<PAGE>
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, 1999 Commission file no. 0-10823
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BCT INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 22-2358849
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(State or other jurisdiction of incorporation of organization) (I.R.S. Employer Identification No.)
</TABLE>
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. [X]
The aggregate market value of Registrant's voting stock held by non-
affiliates of the Registrant, at May 18, 1999 was approximately $9,333,000.
The number of shares outstanding of Registrant's Common Stock, par value
$.04 per share, at May 18, 1999 was 5,793,925.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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This document consists of 41 pages.
The Index to exhibits appears on page 17.
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Item 1. Business
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(a) General
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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 89 "Business Cards Tomorrow Franchises"
(the "Franchises") specializing in thermography products, labels, rubber stamps
and business announcements for resale by retail printing providers in 38 states,
Canada and Argentina. One Franchise, located in Delray Beach, Florida, is owned
by BCT through a wholly-owned subsidiary. One Franchise located in Merrimack,
New Hampshire is owned directly by BCT. Another subsidiary of BCT owns 70% of
the Louisville, Kentucky, Franchise and the remaining 30% is owned by third
parties who manage day to day operations.
The Company adopted a plan effective February 28, 1999 for the
disposition of all Company owned Franchises. Under the plan, the Company intends
to sell all Company owned Franchises in fiscal 2000.
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 four operating segments of a single
industry. The segments include 1) operations as a franchisor of printing
franchises, 2) ownership and operation of Company owned franchises, 3) sale of
paper products and supplies to the BCT Franchises, and 4) other operations.
(b) Narrative description of the business
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Business Cards Tomorrow, Inc.
- -----------------------------
General
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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"). The Dealers
secure orders from their customers for thermographed printed products and other
printed matter which 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. Increasingly, Franchises receive orders by fax
and electronic communication via the Internet.
Thermography is a specialized printing process that gives a raised
printing effect similar to engraving and requires specialized equipment and
operating techniques. Most commercial printers, quick printers, office
superstores and other retail dealers choose not to invest in this specialized
equipment, preferring to subcontract this type of work to wholesale "trade"
printing companies such as BCT Franchises that specialize in thermography.
BCT supplies business stationery and rubber stamp and label catalogs
to its Franchises and also sells them the paper products featured in the
catalogs through PPP.
PPP is a primary 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 addition, certain conversion functions are performed "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. BCT has developed the BCT network primarily through the sale of
franchises to third parties. BCT Franchises are located throughout the
Continental U.S., Hawaii, Argentina and Canada.
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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 to
existing franchisees.
As of May 18, 1999, 89 BCT Franchises are in operation in 38 states,
Canada and Argentina. The current number of Franchises compares with 88 and 98
Franchises in operation on May 15, 1998 and May 1, 1997, respectively. The
decrease in the number of franchises is the result of several instances of
Franchises combining the operations of multiple Franchises into one Franchise.
Total BCT system sales reached approximately $105,000,000, $96,000,000 and
$91,000,000 for the years ended December 31, 1998, 1997 and 1996, an average of
$1,222,000, $1,057,000 and $919,000, respectively, per Franchise.
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. One
franchise agreement is up for renewal in fiscal 2000. For fiscal years ended
1999, 1998, and 1997, continuing franchise royalties comprised approximately
28%, 25% and 27% of total revenue, respectively. PPP sales to the franchisees
for fiscal years ended 1999, 1998, and 1997 were approximately 69%, 60%, and
53%, of total revenue, respectively.
Raw Materials
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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
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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 16 years. One Franchise comes up
for renewal in fiscal 2000, and in the subsequent 10 years, 17 Franchises come
up for renewal.
The Company does not expect to generate significant revenues from the
sale of new Franchises in the foreseeable future. The Company intends to focus
its growth strategy on increasing sales by existing Franchises.
Competition
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The Company and its franchisees compete with other franchisors,
franchisees and independent operators in the graphic arts industry. While the
Company believes that its BCT franchise system is the leading supplier of
thermographed business cards to printers throughout the United States, there can
be no assurance that competitors will not imitate or improve upon the Company's
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business strategy. BCT's major national competitors are Regency Thermographers,
Carlson Craft, and American Wholesale Thermographers, Inc.; 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 and
development of proprietary software. 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. The
Company has done extensive research and development in the use of an Internet-
based order entry and distribution system.
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
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The Company has 90 employees, all of whom are located at either (i)
the Company's corporate headquarters in Fort Lauderdale, Florida, or (ii) the
Company Franchises in Delray Beach, Florida; Merrimack, New Hampshire, and
Louisville, Kentucky. See discussion of discontinued operations in item 1.
Financial Information Relating to Foreign and Domestic Operations
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<TABLE>
<CAPTION>
February 28, February 28, February 28,
1999 1998 1997
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<S> <C> <C> <C>
Revenue:
Foreign operations $ 832,000 $ 924,000 $ 969,000
Domestic operations $17,774,000 $16,098,000 $14,247,000
Operating Profit (Loss):
Foreign operations $ 128,000 $ 118,000 $ (22,000)
Domestic operations (1) $ 3,063,000 $ 2,677,000 $ 348,000
Identifiable Assets:
Foreign operations $ 334,000 $ 355,000 $ 356,000
Domestic operations $15,072,000 $13,802,000 $10,873,000
</TABLE>
(1) Amounts do not include losses from discontinued operations amounting
to $327,000, $244,000 and $657,000 for the years ended February 28, 1999,
1998 and 1997, respectively.
Page 3
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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 7,500
square feet. The lease on this facility continues to October 2002 at a monthly
rental of approximately $9,800.
The Delray Beach, Florida, Company Franchise utilizes a 6,000 square
foot facility, which is leased for a monthly rental of $3,700. 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 $1,400. The lease on this
facility continues through September 1999.
The Merrimack, New Hampshire, Company Franchise utilizes a 4,000
square foot facility, which is leased for a monthly rental of $4,200. The lease
on this facility continues through March 2001.
Management believes that existing facilities are adequate for the
foreseeable future. See discussion of discontinued operations in item 1.
Item 3. Legal Proceedings
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No material matters.
Item 4. Submission of Matters to a Vote of Securities Holders
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No matters were submitted to a vote of securities holders, through the
solicitation of proxies or otherwise, during the fiscal quarter ended February
28, 1999.
Item 5. Market for Registrant's Common Stock and Related Security Holder
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Matters
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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 price for the Common Stock as reported on the NASDAQ National
Market.
<TABLE>
<CAPTION>
Fiscal Quarters High Low
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<S> <C> <C> <C>
1998 First Quarter $ 3.80 $ 2.00
Second Quarter $ 3.75 $ 2.50
Third Quarter $ 3.62 $ 2.62
Fourth Quarter $ 3.43 $ 2.37
1999 First Quarter $ 3.75 $ 2.63
Second Quarter $ 3.125 $2.3125
Third Quarter $2.4375 $1.8125
Fourth Quarter $ 3.625 $2.0625
2000 First Quarter (through May 18, 1999) $ 2.75 $ 2.13
</TABLE>
On May 18, 1999, the closing price per share of common stock, as
reported by NASDAQ, was $2 5/8.
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 15, 1999 was 800.
During the fiscal years ended February 28, 1999, 1998 and 1997, no
cash dividends were declared on the outstanding Common Stock. The Company has no
plans to pay any dividends on the Common Stock.
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Item 6. Selected Financial Data (000's omitted, except per share data)
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<TABLE>
<CAPTION>
OPERATIONS
for the fiscal year ended: Feb. 28, 1999 Feb. 28, 1998 Feb. 28, 1997 Feb. 29, 1996 Feb. 28, 1995
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<S> <C> <C> <C> <C> <C>
REVENUES:
Royalties and franchise fees $ 5,356 $ 4,921 $ 4,852 $ 4,820 $ 4,540
Paper and printing sales 12,817 11,734 10,118 9,159 7,585
Sales of franchises 87 44 40 870 466
Interest and other income 346 323 206 436 130
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18,606 17,022 15,216 15,285 12,721
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EXPENSES:
Cost of paper and printing sales 10,939 9,857 8,823 7,796 6,657
Cost of franchises sold --- --- --- 521 326
Selling, general and administrative 4,290 4,171 5,820 4,880 4,212
Depreciation and amortization 186 199 247 170 227
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15,415 14,227 14,890 13,367 11,422
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Income from continued operations before
income taxes 3,191 2,795 326 1,918 1,299
Income tax provision (benefit) 690 986 54 404 ( 6)
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Income from continued operations 2,501 1,809 272 1,514 1,305
Discontinued operations (2):
Loss from Company owned Franchises
operated under a plan of disposition, net
of income tax benefit ( 327) ( 244) ( 657) ( 373) ( 150)
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Net income (loss) $ 2,174 $ 1,565 $ ( 385) $ 1,141 $ 1,155
======= ======= ======= ======= =======
Earnings (loss) per common share:
Income from continued operations $ .47 $ .35 $ .05 $ .29 $ .38
Loss from discontinued operations ( .06) ( .05) ( .13) ( .07) ( .04)
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Basic $ .41 $ .30 $( .08) $ .22 $ .34
======= ======= ======= ======= =======
Income from continued operations $ .45 $ .32 $ .05 $ .27 $ .26
Loss from discontinued operations ( .06) ( .04) ( .13) ( .07) ( .03)
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Diluted $ .39 $ .28 $ ( 08) $ .20 $ .23
======= ======= ======= ======= =======
Total assets $15,406 $14,157 $11,229 $10,738 $10,018
Long-term debt $ 433 $ 539 $ 215 $ 5 $ 48
Preferred stock $ 60 $ 60 $ 60 $ 260 $ 810
Working capital $ 6,253 $ 5,145 $ 3,614 $ 4,633 $ 5,542
Stockholders' equity (1) $12,892 $11,073 $ 9,310 $ 9,374 $ 7,759
</TABLE>
(1) During the five fiscal years ended February 28, 1999, no cash dividends have
been declared on the common stock outstanding.
(2) Discontinued operations are discussed in Note 2 to the Consolidated
Financial Statements.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
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of Operations
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Fiscal 1999 Compared to Fiscal 1998
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Total revenue for fiscal 1999 increased $1,584,000 or 9%. Royalty
revenue increased by $435,000 or 9%; and paper and printing sales increased by
$1,083,000 or 9%. Revenue growth was attributable to the overall sales growth of
the BCT Franchises, which was stimulated by a national contract, which began in
January 1998, to provide business stationery to over 700 OfficeMax locations.
Cost of paper and printing sales as a percentage of paper and printing
sales was 85%, 84% and 87%, respectively, for the fiscal years ended February
28, 1999, 1998 and 1997. Fluctuations in this percentage result primarily from
differences in the sales mix. Selling, general and administrative expenses
represented 23%, 25% and 38% of gross revenues in fiscal 1999, 1998 and 1997,
respectively. The decrease in fiscal 1999 demonstrates the Company's ability to
increase revenues without incurring a proportionate increase in expenses.
Under a plan adopted effective February 28, 1999, the Company intends
to dispose of its Company owned franchises in fiscal 2000. See Note 2 to the
Consolidated Financial Statements.
Fiscal 1998 Compared to Fiscal 1997
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Total revenue for fiscal 1998 increased by $1,806,000 or 12% over the
prior fiscal year. Royalty revenue increased by $69,000 or 1%; and paper and
printing sales increased by $1,616,000 or 16%. Revenue growth was attributable
to the overall revenue growth of the BCT system, continued increased market
penetration by PPP, the introduction of labels to the revenue mix of the BCT
system and the corresponding sale of labels materials and supplies by PPP.
Interest and other income increased $117,000 or 57% due to the Company's
increase in trade notes receivable.
