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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year
ended February 28, 1997 Commission file no. 0-10823
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BCT INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-2358849
- - ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
3000 NE 30th Place, Fifth Floor, Fort Lauderdale, Florida 33306
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954) 563-1224
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Securities registered pursuant to Section 12 (b) of the Act:
NONE
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Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK, par value $.04 per share
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of Registrant's voting stock held by non-
affiliates of Registrant, at May 16, 1997 was approximately $8,803,000.
The number of shares outstanding of Registrant's Common Stock, par value
$.04 per share, at May 16, 1997 was 5,450,779.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
----
This document consists of 51 pages.
The Index to exhibits appears on page 21.
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 franchise system,
the world's largest wholesale franchise printing chain. Since its founding in
1975, the system has grown to include 98 "Business Cards Tomorrow Franchises"
(the "Franchises") specializing in thermography products for resale by retail
printing providers in 38 states and Canada. Two of the Franchises -- located in
Delray Beach, Florida and Boston, Massachusetts, are owned by BCT through
wholly-owned subsidiaries. Another subsidiary of BCT owns 70% of the Louisville,
Kentucky, Franchise and the remaining 30% is owned by third parties.
BCT's operations also include the Pelican Paper Products Division ("PPP")
which supplies paper products, press supplies and press parts to the BCT
Franchises. The Company operates in a single industry segment: the
franchising, ownership and operation of and sale of paper products to the BCT
Franchises.
(b) Narrative description of the business
-------------------------------------
Business Cards Tomorrow, Inc.
- - -----------------------------
General
-------
The Franchises typically operate through the placement of business card,
stationery, rubber stamp and labels catalogs with commercial and retail "quick"
printers, office superstores, forms brokers, office supply companies and
stationers in the Franchises' trade areas (collectively, "Dealers"). These
catalogs are utilized by the Dealers to secure orders from their customers for
thermographed printed products and other printed matter. Such orders are
normally picked up daily by the Franchises' route drivers, who also deliver
products previously ordered. The Franchises specialize in the "fast turnaround"
of their products, delivering many items, such as business cards, in one
business day, with most products being delivered within two days of the date of
order. While most Franchises receive at least some orders by mail, fax and
electronic communication, this normally does not constitute a major portion of a
Franchise'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 Franchises that specialize in thermography.
BCT supplies business card, stationery, rubber stamp and label catalogs to
its Franchises and also sells them the paper products featured in the catalogs
through PPP.
PPP is a supplier of paper products for the BCT Franchises. 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 Franchises.
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 three Franchises described in Item 1(a) above (the
"Company Franchises "). BCT Franchises are located throughout the Continental
U.S., Hawaii and Canada. As demographics change and develop, the potential for
new markets may expand.
Page 1
During the second quarter of fiscal 1996, BCT began offering for sale to
existing franchisees additional exclusive territories, known as "Satellites",
which do not require the opening of a Franchise. The franchisee purchasing a
Satellite is required to open a sales office in the territory and send all work
orders to the franchisee's Franchise located in a neighboring territory. Once
the satellite's territory develops demographically to support approximately 500
Dealers, BCT has the right to require the franchisee to open a production plant
in the territory. BCT is offering the Satellites at a price of $35,000 each.
Additionally, BCT may from time to time sell to existing franchisees
additional territories which are not expected to support a production plant,
(each a "Territory"). The price of a Territory is currently set at $35,000.
BCT derives revenues from six principal sources: (i) royalties, which are
based on a percentage of sales from the BCT Franchises; (ii) franchise fees from
newly franchised Franchises and resale fees from the resale of operating
Franchises; (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 Franchises; and (vi) sales of additional Territories
and Satellites to existing franchisees.
As of May 1, 1997, 98 BCT Franchises are in operation in 38 states and
Canada. The current number of Franchises compares with 100 and 98 Franchises in
operation on May 1, 1996 and 1995, respectively. Total BCT system sales reached
approximately $91,000,000 for the year ended December 31, 1996, an average of
$919,000 per Franchise, compared to total and average sales of $84,000,000 and
$853,000 for fiscal 1996 and $80,000,000 and $824,000 for fiscal 1995,
respectively.
BCT receives either a 5% or 6% royalty fee based on gross BCT Franchisee
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 Franchises. See "Franchises" below for a detailed description.
For fiscal years ended 1997, 1996 and 1995, continuing franchise royalties
comprised approximately 27%, 27% and 34% of total revenue, respectively.
Pelican Paper Products sales to the franchisees for fiscal years ended 1997,
1996 and 1995 were approximately 53%, 47% and 52% of total revenue,
respectively.
Raw Materials
-------------
The primary raw materials of the BCT Franchises 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 Franchises and the Company Franchises, the
Franchises 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 Franchises. It is not considered by BCT as
very likely that any of its Franchises 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 Franchises 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 Franchise 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 Franchises
have an average remaining term of approximately 18 years.
Page 2
Franchise agreements for 5 Franchises come up for renewal in fiscal 1998,
and in the subsequent 10 years, ten Franchises come up for renewal. As of May
1, 1997, one of these Franchises has renewed their franchise agreement for a 10-
year term. 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:
Gross Sales For Royalty
Each Quarter Percentage
--------------- ----------
$0 to $375,000 5.0 %
$375,001 to $500,000 4.5 %
$500,001 to $750,000 4.0 %
$750,001 or more 3.5 %
The renewal royalty scale is based on total sales, not incremental sales.
For example, if a Franchise 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 Franchise revenues beyond the $1.5 million annual level. For the
calendar year ended December 31, 1996, average Franchise sales were $919,000.
It is not anticipated that this renewal royalty scale will have an adverse
effect on the Company's royalty revenues.
As of May 1, 1997, a new franchisee is required to pay an initial fee
of $82,500, which consists of a $35,000 franchise fee and a $47,500 opening
package fee, and an ongoing royalty of 6% of the gross sales of the Franchise.
Additionally, a new franchisee must obtain an initial equipment and furnishings
package at a cost of approximately $215,000. 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.
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 Franchise. 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 Franchise, 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 Franchise's production, sales
and marketing efforts and financial performance.
To expedite the sale of 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 opening the Franchise, a
dissatisfied franchisee may notify BCT of its intent to sell the Franchise'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 Franchise'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.
Company Franchises
------------------
BCT, through its wholly-owned subsidiary BCT Delray, acquired its first
Company Franchise in June 1993, in Delray Beach, Florida. In December 1994, BCT
acquired another Company Franchise in Honolulu, Hawaii. The Honolulu Franchise
was sold in fiscal 1996. During fiscal 1996, BCT, through its wholly-owned
subsidiaries, acquired or repossessed four under-performing Franchises in
Boston, Massachusetts; Louisville, Kentucky; Newbury Park, California; and
Riverside, California; and created through acquisition, the Marietta, Georgia
Company Franchise.
Page 3
and Riverside, California. The Boston Franchise was sold in February 1996;
however, due to active continuing involvement by management of BCT, the
recognition of this sale was deferred. The Boston Franchise was reacquired by
the Company on March 1, 1997. During fiscal 1997, the Company sold the Company
Franchises in Marietta, Georgia, and Riverside, California, and sold the right
to operate the Newbury Park, California franchise for a 30 month period. The
recognition of these sales has been deferred due to continuing active
involvement. BCT utilizes its BCT Delray Beach Franchise as its test site for
the improvement of the BCT operating system, as well as the testing of new
products.
As of May 1, 1997, BCT has one Company Franchise which it intends to hold
for long-term growth: the Delray Beach, Florida Franchise. In addition, as of
May 1, 1997, two Company Franchises, the Boston Franchise and the Louisville,
Kentucky Franchise, are currently held for sale.
