It was a disaster. In fact, it might have been the end of Puff Pac had the Koreans not made an offer for 1991 that Puff Pac couldn't refuse. Mantae was willing to extend a $2-million line of credit, plus 90-day terms. The Koreans said they had worked out the production bugs and were ready to try again. "We had no choice but to accept," says chief financial officer Harry Mitchell about the Mantae offer. "It was the only way we could keep going."
So in January 1991 Puff Pac ordered 8 million bags from Mantae, betting the ranch once again on the Koreans. Trotter was sure he could move 8 million bags. The independent sales groups he was marketing through were geared to start selling the gift-wrap pouches to Wal-Mart, Woolworth's, Ekard Drug, and more than 3,000 other stores.
By midsummer, however, things were turning ugly with Mantae. Production was wildly behind schedule. Only 500,000 bags had been made, mostly by Puff Pac's own people working in Mantae's Walnut, Calif., factory on a Puff Pacbuilt fabrication machine that Mantae had yet to pay for.
On Labor Day a desperate Pharo took action. He and Mitchell rented a dump truck, drove to Walnut, packed up the machinery, and installed it in Puff Pac's warehouse in Valencia.
* * *
All last fall, Puff Pac scrambled to survive.
It was now in the manufacturing business, like it or not, and the transition was costly. Adding three shifts of labor to run the machine and handle ancillary work boosted biweekly payroll from $20,000 to $40,000.
At least now the company had some control over its destiny, but the damage was severe. Bags were being shipped as fast as they came off the machine, but several million bags promised to distributors simply could not be produced in time. "That's caused me a lot of problems," says Trotter. "The minute you don't deliver product, the sales reps don't even know your name."
But by dint of 18-hour days, an unshakable belief in itself, and almost miraculous luck, the company managed to pull back from the brink.
Money suddenly appeared to cover operating losses. Don Farrell in Vancouver was able to convert stock options and warrants to generate cash. In December a Swiss investment bank came through with a $1.5-million investment. And the sales that were made generated greater profits than expected. "We projected a gross margin for the gift wrap of about 42%," says Saltiel. "With the Koreans out of the picture, it is closer to 50% or 55%."
The company urgently needed another machine to service its contracts with Unique Industries, a major party-goods reseller located in Philadelphia, and the others. Amazingly, it found a small company in Rhode Island, Chase Machine Co., which agreed to take a 15% down payment in the form of Puff Pac stock.
Chase would build a brand-new machine, a second-generation model capable of producing 12 million bags a year. With technology chief Henry Swartz on the scene, Chase turned it out in three months.
And as 1991 was winding down, Saltiel was closing in on his first two licensing deals, one with a Dutch company and one with a German outfit, which would give them rights to manufacture and sell Puff Pac gift wrap and industrial bags in Europe. Combined, the licenses would be worth $3.8 million, on top of which Puff Pac would collect 6% royalties on gross sales.
The company, finally, seemed to be on its way. For 1992 it projects sales of $16.5 million, half in gift wrap, half in industrial bags, and with a swift ramp upward in the following years.
But all that hinges on Puff Pac's ability to clear remaining hurdles. "We need the ability to buy materials properly, cost-effectively, and at the right time," says Saltiel. "We need to get the quality that's required. And we need to decide how much of our finite capacity to devote to running industrial and how much to running retail. We get three stars for reacting quickly to an emergency. But I don't think we have in house the expertise to be able to plan a solid production process, and that's what we need."
But Pharo, despite all he's been through, remains as optimistic as the bumper sticker on his car. "Life is great," it reads. "Business is terrific. People are wonderful."
* * *
EXECUTIVE SUMMARY
THE COMPANY:
Puff Pac Industries Inc., Valencia, Calif.
Concept: Capitalize on landfill crisis and environmental concern, with new, balloonlike packaging product that reduces waste from industrial-packing materials by more than 90%. Further leverage product by selling decorated versions as inflatable gift wrap
Projections: Combined sales from industrial and retail customers of $16.5 million in 1992, rising to $78 million in 1995. In 1991, loss of $1.3 million on revenues of $2.1 million
Hurdles: Assuring users that packaging in inflated bags is as effective as established methods such as foams, bubble wraps, and polystyrene peanuts; developing a reliable production process; raising enough capital to install adequate manufacturing capability
THE FOUNDER
Dan Pharo
Age: 40
Family: Married, two children
Source of idea: Accidentally overinflated a balloon
Personal funds invested: $125,000
Equity held: 27%
Salary: $50,000
Education: Art and business major at Arizona State University; dropped out a year before graduating
Other companies started: Exotic Woods Inc., 1974-1977; Grapevine Tables Inc., 1977-1980; Dan Pharo Studio, 1981-1985; Yuppie University Inc., 1985-1988
Last job held: President, Yuppie University Inc.
FINANCIALS
Puff Pac Industries Projected Operating Statement
(in $ thousands) 1991 1992 1993
Retail sales (gift wrap) $1,909 $8,000 $18,000