Cost of paper and printing sales as a percentage of paper and printing
sales was 84%, 87% and 85%, respectively, for fiscal years ended 1998, 1997 and
1996. Fluctuations in this percentage primarily result from changes in the
revenue mix. Selling, general and administrative expenses represented 25%, 38%
and 32% of gross revenues in fiscal 1998, 1997 and 1996, respectively. The
decrease in fiscal 1998 was the result of applying the cost containment begun in
fiscal 1997 for a full year. In addition, selling, general and administrative
cost in fiscal 1997 included a loss of $130,000 incurred by the Company relating
to its freight auditing company as well as a writedown of certain assets
relating to the social stationery program amounting to $144,000.
Losses from the operation of Company Franchises were $377,000 in fiscal
1998 versus losses of $733,000 in fiscal 1997. The reduction of losses resulted
from the decrease in the weighted average number of Company Franchises in
operation during fiscal 1998.
Liquidity and Capital Resources
- -------------------------------
The Company generated cash from continuing operations of $1,825,000
during the fiscal year ended February 28, 1999. The Company employed the cash
generated to make capital expenditures of $82,000, primarily for computer
hardware and software, acquisitions of $252,000 relating to the Merrimack
Franchise repurchase, repurchase of the Company's common stock amounting to
$607,000, $560,000 to fund discontinued operations and to make principal
payments on debt of $98,000. The remainder of cash generated from operations
together with $247,000 received from stock option exercises was retained to fund
day to day operations of the business.
The Company's cash generated from operations was reduced by the
Company's commitment to the franchise network in the form of note financing for
acquisitions and to finance certain current obligations of the franchise owners.
Although the Company believes its financial involvement with certain franchisees
is necessary, the Company intends to minimize this type of relationship in the
future.
The Company intends to continue to improve its working capital and cash
positions during fiscal 2000 by focusing its efforts on cash collections and
maintaining current inventory levels. Further, the Company intends to pursue
new channels of distribution for its current products and continue to develop
and improve new and existing product offerings.
The Company believes that internally generated funds will be sufficient
to satisfy the its working capital and capital expenditure requirements for the
foreseeable future; however, there can be no assurance that external financing
will not be needed. During fiscal 1999, the Company negotiated a $2 million line
of credit with a bank. No advances have been made on the line.
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Year 2000 Issue
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The Year 2000 issue affects the Company's installed computer systems,
network elements, software applications and other business systems that have
time-sensitive programs, including those with embedded microprocessors, that may
not properly reflect or recognize the year 2000 and years thereafter. Because
many computers and computer applications define dates by the last two digits of
the year, "00" or other two-digit dates after the year 2000 may not properly be
identified as the year 2000 or the appropriate later year, but rather the year
1900 or a year between 1901 and 1999 (as the case may be). This error could
result in system and equipment failures or malfunctions causing disruption of
operations including among other things, a temporary inability to process
telephone calls, transactions and information, or engage in normal business
activities.
The Company has evaluated its installed computer systems, network
elements, software applications and other business systems that have time-
sensitive programs and has developed and implemented a plan to ensure their Year
2000 compliance. The Company believes that its hardware, network and software
systems are fully Year 2000 compliant.
Since the Year 2000 issue may affect the systems and applications of
the Company's franchises, customers or suppliers, the Company has communicated
with its franchises, customers and suppliers to determine their overall Year
2000 readiness. Based upon responses received from its franchises, customers and
suppliers, the Company does not anticipate any material adverse impact on its
operations as a result of Year 2000 issues. No assurance can be given that the
failure by one or more of its major franchises, suppliers or customers to become
Year 2000 compliant will not have a material adverse impact on its operations.
The cost to the Company of developing and implementing its Year 2000 compliance
plan has amounted to approximately $45,000.
Forward-Looking Information
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Certain information contained in this annual report, particularly
information regarding future economic performance and finances, plans and
objectives of management, constitutes "forward-looking statements" within the
meaning of the federal securities laws. In some cases, information regarding
certain important factors that could cause actual results to differ materially
from any forward-looking statement appear together with such statement. In
addition, the following factors, in addition to other possible factors not
listed, could affect the Company's actual results and cause such results to
differ materially from those expressed in forward-looking statements. These
factors include competition within the wholesale printing industry, which is
intense; changes in general economic conditions; technological changes; changes
in customer tastes; legal claims; the continued ability of the Company and its
franchisees to obtain suitable locations and financing for new Franchises as
well as expansion of existing Franchises; governmental initiatives, in
particular those relating to franchise regulation and taxation; and risk factors
detailed from time to time in the Company's filings with the Securities and
Exchange Commission.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
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The Company had no outstanding balances subject to market risk during
the period covered by this report. The Company has a $2 million line of credit
with a bank which bears interest at prime + .25%.
Item 8. Financial Statements and Supplementary Data
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The financial statements and schedules listed in the accompanying
Index to consolidated financial statements and schedules on page D-1 are filed
as a part of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------- ---------------------------------------------------------------
Financial Disclosure
--------------------
None
Item 10. Directors and Executive Officers of the Registrant
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<TABLE>
<CAPTION>
Date Elected
Name Age Position Or Appointed
- ---- --- -------- ------------
<S> <C> <C> <C>
William Wilkerson 57 Chairman of the Board January 1978
Peter T. Gaughn 43 Chief Executive Officer, President
and Director May 1999
Michael R. Hull 45 Chief Financial Officer, Treasurer
and Secretary May 1996
Thomas J. Cassady 77 Director April 1988
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Alvin Katz 69 Director October, 1996
Henry A. Johnson 64 Director February 1975
Bill LeVine 79 Director May 1992
</TABLE>
William Wilkerson has been Chairman of the Board and a Director of the
Company since January 1986. He was Chief Executive Officer of the Company from
May 1988 until October 1997. 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.
Peter T. Gaughn became a Director of the Company in April 1998. He
was appointed Chief Executive Officer and President of the Company in May 1999.
He previously served as President and Chief Executive Officer and Director of
PIP Printing from February 1995 to April 1999. Additionally, Mr. Gaughn was
previously President and Chief Operating Officer of the Company from August 1989
to January 1995.
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.
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 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. 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 Mellon First Business Bank, Los Angeles,
California, since 1982, Rentrak Corporation, formerly National Video, Portland,
Oregon, since 1987 and California Closets, Inc., San Francisco, California since
1994.
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 aware of
no instances involving a late filing of 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.
Page 8
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Item 11. Executive Compensation
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(a) Board Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors, which is
comprised of a majority 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. Pursuant to recently adopted rules designed to enhance
disclosure of companies' policies toward executive compensation, set forth below
is a report submitted by Mr. LeVine in his capacity as the Chairman of the
Board's Compensation Committee, addressing the Company's compensation policies
for fiscal 1999 as they affected the Company's executive officers generally and
Mr. William A. Wilkerson, Chairman of the Board (and Chief Executive Officer
until October 1997), and Mr. James H. Kaufenberg, President and Chief Executive
Officer of the Company from October 1997 until his resignation in April 1999.
Compensation Policies For Executive Officers
The executive compensation program is based on a philosophy which
aligns compensation with business strategy, Company values and management
initiatives. The principles underlying this compensation philosophy are: the
linkage of executive compensation to the enhancement of shareholder value;
maintenance of a compensation program that will attract, motivate and retain key
executives critical to the long-term success of the Company; creation of a
performance oriented environment by rewarding performance leading to the
attainment of the Company's goals; evaluation of competitiveness of salary and
equity incentive opportunities; and determination of the adequacy and propriety
of the annual bonus plan, including structure and performance measures.
Relationship of Performance Under Compensation Plans
Compensation paid Messrs. Wilkerson and Kaufenberg in fiscal 1999, as
reflected in the following Tables, consisted of base salary and bonus.
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 1999 after informal discussions
with other members of the Board.
Mr. Wilkerson's Fiscal 1999 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 1999 compensation was paid pursuant to this
contract. In June 1997, Mr. Wilkerson's contract was extended for an additional
three year term through fiscal 2003. The agreement calls for minimum annual
salary amounts of $300,000 during the employment term.
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.
Page 9
<PAGE>
Mr. Kaufenberg's Fiscal 1999 Compensation
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. Mr. Kaufenberg's compensation in fiscal 1999 consisted of a base salary
plus a bonus based upon the achievement of certain levels of profitability by
the Company. Mr. Kaufenberg resigned in April 1999 and consequently, his
severance package will be paid and recorded in fiscal 2000.
SUBMITTED BY THE COMPENSATION COMMITTEE OF THE COMPANY'S BOARD OF DIRECTORS:
Bill LeVine Peter Gaughn William Wilkerson
(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,
1999, 1998 and 1997, by the executive officers of the Company as to whom the
total salary and bonus in the most recent year exceeded $100,000.
Page 10
<PAGE>
BCT International, Inc.
-----------------------
Summary Compensation Table
--------------------------
Fiscal Years 1999, 1998 and 1997
--------------------------------
000's omitted
-------------
<TABLE>
<CAPTION>
Long-Term
Compensation Awards Annual Compensation
- -----------------------------------------------------------------------------------------------
Fiscal Form of Payment
---------------
Name Position Year Salary Bonus Cash Shares Options
- ----------------- ------------------- ------ ------ ----- ------ ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
W.A. Wilkerson Chairman of 1999 $312 (1) $ 75 $387 --- 2 (2)
the Board 1998 $294 (1) $ 50 $344 --- 70 (3)
1997 $312 (1) $ --- $300 --- 50 (4)
J.H. Kaufenberg Chief Executive 1999 $150 (6) $ 85 $235 --- 2 (2)
Officer and 1998 $150 (6) $ 150 $300 --- ---
President (5) 1997 $120 (7) $ 10 $130 --- 200 (8)
M.R. Hull Chief Financial 1999 $ 92 $ 36 $128 --- ---
Officer, Secretary 1998 $ 88 $ 31 $119 --- ---
and Treasurer 1997 $ 68 $ --- $ 68 --- 15 (9)
</TABLE>
(1) Salary for fiscal 1999, 1998 and 1997 includes a $12 car allowance.
(2) Options granted in fiscal 1999, all of which immediately vested.
(3) Options granted in fiscal 1998, all of which immediately vested.
(4) Options granted in fiscal 1997, all of which immediately vested.
(5) Mr. Kaufenberg resigned as an officer and director of the Company in April
1999.
(6) Salary includes a $10 car allowance.
(7) Includes a $50 non-accountable moving allowance.
(8) Options granted in fiscal 1997, which vested in equal installments over a
four year period ending in fiscal 2001; 100 were cancelled upon Mr.
Kaufenberg's April 1999 resignation.
(9) Options granted in fiscal 1997, which vest in equal installments over a
three year period ending in fiscal 2000.
Page 11
<PAGE>
BCT International, Inc.
-----------------------
Aggregated Option Exercises and Year-End
----------------------------------------
Option Values for Fiscal 1999
-----------------------------
000's omitted
-------------
<TABLE>
<CAPTION>
Number of Value of
Unexercised In-The-Money
Options at Options at
Shares 2/28/99 (#) 2/28/99 ($)
Acquired on Value Exercisable/ Exercisable/
Name Position Exercise # Realized ($) Unexercisable Unexercisable
- ----------------- --------------- ------------ ----------- -------------- -------------
<S> <C> <C> <C> <C> <C>
W.A. Wilkerson Chairman of
the Board --- $ --- 331/0 $ 253/$0
J.H. Kaufenberg Chief Executive
Officer and --- $ --- 103/100 $ 77/$75
President
M.R. Hull Chief Financial --- $ --- 10/5 $ 8/$4
Officer, Secretary
and Treasurer
</TABLE>
Page 12
<PAGE>
BCT International, Inc.