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 Franchises to implement the RST program as part of their
franchise. Each participating BCT Franchise 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 Franchises 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 Franchises 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 Franchises
lease the AMOS software at a nominal monthly rate from the computer system
design consultants. To date, the Company has incurred expenses totalling
$619,000 for the research and development of AMOS. During fiscal 1997, 1996 and
1995, the Company spent approximately $424,000, $421,000, and $279,000 on
research and development, respectively.
Page 4
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 90 employees, all of whom are located at (i) the Company's
corporate headquarters in Fort Lauderdale, Florida, and (ii) the Company
Franchises in Delray Beach, Florida; Boston, Massachusetts and Louisville,
Kentucky.
Financial Information Relating to Foreign and Domestic Operations
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February 28, February 29, February 28,
1997 1996 1995
------------ ------------ ------------
Revenue:
Foreign operations $ 969,000 $ 922,000 $ 779,000
Domestic operations $16,776,000 $16,668,000 $12,794,000
Operating (Loss) Profit:
Foreign operations $ (22,000) $ 123,000 $ 112,000
Domestic operations $ (385,000) $ 823,000 $ 919,000
Identifiable Assets:
Foreign operations $ 356,000 $ 312,000 $ 251,000
Domestic operations $10,873,000 $10,426,000 $ 9,767,000
Item 2. Properties
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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 2002 at a monthly rental
of approximately $9,000.
The Company leased 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 expired in February
1997. The Company printing and training facility was incorporated into the
Delray Beach, Florida Company Franchise location in January 1997.
The Delray Beach, Florida, Company Franchise 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 Franchise 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 Boston, Massachusetts, Company Franchise utilizes a facility, which is
leased for a monthly rental of $3,000. The lease on this facility continues
through February 2001.
Management believes that existing facilities are adequate for the
foreseeable future.
Page 5
Item 3. Legal Proceedings
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None
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
28, 1997.
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.
Fiscal Quarters High Low
- - --------------- ------ ------
1996 First Quarter $5.38 $4.62
Second Quarter $6.00 $4.75
Third Quarter $5.62 $4.25
Fourth Quarter $4.62 $3.50
1997 First Quarter $4.38 $3.00
Second Quarter $3.62 $2.75
Third Quarter $4.38 $3.12
Fourth Quarter $5.00 $2.50
1998 First Quarter (through May 16, 1997) $3.00 $2.06
On May 16, 1997, the closing price per share of common stock, as reported
by NASDAQ, was $2.62.
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 16, 1997 was 900.
During the fiscal years ended February 28, 1997, February 29, 1996, and
February 28, 1995, no cash dividends were declared on the outstanding Common
Stock. The Company has no plans to pay any dividends on the common stock.
Page 6
Item 6. Selected Financial Data (continued) (000's omitted) (except for per
- - ------- -------------------------------------------------------------------
share data)
-----------
OPERATIONS
for the fiscal year ended: FEB. 28, 1997 FEB. 29, 1996 FEB. 28, 1995 FEB. 28, 1994 FEB. 28,1993
------------- ------------- ------------- ------------- ------------
REVENUES:
Royalties and Franchise Fees $ 4,852 $ 4,820 $ 4,540 $ 4,004 $3,517
Paper and Printing Sales 10,118 9,159 7,585 7,400 6,524
Company Franchises 1,920 1,054 760 651 ---
Company Franchises Held for Sale 609 1,251 92 --- ---
Sales of Franchises 40 870 466 957 573
Interest and Other Income 206 436 130 109 78
---------- ---------- ---------- ---------- ---------
17,745 17,590 13,573 13,121 10,692
---------- ---------- ---------- ---------- ---------
EXPENSES:
Cost of Paper and Printing Sales 8,823 7,796 6,657 6,376 5,536
Operating Expenses of
Company Franchises 2,224 1,563 1,030 802 ---
Operating Expenses of Company
Franchises Held for Sale 1,038 1,734 90 --- ---
Cost of Franchises Sold --- 521 326 691 402
Selling, General and Administrative 5,551 4,871 4,184 3,854 3,441
Depreciation and Amortization 247 170 227 338 239
Interest and Other 287 9 28 292 296
Minority Interest (18) (20) --- --- ---
---------- ---------- ---------- ---------- ---------
18,152 16,644 12,542 12,353 9,914
---------- ---------- ---------- ---------- ---------
(Loss) income before income taxes (407) 946 1,031 768 778
Income tax benefit 22 195 124 93 ---
---------- ---------- ---------- ---------- ---------
(Loss) Income From
Continuing Operations (385) 1,141 1,155 861 778
Extraordinary Item:
Gain on Early
Extinguishment of Debt --- --- --- --- 53
---------- ---------- ---------- ---------- ---------
Net (Loss) Income $ (385) $ 1,141 $ 1,155 $ 861 $ 831
========== ========== ========== ========== =========
Page 7
Item 6. Selected Financial Data (continued) 000's omitted (except for per
- - ------- ------------------------------------------------------------------
share data)
-----------
For the fiscal year ended: FEB. 28, 1997 FEB. 29, 1996 FEB. 28, 1995 FEB. 28, 1994 FEB. 28, 1993
-------------- ------------- ------------- ------------- -------------
Earnings (Loss) per Common Share:
Income (Loss) from Operations
Primary $ (.08) $ .19 $ .18 $ .17 $ .27
Fully Diluted (.08) .19 .18 .10 .19
Extraordinary Item:
Primary --- --- --- --- .02
Fully Diluted --- --- --- --- .01
Net Income (Loss) ------- ------- ------- ------ ------
Primary $ (.08) $ .19 $ .18 $ .17 $ .29
------- ------- ------- ------ ------
Fully Diluted $ (.08) $ .19 $ .18 $ .10 $ .20
------- ------- ------- ------ ------
Total Assets $11,229 $10,738 $10,018 $7,781 $5,743
Long-term Debt $ 215 $ 5 $ 48 $ 459 $2,073
Preferred Stock $ 60 $ 260 $ 810 $1,622 $ 765
Net Working Capital $ 3,614 $ 4,633 $ 5,542 $1,067 $1,153
Stockholders' Equity (1) $ 9,310 $ 9,374 $ 7,759 $2,290 $1,247
(1) During the five fiscal years ended February 28, 1997, no cash dividends have
been declared on the common stock outstanding.
Page 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- - ------- -----------------------------------------------------------------------
of Operations
-------------
Fiscal 1997 Compared to Fiscal 1996
- - -----------------------------------
Total revenue for fiscal 1997 increased by $155,000 or 1% over the prior
fiscal year. Royalty revenue increased by $32,000 or 1%; paper and printing
sales increased by $959,000 or 10%; revenue from Company Franchises increased by
$866,000 or 82%; revenue from Company Franchises held for sale decreased by
$642,000 or 51%; revenue from the sales of franchises decreased by $830,000 or
95% and interest and other income decreased by $230,000 or 53%. Revenue growth
was attributable to the overall revenue growth of the BCT system, increased
market penetration by Pelican Paper, and a complete year of revenue from the
Company Franchises. Revenue growth was tempered by an increase in the number of
franchises participating in the renewal royalty scale and a decrease in revenues
from Company Franchises held for sale as current year revenue includes revenue
from three Franchises versus five in the prior year. In addition, Franchise
sales decreased as a result of the sale of one Franchise in fiscal 1997 versus
sales of two Franchises, a Facility, two territories and a Company Franchise in
fiscal 1996.
