U. S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark one)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________ to ____________
Commission File No. 0-18686
PAK MAIL CENTERS OF AMERICA, INC.
---------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
Colorado 84-0934575
-------- ----------
(State or other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
3033 S. Parker Road, Suite 1200, Aurora, Colorado 80014
-------------------------------------------------------
(Address of principal executive offices) (zip code)
Issuer's telephone number: 303-752-3500
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report: N/A
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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 [ ]
As of October 15, 1998, there were outstanding 2,989,483 shares of the issuer's
Common Stock, par value $.001 per share.
Transitional Small Business Disclosure Format
Yes [ ] No [X]
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
PAK MAIL CENTERS OF AMERICA, INC. AND SUBSIDIARY
Consolidated Balance Sheets
AUGUST NOVEMBER
31, 1998 30, 1997
(Unaudited)
- --------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 105,428 $ 87,405
105,428
Restricted cash 23,780
Accounts receivable, net of allowance
of $75,972 (1998) and $101,039 (1997) 359,644 262,791
Inventories 38,126 34,514
Prepaid expenses and other current assets 48,113 31,805
Deferred income tax benefit - current 136,100 136,100
----------- -----------
Total current assets 687,411 576,395
----------- -----------
Property and equipment, at cost, net of
accumulated depreciation 97,066 61,892
----------- -----------
Other assets:
Notes receivable, net: 674,119 722,478
Deposits and other 69,678 90,130
Deferred franchise costs, net of accumulated
amortization of $40,094 (1998)
and $36,360 (1997) 200,442 175,943
Capitalized software costs, net 313,622 124,202
----------- -----------
Total other assets 1,257,861 1,112,753
----------- -----------
$ 2,042,338 $ 1,751,040
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities
Current portion of long-term debt $ 0 $ 100,000
Trade accounts payable 291,716 284,355
Accrued commissions 16,716 52,950
Other accrued expenses 53,814 18,580
Due to advertising fund 11,320 23,780
----------- -----------
Total current liabilities 373,566 479,665
----------- -----------
Deferred revenue 638,564 533,518
Stockholders' equity:
Series C redeemable preferred stock,
$1,000 par value; 6% cumulative; 2,500
shares authorized; 2,216.668 shares issued
and outstanding (liquidation
preference $2,216,668) 2,216,668 2,216,668
Common stock, $.001 par value; 200,000,000
shares authorized; 2,989,483 shares issued
and outstanding 2,990 2,990
Additional paid-in capital 5,026,453 5,026,453
Accumulated deficit (6,215,903) (6,508,254)
----------- -----------
Total stockholders' equity 1,030,208 737,857
----------- -----------
$ 2,042,338 $ 1,751,040
=========== ===========
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
PAK MAIL CENTERS OF AMERICA, INC. AND SUBSIDIARY
Consolidated Statement of Operations
THREE MONTHS ENDED NINE MONTHS ENDED
AUGUST 31, AUGUST 31,
(Unaudited) (Unaudited)
--------------------------------------------------------------------------
1998 1997 1998 1997
--------------- -------------- --------------- ----------------
Revenue
<S> <C> <C> <C> <C>
Royalties from franchisees $ 520,671 $ 453,533 $ 1,712,435 $ 1,479,977
Sales of equipment, supplies, and services 168,479 247,899 438,137 560,467
Individual franchise fees 270,640 429,050 497,550 840,870
Area franchise fees, net 49,930 63,294 582,703 90,794
Interest Income 4,722 3,867 16,645 8,139
Other 29,370 36,311 75,116 62,409
--------------- --------------- --------------- ----------------
1,043,812 1,233,954 3,322,586 3,042,656
--------------- --------------- --------------- ----------------
Costs and expenses
Selling, general, and administrative 463,538 400,108 1,415,601 1,360,871
Cost of sales of equipment, supplies and 154,935 222,975 389,942 502,192
services
Commissions on franchise sales 136,582 226,930 399,472 446,372
Royalties paid to area franchises 197,209 158,730 645,913 524,556
Advertising 44,259 38,248 125,556 145,941
Loss on investment in assets held for resale 0 5,124 0 15,575
Depreciation and amortization 19,040 12,489 52,875 37,005
Interest 876 108 876 2,494
--------------- ---------------- --------------- --------------
1,016,439 1,064,712 3,030,235 3,035,006
--------------- ---------------- --------------- --------------
Net income $ 27,373* $ 169,242* $ 292,351* $ 7,650
=============== ================ =============== ==============
Basic income per common share $ 0.01 $ 0.06 $ 0.10 $ 0.00
=============== ================ =============== ==============
Weighted average number of common shares 2,989,483 2,989,483 2,989,483 2,989,483
outstanding
=============== ================ =============== ==============
* No provision for income tax expense is included as the Company has approximately $2,000,000 in net operating loss carryforwards
to offset future taxable income.
