the sales of individual franchises, including the initial equipment package, is recognized upon the opening of the related franchise and when all significant services or conditions relating to the sale have been substantially performed. When these criteria have not been met, then the net profit from the sale has been deferred and characterized as deferred revenue. Revenue from the sale of an area franchise is recognized when all significant services relating to the sale have been completed.
Continuing Franchise Royalties, Paper and Printing Revenues
Continuing franchise royalties and paper and printing revenues are recognized monthly when earned. Collectibility of these revenues is assessed on a regular basis. The allowance for doubtful accounts is established through a provision for losses charged to selling, general and administrative expense. Accounts receivable are charged off against the allowance for doubtful accounts when management believes that collectibility is unlikely. The allowance is an amount that management believes will be adequate to absorb possible losses in existing accounts and notes receivable that may become uncollectible.
Accounting for Stock Based Compensation
In October 1995, the FASB issued Statement No. 123, (SFAS 123) "Accounting and Disclosure of Stock-Based Compensation," which encourages but does not require companies to recognize stock awards based on their fair value at the date of grant. The Company currently follows, and expects to follow, the provisions of APB No. 25 and related interpretations in accounting for its employee stock options. Under APB No. 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Although the Company is permitted to continue to follow the provisions of APB No. 25 under SFAS 123, certain pro forma disclosure will be required beginning in fiscal 1997 as if the Company had accounted for its stock options under the SFAS 123 fair value method.
Research and Development
Research and development costs include costs for new product development which are charged to operations as incurred.
Income Taxes
The Company utilizes an asset and liability approach to accounting for income taxes that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than enactments of changes in the tax law or rates.
Earnings Per Common Share
Primary earnings per common share are calculated by dividing net earnings applicable to common stock by the weighted average number of common stock shares outstanding and common stock equivalents which consist of stock options and stock warrants. On a fully-diluted basis, net earnings, weighted average shares outstanding and common stock equivalents are adjusted to assume the conversion of convertible subordinated debentures and preferred stock from the date of issue.
Cash and Cash Equivalents
For the purposes of reporting cash flows, cash and cash equivalents include investments with maturities of ninety days or less at purchase date.
Presentation and Reclassification
All dollar and share amounts, except amounts related to per share data, are expressed in thousands of dollars. Certain items in the 1995 and 1994 consolidated financial statements have been reclassified for comparative purposes.
NOTE 2: SHORT-TERM INVESTMENTS - ------ ---------------------- Short term investments consist of the following:
NOTE 3: ACCOUNTS AND NOTES RECEIVABLE - ------- ----------------------------- Accounts and notes receivable consist of the following:
In the normal course of business, to meet the financing needs of its franchisees, the Company extends credit to its franchisees throughout the United States and Canada. Although the Company has a diversified receivable portfolio, a substantial portion of the franchisees' ability to honor their commitments to the Company is reliant upon the economic stability of the market in the franchisee's particular geographic area. The Company's exposure to loss in the event of nonperformance by the franchisees is represented by the contractual amount of the notes and accounts receivables and the franchise equipment leases guaranteed by the Company (see Note 10). The Company controls the credit risk of its receivables through credit approvals, limits and monitoring procedures. The Company may require collateral or other security to support the receivables with credit risk.
At February 29, 1996, approximately $416 ($170 in 1995) of accounts receivable, although currently due, are classified into long term accounts and notes receivable, based upon historic payment performance of the franchisees. A significant portion of the allowance for doubtful accounts relates to these accounts and notes receivable. Amounts included in long term accounts and notes receivable include the following contractual payment terms: 1998 - $366, 1999- $230, 2000 and thereafter - $1,090.
At February 29, 1996, $433 of notes receivable, with an 8% interest rate per annum, related to the purchase of the Honolulu, Hawaii Company Plant by South Pacific Wholesale Printers, Inc. The Chairman of the Board of the Company owns 50% of South Pacific Wholesale Printers, Inc.
Bad debt expense for the years ended February 29, 1996, February 28, 1995 and February 28, 1994, was approximately $504, $352 and $196, respectively.
Interest income is recognized on a cash basis for those accounts and notes receivable with specific reserves. Interest income for all other accounts and notes receivable are recognized on an accrual basis.
NOTE 4: ACQUISITIONS - ------- ------------
On October 9, 1995, the Company acquired certain assets and liabilities from a franchisee plant located in Riverside, California for $335. This acquisition has been accounted for under the purchase method of accounting and accordingly, the purchase price has been allocated to the assets acquired (approximately $115) based on the estimated fair values at the date of acquisition. The purchase price associated with the acquisition exceeded the net assets acquired by approximately $220, which was recorded as an intangible asset. The operating results associated with this business acquisition are included in the Company's consolidated results of operations from October 9, 1995.