Cost of goods sold as a percentage of revenue was 50%, 47% and 51%,
respectively, for fiscal years ended 1997, 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
29%, 25% and 29% of gross revenues in fiscal 1997, 1996 and 1995, respectively.
In fiscal 1997, management focused on the sale of Company owned Franchises held
for sale and on cost containment as it related to BCT operations.
In fiscal 1997, significant losses were incurred by both the Company
Franchises and the Company Franchises held for sale of $304,000 and $429,000,
respectively. Company Franchise and Company Franchises held for sale losses
improved from fiscal 1996 due to improved operations at the Delray Beach,
Florida and Louisville, Kentucky Company Franchises and through the sales in
August 1996 of the Marietta, Georgia, Riverside, California and Newbury Park,
California Company Franchises held for sale.
In addition, the Company discontinued its social stationery program in fiscal
1997. As a result, provision was made for inventory obsolescence; and certain
assets related to development of the social catalog were written off. The
aggregate charge to fiscal 1997 earnings was $270.
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 and printing
sales increased by $1,574,000 or 21%; revenue from Company Franchises increased
by $294,000 or 39%; revenue from Company Franchises held for sale increased by
$1,159,000 or 1,260%; 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 Franchise. Also, from Company Franchises held for sale, revenue
includes revenue from five Franchises 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
Franchises and the Company Franchises held for sale of $509,000 and $483,000,
respectively. The majority of the Company Franchises' losses have been
generated by the Delray Beach, Florida, and Newbury Park, California,
Franchises. Due to the continuing operating losses and negative cash flow of
the Delray Beach Franchise, the goodwill associated with the acquisition of this
Franchise 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.
Page 9
Liquidity and Capital Resources
- - -------------------------------
In fiscal 1997, operating losses of $429,000 were generated by the Company
Franchises held for sale, $202,000 of which was generated by the Marietta,
Georgia Franchise. This Franchise was created by the purchase of an existing
Thermographer. Initial losses resulted from the need to relocate the facility,
as well as rebuild its customer base. Consequently, the Company incurred
substantial losses initially. The Marietta, Georgia Franchise was sold in
August 1996.
During fiscal 1997, the Company utilized working capital to make debt payments
totalling $98,000.
For the fiscal year ended February 28, 1997, the Company made capital
expenditures of approximately $240,000, most of which were dedicated to office
equipment, computer software and equipment, furniture and fixtures, and
machinery and equipment for Company Franchises and Company Franchises held for
sale.
The Company intends to improve its working capital and cash positions during
fiscal 1998 by focusing its efforts on cost containment, increasing cash
collections and 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. Financial Statements and Supplementary Data
- - ------- -------------------------------------------
The financial statements and schedules listed in the accompanying Index to
consolidated financial statements and schedules on page F-1 are filed as a part
of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- - ------- ---------------------------------------------------------------
Financial Disclosure
--------------------
None
Page 10
Item 10. Directors and Executive Officers of the Registrant
- - -------- ------------------- -----------------------------
Date Elected
Name Age Position Or Appointed
- - ---- --- -------- ------------
William Wilkerson 55 Chairman of the Board and January 1978
Chief Executive Officer
James H. Kaufenberg 55 Chief Operating Officer and President September 1996
Michael R. Hull 43 Chief Financial Officer, Treasurer May 1996
and Secretary
Thomas J. Cassady 75 Director April 1988
Alvin Katz 67 Director October, 1996
Raymond J. Kiernan 72 Director December 1983
Henry A. Johnson 62 Director February 1975
Bill LeVine 77 Director May 1992
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.
James H. Kaufenberg joined the Company in September 1996 and serves as
President and Chief Operating Officer. Previously, he was President and Chief
Executive Officer and a Director of Insty-Prints, Inc. since September 1989.
Mr. Kaufenberg has an extensive background in general and financial management
in the paper, manufacturing and technology industries. From November 1984 to
October 1989, he was Chief Financial Officer of CPT Corporation based in
Minnesota. From May 1983 to October 1984, he was President and Chief Executive
Officer of Daycom Corporation based in Dayton, Ohio. Before that, Mr.
Kaufenberg was President and General Manager of Miami Paper Corporation in
Dayton, Ohio. Mr. Kaufenberg graduated with distinction from the University of
Nebraska in 1969 and earned his CPA in 1970.
Michael R. Hull joined the Company in May 1996 and became 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.
Alvin Katz became a Director in October 1996. He has been an adjunct
professor of management at Florida Atlantic University in Boca Raton, Florida
since 1980. He spent 20 years with United Parcel Service, Inc. from 1957 to
1976 in various staff assignments, including Corporate Director of R&D and
Operations Planning. Subsequently, he served as CEO of a privately owned
conglomerate in New York City. He is a Director of NASTECH Co., Blimpies
International, Inc., AMTECH Systems, Inc., MIKRON Instrument Company, and OZO
Diversified Automation, Inc.
Page 11
Raymond J. Kiernan has been a Director of the Company since December 1983. He
was associated with Merrill Lynch in various capacities from 1951 to 1980,
ultimately holding the office of Vice President. He was also on the Board of
Directors of Merrill Lynch, Fenner and Smith, its predecessor. During his tenure
with Merrill Lynch, Mr. Kiernan was an allied member of the NYSE, a director of
the Security Traders Association of New York, and was on the Board of Governors
of the National Association of Securities Dealers, chairing the trading
marketing and development committees. Mr. Kiernan presently holds directorship
on the Boards of Fleet Trust Co. of Florida, and U.S. Plastic Lumber Corporation
of Boca Raton, Florida.
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 is not aware of any
failure to file a required Form by a 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.
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 1997 as they affected
Mr. William A. Wilkerson, Chairman of the Board and Chief Executive Officer, and
Mr. James H. Kaufenberg, President and Chief Operating Officer of the Company.
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.
Page 12
Relationship of Performance Under Compensation Plans
Compensation paid Messrs. Wilkerson and Kaufenberg in fiscal 1997, as
reflected in the following Tables, consisted of base salary. In addition, as
indicated in the Tables, in fiscal 1997 the Compensation Committee awarded stock
options to Messrs. Wilkerson and Kaufenberg.
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 1997 after informal discussions
with other members of the Board.
Mr. Wilkerson's Fiscal 1997 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 1997 compensation was paid pursuant to this
contract. The agreement calls for minimum annual remaining salary amounts
during the employment term as follows:
Year Ending February 28/29 Amount
-------------------------- --------
1998 $300,000
1999 $300,000
2000 $300,000
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 1997 and 1998 salary was kept at $300,000 which is the
minimum level prescribed for those years in his employment contract.
Page 13
During fiscal 1997, the Committee approved the terms of Mr. Kaufenberg's
employment. Under the terms of his employment, if Mr. Kaufenberg is terminated
for any reason, he is entitled to receive six months of severance pay.
SUBMITTED BY THE COMPENSATION COMMITTEE OF THE COMPANY'S BOARD OF DIRECTORS:
RAYMOND J. KIERNAN BILL LEVINE
(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 28, 1997, and
February 29, 1996, and February 28, 1995, by the executive officers of the
Company as to whom the total salary and bonus in the most recent year exceeded
$100,000.
Page 14
BCT INTERNATIONAL, INC.