-----------------------
Executive Management Compensation
---------------------------------
Option Grants in Fiscal Year 1999
---------------------------------
000's omitted
-------------
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed
% of Total Annual Rates of
Options Stock Price
Options Granted to Exercise Expiration Appreciation
Name Position Granted Employees Price Date for Option Term
- -------------------- ----------- -------- ----------- ------------ --------------- ---------------
5% ($) 10% ($)
<S> <C> <C> <C> <C> <C> <C>
W.A. Wilkerson Chairman of
the Board 2.5 50% $3.06 4/28/08 $12/$20
J. H. Kaufenberg President and Chief
Executive Officer 2.5 50% $3.06 4/28/08 $12/$20
</TABLE>
Page 13
<PAGE>
(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 18, 1999, 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 18, 1999, 5,793,925 shares of Common Stock were
outstanding.
Page 14
<PAGE>
<TABLE>
<CAPTION>
Percent of
Number of Shares Outstanding
Name Beneficially Owned (1) Common Stock
- -------------------------- ---------------------- -------------
<S> <C> <C>
Certain Beneficial Owners:
Steven N. Bronson 472,000 8.47%
B & B Management Group II, Inc.
16 East 52nd Street, Suite 501
New York, NY 10022
Officers and Directors:
William A. Wilkerson 1,333,182 (2) 22.58%
Bill LeVine 697,532 (3) 12.35%
Henry A. Johnson 154,347 (4) 2.75%
Thomas J. Cassady 38,750 (5) .69%
Alvin Katz 22,500 (6) .40%
Peter T. Gaughn 153,500 (7) 2.68%
Michael R. Hull 10,500 (8) .19%
Officers and Directors
as a group (7 persons) 2,410,311 (9) 38.77%
</TABLE>
___________________
(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 331,250 shares covered by currently exercisable stock options and
warrants.
(3) Includes 73,750 shares covered by currently exercisable stock options.
(4) Includes 31,250 shares covered by currently exercisable stock options.
(5) Includes 22,500 shares covered by currently exercisable stock options.
(6) Includes 22,500 shares covered by currently exercisable stock options.
(7) Includes 152,500 shares covered by currently exercisable stock options.
(8) Includes 10,000 shares covered by currently exercisable stock options.
(9) Includes 643,750 shares covered by currently exercisable stock options and
warrants.
Page 15
<PAGE>
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 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 Franchise, as well as the personal
guarantees of the shareholders.
The Hawaii Franchise is 33 months behind on payments under the $325,000
note and 33 months behind on payments under the $108,000 note. Further, the
Hawaii Franchise's debt to the Company for paper purchases, royalties and other
advances totalling $276,000 is more than 90 days past due as of May 18, 1999.
The proposed buyout transaction has not been concluded. In fiscal 1999, the
Company advanced $167,000 to the owners of the Hawaii Franchise as repayment of
monies contributed by the owners. Specific reserves have been recorded on the
receivables relating to the Hawaii franchise.
The Company has thus far elected not to exercise its contractual rights to
declare a default, accelerate the Hawaii Franchise's indebtedness and foreclose
its security interest in the Franchise's assets. This election has been made in
accordance with the Company's policy of working closely with troubled
franchisees in an attempt to restore their financial and operating health and of
taking legal action to collect debts and repossess assets only when the troubled
Franchise appears unable to be successfully turned around. In the case of the
Hawaii Franchise, which was in very poor financial and operating condition when
acquired by Mr. Wilkerson's company, the Company believes that the operating
performance of the Franchise has improved significantly in recent months and
that, by continuing its current posture, the Company will maximize the
probability of making the Hawaii Franchise a successful Franchise contributing
to the Company's long-term profitability.
On April 19, 1999, James H. Kaufenberg resigned from his positions as
President, Chief Executive Officer and Director of the Company. In connection
with his resignation, the Company and Mr. Kaufenberg entered into an agreement
providing for (i) payment to Mr. Kaufenberg of $70,000 pursuant to six months of
salary payments at an annual rate of $140,000 from May to October 1999, (ii)
payment to Mr. Kaufenberg of an $85,000 bonus for fiscal 1999, (iii) exercise by
Mr. Kaufenberg of options to purchase 23,700 shares of Common Stock at an
exercise price of $1.875 per share, (iv) payment by the Company to Mr.
Kaufenberg of $34,475 in cancellation of Mr. Kaufenberg's remaining options to
purchase 78,800 shares of Common Stock at an exercise price of $1.875 per share
($.4375 per option share), (v) payment to Mr. Kaufenberg of $17,500 in accrued
vacation and (vi) customary releases, indemnification and other legal
provisions.
Effective May 8, 1999, the Company entered into a three-year employment
agreement with Peter T. Gaughn, its new President and Chief Executive Officer.
The agreement provides for a base salary of $250,000 during the first year with
minimum 5% salary increases thereafter. In addition, the agreement provides for
incentive compensation based upon the Company's pre-tax income, which
compensation shall not exceed $125,000 in fiscal 2000 and shall not exceed the
base salary thereafter. Additionally, the agreement provides for the grant of
options to purchase 400,000 shares of Common Stock, of which 100,000 shares
vested immediately and the remainder shall vest in annual increments of 60,000
shares over the next five years. In addition, the agreement provides for the
granting each year of options to purchase a number of shares of Common Stock
equal to the amount of incentive compensation for that fiscal year divided by
the market price of the Common Stock on the day preceding the payment of the
incentive compensation. These options will vest 25% immediately and 15% each
year for five years thereafter.
Page 16
<PAGE>
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- ------- ---------------------------------------------------------------
(a) Financial Statements and Financial Statement Schedules
See index to Financial Statements on page D1
(b) Reports of Form 8-K
No Reports on Form 8-K were filed during the quarter ended
February 28, 1999.
(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.
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 Amendment dated June 12, 1997 to employment agreement
between the Company and William A. Wilkerson., as filed with
the SEC as Exhibit 10.2 to the Company's report on Form 10-K
for the fiscal year ended February 28, 1998 is incorporated
herein by reference.
10.3 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.
10.4 Asset Purchase Agreement dated February 23, 1996, between
BCT and E.V. Antrim, Rosemary R. Antrim and William A.
Wilkerson, as filed with the SEC as Exhibit 10.3 to the
Company's report on Form 10-K for the fiscal year ended
February 28, 1997 is incorporated herein by reference.
10.5 Employment agreement between the Company and Peter T.
Gaughn dated May 8, 1999.
10.6 Termination agreement between the Company and James H.
Kaufenberg dated April 19, 1999.
Page 17
<PAGE>
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 28, 1999 By: /s/ Peter T. Gaughn
------------------------- -----------------------------
Peter T. Gaughn
President, Chief Executive
Officer and Director
DATE: May 28, 1999 By: /s/ 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.
/s/ William Wilkerson /s/ Henry A. Johnson
- ----------------------------------- ---------------------------
William Wilkerson Henry A. Johnson
Chairman of the Board & Director Director
Date: May 28, 1999 Date: May 28, 1999
/s/ Thomas J. Cassady /s/ Bill LeVine
- ----------------------------------- ---------------------------
Thomas J. Cassady Bill LeVine
Director Director
Date: May 28, 1999 Date: May 28, 1999
/s/ Alvin Katz /s/ Peter T. Gaughn
- ----------------------------------- ---------------------------
Alvin Katz Peter T. Gaughn
Director Director
Date: May 28, 1999 Date: May 28, 1999
Page 18
<PAGE>
BCT INTERNATIONAL, INC.
-----------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
--------------------------------------------------------
<TABLE>
<CAPTION>
Financial Statements: Page Numbers
- -------------------- ------------
<S> <C>
Report of Independent Certified Public Accountants D-2
Consolidated Balance Sheets at February 28, 1999 and 1998 D-3
Consolidated Statements of Operations for the fiscal years ended
February 28, 1999, 1998 and 1997 D-4
Consolidated Statements of Changes in Stockholders' Equity
for the fiscal years ended February 28, 1999, 1998 and 1997 D-5
Consolidated Statements of Cash Flows for the fiscal years ended
February 28, 1999, 1998 and 1997 D-6 to D-7
Notes to Consolidated Financial Statements D-8 to D-21
Schedules:
- ---------
For the fiscal years ended February 28, 1999, 1998 and 1997:
II Valuation and Qualifying Accounts D-22
X Supplementary Income Statement Information D-23
</TABLE>
All other schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
D-1
Page 19
<PAGE>
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, 1999 and 1998, and the
results of its operations and its cash flows for each of the three years in the
period ended February 28, 1999, 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.
