0000791014-95-000015.txt : 19950915 0000791014-95-000015.hdr.sgml : 19950915 ACCESSION NUMBER: 0000791014-95-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950731 FILED AS OF DATE: 19950913 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAIL BOXES ETC CENTRAL INDEX KEY: 0000791014 STANDARD INDUSTRIAL CLASSIFICATION: PATENT OWNERS & LESSORS [6794] IRS NUMBER: 330010260 STATE OF INCORPORATION: CA FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-14821 FILM NUMBER: 95573449 BUSINESS ADDRESS: STREET 1: 6060 CORNERSTONE CT CITY: SAN DIEGO STATE: CA ZIP: 92121-3791 BUSINESS PHONE: 6194558800 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended July 31, 1995 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from to Commission File Number 0-14821 MAIL BOXES ETC. (Exact name of registrant as specified in its charter) CALIFORNIA 33-0010260 (State of Incorporation) (I.R.S. Employer Identification No.) 6060 Cornerstone Ct. West, San Diego, California 92121 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (619) 455-8800 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, No Par Value 11,120,890 (Class) (Outstanding at July 31, 1995) PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MAIL BOXES ETC. CONDENSED CONSOLIDATED BALANCE SHEETS
July 31, April 30, ASSETS 1995 1995 (Unaudited) Current Assets: Cash and cash equivalents $ 1,439,456 $ 390,841 Restricted cash - franchisee deposits 1,758,042 1,613,569 Short-term investments 12,036,184 10,036,718 Accounts receivable, net 6,755,984 6,723,128 Receivable from National Media Fund 1,100,000 1,600,000 Inventories 770,043 983,095 Current portion of notes receivable 6,516,859 6,065,275 Current portion of net investment in sales-type and direct financing leases 2,474,882 2,488,654 Deferred income taxes 1,453,583 1,453,583 Re-acquired area and center rights held for resale 772,924 1,015,744 Other 1,074,000 1,005,482 Total current assets 36,151,957 33,376,089 Notes receivable, net 11,973,457 11,429,381 Net investment in sales-type and direct financing leases 8,561,192 8,839,949 Property and equipment, net 5,627,151 5,615,060 Excess of cost over assets acquired, net 483,729 498,078 Reacquired area rights 2,991,796 3,030,670 Deferred income taxes 651,322 651,322 Other assets 598,118 852,555 Total assets $67,038,722 $64,293,104
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities: Accounts payable $1,211,594 $1,151,375 Franchisee deposits 2,434,951 2,152,904 Royalties, referrals and commissions payable 2,321,051 2,448,624 Accrued employee expenses and related taxes 887,914 1,462,933 Other accrued expenses 1,523,590 1,173,580 Income taxes payable 1,662,875 717,381 Current maturities of debt and notes payable 1,228,893 1,704,848 Total current liabilities 11,270,868 10,811,645 Long-term debt, net of current maturities 1,390,045 1,336,627 Shareholders' equity: Preferred stock, no par value, 10,000,000 shares authorized, with none issued and outstanding -- -- Common stock, no par value, 40,000,000 shares authorized, with 11,120,890 and 11,058,387 shares issued outstanding at July 31, 1995 and April 30, 1995, respectively 15,065,301 14,454,524 Retained earnings 39,312,508 37,690,308 Total shareholders' equity 54,377,809 52,144,832 Total liabilities and shareholders' equity $67,038,722 $64,293,104 See accompanying notes.
MAIL BOXES ETC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three months ended July 31, 1995 1994 Revenue: Royalty and marketing fees $6,463,486 $4,828,987 Franchise fees 1,779,559 1,510,216 Sales of supplies and equipment 2,457,860 1,804,989 Interest income on leases and other 1,683,959 1,212,134 Company centers 418,436 369,501 Total revenues 12,803,300 9,725,827 Cost and Expenses: Franchise operations 3,073,603 2,440,985 Franchise development 1,263,523 1,013,909 Cost of supplies and equipment sold 1,940,539 1,379,430 Marketing 1,131,838 1,016,849 General and administrative 2,444,700 1,769,590 Company centers 424,775 342,055 Total cost and expenses 10,278,978 7,962,818 Operating Income 2,524,322 1,763,009 Interest on investments and other 133,880 118,910 Income before provision for income taxes 2,658,202 1,881,919 Provision for income taxes 1,036,002 767,988 Net income $1,622,200 $1,113,931 Net income per common share: $ .14 $ .10 Weighted average common and common equivalent shares outstanding 11,208,445 11,537,117 See accompanying notes.