-----------------------
SUMMARY COMPENSATION TABLE
--------------------------
FISCAL YEARS 1997, 1996 AND 1995
--------------------------------
000'S OMITTED
-------------
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
- - ------------------------------------------------------------------------------------------------------------------------------------
FORM OF PAYMENT
FISCAL ---------------
NAME POSITION YEAR SALARY BONUS CASH SHARES OPTIONS
- - -------------- --------------------------- ------ ------ ----- ----- ------ -------
W.A. Wilkerson Chairman of the Board and 1997 $312 (1) $ - $300 --- 50 (3)
Chief Executive Officer 1996 $287 (1) $ 10 $297 --- ---
1995 $287 (1) $ 23 (2) $310 --- 200
J.H. Kaufenberg Chief Operating Officer and 1997 $120 (4) $ 10 $130 --- 200 (5)
President
(1) Salary for fiscal 1997, 1996 and 1995 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 1997 all of which immediately vested.
(4) Includes a $50 non-accountable moving allowance.
(5) Options granted in fiscal 1997, which vest in equal installments over a
four year period ending in fiscal 2001.
Page 15
BCT INTERNATIONAL, INC.
-----------------------
AGGREGATED OPTION EXERCISES AND YEAR-END
----------------------------------------
OPTION VALUES FOR FISCAL 1997
-----------------------------
000'S OMITTED
-------------
NUMBER OF VALUE OF
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES 2/28/97 (#) 2/28/97 ($)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME POSITION EXERCISE # REALIZED UNEXERCISABLE UNEXERCISABLE
- - ------------------ -------------------------------- ---------- ----------- ------------- -------------
W.A. Wilkerson Chairman of the Board and
Chief Executive Officer --- $ --- 284 / 0 $58 /$0
J.H. Kaufenberg Chief Operating Officer and --- $ --- 0 / 200 $0 / $26
President
Page 16
BCT INTERNATIONAL, INC.
-----------------------
EXECUTIVE MANAGEMENT COMPENSATION
---------------------------------
OPTION GRANTS IN FISCAL YEAR 1997
---------------------------------
000'S OMITTED
-------------
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
% OF TOTAL ANNUAL RATES OF
OPTIONS STOCK PRICE
OPTIONS GRANTED TO EXERCISE EXPIRATION APPRECIATION
NAME POSITION GRANTED EMPLOYEES PRICE DATE FOR OPTION TERM
- - ------------------ ---------------------------- ------- ---------- -------- ---------- -----------------
5% ($) / 10% ($)
W.A. Wilkerson Chairman of the Board and
Chief Executive Officer 50 14% $3.50 2/10/07 $109 / $279
J.H. Kaufenberg Chief Operating Officer and 200 56% $2.87 8/13/01 $158 / $352
President
Page 17
(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, $500 for each telephonic
meeting and $500 for each committee meeting attended.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- - -------- --------------------------------------------------------------
The following table sets forth as of May 16, 1997, 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 16, 1997, 5,450,779 shares of Common Stock were
outstanding.
Page 18
PERCENT OF
NUMBER OF SHARES OUTSTANDING
NAME BENEFICIALLY OWNED (1) COMMON STOCK
- - ----------------------------------------- ---------------------- -------------
Certain Beneficial Owners:
Steven N. Bronson 635,320 (2) 11.19%
Barber & Bronson, Inc.
2101 West Commercial Blvd., Suite 1500
Fort Lauderdale, Florida 33309
Officers and Directors:
William A. Wilkerson 1,226,386 (3) 21.39%
Bill LeVine 695,032 (4) 12.59%
Henry A. Johnson 151,847 (5) 2.76%
Raymond J. Kiernan 91,500 (6) 1.65%
Thomas J. Cassady 36,250 (7) .66%
Alvin Katz 20,000 (8) .37%
James H. Kaufenberg 2,000 .04%
Officers and Directors
as a group (7 persons) 2,223,015 (9) 37.12%
(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 283,750 shares covered by currently exercisable stock options and
warrants.
(4) Includes 71,250 shares covered by currently exercisable stock options.
(5) Includes 53,750 shares covered by currently exercisable stock options.
(6) Includes 90,000 shares covered by currently exercisable stock options.
(7) Includes 20,000 shares covered by currently exercisable stock options.
(8) Includes 20,000 shares covered by currently exercisable stock options.
(9) Includes 538,750 shares covered by currently exercisable stock options and
warrants.
Page 19
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 Franchise
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. During 1997, the
Company advanced an additional $65,000 to the Hawaii Franchise in exchange for
three demand notes bearing interest of 8%. These notes are secured by pledges of
substantially all of the assets of the Hawaii Plant, as well as the personal
guarantees of the shareholders.
Page 20
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 F-1;
Report of Independent Certified Public Accountants - page F-2
Consolidated Balance Sheets at February 28, 1997 and
February 29, 1996 - page F-3
Consolidated Statements of Operations for the fiscal years
ended February 28, 1997, February 29, 1996, and
February 28, 1995 - page F-4
Consolidated Statements of Changes in Stockholders' Equity
for the fiscal years ended February 28, 1997,
February 29, 1996, and February 28, 1995 - pages F-5 through F-7
Consolidated Statements of Cash Flows for the fiscal years
ended February 28, 1997, February 29, 1996, and
February 28, 1995 - pages F-8 through F-9
Notes to Consolidated Financial Statements - pages F-10
through F-22
(2) Financial Statement Schedules
For the Years Ended February 28, 1997, February 29, 1996,
and February 28, 1995:
Schedule VIII - Valuation and Qualifying Accounts - page F-23
Schedule X - Supplementary Income Statement Information page F-24
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 1997.
(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 amended, 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, 1995, are 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 herein by reference.
Page 21
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 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.
10.2 Agreement dated January 1, 1993 between Business Cards Tomorrow,
Inc. and Hence/EDP, as filed with the SEC as Exhibit 10.5 to the
Company's report on Form 10-K for the fiscal year ended February
28, 1995, is incorporated herein by reference.
10.3 Asset Purchase Agreement dated February 23, 1996, between BCT and
E.V. Antrim, Rosemary R. Antrim and William A. Wilkerson.
Page 22
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 29, 1997 By: William Wilkerson
---------------------- ------------------------------
William Wilkerson
Chairman of the Board &
Chief Executive Officer
DATE: May 29, 1997 By: Michael R. Hull
---------------------- -----------------------------
Michael R. Hull
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 29, 1997 Date: May 29, 1997
Thomas J. Cassady Bill LeVine
- - -------------------------------- -------------------
Thomas J. Cassady Bill LeVine
Director Director
Date: May 29, 1997 Date: May 29, 1997
Alvin Katz Raymond J. Kiernan
- - -------------------------------- -------------------
Alvin Katz Raymond J. Kiernan
Director Director
Date: May 29, 1997 Date: May 29, 1997
Page 23
BCT INTERNATIONAL, INC.