PricewaterhouseCoopers LLP
Fort Lauderdale, Florida
May 3, 1999
D-2
Page 20
<PAGE>
<TABLE>
<CAPTION>
BCT INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS February 28, 1999 February 28, 1998
----------------- -----------------
000's omitted, except par value
ASSETS
------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,143 $ 989
Accounts and notes receivable, net 3,252 2,418
Inventory 2,122 2,354
Assets held for sale 1,082 790
Prepaid expense and other current assets 199 160
Deferred income taxes 476 919
--------- -------------
Total current assets 8,274 7,630
Accounts and notes receivable, net 6,052 5,376
Property and equipment at cost, net 460 537
Deferred income taxes 246 214
Deposits and other assets 90 89
Trademark and other intangible assets, net 284 311
--------- -------------
Total assets $ 15,406 $ 14,157
========= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Accounts payable $ 844 $ 1,264
Notes payable 113 105
Accrued liabilities 753 777
Deferred revenue 311 339
--------- -------------
Total current liabilities 2,021 2,485
Notes payable, less current maturities 433 539
--------- -------------
Total liabilities 2,454 3,024
--------- -------------
Commitments and contingencies (Note 10) --- ---
--------- -------------
Preferred stock, Series A, 12%
cumulative, $1 par value,
mandatorily redeemable, 810 shares
authorized, 60 shares
issued and outstanding 60 60
--------- -------------
Stockholders' equity:
Common stock, $.04 par value,
authorized 25,000,
issued 5,753 shares (5,573 shares in 1998) 230 223
Paid in capital 12,506 12,254
Retained earnings (accumulated deficit) 1,322 ( 845)
--------- -------------
14,058 11,632
Less: Treasury stock, at cost 496 shares, (251 shares in 1998) ( 1,166) ( 559)
--------- -------------
Total stockholders' equity 12,892 11,073
--------- -------------
Total liabilities and stockholders' equity $ 15,406 $ 14,157
========= ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
D-3
Page 21
<PAGE>
BCT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(000's omitted, except per share data)
<TABLE>
<CAPTION>
For the For the For the
Fiscal year ended Fiscal year ended Fiscal year ended
February 28, 1999 February 28, 1998 February 28, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Revenues:
Royalties and Franchise fees $ 5,356 $ 4,921 $ 4,852
Paper and printing sales 12,817 11,734 10,118
Sales of franchises 87 44 40
Interest and other income 346 323 206
------- ------- -------
18,606 17,022 15,216
------- ------- -------
Expenses:
Cost of paper and printing sales 10,939 9,857 8,823
Selling, general and
administrative 4,290 4,171 5,820
Depreciation and amortization 186 199 247
------- ------- -------
15,415 14,227 14,890
------- ------- -------
Income from continued operations before income taxes 3,191 2,795 326
Income tax provision 690 986 54
------- ------- -------
Income from continued operations 2,501 1,809 272
Discontinued operations (Note 2):
Loss from Company owned Franchises
operated under a plan of disposition, net of
tax benefit of $130, $133 and $76, respectively (327) (244) (657)
------- ------- -------
Net income (loss) $ 2,174 $ 1,565 $ (385)
======= ======= =======
Net income (loss) per common share
Income from continued operations $ .47 $ .35 $ .05
Loss from discontinued operations (.06) (.05) (.13)
------- ------- -------
Basic $ .41 $ .30 $ (.08)
======= ======= =======
Income from continued operations $ .45 $ .33 $ .05
Loss from discontinued operations (.06) (.04) (.13)
------- ------- -------
Diluted $ .39 $ .28 $ (.08)
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
D-4
Page 22
<PAGE>
<TABLE>
<CAPTION>
BCT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(000's omitted, except per share data) Retained
Common Stock Earnings
------------
Number of Par Paid In (Accumulated Treasury
Shares Value Capital Deficit) Stock Total
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance February 29, 1996 5,164 $207 $11,659 $( 1,991) $( 501) $ 9,374
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
Other changes --- --- 37 --- ( 58) ( 21)
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
Exercise of stock options at
prices from $1.25 to $1.48
per share 163 7 198 --- --- 205
Dividends on convertible
preferred stock --- --- --- ( 7) --- ( 7)
Net income 1,565 1,565
----- ---- ------- ---------- -------- -------
Balance February 28, 1998 5,573 223 12,254 ( 845) ( 559) 11,073
Treasury stock purchases --- --- --- --- ( 571) ( 571)
Exercise of warrants 176 7 240 --- --- 247
Other charges 4 --- 12 --- ( 36) ( 24)
Dividends on convertible preferred stock --- --- --- ( 7) --- ( 7)
Net income --- --- --- 2,174 --- 2,174
----- ---- ------- ---------- -------- -------
Balance February 28, 1999 5,753 $230 $12,506 $ 1,322 $( 1,166) $12,892
===== ==== ======= ========== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
D-5
Page 23
<PAGE>
<TABLE>
<CAPTION>
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, 1999 February 28, 1998 February 28, 1997
----------------- --------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,174 $ 1,565 $ ( 385)
Plus loss from discontinued operations 327 244 657
---------- --------- ----------
Income from continuing operations 2,501 1,809 272
Adjustments to reconcile income from continuing
operations to net cash provided by (used by)
operating activities:
Deferred income taxes 411 748 ( 65)
Depreciation and amortization 186 199 247
Cost assigned to warrants issued --- --- 37
Provision for doubtful accounts 350 109 503
Provision for inventory obsolescence 145 50 140
Write-off of fixed assets --- --- 145
Other adjustments 31 31 20
Changes in assets and liabilities
Accounts and notes receivable ( 1,375) ( 2,552) ( 728)
Inventory 87 ( 5) ( 96)
Prepaid expenses and other current assets ( 39) ( 94) 16
Accounts payable ( 420) 288 345
Deferred revenue ( 28) 67 85
Accrued liabilities ( 24) 486 110
---------- --------- ----------
Net cash provided by continuing operations 1,825 1,136 1,031
Net cash used by discontinued operations ( 812) ( 301) ( 1,403)
---------- --------- ----------
Net cash provided by (used by) operating activities 1,013 835 ( 372)
---------- --------- ----------
Cash flows from investing activities:
Maturity of short-term investments --- --- 50
Capital expenditures for property and equipment ( 82) ( 88) ( 240)
Sale of Company Franchises held for sale --- --- 43
Discontinued operations ( 312) ( 195) ---
---------- --------- ----------
Net cash (used by) investing activities ( 394) ( 283) ( 147)
---------- -------- ---------
Cash flows from financing activities:
Treasury stock purchases ( 607) --- ( 58)
Dividend on Series A Preferred Stock ( 7) ( 7) ( 27)
Exercise of stock options and warrants 247 205 169
Repayments on borrowings ( 98) ( 75) ( 98)
---------- -------- ---------
Net cash provided by (used by) financing activities ( 465) 123 ( 14)
---------- -------- ---------
Net increase (decrease) in cash and cash equivalents 154 675 ( 533)
Cash and cash equivalents at beginning of year 989 314 847
---------- -------- ---------
Cash and cash equivalents at end of year $ 1,143 $ 989 $ 314
========== ======== =========
Supplemental disclosures:
- ------------------------
Interest paid during the year $ 57 $ 42 $ 14
========== ======== =========
Income taxes paid during the year $ 200 $ 9 $ 7
========== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
D-6
Page 24
<PAGE>
BCT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(000's omitted)
Noncash activities:
- ------------------
In fiscal 1999, the Company exchanged accounts and notes receivable amounting to
$485 in connection with the purchase of the Merrimack, New Hampshire franchise.
In fiscal 1998, the Company acquired an independent thermography business in
exchange for cash and a $455 note payable and sold the business to 2 franchises
in exchange for notes receivable of $505.
In fiscal 1998, the Company exchanged accounts and notes receivable amounting to
$380, and took notes receivable amounting to $498 in connection with the
purchase and resale of the Boston franchise.
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.
The accompanying notes are an integral part of these consolidated financial
statements
D-7
Page 25
<PAGE>
BCT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000's omitted, except per share data)
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. BCT Franchises are located in 38 states, Canada and
Argentina. At February 28, 1999 and 1998, BCT, through its wholly-owned
subsidiary BCT Enterprises, Inc. owned two Company Franchises and directly owned
one Company Franchise. BCT's ownership interest in one of the Company Franchises
is 70%. The Company adopted a plan of disposition for its three Company owned
franchises effective February 28, 1999 and accordingly the results of operations
of these Franchises are presented as discontinued operations. The Company also
sells paper stock and catalogs to franchisees and Company Franchises.
Principles of Consolidation and Discontinued Operations
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. As of February 28, 1999, the net
assets of the Company Franchises are reflected in assets held for sale as it is
the Company's intent to sell these Franchises. The results of operations of the
Company Franchises, including the estimated losses through the dates of
disposition, are included in discontinued operations.
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, estimated future losses on
discontinued operations and the tax valuation allowance. Actual results could
differ from those estimates.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts and notes
receivable, accounts payable, and notes payable approximate fair value as of
February 28, 1999 and 1998.
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. As of February 28, 1999 and
1998, the allowance for obsolete inventory was $226 and $106, respectively.
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.
D-8
Page 26
<PAGE>
BCT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(000's omitted)
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 Company acquired one Franchise in fiscal 1999, and acquired and
resold one Franchise in fiscal 1998.
Assets Held for Sale
Assets held for sale, which consist primarily of Company Franchises held for
sale, are carried at the lower of cost or market value.
Trademark and Other Intangible Assets
The trademark is amortized using the straight-line method over 17 years.
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 19 years, which represented the remaining life of the
franchise agreement acquired. As of February 28, 1999 and 1998, accumulated
amortization of intangible assets amounted to $432 and $405, respectively.
Impairment of Long-Lived Assets and Identifiable Intangibles
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.
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. Management believes
the allowance 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).
D-9
Page 27
<PAGE>
BCT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(000's omitted)
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.
Segment Reporting
In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards (FAS) 131, Disclosures about Segment of an Enterprise and Related
Information. FAS 131 supercedes FAS 14, Financial Reporting for Segments of a
Business Enterprise, replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. FAS
131 also requires information about products and services, geographic areas and
major customers. The adoption of FAS 131 did not affect results of operations or
financial position but did affect the disclosure of segment information.
Earnings Per Common Share
In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 128 (FAS128), "Earnings Per Share" (EPS). FAS128 supercedes
Accounting Principles Board Opinion No. 15 and replaces primary and diluted EPS
with a dual presentation of basic and diluted EPS. Basic EPS equals net income
available to common shareholders divided by the number of weighted average
common shares. Diluted EPS includes potentially dilutive securities such as
stock options and convertible securities.
A reconciliation of the numerators and denominators of the basic and
diluted EPS computations is illustrated below:
<TABLE>
<CAPTION>
Basic Computation:
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Income from continued operations $2,501 $1,809 $ 272
Loss from discontinued operations (327) (244) (657)
------ ------ ------
Net income (loss) 2,174 1,565 (385)
Preferred stock dividend (7) (7) ( 27)
------ ------ ------
Basic earnings (loss) per common share $2,167 $1,558 $ (412)
====== ====== ======
Weighted average common shares 5,323 5,230 5,018
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Diluted Computation:
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Income from continued operations $2,501 $1,809 $ 272
Loss from discontinued operations (327) (244) (657)
------ ------ ------
Net income (loss) 2,174 1,565 (385)
Preferred stock dividend (7) (7) ( 27)
------ ------ ------
Basic earnings (loss) per common share $2,167 $1,558 $ (412)
====== ====== ======
Weighted average common shares 5,323 5,230 5,018
Effect of stock options and warrants 273 310 ---
------ ------ ------
Weighted average common shares 5,596 5,540 5,018
====== ====== ======
</TABLE>
D-10
Page 28
<PAGE>
BCT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(000's omitted)
Cash and Cash Equivalents
For the purposes of reporting cash flows, cash and cash equivalents include
investments with original 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 1998 and 1997
consolidated financial statements have been reclassified for comparative
purposes.
NOTE 2: DISCONTINUED OPERATIONS
- ------ -----------------------
On February 28, 1999, the Company's Board of Directors approved a strategy
decision to discontinue the operations comprising its Company owned franchises.
The Company owned franchises include the 100% owned franchises in Delray Beach,
Florida and Merrimack, New Hampshire and the 70% owned franchise in Louisville,
Kentucky. As of May 3, 1999, the assets of the Delray Beach and Louisville
franchises are under negotiation for sale. Both transactions include the Company
taking promissory notes equal to the respective sales price. As such, gains, if
any, will be recognized over the life of the promissory notes as payments are
received. The $327 loss from discontinued operations for the year ended February
28, 1999 is net of a $130 income tax benefit generated by the loss, and includes
$89 of anticipated losses to be incurred by the Merrimack, New Hampshire
franchise until its disposition in fiscal 2000. The fiscal 1998 and 1997 results
of operations have been reclassified for the Company Franchises designated as
discontinued operations in fiscal 1999.
Sales from these discontinued operations were $2,643, $2,383 and $2,529 for the
years ended February 28, 1999, 1998 and 1997, respectively.
The components of net assets of discontinued operations included in the
Consolidated Balance Sheets at February 28, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash $ 51 $ 66
Accounts receivables 252 176
Inventories 108 99
Property and equipment 413 186
Other 511 309
Accounts payable and
accrued liabilities (253) (46)
------ -----
$1,082 $ 790
====== =====
</TABLE>
D-11
Page 29
<PAGE>
NOTE 3: ACCOUNTS AND NOTES RECEIVABLE
- ------ -----------------------------
Accounts and notes receivable consist of the following:
<TABLE>
<CAPTION>
February 28, February 28,
1999 1998
----------- -----------
<S> <C> <C>
Franchise fees and royalties
receivable $ 1,233 $ 920
Paper sales receivable
from franchisees 3,644 2,181
Notes receivable from sale of
franchises, interest at 7%
to 12%, due in monthly
installments through 2008 1,535 1,975
Notes receivable due from franchisees,
interest at 8% to 12%, payable
in monthly installments through
2005 3,942 3,788
Other 253 134
-------- --------
10,607 8,998
Less - allowance for doubtful accounts (1,303) (1,204)
-------- --------
9,304 7,794
Less - amounts not expected to
be collected within one year,
net of $1,096 allowance
for doubtful accounts
($845 in 1998) (6,052) (5,376)
-------- --------
$ 3,252 $ 2,418
======== ========
</TABLE>
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 generally requires collateral or other security to support the
receivables with credit risk.
D -12
Page 30
<PAGE>
BCT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(000's omitted)
At February 28, 1999, approximately $2,053 ($1,110 in 1998) 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.
At February 28, 1999, $485 ($485 in 1998) of notes receivable, with an 8%
interest rate per annum, related to the purchase of the Franchise by South
Pacific Wholesale Printers, Inc. The Chairman of the Board of the Company owns
50% of South Pacific Wholesale Printers, Inc. Specific reserves have been
recorded on the receivables relating to the Hawaii franchise. Accounts
receivable from this franchise as of February 28, 1999 amounted to $245 ($180 in
1998). Revenues from this Franchise amounted to $154 in fiscal 1999 ($167 in
fiscal 1998 and $141 in fiscal 1997).