On November 1, 1995 the Company entered into an agreement with a franchisee plant located in Louisville, Kentucky, in which it acquired 70% of all the assets and related liabilities for $276. The original owners of the franchise plant are maintaining a 30% minority interest. This acquisition has been accounted for under the purchase method of accounting and accordingly, the purchase price has been allocated to the assets acquired based on the estimated fair values at the date of acquisition. The purchase price associated with the acquisition exceeded the net assets acquired by approximately $276, which was recorded as an intangible asset. The operating results associated with this business acquisition are included in the Company's consolidated results of operations from November 1, 1995.
On December 1, 1995, the Company acquired certain assets from United Impressions, Inc. for $365 relating to its store operations. This acquisition has been accounted for under the purchase method of accounting and accordingly, the purchase price has been allocated to the assets acquired (approximately $158) based on the estimated fair values at the date of acquisition. The purchase price associated with the acquisition exceeded the net assets acquired by approximately $207, which was recorded as an intangible asset. The operating results associated with this business acquisition are included in the Company's consolidated results of operations from December 1, 1995.
The pro forma unaudited results of operations for the years ended February 29, 1996 and February 28, 1995, assuming these acquisitions had been consummated as of March 1, 1994 are as follows:
NOTE 5: PROPERTY AND EQUIPMENT - ------- ----------------------
Major classifications of property and equipment are as follows:
NOTE 6: NOTES PAYABLE - ------- -------------
Notes payable consist of the following:
Scheduled maturities after February 29, 1996 for notes payable are as follows:
Fiscal Note Year Payable ------ -------
1997 $ 64 1998 $ 5 ----- $ 69 =====
NOTE 7: PREFERRED STOCK - ------- ----------------
Effective May 1992 750 shares of Series A Convertible Preferred Stock, $1.00 par value, were authorized and issued by the Company. In January 1994, 60 additional shares of Series A preferred stock were authorized and issued, bringing the total to 810 shares. Dividends on preferred stock are cumulative and accrue from the date of original issue at a 12% rate per annum, payable quarterly on the first day of each January, April, July and October. Dividends in arrears are non-interest bearing. Dividends must either be fully paid or declared and aggregated for payment prior to the declaration of dividends on the common shares. The Series A preferred stock is non-voting except as it relates to any action affecting the terms of the priority of the preferred stock.
Upon the event of a voluntary or involuntary liquidation, the holders of the Series A preferred stock will be entitled to receive $1.00 per share plus all accrued and unpaid dividends. The Series A preferred stock is convertible into common stock at a ratio of 1.48 shares of preferred stock for each share of common stock. The Company has the option to require conversion of the preferred stock beginning two years after the date of issuance if the common stock closing price or last reported sales price is at least $7.00 per share for 10 consecutive business days. If the preferred stock is not converted within five years of issuance, the Company must redeem the stock at $1.00 per share plus all accrued and unpaid dividends.
On October 1, 1995, 550 shares of Series A preferred stock were voluntarily converted, at a ratio of 1.48 shares, into 372 shares of common stock. At February 29, 1996, 260 shares of Series A preferred stock remain outstanding.
Effective February 17, 1994, 2,500 shares of Series B convertible preferred stock, $1.00 par value, were authorized by the Company for sale in a private placement offering at a $1.00 price per share. A total of 2,225 shares were sold in the offering. The net proceeds of the offering, which totalled $1,973, were used by the Company (i) to pay off the outstanding 11% convertible subordinated debentures due on March 31, 1994 of $1,180 and (ii) for general working capital. Dividends on the Series B convertible preferred stock were cumulative and accrued from the date of original issue at a 9% rate per annum, payable quarterly on the first day of each January, April, July and October. Total Series B dividends declared and paid to holders were $129 in fiscal 1995. The Company exercised its right to require conversion of the Series B preferred stock into common stock on November 1, 1994. As a result, the Series B preferred stock totalling 2,225 shares was converted into 989 shares of the Company's common stock.
The holders of the Series B convertible preferred stock received one warrant for each 2.25 shares of preferred stock purchased, entitling the holder to purchase one share of the Company's common stock for three years from the date of issuance at an exercise price of $3.00 per share. Contemporaneous with the Company's forced conversion of the Series B preferred stock into common stock, the holders were required to either exercise their Series B Warrants or have them redeemed by the Company. Effective December 8, 1994, 689 warrants were exercised at $3.00 per warrant and the Company issued 689 shares of its common stock, yielding gross proceeds to the Company of $2,067. A commission of $86 was paid to an investment banker in connection with the exercise of these warrants and was offset against additional paid in capital. The Company redeemed the 300 remaining Series B warrants at a price of $.05 each or $15. The original commission of $78 paid in connection with the sale of the Series B preferred stock was fully accreted to additional paid in capital upon the conversion of Series B preferred stock into common stock.