-----------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
--------------------------------------------------------
Financial Statements: Page Numbers
- - --------------------- ------------
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets at February 28, 1997 and February 29, 1996 F-3
Consolidated Statements of Operations for the fiscal years ended February 28, 1997,
February 29, 1996 and February 28, 1995 F-4
Consolidated Statements of Changes in Stockholders' Equity
for the fiscal years ended February 28, 1997,
February 29, 1996 and February 28, 1995 F-5 to F-7
Consolidated Statements of Cash Flows for the fiscal years ended February 28, 1997,
February 29, 1996 and February 28, 1995 F-8 to F-9
Notes to Consolidated Financial Statements F-10 to F-22
Schedules:
- - ----------
For the fiscal years ended February 28, 1997, February 29, 1996 and
February 28, 1995:
VIII Valuation and Qualifying Accounts F-23
X Supplementary Income Statement Information F-24
All other schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
F-1
Page 24
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 28, 1997 and February 29,
1996, and the results of their operations and their cash flows for each of the
three years in the period ended February 28, 1997, 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 22, 1997
F-2
Page 25
BCT INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
000's omitted
ASSETS
------ February 28, 1997 February 29, 1996
----------------- -----------------
Current Assets:
Cash and cash equivalents $ 314 $ 923
Short-term investments --- 50
Accounts and notes receivable, net of allowance for doubtful
accounts of $379 ($408 in 1996) 1,641 2,028
Inventory, net of reserve of $89 ($105 in 1996) 2,468 2,201
Assets held for sale, net 457 281
Prepaid expense and other current assets 66 58
Net deferred tax asset 312 211
------- --------
Total current assets 5,258 5,752
Accounts and notes receivable, net of allowance for doubtful
accounts of $769 ($505 in 1996) 3,209 1,597
Property and equipment at cost, net of accumulated depreciation
and amortization of $675 ($500 in 1996) 762 1,014
Net deferred tax asset 1,569 1,604
Deposits and other assets 94 118
Trademark, net of accumulated amortization of $81 ($29 in 1996) 113 165
Intangible assets, net of accumulated amortization of $298
($283 in 1996) 224 488
------- --------
$11,229 $ 10,738
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- - -------------------------------------
Current Liabilities:
Accounts payable $ 1,032 $ 687
Notes payable 49 64
Accrued liabilities 291 181
Deferred revenue 272 187
------- --------
Total current liabilities 1,644 1,119
Notes payable 215 5
------- --------
Total liabilities 1,859 1,124
------- --------
Commitments and contingencies (Note 10) --- ---
------- --------
Minority stockholder interest --- (20)
------- --------
Preferred stock, Series A, 12% cumulative, $1 par value,
mandatorily redeemable, 810 shares authorized, 60 shares
issued and outstanding (260 shares in 1996) 60 260
------- --------
Stockholders' equity:
Common stock, $.04 par value, authorized 25,000,
issued and outstanding 5,410 shares (5,164 shares in 1996) 216 207
Paid in capital 12,056 11,659
Accumulated deficit (2,403) (1,991)
------- --------
9,869 9,875
Less: Treasury stock, at cost, 251 shares (226 shares in 1996) (559) (501)
------- --------
Total stockholders' equity 9,310 9,374
------- --------
$11,229 $ 10,738
======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
Page 26
BCT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(000's omitted)
For the For the For the
Fiscal year ended Fiscal year ended Fiscal year ended
February 28, 1997 February 29, 1996 February 28, 1995
------------------ ----------------- -----------------
Revenues:
Royalties and Franchise fees $ 4,852 $ 4,820 $ 4,540
Paper and printing sales 10,118 9,159 7,585
Company Franchises 1,920 1,054 760
Company Franchises held for sale 609 1,251 92
Sales of franchises 40 870 466
Interest and other income 206 436 130
------- ------- -------
17,745 17,590 13,573
------- ------- -------
Expenses:
Cost of paper and printing sales 8,823 7,796 6,657
Operating costs of Company Franchises 2,224 1,563 1,030
Operating costs of Company Franchises held for sale 1,038 1,734 90
Cost of franchises sold --- 521 326
Selling, general and administrative 5,551 4,871 4,184
Depreciation and amortization 247 170 227
Other 273 --- ---
Interest 14 9 28
Minority interest (18) (20) ---
------- ------- -------
18,152 16,644 12,542
------- ------- -------
(Loss) income before income taxes (407) 946 1,031
Income tax benefit 22 195 124
------- ------- -------
Net (loss) income $(385) $1,141 $1,155
======= ======= =======
Net (loss) income per common share: $(.08) $ .19 $ .18
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
Page 27
BCT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(000's omitted)
Common Stock
------------------ Less
Number of Par Paid In Accumulated Treasury
Shares Value Capital Deficit Stock Total
--------- ----- ------- ----------- -------- -----
Balance March 1, 1994 3,008 $120 $6,625 $(3,981) $(474) $2,290
Cancellation of common stock
for note receivable from an employee (5) --- --- --- (14) (14)
Cancellation of common stock
of an employee (59) (2) (15) --- --- (17)
Conversion of $252 of subordinated
convertible debentures with a
conversion rate of $3.00 84 3 249 --- --- 252
Conversion of $150 of subordinated
convertible debentures with a
conversion rate $2.27 66 3 147 --- --- 150
Exercise of 10 stock options with an
exercise price of $1.25 10 --- 12 --- --- 12
Exercise of 6 warrants with an
exercise price of $2.92 3 --- 9 --- --- 9
Issuance of warrants --- --- 38 --- --- 38
Accretion of commission paid on
Series B convertible preferred stock --- --- (78) --- --- (78)
Conversion of 2,225 of Series B convertible
preferred stock to common stock
with a conversion rate of $1.25 989 40 2,185 --- --- 2,225
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
Page 28
BCT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued)
(000's omitted)
Common Stock
------------------ Less:
Number of Par Paid In Accumulated Treasury
Shares Value Capital Deficit Stock Total
--------- ------- ------------ ----------- ------- -------
Exercise of 689 Series B convertible preferred stock
warrants with an exercise price of $3.00 689 27 2,039 --- --- 2,066
Cost associated with exercise of Series B
convertible preferred stock warrants --- --- (86) --- --- (86)
Redemption of 300 Series B convertible
preferred stock warrants with a
redemption price of $.05 --- --- (15) --- --- (15)
Net income --- --- --- 1,155 --- 1,155
Dividend on convertible
preferred stock --- --- --- (228) --- (228)
----- ------- ------ --------- ------- -----
Balance February 28, 1995 4,785 191 11,110 (3,054) (488) 7,759
Exercise of 9 warrants 7 1 13 --- (13) 1
Issuance of warrants --- --- 38 --- --- 38
Conversion of 550 shares of Series A
Preferred Stock at a conversion
ratio of 1.48 372 15 535 --- --- 550
Registration costs --- --- (37) --- --- (37)
Net income --- --- --- 1,141 --- 1,141
Dividend on convertible
preferred stock --- --- --- (78) --- (78)
----- ------- ------ --------- ------- -----
Balance February 29, 1996 5,164 207 11,659 (1,991) (501) 9,374
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
Page 29
BCT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued)
(000's omitted)
Common Stock
------------------ Less:
Number of Par Paid In Accumulated Treasury
Shares Value Capital Deficit Stock Total
--------------------------------------------------------------
Purchase of common stock
held by employee --- --- --- --- ( 58) ( 58)
Exercise of stock options
at prices from $1.25 to
$3.38 per share 111 4 165 --- --- 169
Conversion of 200 shares of
convertible preferred stock
to common stock with a
conversion rate of 1.48 135 5 195 --- --- 200
Cost of warrants --- --- 37 --- --- 37
Dividends on convertible
preferred stock --- --- --- ( 27) --- ( 27)
Net loss ( 385) ( 385)
----- ---- ------- -------- ------- ------
Balance February 28, 1997 5,410 $216 $12,056 ($2,403) ($559) $9,310
===== ==== ======= ======== ======= ======
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
Page 30
BCT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted)
For the For the For the
Fiscal year ended Fiscal year ended Fiscal year ended
February 28, 1997 February 29, 1996 February 28, 1995
----------------- ----------------- -----------------
Cash flows from operating activities:
Net income $ (385) $ 1,141 $ 1,155
Adjustments to reconcile net income
to net cash (used by) provided by
operating activities:
Income tax benefit (65) (778) (594)
Income tax expense --- 583 470
Depreciation and amortization 385 381 286