Provision for doubtful accounts for the years ended February 28, 1999, 1998
and 1997, was approximately $350, $109 and $503, 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:
<TABLE>
<CAPTION>
Estimated
useful
February 28, February 28, lives
1999 1998 (in years)
------------- ------------- ----------
<S> <C> <C> <C>
Leasehold improvements $ 78 $ 78 5 - 7
Machinery and equipment 358 346 3 - 20
Furniture, fixtures and other equipment 196 196 5 - 10
Computers 727 666 5
Other 83 45 3 - 5
------ ------
1,442 1,331
Less - accumulated depreciation
and amortization (982) (794)
------ ------
$ 460 $ 537
====== ======
</TABLE>
NOTE 5: SALES AND ACQUISITIONS
- ------- ----------------------
On September 28, 1998, the Company executed an asset purchase agreement
whereby it acquired certain assets of the BCT Franchise in Merrimack, New
Hampshire (the Merrimack Franchise) in exchange for cash and notes and accounts
receivable due the Company amounting to approximately $737. The Company has
included the results of operations of the Merrimack Franchise since the
acquisition, a loss of $209, including $89 of anticipated future losses to the
date of disposition, in the consolidated statement of operations for fiscal
1999. The net assets of the Merrimack Franchise are included in assets held for
sale in the accompanying consolidated balance sheet as it is management's intent
to resell the Merrimack Franchise. Prior to the acquisition, the Company wrote
off against the allowance for doubtful accounts, $237 of receivables due from
the Merrimack Franchise. As a result, the initial net asset value for the
Merrimack Franchise was $500.
On July 15, 1997, the Company purchased certain assets of an independent
thermography business in exchange for a payment of $120 and a note payable of
$455. The assets consisted of certain equipment, the customer list and a non-
compete agreement from the owners of the business. The Company resold certain of
the assets acquired to two Franchises in exchange for cash and notes amounting
to $535.
On March 1, 1997, the Company acquired certain assets of the Boston,
Massachusetts Franchise for $75 cash and forgiveness 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
D-13
Page 31
<PAGE>
BCT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(000's omitted)
of acquisition. The purchase price associated with the acquisition was recorded
as an asset held for sale as it was the Company's intent to resell this
Franchise. The operating results of this business acquisition were included in
the Company's consolidated results of operations from March 1, 1997. On August
1, 1997, the Company resold the Boston Franchise to two existing Franchises in
exchange for promissory notes amounting to $498. Due to the Company's
continuing involvement with these Franchises, no gain has been recorded on this
transaction. Deferred revenue as of February 28, 1998 includes $68 relating to
this transaction.
NOTE 6: NOTES PAYABLE
- ------- -------------
Notes payable consist of the following:
<TABLE>
<CAPTION>
February 28, February 28,
1999 1998
------------ ------------
<S> <C> <C>
Note payable to prior owner of Company Franchise,
monthly principal and interest payments
of $2, interest at 8% per annum, through August 2004 $ 98 $ 113
Notes payable relating to acquisitions, monthly
payments of principal and interest of 8% 448 531
-------- ---------
546 644
Less - current maturities (113) (105)
-------- ---------
$ 433 $ 539
======== =========
</TABLE>
Scheduled maturities after February 28, 1999 for notes payable are as
follows:
<TABLE>
<CAPTION>
Fiscal Amount
Year Payable
------ -------
<S> <C>
2000 $ 113
2001 104
2002 85
2003 91
2004 98
Thereafter 55
-------
$ 546
=======
</TABLE>
In September 1998, the Company negotiated a $2 million line of credit with
a bank. The line of credit is collateralized by receivables and inventory and
bears interest of prime +.25%, interest is payable monthly. As of Februrary 28,
1999, no advances have been made on the line.
NOTE 7: PREFERRED STOCK
- ------- ---------------
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, January 21, 1997, and May 1, 1999, 550, 200 and 60
shares of Series A preferred stock were voluntarily converted into 372, 135 and
41 shares of common stock, respectively. As such, as of May 1, 1999 no Series A
preferred stock remained outstanding.
D -14
Page 32
<PAGE>
BCT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(000's omitted)
NOTE 8: STOCKHOLDERS' EQUITY
- ------- --------------------
In Fiscal 1997, the Company adopted the disclosure requirements of
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.
Warrants
- --------
As of February 28, 1998, there were outstanding warrants for the purchase
of 508 shares of common stock. During fiscal 1999, 308 warrants were exercised,
200 warrants expired. Of the 308 warrants exercised, 187 were exercised in
exchange for 55 shares of common stock. The remainder were exercised for cash.
No warrants were granted during fiscal 1999.
Stock Options
- -------------
A summary of stock option activity is as follows (share amounts in 000's):
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 1998 Fiscal 1997
--------------------- ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 1,202 $ 2.76 1,318 $ 2.64 1,213 $ 2.32
Granted (1) 737 1.87 95 2.85 358 3.01
Exercised (85) 2.20 (163) 1.26 (111) 1.53
Cancelled (12) 3.00 (37) 1.37 (42) 2.98
Expired (1) (706) 3.10 (11) 1.45 (100) 1.40
------ ------ ----- ------- ------ -------
Outstanding at end
of year 1,136 $ 2.01 1,202 $ 2.76 1,318 2.64
====== ====== ===== ======= ====== =======
Exercisable at end
of year 1,014 $ 2.05 992 $ 2.74 1,042 2.52
====== ====== ===== ======= ====== ========
Weighted average
fair value of
options granted
during the year $ 1.45 $ 1.80 $ 1.43
====== ======= ========
</TABLE>
(1) In November 1998, the Company lowered the exercise price to $1.87 per share
on 685 options held by directors, executives and employees. The exercise
prices of these options ranged from $2.38 to $5.00 per share.
D-15
Page 33
<PAGE>
BCT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(000's omitted)
A summary of stock options outstanding at February 28, 1999 is as follows (share
amounts in 000's):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- -----------------------------------
Number Weighted Weighted Number Weighted
Range of Outstanding Average Average Exercisable Average
Exercise at Remaining Exercise at Exercise
Prices February 28, 1999 Life (in years) Price February 28, 1999 Price
- ------ ----------------- --------------- ----- ----------------- ------
<S> <C> <C> <C> <C> <C>
$1.25 to $1.88 905 5.8 $ 1.65 783 $ 1.74
$2.38 to $3.13 141 2.8 $ 2.80 141 $ 2.81
$3.38 to $5.00 90 3.7 $ 3.49 90 $ 3.49
----- -----
1,136 1,014
===== =====
</TABLE>
Pro forma information regarding net income and net income per share is
required by Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" and has been determined as if the Company had
accounted for stock options using the fair value method of that statement.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
February 28, February 28, February 28,
1999 1998 1997
------------ ------------ -------------
<S> <C> <C> <C>
Net income (loss):
As reported $ 2,174 $ 1,565 ($ 385)
========== ========== ============
Pro forma $ 2,042 $ 1,287 ($ 628)
========== ========== ============
Net income (loss) per share:
As reported Basic $ .41 $ .30 ($ .08)
========== ========== ============
Diluted $ .39 $ .28 ($ .08)
========== ========== ============
Proforma Basic $ .38 $ .25 ($ .13)
========== ========== ============
Diluted $ .36 $ .23 ($ .13)
========== ========== ============
</TABLE>
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 from 44% to 47%, a risk free interest rate of from 6.0% to 6.5% and
weighted average expected option term of 4.8 years.
D-16
Page 34
<PAGE>
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, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current Provision:
Federal $ 221 $ 187 $ 80
State 58 51 39
------ ------- -------
Total current 279 238 119
Deferred provision (benefit) 411 748 ( 65)
------ ------- -------
Income tax provision from continued operations 690 986 54
Income tax benefit from discontinued operations (130) (133) ( 76)
------ ------- -------
$ 560 $ 853 $ ( 22)
====== ======= =======
</TABLE>
The Company's deferred income taxes are comprised of the following:
<TABLE>
<CAPTION>
February 28, 1999 February 28, 1998 February 29, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Deferred income taxes - current:
Bad debt reserve $ 193 $ 140 $ 148
Net operating loss carryovers --- 833 ---
Capitalization of inventory cost 139 293 238
Inventory reserves 88 41 ---
Other 56 56 60
------------ -------------- ---------------
476 1,363 446
Valuation allowance --- ( 444) ( 134)
------------ -------------- ---------------
Deferred income taxes - current $ 476 $ 919 $ 312
============ ============== ===============
Deferred income taxes - non-current:
Bad debt reserve $ 193 $ 329 $ 300
Net operating loss carryovers 203 203 1,967
Other 123 100 86
------------ -------------- ---------------
519 632 2,353
Valuation allowance (203) ( 306) ( 672)
Deferred tax liabilities - non-current:
Fixed assets ( 70) ( 112) ( 112)
------------ -------------- ---------------
Deferred income taxes - non-current $ 246 $ 214 $ 1,569
============ ============== ===============
Deferred income taxes - total $ 722 $ 1,133 $ 1,881
============ ============== ===============
</TABLE>
D-17
Page 35
<PAGE>
BCT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(000's omitted)
Net operating loss carryforwards for Federal income tax purposes total
approximately $539 at February 28, 1999, all of which will expire in 2005 and
include certain limitations.
During fiscal 1999, the Company reduced the valuation allowance by $547 due
to profitable operations. Although realization is not assured, management
believes it is more likely than not that the net deferred tax asset will be
realized. The amount of deferred tax asset considered realizable, could be
reduced in the near term if estimates of future taxable income are reduced.
The difference between the statutory and effective tax rates are as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Tax provision (benefit) at
statutory rate $ 930 34% $ 841 34% $ ( 139) ( 34%)
State income tax, net of
federal benefit 38 2 34 1 24 6
Alternative minimum tax --- --- 54 2 4 1
Increase (decrease) in Federal
and state valuation allowance (547) ( 20) ( 56) ( 2) 30 7
Other 139 4 ( 20) --- 59 15
------ ----- ------ ----- -------- -----
$ 560 20% $ 853 35% $ ( 22) ( 5%)
====== ===== ====== ====== ======== =====
</TABLE>
NOTE 10: COMMITMENTS AND CONTINGENCIES
- ------- -----------------------------
The Company is a party to several litigation matters. In the opinion of
management, potential losses, if any, on the 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.
The following are the approximate minimum annual noncancellable rentals to
be paid under the provisions of the leases, including the Company Franchises
calssified as assets held for sale:
<TABLE>
<CAPTION>
Fiscal Year Lease Commitments
----------- -----------------
<S> <C>
2000 $230
2001 182
2002 133
2003 69
----
$614
====
</TABLE>
D-18
Page 36
<PAGE>
BCT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(000's omitted)
Rental expense amounted to the following approximate amounts for the
corresponding periods:
<TABLE>
<CAPTION>
For the year ended Amount
-------------------- ------
<S> <C>
February 28, 1999 $ 206
February 28, 1998 $ 234
February 28, 1997 $ 287
</TABLE>
At February 28, 1999, the Company has guaranteed the payment of equipment
lease obligations and promissory note obligations for certain of its franchisees
for an aggregate amount of approximately $905.
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 of $300. In June 1997, the employment agreement was extended for an
additional 3 years at an annual salary of $300 through February 28, 2003.
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 May 1999, the Company executed an employment agreement with the new
President and Chief Executive Officer of the Company. The initial term of the
employment agreement is three years, but shall be automatically extended for
successive one-year terms unless either party gives notice of its intent not to
renew. The agreement calls for minimum annual salary amounts during the initial
three year term of $250, $262 and $276. In addition, the agreement provides for
incentive compensation based upon pretax income of the Company, which shall not
exceed $125 in fiscal 2000 and shall not exceed the base salary, thereafter.