MAIL BOXES ETC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three months ended July 31, 1995 1994 Operating Activities: Net income $1,622,200 $1,113,931 Adjustments to reconcile net income to net cash provided from (used in) operating activities: Depreciation and amortization 256,917 260,830 Gain on sale of equipment under sales-type lease agreements (154,951) (110,407) Changes in assets and liabilities: Restricted cash (144,473) (417,487) Accounts and notes receivable (1,028,516) (926,259) Receivable from National Media Fund 500,000 (2,126,383) Assets leased to franchisees and inventories (205,888) (610,270) Re-acquired area and center rights 242,820 3,272 Other current assets (68,518) (40,766) Other assets 254,437 (111,911) Accounts payable 60,219 284,167 Franchisee deposits 282,047 562,757 Royalties, referrals and commissions payable (127,573) (174,933) Accrued employee expenses and related taxes (575,019) 43,426 Other accrued expenses 350,010 99,556 Income taxes payable 945,494 752,043 Net cash flows provided from (used in) operating activities 2,209,206 (1,398,434) Investing Activities: Net change in short-term investments (1,999,466) 956,087 Additions to property and equipment (106,255) (81,731) Principal payments received on sales-type leases 866,420 801,200 Re-acquired area rights -- (514,960) Net cash flows provided from (used in) investment activities (1,239,301) 1,160,596 Financing Activities: Borrowings under revolving loan 450,000 3,324,072 Repayments under revolving loan (950,000) -- Repayments on notes payable (32,067) -- Repurchase of common shares (191,471) (2,918,960) Proceeds from the issuance of common shares 673,736 272,400 Other changes in equity 128,512 (24,998) Net cash flows provided from financing activities 78,710 652,514 Increase in cash and cash equivalents 1,048,615 414,676 Cash and cash equivalents at beginning of period 390,841 251,055 Cash and cash equivalents at end of period $1,439,456 $ 665,731 Supplemental Disclosure for Cash Flow Information: Cash paid during the period for income taxes $ 112,108 $ 45,518 Interest 47,259 4,617 Supplemental Schedule with Non-Cash Investment and Financing Activities: Equipment sold under sales-type agreements $ 573,891 $ 501,851 Additions to debt for acquisition of equipment 109,530 -- See accompanying notes.
PART I - FINANCIAL INFORMATION MAIL BOXES ETC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ITEM 1. BASIS OF PRESENTATION: Note 1. Presentation The condensed consolidated balance sheet as of July 31, 1995, the consolidated statements of income for the three-month periods ended July 31, 1995 and 1994, and the consolidated statements of cash flows for the three-month periods then ended have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the 1995 Annual Report on Form 10-K. The results of operations for the quarter ended July 31, 1995 are not necessarily indicative of the operating results for the full year. Certain reclassifications have been made to prior period balances to conform to current period presentations. Note 2. Litigation The company has become subject to various lawsuits and claims from its franchisees and employees in the course of conducting its business. The company intends to vigorously defend these actions and believes that the ultimate resolution will not have a material adverse effect on the company's financial condition or liquidity. However, there can be no assurance that an unfavorable result would not have a material adverse effect on the company's results of operations. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS: Three months ended July 31, 1995 compared to Three months ended July 31, 1994: Revenues for Mail Boxes Etc. ("MBE" or the "Company") for the three months ended July 31, 1995, increased by $3,077,473 or 32% from the same quarter of the prior year. Revenues from royalty and marketing fees increased by $1,634,499 or 34% over the prior ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS (Continued): Three months ended July 31, 1995 compared to Three months ended July 31, 1994: period. The increase in royalty and marketing fees is due to the 23% same store sales increase experienced by the network during the first quarter of FY 96 and the increased number of centers in operation, 2789 at July 31, 1995, compared with 2447 at July 31, 1994. Revenue from franchise fees increased by $269,343 or 18%. Revenues