NOTE 8: STOCKHOLDERS' EQUITY - ------- --------------------
Stock Options - -------------
Stock options outstanding, exercisable and exercise price for the three years ended February 29, 1996 are as follows:
Warrants - --------
As of February 29, 1996 and February 28, 1995, there were respectively, outstanding warrants for the purchase of 721 and 694 shares of common stock, respectively, 37 of which are held by the Chairman of the Board. During fiscal 1996, 9 warrants were exercised and paid for in-kind 22 warrants expired and 58 warrants were issued. The exercise price and the dates are as follows:
As of February 28, 1995, 289 warrants issued in conjunction with convertible subordinated debentures had expired and 6 of these warrants were exercised yielding $9. The 989 warrants issued in conjunction with the Series B convertible preferred stock were called for exercise at $3.00 per share or redemption at $.05 each by the Company on November 1, 1994. Of the 989 warrants, 689 were exercised yielding gross proceeds of $2,066, and the remaining 300 were redeemed by the Company for $15.
NOTE 9: INCOME TAXES - ------- ------------
The components of the provision for (benefit from) income taxes for the years ended February 28, 1996, 1995 and 1994 are as follows:
The Company's net deferred tax asset is comprised of the following:
The net change in the valuation allowance for the deferred tax asset was a decrease of $778, $577 and $1,706 for the fiscal years ended February 29, 1996, February 28, 1995 and 1994, respectively. For fiscal year ended February 28, 1994, $288, of the reduction in the valuation allowance related to the utilization of acquired net operating loss carryforwards which reduced goodwill. The remaining reduction in the valuation allowance of $1,418 relates to management's change in judgment about the realizability of the related deferred tax asset in future years. Of this amount, $928 related to the valuation allowance for acquired net operating losses which reduced goodwill and the remaining decrease of $490 in the valuation allowance reduced tax expense. For fiscal year ended February 29, 1996 and February 28, 1995, the decrease of $778 and $577 in the valuation allowance reduced tax expense of $583 and $577, respectively.
Net operating loss carryforwards for Federal income tax purposes total approximately $5,452 at February 29, 1996. The net operating loss carryforward includes $540 with certain limitations. Net operating losses expire as follows:
For Federal income tax purposes, the Company has approximately $19 of general business credit carryovers which expire at various dates through 2001.
If certain substantial changes in the Company's ownership should occur, there would be an annual limitation on the amount of carryforward which could be utilized.
The difference between the statutory and effective tax rates are as follows:
NOTE 10: COMMITMENTS AND CONTINGENCIES - -------- -----------------------------
The Company is a party to various litigation matters, including a matter with a prior officer of the Company. In the opinion of management, potential losses, if any, on the various matters will not have a material impact on the financial condition or results of operation of the Company.
The Company's corporate offices and office equipment are leased under noncancellable lease agreements. The leases initially expire at various dates through 2000, and contain options for renewals. There are provisions in the leases for rent increases based on cost of living increases under certain conditions.
During the Company's operation of the Hawaii Company Plant, a lease was executed with a lessor for its facilities. Upon sale of the Hawaii Plant, the Company entered into a sublease agreement with its new franchisee. The commitment of the Company is through May 1997 with minimum monthly payments of $5. As part of the terms of the Hawaii Company Plant sale, the buyer is obligated to reimburse the Company in full for the monthly lease cost for the lease term.
The following are the approximate minimum annual noncancellable rentals to be paid under the provisions of the leases:
Rental expense amounted to the following approximate amounts for the corresponding periods:
At February 29, 1996, the Company has guaranteed the payment of equipment lease obligations for certain of its franchisees for an aggregate amount of approximately $765.
In March 1993, the Company entered into an employment agreement with the Chairman of the Board. The term of the employment contract is seven years. The agreement calls for minimum annual salary amounts during the term of this contract as follows:
In the event that the Chairman of the Board is substantially incapacitated during the term of his employment for a period of 90 days in the aggregate during any twelve month period, the Company has the right to terminate his employment. Upon termination, the Chairman of the Board will receive one-half of his salary in effect on the date of termination for the remaining term of the agreement. Additionally, in the event of the Chairman's death during his employment, his designated beneficiary or his estate shall be paid one-half of his salary in effect on the date of his death for the remaining term of the agreement.
In March 1995 the Company entered into an employment contract with the President of BCT. The President may be terminated by the Company at will; however, under his agreement with the Company, if he is terminated during the first three years of his employment, he is entitled to receive six months of severance pay. The President was granted 40 options of which 10 immediately vested and the remainder are scheduled to vest over a three year period ending in fiscal 1999.
BCT INTERNATIONAL, INC. ----------------------- 000's omitted SCHEDULE VIII - ------------- VALUATION AND QUALIFYING ACCOUNTS ---------------------------------
Allowance for doubtful accounts at February 29, 1996 of $913 is comprised of $408 related to current receivables and $505 to long-term receivables.
(1) Write off of uncollectible receivables. (2) A deferred tax asset value. (3) The excess of purchase price over fair value of net assets acquired was reduced by $1,216 of the valuation allowance, since this reduction represents the utilization of the acquired operating loss carryforwards.
SCHEDULE X BCT INTERNATIONAL, INC. ----------------------- 000's omitted ------------- SUPPLEMENTARY INCOME STATEMENT INFORMATION ------------------------------------------