Additionally, the agreement granted 400 options to purchase Common Stock of the
Company, of which 100 vested immediately and the remainder will vest 15%
annually over the next 5 years. Further, the agreement provides for the granting
each year of options to purchase shares of the Company's Common Stock equal to
the amount of the incentive compensation for that year divided by the market
price of the Company's stock on the day preceding the payment of the incentive
compensation. These options shall vest 25% immediately and 15% each year for the
five years, thereafter.
NOTE 11: SEGMENT INFORMATION
- ------- -------------------
In fiscal 1999, the Company adopted FAS 131. The Company's four reportable
segments are (1) Franchisor operations, (2) Pelican Paper Products, (3) Company
owned Franchises and (4) other operations.
The accounting policies of the segments are the same as those described in
the "Summary of Significant Accounting Policies." The Company evaluates the
performance of its segments based on earnings before income taxes.
D-19
Page 37
<PAGE>
BCT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(000's omitted)
The Company is organized primarily on the basis of business activity units.
Information relating to Company Franchises is included in Note 2. The table
below presents information about reported segments for the years ended:
<TABLE>
<CAPTION>
1999 Franchisor Pelican Paper Other Total
----------- ------------- ------- -------
<S> <C> <C> <C> <C>
Revenues $ 5,443 $12,817 $ 346 $18,606
Cost of sales --- 10,939 --- 10,939
Operating expenses 3,993 483 --- 4,476
------- ------- ------- -------
Income before income taxes $ 1,450 $ 1,395 $ 346 $ 3,191
======= ======= ======= =======
Depreciation and amortization $ 140 $ 46 $ --- $ 186
======= ======= ======= =======
Income tax provision $ 209 $ 406 $ 75 $ 690
======= ======= ======= =======
Capital expenditures $ 65 $ 17 $ --- $ 82
======= ======= ======= =======
1998
Revenues $ 4,965 $11,734 $ 323 $17,022
Cost of sales --- 9,857 --- 9,857
Operating expenses 3,933 437 --- 4,370
------- ------- ------- -------
Income before income taxes $ 1,032 $ 1,440 $ 323 $ 2,795
======= ======= ======= =======
Depreciation and amortization $ 154 $ 45 $ --- $ 199
======= ======= ======= =======
Income taxes $ 210 $ 662 $ 114 $ 986
======= ======= ======= =======
Capital expenditures $ 77 $ 11 $ --- $ 88
======= ======= ======= =======
1997
Revenues $ 4,893 $10,118 $ 205 $15,216
Cost of sales --- 8,823 --- 8,823
Operating expenses 5,597 470 --- 6,067
------- ------- ------- -------
Income before income taxes $( 704) $ 825 $ 205 $ 326
======= ======= ======= =======
Depreciation and amortization $ 197 $ 50 $ --- $ 247
======= ======= ======= =======
Income tax provision (benefit) $ (194) $ 214 $ 34 $ 54
======= ======= ======= =======
Capital expenditures $ 217 $ 23 $ --- $ 240
======= ======= ======= =======
</TABLE>
The following is sales information by geographic area for the years ended
February 28:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
United States $17,774 $16,098 $14,247
Canada 832 924 969
------- ------- -------
$18,606 $17,022 $15,216
======= ======= =======
</TABLE>
All long-lived assets of the Company are domiciled in the United States.
NOTE 12: SUBSEQUENT EVENT
The Company's Chief Executive Officer and President resigned in April 1999.
Under the terms of his employment, the Company is liable for six months
severance pay, which will be expensed during the first quarter of fiscal 2000.
In addition, the
D-20
Page 38
<PAGE>
BCT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(000's omitted)
Company paid approximately $85 in accrued management incentives, $17 in accrued
vacation and $35 to repurchase options in connection with a termination
agreement dated April 19, 1999.
On May 14, 1999, the Company executed an agreement for the sale of the
Delray Beach Company Franchise in exchange for a $550, ten year note bearing
interest of 7.5%. In addition, the Company will be paid approximately $80 for
accounts receivable. The transaction will result in deferred revenue of
approximately $350, which will be recognized over the term of the note.
D-21
Page 39
<PAGE>
BCT INTERNATIONAL, INC.
-----------------------
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
---------------------------------
(000's omitted)
<TABLE>
<CAPTION>
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
---------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
For the year ended February 28, 1999
Allowance for doubtful accounts $ 1,204 $ 350 $ --- $ (251) $ 1,303
========== ======== ======== ========== ========
Deferred tax assets valuation allowance $ 750 $ --- $ --- $ (547) $ 203
========== ======== ======== ========== ========
For the year ended February 28, 1998
Allowance for doubtful accounts $ 1,148 $ 109 $ --- $ (53) $ 1,204
========== ======== ======== ========== ========
Deferred tax assets valuation allowance $ 806 $ --- $ --- $ (56) $ 750
========== ======== ======== ========== ========
For the year ended February 28, 1997
Allowance for doubtful accounts $ 913 $ 503 $ --- $ (268) $ 1,148
========== ======== ======== ========== ========
Deferred tax assets valuation allowance $ 776 $ --- $ 30 $ --- $ 806
========== ======== ======== ========== ========
</TABLE>
Allowance for doubtful accounts at February 28, 1999 of $1,303 is comprised of
$207 related to current receivables and $1,096 to long-term receivables.
D-22
Page 40
<PAGE>
SCHEDULE X
BCT INTERNATIONAL, INC.
-----------------------
SUPPLEMENTARY INCOME STATEMENT INFORMATION
------------------------------------------
(000's omitted)
Item
- -----
<TABLE>
<CAPTION>
February 28, 1999 February 28, 1998 February 28, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Advertising Costs $ 22 $ 12 $ 83
====== ====== ======
Amortization of intangible assets
$ 26 $ 26 $ 166
====== ====== ======
</TABLE>
D-23
Page 41
<PAGE>
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT is made and entered into as of the 8/th/ day of
May, 1999, by and between BCT International, Inc., a Delaware corporation (the
"Company"), and Peter T. Gaughn (the "Executive").
---------
Preliminary Statements:
----------------------
WHEREAS, the Company desires to secure the services of the Executive, and
the Executive desires to furnish such services to the Company upon the terms and
conditions set forth in this Agreement; and
WHEREAS, the Executive, by reason of the nature of the Executive's duties,
will be provided access to the Company's trade secrets and other confidential
information and the Company desires to maintain the confidentiality of the same.
Agreement:
---------
NOW, THEREFORE, in consideration of the premises and mutual covenants set
forth herein, the parties agree as follows:
1. Employment.
----------
1.1 General. The Company hereby agrees to employ the Executive, and
-------
the Executive hereby agrees to serve the Company, on the terms and subject to
the conditions set forth herein.
1.2 Duties of Executive. During the term of this Agreement, the
-------------------
Executive shall serve as the President and Chief Executive Officer of the
Company, shall diligently perform all services as may be assigned to him by the
Company's Board of Directors (the "Board"), and shall exercise such power and
-----
authority as may from time to time be delegated to him by the Board. The
Executive shall be responsible for management and supervision of all day-to-day
operations of the Company. The Executive shall devote his full time and
attention to the business and affairs of the Company, render such services to
the best of his ability, and use his best efforts to promote the interests of
the Company.
1.3 Directorship. The Executive is a director of the Company, and
------------
for so long as he is employed under this Agreement, the Company's Board of
Directors shall nominate him for reelection by the Company's shareholders to the
Board at each annual meeting at which his seat is up for reelection.
<PAGE>
2. Term.
----
2.1 Initial Term. The initial term of this Agreement and the
------------
employment of the Executive hereunder shall be for the period from the date
hereof through ____ , 2002 (the "Initial Term"), unless sooner terminated in
------------
accordance with the terms and conditions hereof.
2.2 Renewal Terms. The Initial Term of this Agreement, and the
-------------
employment of the Executive hereunder, shall be automatically renewed and
extended for successive one-year terms unless either party gives written notice
of non-renewal to the other party at least three months before the third
anniversary of this Agreement or the relevant anniversary date thereafter. If
timely notice of non-renewal is given, then this Agreement, and the employment
of the Executive hereunder shall automatically terminate upon the expiration of
the Initial Term or the then effective renewal term, as the case may be.
3. Compensation.
-------------
3.1 Base Salary. The Executive shall receive a base salary at the
-----------
following annual rates (the "Base Salary") during the Initial Term of this
-----------
Agreement:
<TABLE>
<CAPTION>
Period Base Salary
------ -----------
<S> <C>
4/1/99 - 3/31/00 $250,000
4/1/00 - 3/31/01 $262,500
4/1/01 - 3/31/02 $275,625
</TABLE>
The Base Salary shall be payable in equal installments consistent with the
Company's normal payroll schedule, subject to applicable withholding and other
taxes. If the term of this Agreement shall be renewed and extended as provided
in Section 2.2 hereof, then during such renewal term of his employment hereunder
the Executive shall be paid a base salary reflecting an increase of at least 5%
per year.
3.2 Incentive Compensation.
----------------------
(a) In addition to the Base Salary, the Executive shall be
entitled to receive annual incentive compensation (the "Incentive Compensation")
----------------------
for the fiscal year ended February 29, 2000, and each fiscal year thereafter
ending during the term of the Executive's employment hereunder equal to (i) 2.5%
of the Company's Operating Income (as defined below) for the fiscal year up to
the level of the prior fiscal year's Operating Income, plus 10% of the Operating
Income in excess of such level. For purposes of this Agreement, "Operating
Income" shall mean the Company's consolidated pretax income computed in
accordance with generally accepted accounting principles, consistently applied
("GAAP") before taking into account any "extraordinary items" (as defined by
GAAP).
-2-
<PAGE>
(b) For purposes of this Agreement, the amount of Incentive
Compensation payable with respect to any fiscal year or portion thereof (net of
any tax or other amount properly withheld therefrom) shall be paid by the
Company to the Executive on or before the later of (i) three months after the
end of the fiscal year or (ii) completion of the Company's audited financial
statements for such year.
(c) Notwithstanding the foregoing, the Incentive Compensation
payable to the Executive for the fiscal year ended February 29, 2000, shall not
exceed $125,000, and the Incentive Compensation payable for any fiscal year
shall not exceed the Base Salary for that year.
(d) The Company shall permit the Executive or his designated
representative, on reasonable advance notice, from time to time to review the
Company's books and records relevant to the calculation of the Incentive
Compensation. The Executive shall bear the entire cost of such review.
3.3 Stock Options.
--------------
(a) Immediately upon the execution of this Agreement, the
Company shall grant to the Executive 10-year options to purchase 400,000 shares
of the Company's common stock at a price per share equal to the closing price of
the common stock on the Nasdaq National Market on the immediately preceding
trading day. These options shall be "non-qualified" options and shall vest 25%
upon execution of this Agreement and 15% on each of the first five anniversaries
of this Agreement provided that the Executive is still employed by the Company
on each such anniversary. In the event that the Executive's employment by the
Company is terminated for any reason, his unvested options shall immediately be
canceled. The Executive's options shall fully vest upon the occurrence of an
event described in Section 7(b) of the Company's 1995 Stock Option Plan, as
amended through the date of this Agreement (a "Change in Control").
(b) Simultaneous with each payment of Incentive Compensation to
the Executive the Company shall grant to the Executive further non-qualified
stock options with an exercise price equal to the closing price of the Company's
common stock on the trading day immediately preceding the payment date. Each
such option grant shall provide for the right to purchase the number of shares
of common stock equal to the amount of the relevant Incentive Compensation
payment divided by the relevant exercise price. The options granted pursuant to
this Section 3.3(b) shall be exercisable for 10 years from the date of grant and
shall vest 25% on the grant date and 15% on each of the first five anniversaries
of the grant date provided that the Executive is still employed by the Company
on each such anniversary. In the event that the Executive's employment is
terminated for any reason, his unvested options shall immediately be canceled.