Cost assigned to warrants issued 37 38 38
Provision for doubtful accounts 503 435 352
Provision for inventory obsolescence 140 --- 100
Write-off of fixed assets 145 --- ---
Minority interest (18) (20) ---
Changes in assets and liabilities
(Increase) in accounts and notes receivable (1,474) (985) (355)
(Increase) decrease in inventory (96) (338) 4
(Increase) in assets held for sale (176) (367) ---
(Increase) decrease in prepaid expenses and
other assets 16 (18) 20
Increase (decrease) in accounts payable 345 (241) (308)
Increase in deferred revenue 85 --- ---
Increase (decrease) in other accrued liabilities 110 57 (78)
-------- -------- --------
Net cash (used by) provided by operating activities (448) (112) 1,090
-------- -------- --------
Cash flows from investing activities:
Maturity (purchase) of short-term investments 50 1,021 (1,071)
Capital expenditures for property and equipment (240) (917) (261)
Sale of Company Franchises held for sale 43 --- ---
Acquisition of Company Franchise --- (100) ---
-------- -------- --------
Net cash (used by) provided by investing activities (147) 4 (1,332)
-------- -------- --------
Cash flows from financing activities:
Issuance of Series B Convertible Preferred Stock --- --- 1,300
Investment banker fee associated with Series B
Convertible Preferred Stock --- --- (65)
Dividend payments on Series A Preferred Stock (27) (81) (97)
Dividend payments on Series B Preferred Stock --- --- (131)
Exercise of Series B Convertible Preferred Stock --- --- 2,066
Investment banker fee associated with Series B warrants --- --- (86)
Redemption of nonexercised Series B warrants --- --- (15)
Treasury stock purchase (58) --- ---
Exercise of stock options and warrants 169 --- 21
Repayments on borrowings (98) (187) (352)
Redemption of convertible subordinated debentures --- --- (1,180)
-------- -------- --------
Net cash (used by) provided by financing activities (14) (268) 1,461
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (609) (376) 1,219
Cash and cash equivalents at beginning of year 923 1,299 80
-------- -------- --------
Cash and cash equivalents at end of year $ 314 $ 923 $ 1,299
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
Page 31
BCT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
000's omitted
-------------
For the For the For the
Fiscal year ended Fiscal year ended Fiscal year ended
February 28, 1997 February 29, 1996 February 28, 1995
----------------- ----------------- -----------------
Supplemental disclosures:
- - -------------------------
Interest paid during the year $14 $27 $85
=== === ===
Income taxes paid during the year $ 7 $71 $18
=== === ===
Noncash activities:
- - -------------------
In fiscal 1997, $200 of convertible Series A preferred stock was converted
into 135 shares of common stock.
In fiscal 1997, the Company sold Company Franchises held for sale in
exchange for accounts and notes receivable amounting to $746.
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 1995, $252 and $150 of subordinated convertible debentures were
converted into 84 and 66 shares of common stock, respectively.
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 common stock.
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
Page 32
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 Franchises through its wholly-owned subsidiary, Business Cards
Tomorrow, Inc. (BCT), for which it receives initial franchise fees and
continuing royalties. At February 28, 1997, BCT, through its wholly-owned
subsidiary BCT Enterprises, Inc. owns two Company Franchises. BCT's ownership
interest in one of the Company Franchises is 70%. At February 29, 1996, five
Company Franchises were owned, of which three were held for sale. The Company
also sells paper stock and catalogs to franchisees and Company Franchises. At
February 28, 1997, the Company has 98 thermography printing franchises in
operation. The total number of Franchises was 98 at February 29, 1996 and 97 at
February 28, 1995.
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 in the
statement of operations. As of February 28, 1997, the net assets of the 70%
owned Company Franchise are reflected in assets held for sale as it is the
Company's intent to sell this investment.
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
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 28, 1997 and February 29, 1996.
Inventory
Inventory, consisting primarily of paper products, printing supplies and
catalogs for sale to franchisees and Company Franchises, 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.
F-10
Page 33
BCT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(000's omitted)
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. 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 Franchises.
Acquisitions of Franchises
All acquisitions of Company Franchises 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 no Franchises in
1997, (three in 1996).
Assets Held for Sale
Assets held for sale are carried at the lower of cost or market value.
Trademark
The trademark is amortized using the straight-line method over 17 years.
Intangible Assets
Intangible assets consist of the excess of purchase price over the fair
value of the net assets acquired relating primarily to the acquisition of the
Canadian franchise rights in fiscal 1994. The amortization period for the
Canadian franchise rights is being amortized over 19 years, which represents the
remaining life of the franchise agreement acquired.
Impairment of Long-Lived Assets and Identifiable Intangibles
During fiscal 1996, 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 Franchise ($108) was written
off. The Company reviews long-lived assets and identifiable intangibles and
reserves 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.
F-11
Page 34
BCT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(000's omitted)
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
The Company accounts for employee stock options using the intrinsic value
method as prescribed by APB No. 25 "Accounting for Stock Issued to Employees".
During 1997, the Company adopted the disclosure provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123") (see Note 8).
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. For the year ended February 28, 1997, earnings per share do not include
common stock equivalents as they are anti-dilutive. Fully diluted earnings per
common share are not presented for fiscal 1997 because they are anti-dilutive
and are not presented for fiscal 1996 and 1995 because they are not materially
dilutive.
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 1996 and 1995
consolidated financial statements have been reclassified for comparative
purposes.
NOTE 2: SHORT-TERM INVESTMENTS
- - -------------------------------
Short term investments as of February 29, 1996 consisted of a U.S. Treasury Bill
due May 2, 1996 with a carrying value and market value of $49 and $49,
respectively. There were no short term investments at February 28, 1997.
F-12
Page 35
BCT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(000's omitted)
NOTE 3: ACCOUNTS AND NOTES RECEIVABLE
- - ------- -----------------------------
Accounts and notes receivable consist of the following:
February 28, February 29,
1997 1996
------------ ------------
Franchise fees
receivable $ 1,118 $ 902
Paper sales receivable
from franchisees 1,419 958
Notes receivable from sale of
franchises, interest at 8%
to 12%, due in monthly
installments through 2006 1,572 773
Notes receivable due from franchisees,
interest at 8% to 14%, payable
in monthly installments through
2005 1,675 1,380
Company Plant accounts receivable
from customers 139 187
Miscellaneous 75 338
-------- --------
5,998 4,538
Less - allowance for doubtful accounts ( 1,148) ( 913)
-------- --------
4,850 3,625
Less - amount not expected to
be collected within one year,
net of $769 allowance
for doubtful accounts
($505 in 1996) (3,209) ( 1,597)
-------- --------
$ 1,641 $ 2,028
======== ========
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.
F-13
Page 36
BCT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(000's omitted)
At February 28, 1997, approximately $723 ($416 in 1996) 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. Notes receivable include the following
contractual payment terms: 1998 - $538 , 1999 - $341, 2000 - $339, 2001 - $296,
2002 - $406 and thereafter - $1,327.
At February 28, 1997, $487 ($433 in 1996) 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.
Provision for doubtful accounts for the years ended February 28, 1997,
February 29, 1996 and February 28, 1995, was approximately $503, $504 and $352,
respectively.
Interest income is recognized on accounts and notes receivable when it is
received.