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAK MAIL CENTERS OF AMERICA, INC. AND SUBSIDIARY
Consolidated Statement of Cash Flows
NINE MONTHS ENDED
AUGUST 31,
(Unaudited)
----------------------------------------------
1998 1997
----------------- -----------------
Cash flows from operating activities
<S> <C> <C>
Net income $ 292,351 $ 7,650
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 52,875 37,005
Deferred revenue, net 105,046 130,950
Change in operating assets and liabilities-
Accounts receivable (96,853) (35,776)
Inventories (3,612) 11,750
Prepaids and deferred franchise costs (44,541) (88,103)
Deposits and other 20,452 (24,177)
Trade accounts payable 7,361 (31,179)
Accrued expenses (1,000) (8,224)
Due to Ad Fund (12,460) (44,674)
--------------- ----------------
Net cash provided by (used in) operating activities 319,619 (44,778)
--------------- ----------------
Cash flows from investing activities
Capital expenditures, net (84,315) (45,195)
Capitalized software costs (189,420) 0
Proceeds from assets held for sale 0 15,300
Payments (advances) on notes receivable 48,359 (60,243)
---------------- ----------------
Net cash used in investing activities (225,376) (90,138)
---------------- -----------------
Cash flows from financing activities
Payment of debt (100,000) 1,494
Decrease in restricted cash 23,780 0
---------------- -----------------
Net cash used in financing activities (76,220) 1,494
---------------- -----------------
Net decrease increase in cash and cash equivalents 18,023 (133,422)
Cash and cash equivalents, beginning of year 87,405 152,472
----------------- ----------------
Cash and cash equivalents, end of period $ 105,428 $ 19,050
================ =================
Supplemental disclosure of cash flow information -
Cash paid during the period for interest $ 876 $ 2,494
================ =================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
PAK MAIL CENTERS OF AMERICA, INC.
Notes to Consolidated Financial Statements
Note 1 ORGANIZATION AND BUSINESS
-------------------------
Pak Mail Centers of America, Inc. was incorporated in Colorado in 1984 and
is engaged in the business of marketing and franchising Pak Mail service
centers and retail stores which specialize in custom packaging and crating
of items to be mailed or shipped. For the period from December 1, 1997
through October 15, 1998, the Company awarded 40 individual franchises and
6 area franchises and as of October 15, 1998, the Company had 350 domestic
and international individual franchise agreements in existence and 31 area
franchises in existence.
The consolidated financial statements include the accounts of Pak Mail
Centers of America, Inc. and its wholly owned subsidiary, Pak Mail Crating
and Freight Service, Inc. (together, the "Company"). All significant
intercompany transactions and balances have been eliminated in
consolidation.
Note 2 BASIS OF PRESENTATION
---------------------
The accompanying consolidated financial statements have been prepared by
the Company. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. In the opinion of the
Company's management, the interim financial statements include all
adjustments necessary in order to make the interim financial statements not
misleading.
The results of operations for the nine months ended August 31, 1998 are not
necessarily indicative of the results to be expected for the full year.
Note 3 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
-----------------------------------------
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (SFAS 130), which established
standards for reporting and display of comprehensive income, its components
and accumulated balances. Comprehensive income is defined to include all
changes in equity except those resulting from investments by owners and
distributions to owners. Among other disclosures, SFAS 130 requires that
all items that are required to be recognized under current accounting
standards as components of comprehensive income, be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Currently the Company's only component which would comprise
comprehensive income is its results of operations.
Also, in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131), which supersedes Statement of Financial Accounting
Standards No. 14, "Financial Reporting for Segments of a Business
Enterprise." SFAS 131 establishes standards for the way that public
companies report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
<PAGE>
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments
as components of a company about which separate financial information is
available that is evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and in assessing performance.
Management believes that SFAS 131 will not have a significant impact on the
Company's disclosure of segment information in the future.
SFAS 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997, and require comparative information for
earlier periods to be restated.
Item 2. Management's Discussion and Analysis or Plan of Operation
---------------------------------------------------------
The following information should be read in conjunction with the unaudited
consolidated financial statements included herein. See Item 1.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company increased cash by $18,023 ($319,619 provided from operating
activities offset by $225,376 used in investing activities and $76,220 used
in financing activities) during the nine months ended August 31, 1998.
Included in the $76,220 used in financing activities, $100,000 was used to
pay in full the note payable to D. P. Kelly & Associates L.P., a
shareholder and an affiliate of the Company's majority shareholder.