These options shall be fully vested upon a Change in Control.
4. Expense Reimbursement and Other Benefits.
----------------------------------------
4.1 Expense Reimbursement. The Executive shall be entitled to
---------------------
reimbursement by the Company for all reasonable business expenses incurred by
him in connection with the
-3-
<PAGE>
performance of his duties hereunder; provided, however, that such entitlement is
-------- -------
conditioned upon the Executive providing the Company with appropriate
documentation of such expenses in accordance with Company policy.
4.2 Car Allowance. The Company shall pay to the Executive a car
-------------
allowance of $1,000 per month during the first year of his employment hereunder.
The amount of this allowance shall increase by 5% per year during subsequent
years.
4.3 Relocation Expenses. The Company will reimburse the Executive
-------------------
for standard and reasonable closing costs relating to the sale of his current
residence and the purchase of a new residence in South Florida, as well as for
reasonable moving expenses for the Executive and his family and reasonable
temporary lodging expenses for the Executive and his family for a period not to
exceed six months. All payments under this Section 4.3 shall be "grossed up" to
result in receipt by the Executive on an after-tax basis of the reimbursable
amounts.
4.4 Other Benefits. The Executive shall be entitled to participate
--------------
in all medical, dental, hospitalization, disability and group life insurance
plans, the 401(k) plan and any and all other employee benefit plans, as are
presently and hereafter provided by the Company to its executives. Without
limiting the generality of the foregoing, (i) the Company shall provide to the
Executive for the benefit of his designated beneficiaries term life insurance
coverage of at least $1,000,000, (ii) the Executive shall receive disability
insurance coverage providing for payment of 70% of his Base Salary in the event
that he is unable to perform his duties hereunder due to a disability and (iii)
the Company shall maintain directors' and officers' liability insurance coverage
equivalent to that in place on the date of this Agreement. The Executive shall
be entitled to four weeks vacation per year in accordance with the Company's
prevailing policy for its executives; provided, however, that in no event may a
-------- -------
vacation be taken when to do so could reasonably be expected to materially and
adversely affect the Company's business and unused vacation time shall not be
carried over to any subsequent year.
4.5 Indemnification. The Company agrees to defend, indemnify and
---------------
hold harmless the Executive for acts in his capacity as an officer or director
to the fullest extent permitted by Delaware corporate law as of the date of this
Agreement (or as such right of indemnity may be increased in the future). The
Company agrees to advance on behalf of the Executive the reasonable costs of
defending any action or investigation (including reasonable attorneys' fees and
expenses) arising from the Executive's performance of his duties under this
Agreement, subject to an undertaking from the Executive to repay the Company if
the Executive is determined not to be entitled to such indemnity by a court of
competent jurisdiction; provided, however, that the Company shall first have the
opportunity to defend the Executive so long as counsel hired by the Company does
not have a conflict of interest in connection with representation of both the
Company and the Executive and the Executive approves of such counsel, which
approval shall not be unreasonably withheld.
5. Termination.
-----------
-4-
<PAGE>
5.1 Termination for Cause. The Company shall at all times have the
---------------------
right, upon written notice to the Executive, to terminate the Executive's
employment hereunder for Cause (as hereinafter defined). For purposes of this
Agreement, the term "Cause" shall mean (a) a willful breach by the Executive of
-----
any of the material terms or provisions of this Agreement, (b) commission by
the Executive of an act or acts involving fraud, embezzlement, misappropriation,
theft, breach of fiduciary duty or dishonesty against the property or personnel
of the Company, or (c) willful or reckless conduct by the Executive which the
Board in good faith reasonably determines could be expected to have a material
adverse effect on the business, assets, properties, results of operations,
financial condition or prospects of the Company; provided, however that the
Executive may not be terminated pursuant to this Section 5.1(d) unless he is
first given written notice of his improper conduct and fails to correct it
within 30 days after receipt of such notice. Upon any termination pursuant to
this Section 5.1, the Executive shall be entitled to be paid his Base Salary to
the date of termination and the Company shall have no further liability under
this Agreement (other than for reimbursement for reasonable business expenses
incurred prior to the date of termination, subject, however to the provisions of
Section 4.1).
5.2 Disability. The Company shall at all times have the right, upon
----------
written notice to the Executive, to terminate the Executive's employment
hereunder, if the Executive shall, as the result of mental or physical
incapacity, illness or disability, become unable to perform his duties hereunder
for in excess of 60 consecutive calendar days or 90 calendar days in any 12-
month period. Upon any termination pursuant to this Section 5.2, (a) the
Company shall pay to the Executive (i) immediately any unpaid amounts of his
Base Salary accrued through the effective date of termination, plus (ii) in
----
accordance with Section 3.2(b), an amount equal to any earned but unpaid
Incentive Compensation payable with respect to the prior fiscal year plus the
Incentive Compensation, if any, payable to him in respect of the fiscal year in
which such termination occurs, prorated for the period of service by the
Executive from the beginning of such year through the date of termination, and
(b) the Company shall have no further liability under this Agreement (other than
for reimbursement for reasonable business expenses incurred prior to the date of
termination, subject, however, to the provisions of Section 4.1).
5.3 Death. In the event of the death of the Executive during the
-----
term of his employment hereunder, (a) the Company shall pay to the deceased
Executive's designated beneficiary or, if no beneficiary has been designated,
the deceased Executive's estate (i) immediately any unpaid amounts of his Base
Salary accrued through the date of his death, plus (ii) in accordance with
----
Section 3.2(b), an amount equal to any earned but unpaid Incentive Compensation
payable with respect to the prior fiscal year plus the Incentive Compensation,
if any, payable to him in respect of the fiscal year in which such death occurs,
prorated for the period of service by the Executive from the beginning of such
year through the date of his death, and (b) the Company shall have no further
liability under this Agreement (other than for reimbursement for reasonable
business expenses incurred prior to the date of the Executive's death, subject,
however to the provisions of Section 4.1).
-5-
<PAGE>
5.4 Termination Without Cause.
-------------------------
The Company shall have the right to terminate the Executive's
employment hereunder without cause upon at least 30 days' prior written notice
to the Executive; provided, however, that the Company shall pay to the Executive
-------- -------
(i) on the effective date of termination specified in the notice, any unpaid
Base Salary accrued through the effective date of termination, (ii) his then-
effective Base Salary, in equal installments consistent with the Company's
normal payroll practices, from the termination date until the later of 12 months
from the termination date or 36 months from the date of this Agreement, and
(iii) in accordance with Section 3.2(b), an amount equal to any earned but
unpaid Incentive Compensation payable with respect to the prior fiscal year plus
the Incentive Compensation, if any, payable in respect of the fiscal year in
which such termination occurs, prorated for the period of service by the
Executive from the beginning of such year through the date of termination. Upon
such termination and payments, the Company shall have no further liability under
this Agreement (other than for reimbursement for reasonable business expenses
incurred prior to the date of termination, subject, however, to the provisions
of Section 4.1). Within 30 days following the consummation of a Change in
Control, the Executive shall have the option to resign from his employment by
written notice to the Company, in which case the resulting termination shall be
deemed a termination without cause by the Company and the Executive shall be
entitled to the compensation set forth in Section 5.4 and, in addition, all
unvested stock options held by the Executive shall immediately vest.
5.5 Termination by the Executive. Effective at any time at least two
----------------------------
years after the commencement of the Executive's employment hereunder, the
Executive shall have the right to terminate his employment hereunder upon at
least six months' prior written notice to the Company. In the event of such
termination, the Company shall pay to the Executive (i) on the effective date of
termination specified in the notice, any unpaid Base Salary accrued through the
effective date of termination, and (ii) in accordance with Section 3.2(b), an
amount equal to any earned but unpaid Incentive Compensation payable with
respect to the prior fiscal year plus the Incentive Compensation, if any,
payable in respect of the fiscal year in which such termination occurs, prorated
for the period of service by the Executive from the beginning of such year
through the date of termination. Upon such termination and payments, the
Company shall have no further liability under this Agreement (other than for
reimbursement of reasonable business expenses incurred prior to the date of
termination, subject, however to the provisions of Section 4.1).
6. Restrictive Covenants.
---------------------
6.1 Non-competition. While employed by the Company and during the
---------------
Non-competition Period (as hereinafter defined), the Executive shall not,
directly or indirectly, engage in or have any interest in any sole
proprietorship, partnership, limited liability company, corporation or business
or any other person or entity other than the Company, its subsidiaries or
affiliates (whether as an employee, officer, director, partner, agent, security
holder, creditor, consultant, franchisee or otherwise) that directly or
indirectly engages in a business similar to the Company's and/or its
franchisees' then-existing wholesale printing business anywhere such business
is then conducted by the Company and/or its franchisees (as may reasonably be
determined by the Company to be the
-6-
<PAGE>
appropriate geographical market(s) for such products); provided, however, that
-------- -------
nothing contained herein shall be deemed to prevent or restrict the Executive
from owning up to 1% of the shares of any class of capital stock of any
corporation whose shares are listed on a national securities exchange or are
regularly traded in the over-the-counter market; provided that the Executive
--------
does not actively participate or engage in the conduct of the business of any
such other corporation. For purposes of this Section 6.1, the term "Non-
----
competition Period" shall mean (a) in the event the Executive's employment is
- ------------------
terminated pursuant to Section 5.4 or 5.5, one year following the effective date
of such termination, or (b) in the event the Executive's employment hereunder is
terminated pursuant to Section 5.1, a period of two years following the date his
employment is terminated.
6.2 Nondisclosure. The Executive shall not divulge, communicate, or
-------------
use to the detriment of the Company or for the benefit of any other person or
persons, or misuse in any way, any confidential information pertaining to the
business of the Company. For purposes hereof, "confidential information" means
information, including but not limited to, technical or non-technical data, a
formula, pattern, compilation, program, device, method, technique, drawing,
process, financial data, or list of actual or potential customers or suppliers,
that is both: (i) sufficiently secret to derive economic value, actual or
potential, from not being generally known to other persons who can obtain
economic value from its disclosure or use; and (ii) the subject of efforts that
are reasonable under the circumstances to maintain its secrecy or
confidentiality. Any confidential information now known or hereafter acquired
by the Executive with respect to the business of the Company shall be deemed a
valuable, special and unique asset of the Company that is received by the
Executive in confidence and as a fiduciary, and the Executive shall remain a
fiduciary to the Company with respect to all of such information. The
provisions of this Section 6.2 shall not apply to information which is or shall
become generally known to the public or the trade (except by reason of the
Executive's breach of his obligations hereunder), information which is or shall
become available in trade or other publications (except by reason of the
Executive's breach of his obligations hereunder), and information which the
Executive is required to disclose by order of a court of competent jurisdiction
(but only to the extent specifically ordered by such court and, when reasonably
possible, if the Executive shall give the Company prior notice of such intended
disclosure so that it has the opportunity to seek a protective order if it deems
appropriate).
6.3 Non-solicitation of Employees and Customers. While employed by
-------------------------------------------
the Company and for the relevant Non-competition Period thereafter, the
Executive shall not, directly or indirectly, for himself or for any other
person, firm, corporation, partnership, limited liability company, association
or other entity, attempt to employ or enter into any contractual arrangement
with any employee or former employee of the Company, unless such employee or
former employee has not been employed by the Company for a period in excess of
six months.