NOTE 4: PROPERTY AND EQUIPMENT
- - ------- ----------------------
Major classifications of property and equipment are as follows:
Estimated
useful
February 28, February 29, lives
1997 1996 (in years)
------------ ------------ ----------
Leasehold improvements $ 107 $ 78 5 - 7
Machinery and equipment 411 450 3 - 20
Dies and artwork --- 130 3
Videos 33 37 5
Furniture, fixtures and other
equipment 171 160 5 - 10
Computers 667 606 5
Franchisee software 48 48 3
Auto --- 5 5
------ ------ --------
1,437 1,514
Less - accumulated depreciation
and amortization (675) ( 500)
------ ------
$ 762 $1,014
====== ======
NOTE 5: SALES AND ACQUISITIONS
- - ------- ----------------------
On October 9, 1995, the Company acquired certain assets and liabilities of a
Franchise 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 upon the estimated fair values at the date of acquisition. The purchase
price associated with the acquisition exceeded the net assets acquired by $220,
which was recorded as an intangible asset. The operating results of this
business acquisition are included in the Company's consolidated results of
operations from October 9, 1995 until August 30, 1996.
F-14
Page 37
BCT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(000's omitted)
On August 30, 1996, the Company sold the assets of the Riverside, California
Franchise, the assets of the Newbury Park, California Franchise and the rights
to doing business in the Newbury Park, California Franchise Territory along with
a 30 month option to purchase the Newbury Park Franchise. The purchase price
was $338 consisting of cash and a $254, 10 year note bearing interest of 2%
above prime. Due to the Company's continuing involvement with these Franchises,
no sale has been recorded on this transaction. Deferred revenue includes $57
relating to this transaction.
On November 1, 1995, the Company entered into an agreement with the owners of
the Franchise in Louisville, Kentucky, in which it acquired 70% owneship of the
Franchise for $276. The original Franchise owners maintain 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 upon 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 of this business acquisition are included in the Company's consolidated
results of operations from November 1, 1995. At February 28, 1997, the net
assets of this Franchise are included in assets held for sale.
On December 1, 1995, the Company acquired certain assets from United
Impressions, Inc. for $365. 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 upon the estimated
fair values at the date of acquisition. The purchase price associated with the
acquisition exceeded the net assets acquired by $207, which was recorded as an
intangible asset. The assets acquired were used to form the Marietta, Georgia
Franchise. The operating results of the Marietta, Georgia Franchise are included
in the Company's consolidated results of operations from December 1, 1995. On
August 27, 1996, the Company sold the Marietta, Georgia Franchise for $450. In
exchange the Company received a note payable for $450 bearing interest of 8%,
payable over ten years. Due to the Company's continuing involvement in this
Franchise, no sale has been recorded. Deferred revenue as of February 28, 1997,
includes $78 relating to this transaction.
NOTE 6: NOTES PAYABLE
- - ------- -------------
Notes payable consist of the following:
February 28, February 29,
1997 1996
------------ ------------
Notes payable relating to an acquisition, monthly
principal and interest due in installments of $2
through May 1997 $ 5 $ 27
Unsecured amount due to Continental Stamps West,
interest imputed at 13%, principal and interest of
$4 due monthly through February 1997 --- 42
Note payable to prior owner of Company Franchise,
monthly principal and interest payments
of $2, interest at 8% per annum, through August 2004 125 ---
Notes payable relating to an acquisition, monthly
principal and interest due in installments of $4
through December 2000 134 ---
----- -----
264 69
Less - amount due within one year (49) (64)
----- -----
$215 $ 5
===== =====
F-15
Page 38
BCT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(000"s omitted)
Scheduled maturities after February 28, 1997 for notes payable are as
follows:
Fiscal Amount
Year Payable
--------------- -------
1998 $ 49
1999 52
2000 56
2001 39
2002 17
Thereafter 51
----
$264
====
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 and January 21, 1997, 550 and 200 shares of Series A
preferred stock were voluntarily converted into 372 and 135 shares of common
stock, respectively. At February 28, 1997, 60 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 $2,066. 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.
F-16
Page 39
BCT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(000's omitted)
NOTE 8: STOCKHOLDERS' EQUITY
- - ------ --------------------
Stock Options
- - ---------------
Stock options outstanding, and the range of exercise prices for the three
years ended February 28, 1997 are as follows:
Options
Outstanding Price Range Aggregate
----------- -------------- ---------
At February 28, 1994 1,006 $1.25 to $3.50 $1,936
Options granted 215 $3.38 727
Options exercised ( 10) $1.25 ( 12)
Options cancelled ( 31) $1.25 to $2.38 ( 53)
Options expired ( 16) $3.00 ( 48)
----- -------------- ------
At February 28, 1995 1,164 $1.25 to $3.50 2 ,550
Options granted 65 $4.94 to $5.00 323
Options exercised --- --- ---
Options cancelled ( 16) $2.38 to $5.00 ( 64)
Options expired --- --- ---
----- -------------- ------
At February 29, 1996 1,213 $1.25 to $5.00 2,809
Options granted 358 $2.75 to $5.00 1,107
Options exercised (111) $1.25 to $3.38 (169)
Options cancelled (42) $2.38 to $5.00 (126)
Options expired (100) $1.25 to $3.00 (140)
----- -------------- ------
At February 28, 1997 1,318 $1.25 to $5.00 $3,481
===== ============== ======
F-17
Page 40
BCT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(000's omitted)
Warrants
- - --------
As of February 28, 1997 and February 29, 1996, there were outstanding
warrants for the purchase of 658 and 721 shares of common stock, respectively,
37 of which were held by the Chairman of the Board as of February 29, 1996.
During fiscal 1997, no warrants were exercised, 96 warrants expired. The
exercise price and the dates are as follows:
Title of Issue Aggregate Amount Date from which Price at which
Called for of Securities Called Warrants Expiration Warrants
by Warrants for by Warrants are Exercisable Date are Exercisable
- - ------------------------ --------------------- ----------------- ----------------- -----------------
Converted Subordinated
Debentures 150 August 30, 1991 - March 31, 1997 $3.50 to $4.46
March 31, 1994
Issued to Investment
Banker 208 May 31, 1993 May 31, 1998 $2.25
Issued to Investment
Banker 300 February 1, 1994 February 1, 1999 $2.00 to $4.00
---
Warrants outstanding 658
===
In Fiscal 1997, the Company adopted Statement of Financial Accounting
Standards No. 123--Accounting for Stock Based Compensation, to establish a fair
value based method of accounting for stock compensation plans for awards granted
in fiscal years that begin after December 15, 1994.
A summary of stock option activity is as follows (share amounts in 000's):
Fiscal 1997 Fiscal 1996
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ -------- ------ --------
Outstanding at beginning
of year 1,213 $2.32 1,164 $2.17
Granted 358 $3.01 65 $4.96
Exercised (111) $1.53 --- ---
Expired (100) $1.40 --- ---
Cancelled (42) $2.98 (16) $4.00
------ ------
Outstanding at end
of year 1,318 $2.64 1,213 $2.32
====== ======
Exercisable 1,042 $2.52 1,131 $2.20
====== ======
Weighted average
fair value of
options granted $ 1.43 $ 1.52
====== ======
F-18
Page 41
BCT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(000's omitted)
A summary of stock options outstanding at February 28, 1997 is as follows (share
amounts in 000's):
Options Outstanding Options Exercisable
-------------------------------------------- ----------------------------
Weighted Weighted Weighted
Range of Outstanding Average Average Exercisable Average
Exercise at Remaining Exercise at Exercise
Prices February 28, 1997 Life (in years) Price February 28, 1997 Price
- - ---------------- ----------------- --------------- -------- ------------------ --------
$1.25 to $1.88 389 2.83 $1.32 389 $1.32
$2.38 to $3.13 484 4.44 $2.79 238 $2.72
$3.38 to $5.00 445 7.69 $3.63 415 $3.54
----- -----
1,318 1,042
===== =====
The Company applies APB Opinion No. 25 and related interpretations in accounting
for stock options. Accordingly, no compensation cost has been recognized for
stock options granted in fiscal 1997 and 1996. Had compensation cost for the
Company's option plan been determined based on the fair value at the grant
dates, consistent with SFAS 123, the Company's net income (loss) and net income
(loss) per share would have been as follows:
Year Ended
February 28, February 29,
1997 1996
------------- ------------
Net income (loss):
As reported ($ 385) $1,141
========== ======
Pro forma ($ 628) $1,119
========== ======
Net income (loss) per share:
As reported ($ .08) $ .19
=========== ======
Pro forma ($ .13) $ .19
=========== ======
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model assuming a dividend yield of 0%, expected
volatility of from 44% to 47%, a risk free interest rate of 6.0% and weighted
average expected option term of 4.8 years.