from individual franchise fees increased by $194,800 or 15% compared to the three months ended July 31, 1994 as the result of the sale of 65 new Individual Franchises sold in the first quarter of FY 96 as compared to 56 during the first quarter of FY 95. Revenues from the sale of foreign master licenses decreased by $75,000 because no master license was sold in the first quarter of FY 96. MBE believes that master license sales may be a less significant source of revenue during FY 96 and beyond and that the timing of these sales will not be predictable. The remainder of this revenue category includes international sales of individual and area franchises by master licensees for $108,687 which represents more than 200% increase as compared to the first quarter of FY 95, and transfer and renewal fees of $213,922 which represents an 82% increase over same period in FY 95. Revenues from the sale of supplies and equipment increased by $652,871 or 36% because there were more individual centers opened during the first quarter of FY 96 (84 compared to 77) and there was a strong emphasis on center upgrades during this quarter. Interest income on leases and other increased by $471,825 or 39% as compared to the three months ended July 31, 1994. The major components of this revenue category include interest income earned on leases and notes receivable, late fees, finance charges, and various administrative fees. Interest income on leases decreased slightly by $21,000. Interest on notes receivable increased by $165,907 or 51%. This increase resulted from additional financing programs available to franchisees. Administrative fees on national vendor contracts increased more than 160% as the transaction volumes increased. Late fees increased by $118,797 and finance charges remained virtually the same. Revenues from the Company owned and operated centers increased by $48,935 or 13%. This slight increase is due to the third company owned center which started its operation in November 1994. Cost and expenses for the three months ended July 31, 1995 increased by $2,316,160 or 29% when compared to the three months ended July 31, 1994. The increase in Franchise operations expense was $632,618 or 26% over FY 95 and resulted primarily from the increase in royalties paid to area franchisees for their share of the royalty income, which they earn, in part by providing ongoing support to the network. These costs will generally increase in the same manner as the network's royalty revenue growth. Royalties paid to area franchisees increased by $520,205 or 27% over first quarter FY 95. This increase is directly related to the increase in royalty and marketing fees booked during the first quarter of FY 96. Franchise development expenses increased by $249,614 or 25%. The increase reflects increased domestic and international sales efforts and the resultant higher commissions paid. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS (Continued): Three months ended July 31, 1995 compared to Three months ended July 31, 1994: Cost of supplies and equipment increased by $561,109 or 41%. This increase is due to the increase in sales of supplies and equipment as discussed earlier. The gross margin decreased from 24% to 21% because of the product mix. Marketing expenses increased by $114,989 or 11% when compared to the first quarter ended July 31, 1994. Marketing expenses will continue to grow as the network grows. General and administrative expenses increased by $675,110 or 38% over the first quarter of FY 95. This increase is primarily attributed to the growth of franchise centers in operation, and increase in the reserves. These expenses will continue to grow with domestic and international growth of the Network. As of July 31, 1995, there were 2,435 MBE centers operating in the USA and 354 MBE centers operating outside the USA. The Company centers' cost and expenses increased by $82,720 or 24%. The Company centers' combined operating margin was negative in first quarter FY 96. One of the primary objectives of the Company centers is to develop and test new products and services and, as a result, their operating expenses are higher than might be experienced by a typical owner-operated franchise. Other income (interest on investments and other) increased slightly by $14,970 or 13% for the quarter ended July 31, 1995, compared to the quarter ended July 31, 1994. Net income