6.4 Books and Records. All books, records and accounts relating in
-----------------
any manner to the business, customers, suppliers or clients of the Company and
all other documents, disks, software or other items containing confidential
information relating to the Company, whether prepared by the Executive or
otherwise coming into the Executive's possession, shall be the exclusive
property of the Company and shall be returned immediately, together with any
copies, to the
-7-
<PAGE>
Company on termination of the Executive's employment hereunder or on the
Company's request at any time.
7. Injunction. It is recognized and hereby acknowledged by the parties
----------
hereto that a breach by the Executive of any of the covenants contained in
Section 6 of this Agreement will cause irreparable harm and damage to the
Company, the monetary amount of which may be virtually impossible to ascertain.
As a result, the Executive recognizes and hereby acknowledges that the Company
shall be entitled to an injunction from any court of competent jurisdiction
enjoining and restraining any violation of any or all of the covenants contained
in Section 6 of this Agreement by the Executive or any of his affiliates,
associates, partners or agents, either directly or indirectly, and that such
right to injunction shall be cumulative and in addition to whatever other
remedies the Company may possess.
8. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the internal laws of the State of Florida.
9. Entire Agreement. This Agreement constitutes the entire agreement
----------------
between the parties hereto with respect to the subject matter hereof and, upon
its effectiveness, shall supersede all prior agreements, understandings and
arrangements, both oral and written, between and among the Executive and the
Company (or any of their affiliates) with respect to such subject matter. This
Agreement may not be modified in any way unless by a written instrument signed
by both the Company and the Executive.
10. Notices. Any notice required or permitted to be given hereunder
-------
shall be deemed given when delivered by hand, by facsimile or three business
days after being deposited in the United States mail, by registered or certified
mail, return receipt requested, postage prepaid, (i) if to the Company, to the
address of the Company's principal offices in Fort Lauderdale, Florida, and (ii)
if to the Executive, to his address as reflected on the payroll records of the
Company, or to such other address as either party hereto may from time to time
give notice of to the other.
11. Benefits; Binding Effect. This Agreement shall be for the benefit
------------------------
of and binding upon the parties hereto and their respective heirs, personal
representative, legal representatives, successors and, where applicable,
assigns, including, without limitation, any successor to the Company, whether by
merger, consolidation, sale of stock, sale of assets or otherwise; provided,
however, that under no circumstances may the Executive delegate his employment
obligations hereunder or any portion thereof.
12. Severability. The invalidity of any one or more of the words,
------------
phrases, sentences, clauses or sections contained in this Agreement shall not
affect the enforceability of the remaining portions of this Agreement or any
part thereof, all of which are inserted conditionally on their being valid in
law, and, in the event that any one or more of the words, phrases, sentences,
clauses or sections contained in this Agreement shall be declared invalid, this
Agreement shall be construed as if such invalid word or words, phrase or
phrases, sentence or sentences, clause or clauses, or section or sections had
not been inserted. If such invalidity is caused by length of time or size of
area, or
-8-
<PAGE>
both, the otherwise invalid provision will be considered to be reduced to a
period or area which would cure such invalidity.
13. Waiver. The waiver by either party hereto of a breach or violation
------
of any term or provision of this Agreement shall not operate nor be construed as
a waiver of any subsequent breach or violation.
14. Arbitration; Litigation. Except for the relief provided for in
-----------------------
Section 7, any controversy or claim arising out of or relating to this Agreement
or the breach or validity of any part hereof shall be settled solely through
binding arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association, and judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof. The
arbitrator shall have substantial knowledge and experience in the operation of
companies doing business in fields similar to the Company's. The arbitration
shall be conducted in Broward County, Florida. Expenses of the arbitration,
including the arbitrator's fees, shall be shared equally by the parties, with
the prevailing party entitled to reimbursement by the non-prevailing party. In
addition, the prevailing party shall be entitled to recover from the non-
prevailing party its reasonable attorneys' fees and expenses incurred in
connection with such arbitration and any litigation arising hereunder at all
levels, including before the filing of suit or demand for arbitration.
15. Section Headings. The section headings contained in this Agreement
----------------
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this agreement.
16. No Third Party Beneficiary. Nothing expressed or implied in this
--------------------------
Agreement is intended, or shall be construed, to confer upon or give any person
other than the Company, the parties hereto and their respective heirs, personal
representatives, legal representatives, successors and assigns, any rights or
remedies under or by reason of this Agreement.
17. Subsidiaries. All references to the "Company" in this Agreement,
------------
including but not limited to those in Section 6, shall be deemed to include any
and all of the Company's direct and indirect subsidiaries to the extent the
context may require.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
BCT INTERNATIONAL, INC.
By: William A. Wilkerson,
----------------------------------
William A. Wilkerson, Chairman
Peter T. Gaughn
-----------------------------------
PETER T. GAUGHN
-9-
<PAGE>
EXHIBIT 10.6
TERMINATION AGREEMENT
---------------------
AGREEMENT entered into as of the 19th day of April, 1999, between BCT
International, Inc., a Delaware corporation ("Employer") and James H.
Kaufenberg ("Employee").
WHEREAS, Employer employs Employee as its President and Chief Executive
Officer and Employee serves also as a Director of Employer; and
WHEREAS, Employer and Employee have agreed to terminate their employment
relationship and Employee has agreed to resign as a Director of Employer as of
this date pursuant to the terms and conditions hereof.
NOW THEREFORE, in consideration of the premises and the mutual promises set
forth herein, the parties agree as follows:
1. Employee's employment is hereby terminated, and Employee hereby resigns
as an employee, officer and Director of Employer and all of its subsidiaries.
All agreements and contracts relating to such employment and directorship and
Employee's compensation and benefits, including but not limited to, the letter
agreement dated August 6, 1996, between Employer and Employee and all agreements
relating to Employer's executive bonus plans, are hereby terminated without any
further liability of the parties to each other thereunder except as set forth in
this Agreement. Employee hereby releases Employer and its subsidiaries and
their respective officers, directors, employees, agents and representatives from
any and all claims, demands and liabilities whatsoever, whether actual or
contingent, existing as of the date hereof, including, but not limited to any
and all liability to Employee arising out of or in connection with Employee's
employment or directorship; provided, however, that such release shall not cover
any liability arising under this Agreement and shall not affect Employee's
rights relating to Employer stock options and common stock held by Employee as
set forth in Section 2 below.
2. Employee owns, as of the date hereof, 12,000 shares of Employer's $.04
par value common stock (the "Common Stock"), together with options to purchase
102,500 shares of the Common Stock. These options are exercisable through July
19, 1999, at a price of $1.875 per share.
3. Employee's salary, which is $140,000 per year, has been paid through
April 16, 1999. Employee has accrued six and one-half weeks of vacation time
through the date of this Agreement. On April 30, 1999, Employer shall pay to
Employee two weeks' salary, which shall be applied to the accrued vacation
balance. The balance of the vacation pay, representing four and one-half weeks'
salary, shall be paid by Employer to Employee on or before May 14, 1999.
4. From May 1, 1999, through October 31, 1999, Employer shall pay Employee
a total of $70,000 in the form of salary payments at Employer's normal payroll
intervals.
<PAGE>
5. On or before May 14, 1999, Employer shall pay to Employee the sum of
$85,000, representing Employee's bonus for the fiscal year ended February 28,
1999.
6. Employee hereby exercises, effective May 14, 1999, options to purchase
17,200 shares of Common Stock (the "17,200 Options"). The $46,225 aggregate
exercise price for such shares shall be paid by delivery and endorsement to
Employer of the original certificates for 12,000 shares of Common Stock
beneficially owned by Employee, valued at $2.6875 per share for purposes of this
Agreement. Employee shall cause such certificates to be delivered to Employer
on or before June 14, 1999. If such certificates are not timely delivered, then
Employer may, at its option, cancel the exercise of the 17,200 Options pursuant
to this Section. Upon timely delivery of the certificates to Employer, Employer
shall promptly issue and deliver to Employee certificates for 17,200 shares of
Common Stock in accordance with Employer's past practice concerning its stock
option plans and stock option agreements. Further, on May 14, 1999, Employee
shall apply $12,187.50 of the net amounts payable to him hereunder to the
exercise of additional options to purchase 6,500 shares of Common Stock. On May
14, 1999, Employer shall pay to Employee $34,475 in cancellation of Employee's
unexercised options to purchase 78,800 shares of Common Stock, at a rate of
$.4375 per share.
7. All payments to Employee pursuant to Sections 3, 4, 5 and 6 shall be
subject to withholding of all applicable taxes consistent with Employer's past
practice.
8. Employer and its subsidiaries hereby release Employee from any and all
claims, demands and liabilities whatsoever, whether actual or contingent,
existing as of the date hereof, including, but not limited to, any and all
liability of Employee to Employer and/or its subsidiaries arising from his
employment by or service as a Director of Employer or such subsidiaries;
provided, however, that such release shall not cover any liability arising under
this Agreement.
9. Employee represents that he has returned to Employer all of Employer's
property in his possession, custody or control, including, but not limited to,
all documents and computer-stored information and all copies thereof, and all
communication and other equipment and credit cards; provided, however, that
Employee has retained, with Employer's permission, the laptop computer
previously provided by Employer to Employee.
10. Employee shall not divulge, communicate or use to the detriment of
Employer or for the benefit of any other person or persons, or misuse in any
way, any confidential information pertaining to Employer or any of its
subsidiaries.
11. Notwithstanding any provision of this Agreement to the contrary,
Employer shall indemnify and hold harmless Employee with respect to third-party
claims in accordance with Employer's By-Laws, and Employee shall indemnify and
hold harmless Employer and its subsidiaries and their respective officers,
directors, employees, agents and representatives from and against any and all
liabilities, losses, claims and expenses (including, but not limited to,
reasonable attorneys fees and expenses) arising from third party claims based on
alleged gross negligence or willful misconduct by Employee.
<PAGE>
12. Prior to signing this Agreement, Employee has carefully read and
understood this Agreement and has either carefully reviewed this Agreement with
his attorney or voluntarily waived his right to such review with his attorney.
13. This Agreement contains the entire agreement between the parties
hereto with respect to the subject matter hereof.
14. This Agreement shall be construed and enforced in accordance with the
laws of the State of Florida.
15. This Agreement shall be binding upon and inure to the benefit of the
parties and their respective heirs, successors and assigns.
16. All references in this Agreement to "Employer" shall be deemed to
include any and all of Employer's direct or indirect subsidiaries to the extent
the context may require.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
EMPLOYER:
BCT INTERNATIONAL, INC.
By: William A. Wilkerson
-----------------------
William A. Wilkerson, Chairman
EMPLOYEE:
James H. Kaufenberg
-------------------------
James H. Kaufenberg
<TABLE> <S> <C>
<PAGE>
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<CIK> 0000351541
<NAME> BCT INTERNATIONAL, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 1,143
<SECURITIES> 0
<RECEIVABLES> 10,607
<ALLOWANCES> (1,303)
<INVENTORY> 2,122
<CURRENT-ASSETS> 8,274
<PP&E> 1,442
<DEPRECIATION> (982)
<TOTAL-ASSETS> 15,406
<CURRENT-LIABILITIES> 2,021
<BONDS> 546
60
0
<COMMON> 230
<OTHER-SE> 12,662
<TOTAL-LIABILITY-AND-EQUITY> 15,406
<SALES> 12,817
<TOTAL-REVENUES> 18,606
<CGS> 9,457
<TOTAL-COSTS> 10,939
<OTHER-EXPENSES> 3,883
<LOSS-PROVISION> 350
<INTEREST-EXPENSE> 57
<INCOME-PRETAX> 3,191
<INCOME-TAX> 690
<INCOME-CONTINUING> 2,501
<DISCONTINUED> (327)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,174
<EPS-BASIC> .41
<EPS-DILUTED> .39
</TABLE>