Deferred revenue increased $105,046 to $638,564 and deferred franchise
costs increased $24,499 to $200,442 at August 31, 1998. The increases were
primarily a result of deferring revenue recognition and expensing
commissions on 11 of the 37 new individual franchises awarded during the
nine months ended August 31, 1998. Four of the individual franchise fees
that were deferred as of November 30, 1997 were recognized as revenue
during the nine months ended August 31, 1998.
RESULTS OF OPERATIONS
---------------------
Three months ended August 31, 1998, compared to three months ended
August 31, 1997
---------------------------------------------------------------------------
Total revenues decreased $190,142 (15.4%) from $1,233,954 for the three
months ended August 31, 1997, to $1,043,812 for the three months ended
August 31, 1998. The decrease is primarily attributable to decreases in
individual franchise fees (down 36.9% from $429,050 to $270,640) and sales
of equipment, supplies and services (down 32.0% from $247,899 to $168,479)
offset by an increase in royalties from franchisees (up 14.8% from $453,533
to $520,671).
The $158,410 decrease in individual franchise fees represents the
recognition of revenue from six less franchises during the three months
ended August 31, 1998 as compared to the same prior year period and a
differing mix of per franchise revenue recognition. The Company recognized
revenue on 13 and 19 individual franchises during the three months ended
August 31, 1998 and August 31, 1997, respectively.
<PAGE>
The $79,420 decrease in sales of equipment, supplies and services is
primarily due to the decreased number of new franchisees that purchased
equipment during the three months ended August 31, 1998 as compared to the
same prior year period.
The $67,138 increase in royalties for the three months ended August 31,
1998 as compared to the three months ended August 31, 1997 is due primarily
to increases in the average store volumes and number of stores open.
Total expenses decreased $48,273 (4.5%) from $1,064,712 for the three
months ended August 31, 1997, to $1,016,439 for the three months ended
August 31, 1998. The decrease is primarily attributable to decreases in
commissions on franchise sales (down 39.8% from $226,930 to $136,582) and
cost of sales of equipment, supplies and services (down 30.5% from $222,975
to $154,935) offset by increases in selling, general, and administrative
(up 15.9% from $400,108 to $463,538) and royalties paid to area franchises
(up 24.2% from $158,730 to $197,209).
The $90,348 decrease in commissions on franchise sales is primarily due to
the decreased number of individual franchise sales made during the first
three months ending August 31, 1998 compared to the same prior year period
and the differing mix of commissions.
The $68,040 decrease in cost of sales of equipment, supplies and services
is primarily due to the decreased number of new franchisees that purchased
equipment during the three months ended August 31, 1998 compared to the
same prior year period.
The $63,430 increase in selling, general and administrative relates
primarily to increases in consulting fees, rent and payroll expenses.
The $38,479 increase in royalties paid to area franchises relates to the
increase in percentage of stores that operate within area marketer regions
and an increase in their average store volumes.
Nine months ended August 31, 1998, compared to nine months ended
August 31, 1997
-----------------------------------------------------------------
Total revenues increased $279,930 (9.2%) from $3,042,656 for the nine
months ended August 31, 1997, to $3,322,586 for the nine months ended
August 31, 1998. The increase is primarily attributable to increases in
royalties from franchisees (up 15.7% from $1,479,977 to $1,712,435) and
area franchise fees (up from $90,794 to $582,703) offset by decreases in
sales of equipment, supplies and services (down 21.8% from $560,467 to
$438,137) and individual franchise fees (down 40.8% from $840,870 to
$497,550).
The $232,458 increase in royalties for the nine months ended August 31,
1998 as compared to the nine months ended August 31, 1997 is primarily due
to increases in the average store volumes and the number of stores open.
The $491,909 increase in area franchise fees was primarily due to selling
an area franchise in the country of Japan. There were no area franchise
sales during the nine months ended August 31, 1997. The $90,794 in 1997 was
due to revenue recognition of area franchise sales made prior to fiscal
1997.
<PAGE>
The $122,330 decrease in sales of equipment, supplies and services is
primarily due to the decreased number of new franchisees that purchased
equipment during the nine months ended August 31, 1998 as compared to the
same prior year period.
The $343,320 decrease in individual franchise fees represents the
recognition of revenue from 14 less franchises during the nine months ended
August 31, 1998 as compared to the same prior year period and a differing
mix of franchise revenue recognition. The Company recognized revenue on 24
and 38 individual franchises during the nine months ended August 31, 1998
and August 31, 1997, respectively.