F-19
Page 42
BCT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(000's omitted)
NOTE 9: INCOME TAXES
- - ----------------------
The components of the provision for (benefit from) income taxes for the
years ended February 28, 1997, February 29, 1996 and February 28, 1995 are as
follows:
1997 1996 1995
------ ------ -------
Current Provision:
Federal $ 4 $ 32 $ 26
State 39 52 ---
---- ---- -----
Total current 43 84 26
Deferred benefit (65) (279) (150)
---- ---- -----
Total benefit (22) (195) $(124)
==== ==== =====
The Company's net deferred tax asset is comprised of the following:
February 28, 1997 February 29, 1996 February 28, 1995
----------------- ----------------- -----------------
Deferred Tax Asset - Current
Bad debt reserve $ 148 $ 159 $ 132
Other 60 41 44
Capitalization of inventory cost 238 102 ---
------ ------ -------
Total Deferred Tax Asset 446 302 176
------ ------ -------
Valuation Allowance (134) (91) (88)
------ ------ -------
Net Deferred Tax Asset - Current $ 312 $ 211 $ 88
====== ====== =======
Deferred Tax Asset - Non-Current:
Bad debt reserve $ 300 $ 193 $ 215
Net operating loss carryovers 1,967 2,052 2,747
Other 86 135 34
------ ------ -------
Total Deferred Tax Asset 2,353 2,380 2,996
------ ------ -------
Valuation Allowance (672) (685) (1,466)
------ ------ -------
Deferred Tax Liabilities - Non-Current:
Fixed assets (112) (91) (64)
------ ------ -------
Total Deferred Tax Liability (112) (91) (64)
------ ------ -------
Net Deferred Tax Asset - Non-Current $1,569 $1,604 $ 1,466
====== ====== =======
Net Deferred Tax Asset - Total $1,881 $1,815 $ 1,554
====== ====== =======
F-20
Page 43
BCT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(000's omitted)
Net operating loss carryforwards for Federal income tax purposes total
approximately $5,838 at February 28, 1997. The net operating loss carryforward
includes $540 with certain limitations. Net operating losses expire as follows:
Year of
Expiration Amount
---------- ------
1998 $ 7
2000 11
2001 1,102
2002 1,327
2003 294
2005 1,721
2006 962
2007 12
2008 16
2012 386
------
$5,838
======
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:
1997 1996 1995
---------- ---------- ---------
Amount Rate Amount Rate Amount Rate
---------- ---------- -------- ----- -------- --------
(Benefit) tax at statutory rate $ (139) (34)% $ 321 34% $ 351 34%
Non-deductible amortization
of purchase price over
fair value of net assets
acquired --- --- --- --- 37 3
Other 59 15 178 19 (8) (1)
State income tax, net of
federal benefit 24 6 52 6 47 5
Alternative minimum tax 4 1 32 3 26 3
Increase (decrease) in Federal
and state valuation allowance 30 7 (778) (82) (577) (56)
------ ------ ------ ---- ------ -----
$ (22) (5)% $ (195) (20)% (124) (12)%
====== ====== ====== ==== ====== =====
NOTE 10: COMMITMENTS AND CONTINGENCIES
- - -------- -----------------------------
The Company is a party to various litigation matters. 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, Company Franchise locations and office
equipment are leased under noncancellable lease agreements. The leases initially
expire at various dates through 2002. There are provisions in the leases for
rent increases based on cost of living increases under certain conditions.
F-21
Page 44
BCT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(000's omitted)
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:
Fiscal Year Lease Commitments
----------- -----------------
1998 $172
1999 186
2000 179
2001 132
2002 122
----
$791
====
Rental expense amounted to the following approximate amounts for the
corresponding periods:
For the year ended Amount
------------------ ------
February 28, 1997 $287
February 29, 1996 $295
February 28, 1995 $193
At February 28, 1997, the Company has guaranteed the payment of equipment
lease obligations for certain of its franchisees for an aggregate amount of
approximately $ 366.
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:
Year Ending February 28, Amount
------------------------ ------
1998 $300
1999 $300
2000 $300
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 August 1996, the Company agreed to the terms of employment with the
President and Chief Operating Officer. Under the terms of his employment, the
Company is liable for six months severance pay should employment be terminated
for any reason.
NOTE 11: SUBSEQUENT EVENT
- - -------- ----------------
On March 1, 1997, the Company acquired certain assets of the Boston,
Massachusetts Franchise for $75 cash and foregiveness of all amounts owed the
Company (approximately $380). This acquisition was accounted for under the
purchase method of accounting and accordingly, the purchase price was allocated
to the assets acquired based upon the estimated fair values at the date of
acquisition. The purchase price associated with the acquisition was recorded as
an asset held for sale as it is the Company's intent to resell this Franchise.
The operating results of this business acquisition will be included in the
Company's consolidated results of operations from March 1, 1997.
F-22
Page 45
BCT INTERNATIONAL, INC.
-----------------------
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
---------------------------------
(000's omitted)
Column A Column B Column C Column D Column E
Additions
--------------------
Balance at Charged to Balance at
beginning costs and end of
of year expenses Other Deductions year
---------- -------- ---------- ---------- ----------
For the year ended February 28, 1997
Allowance for doubtful accounts $ 913 $ 503 $ --- (268)(1) $ 1,148
========== ======== ========== ========== ========
Deferred tax assets valuation allowance $ 776 $ --- $ 30 $ --- $ 806(2)
========== ======== ========== ========== ========
For the year ended February 29, 1996
Allowance for doubtful accounts $ 888 $ 504 $ --- $ (479)(1) $ 913
========== ======== ========== ========== ========
Deferred tax assets valuation allowance $ 1,554 $ --- $ --- $ (778) $ 776(2)
========== ======== ========== ========== ========
For the year ended February 28, 1995
Allowance for doubtful accounts $ 836 $ 352 $ --- $ (300)(1) $ 888
========== ======= ========== ========= ========
Deferred tax assets valuation allowance $ 2,131 $ --- $ --- $ (577)(3) $ 1,554(2)
========== ======= ========== ========= ========
Allowance for doubtful accounts at February 28, 1997 of $1,148 is comprised of
$379 related to current receivables and $769 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.
F-23
Page 46
SCHEDULE X
BCT INTERNATIONAL, INC.
-----------------------
SUPPLEMENTARY INCOME STATEMENT INFORMATION
------------------------------------------
(000's omitted)
Item
- - -----
February 28, 1997 February 29, 1996 February 28, 1995
----------------- ----------------- -----------------
Advertising Costs $ 83 $210 $156
==== ==== ====
Amortization of excess cost over
value of net assets acquired $--- $--- $108
==== ==== ====
Amortization of intangible assets $166 $182 $ 68
==== ==== ====
F-24
Page 47