increased by 46% in first quarter FY 96. Earnings per share increased from $.10 to $.14. LIQUIDITY AND CAPITAL RESOURCES Working capital at July 31, 1995 was $24,881,089 compared to $22,564,444 at April 30, 1995. The Company believes it has adequate financial resources for its present and projected operating requirements. The Company has become subject to various lawsuits and claims from its franchisees and employees in the course of conducting its business. The Company intends to vigorously defend these actions and believes that the ultimate resolution will not have a material adverse effect on the Company's financial condition or liquidity. However, there can be no assurance that an unfavorable result would not have a material adverse effect on the Company's operating results. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In Helm et al v. Mail Boxes Etc. and MBE v. B.J. Postal Service Corp. et al, which is described in the Company's 10-K Report for the year ended April 30, 1995, the court has ordered the parties to proceed with the trial of test cases for four individual franchisees. Discovery efforts are continuing and those cases are scheduled to begin trial in February 1996. Plaintiff franchisees in Helm and B.J. Postal Service have also filed a motion seeking leave to amend their complaint and delete several causes of action, including one based on fraud, breach of contract, and breach of the implied covenant of good faith, and add a new cause of action for negligent misrepresentation. The Company is opposing the Plaintiff's motion. In Conklin et al v. Mail Boxes Etc. USA, Inc. which is described in the Company's 10-K Report for the year ended April 30, 1995, the Plaintiffs have filed an amended complaint which added three additional franchisees as Plaintiffs. The Plaintiffs also abandoned their claims for breach of the implied covenant of good faith and are seeking declaratory relief to determine their obligations under the franchise agreements. Other than MBE's right to seek injunctive and other equitable relief, the court has stayed all further action in this case, including discovery. The Company intends to vigorously defend these actions and believes that the ultimate resolution will not have a material adverse effect on the Company's financial condition or liquidity. However, there can be no assurance that an unfavorable result would not have a material adverse effect on the Company's results of operations. ITEM 4. SHAREHOLDER VOTING On August 25, 1995, the Annual Meeting of Shareholders was held. The Shareholders elected all of the nominees for Director, approved the Company's 1995 Employee Stock Option Plan, approved the Company's 1995 Stock Option Plan for Non-Employee (Outside) Directors, and ratified the Board's selection of auditors. The results of the shareholder voting are set forth below. Each of the nominees for director was elected with the following votes: VOTES VOTES NOMINEE STATUS FOR WITHHELD Michael Dooling Re-elected 9,241,553 230,028 Anthony W. DeSio Re-elected 9,247,868 223,713 Robert J. DeSio Re-elected 9,233,322 238,259 James F. Kelly Re-elected 9,334,041 137,540 Daniel L. La Marche Re-elected 9,328,637 142,944 Harry Casari New Nominee 9,341,335 130,246 Joel Rossman New Nominee 9,252,688 218,893 ITEM 4. SHAREHOLDER VOTING (Continued) The proposal to adopt the 1995 Stock Option Plan for Employees received the following votes: For Against Abstain Broker Non-Votes 6,341,254 1,078,132 29,740 2,022,455 The proposal to adopt the 1995 Stock Option Plan for Non- Employee (Outside) Directors received the following votes: For Against Abstain Broker Non-Votes 6,755,050 595,171 40,710 2,080,650 The proposal to ratify the selection of Ernst & Young LLP as independent auditors for the next fiscal year received the following votes: For Against Abstain Broker Non-Votes 8,841,629 613,335 16,617 -0- ITEM 6. REPORTS ON FORM 8-K (b) No reports on Form 8-K were filed during the quarter ended July 31, 1995. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MAIL BOXES ETC. Registrant By: Gary S. Grahn Date: 9-12-95 Gary S. Grahn Chief Financial Officer EX-27 2 ARTICLE 5 FIN. DATA SCHEDULE FOR 1ST QTR 1996 10-Q
5 1,000 APR-30-1996 MAY-01-1995 JUL-31-1995 3-MOS 3,197 12,036 29,317 2,971 770 36,152 9,273 3,645 67,039 11,271 0 0 0 15,065 39,313 67,039 2,458 12,803 1,941 10,279 0 0 0 2,658 1,036 1,622 0 0 0 1,622 .14 .14