Total expenses decreased $4,771 (0.2%) from $3,035,006 for the nine months
ended August 31, 1997, to $3,030,235 for the nine months ended August 31,
1998. The increase is primarily attributable to increases in royalties paid
to area franchisees (up 23.1% from $524,556 to $645,913) and selling,
general, and administrative (up 4.0% from $1,360,871 to $1,415,601) offset
by decreases in commissions on franchise sales (down 10.5% from $446,372 to
$399,472), cost of sales of equipment, supplies and services (down 22.4%
from $502,192 to $389,942) and advertising (down 14.0% from $145,941 to
$125,556).
The $121,357 increase in royalties paid to area franchises relates to the
increase in percentage of stores that operate within area marketer regions
and an increase in their average store volumes.
The $54,730 increase in selling, general and administrative relates
primarily to increases in consulting fees and payroll expenses offset by
decreases in legal and convention expenses.
The $46,900 decrease in commissions on franchise sales is primarily due to
the decreased number of individual franchise sales made during the first
nine months ending August 31, 1998 compared to the same prior year period
and the differing mix of commissions.
The $112,250 decrease in cost of sales of equipment, supplies and services
is primarily due to the decreased number of new franchisees that purchased
equipment during the nine months ended August 31, 1998 compared to the same
prior year period.
The $20,385 decrease in advertising is primarily related to reduced
advertising in national media during the nine months ended August 31, 1998
compared to the same prior year period.
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The Company's annual meeting of shareholders was held on June 19, 1998, at which
the following items were voted on.
(1) The election of directors.The tally for the election of directors was as
follows:
DIRECTOR FOR WITHHELD
J. S. Corcoran 2,599,377 5,431
John W. Grant 2,599,477 5,331
F. Edward Gustafson 2,599,377 5,431
John E. Kelly 2,598,397 6,411
William F. White 2,599,277 5,531
(2) The motion to approve an amendment to Article IX of the Company's Articles
of Incorporation to increase the number of votes necessary to establish a
quorum at shareholder meetings to one-third of the votes entitled to be
cast on a matter by a voting group. The tally for approval of the amendment
was as follows:
IN FAVOR AGAINST ABSTAINED
2,134,804 3,923 186,871
(3) The motion to approve an amendment to the Company's Articles of
Incorporation to amend Article X to revise the votes necessary to amend the
Company's Articles of Incorporation to a majority of a quorum, and to
delete Articles XI and XII. The tally for approval of the amendment was as
follows:
IN FAVOR AGAINST ABSTAINED
2,130,805 6,715 188,078
Item 5. Other Information.
Effective June 29, 1998, the United States Securities and Exchange
Commission adopted new rules relating to shareholder proposals which
shareholders do not request be included in the Company's proxy statement to be
used in connection with the Company's Annual Meeting of Shareholders. Under
these new rules, proxies that confer discretionary authority will not be able to
be voted on a shareholder proposal to be presented at the Annual Meeting of
Shareholders if the shareholder provides the Company with advance written notice
of the shareholders proposal on a date in the current year that is at least 45
days prior to the date the prior year's proxy materials were mailed to the
Company's shareholders. If a shareholder fails to so notify the Company, proxies
that confer discretionary authority will be able to be voted when the proposal
is presented at the Annual Meeting of Shareholders.
<PAGE>
In accordance with the new rules, proxies which confer discretionary
authority will be able to be voted on shareholder proposals that the
shareholders do no request be included in the Company's proxy statement but plan
to present at the Company's next Annual Meeting of Shareholders unless the
Company receives notice of the proposals by no later than March, 17 1999.
<PAGE>
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.
PAK MAIL CENTERS OF AMERICA, INC.
(Registrant)
Date: October 15, 1998
By: /s/ John E. Kelly
--------------------------------------
John E. Kelly
President
By: /s/ Raymond S. Goshorn
--------------------------------------
Raymond S. Goshorn
Secretary and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> AUG-31-1998
<CASH> 105,428
<SECURITIES> 0
<RECEIVABLES> 435,616
<ALLOWANCES> 75,972
<INVENTORY> 38,126
<CURRENT-ASSETS> 687,411
<PP&E> 518,752
<DEPRECIATION> 421,686
<TOTAL-ASSETS> 2,042,338
<CURRENT-LIABILITIES> 373,566
<BONDS> 0
0
2,216,668
<COMMON> 2,990
<OTHER-SE> (1,189,450)
<TOTAL-LIABILITY-AND-EQUITY> 2,042,338
<SALES> 438,137
<TOTAL-REVENUES> 3,322,586
<CGS> 154,935
<TOTAL-COSTS> 1,435,327
<OTHER-EXPENSES> 1,594,908
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 292,351
<INCOME-TAX> 0
<INCOME-CONTINUING> 292,351
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 292,351
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.00
</TABLE>
