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 May 31, 2000
[ ] 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 of (I.R.S. Employer
Incorporation or Organization) Identification No.)
7173 S. Havana St., Englewood, Colorado 80112
(Address of principal executive offices) (zip code)
Issuer's telephone number: 303-957-1000
Former name, former address and former fiscal year, if changed since last
report: N/A
As of May 31, 2000, there were outstanding 3,873,738 shares of the issuer's
Common Stock, par value $.001 per share.
Transitional Small Business Disclosure Format
Yes [ ] No [X]
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
PAK MAIL CENTERS OF AMERICA, INC. AND SUBSIDIARY
Consolidated Balance Sheets
MAY NOVEMBER
31, 2000 30, 1999
(Un-audited)
--------------------------
Assets
<S> <C> <C>
Current assets
Cash and cash equivalents $ 94,677 $ 44,536
Restricted cash -0- 1,880
Accounts receivable, net of allowance
of $107,272 (2000) and $135,716 (1999) 634,946 567,945
Inventories 76,800 101,357
Prepaid expenses and other current assets 160,687 29,274
Deferred income tax benefit - current 347,500 347,500
----------- -----------
Total current assets 1,314,610 1,092,492
----------- -----------
Property and equipment, at cost, net of accumulated depreciation 138,285 179,768
----------- -----------
Other assets:
Notes receivable, net: 514,100 587,368
Deposits and other 151,258 145,902
Deferred franchise costs, net of accumulated amortization of
$82,242 (2000) and $73,062 (1999) 53,362 95,191
Capitalized software costs, net 370,386 850,854
----------- -----------
Total other assets 1,089,106 1,679,315
----------- -----------
$ 2,542,001 $ 2,951,575
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities
Trade accounts payable $ 753,630 $ 315,375
Accrued bonuses & commissions 88,842 157,168
Other accrued expenses 38,330 147,073
Deferred rent 70,630 55,960
Due to advertising fund 12,122 1,880
Preferred dividends payable 66,500 133,000
Notes payable 380,000 120,000
----------- -----------
Total current liabilities 1,410,054 930,456
----------- -----------
Deferred revenue 645,435 663,189
Stockholders' equity:
Series C redeemable preferred stock, $1,000 par value;
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;
3,873,738 shares issued and outstanding 3,874 3,874
Additional paid-in capital 5,113,995 5,113,995
Accumulated deficit (6,848,025) (5,976,607)
----------- -----------
Total stockholders' equity 486,512 1,357,930
----------- -----------
$ 2,542,001 $ 2,951,575
=========== ===========
See notes to consolidated financial statements.
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PAK MAIL CENTERS OF AMERICA, INC. AND SUBSIDIARY
Consolidated Statement of Operations
THREE MONTHS ENDED SIX MONTHS ENDED
MAY 31, MAY 31, MAY 31, MAY 31,
(Un-audited) (Un-audited) (Un-audited) (Un-audited)
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue
Royalties from franchisees $ 628,293 $ 570,093 $ 1,447,929 $ 1,311,993
Sales of equipment, supplies, and services 253,689 196,568 489,909 347,082
Individual franchise fees 305,310 193,600 359,210 264,450
Area franchise fees, net 16,979 49,930 140,799 180,930
PSS licensing & maintenance fees 88,150 0 149,500 0
Interest Income 1,281 3,002 1,315 3,002
Other (4,899) 29,879 24,914 44,004
----------- ----------- ----------- -----------
1,288,803 1,043,072 2,613,576 2,151,461
----------- ----------- ----------- -----------
Costs and expenses
Selling, general, and administrative 698,309 459,574 1,330,726 948,770
Cost of sales of equipment, supplies and services 228,073 166,256 524,207 301,719
Commissions on franchise sales 96,890 89,720 129,230 128,670
Royalties paid to area franchises 267,206 267,548 694,044 546,773
Advertising 49,785 32,596 115,817 72,612
Depreciation and amortization 21,000 23,100 42,000 44,100
Amortization - miscellaneous 7,299 0 14,508 0
Impairment of capitalized software costs 362,854 0 557,854 0
Interest 7,914 0 10,107 0
----------- ----------- ----------- -----------
1,739,330 1,038,794 3,418,493 2,042,644
----------- ----------- ----------- -----------
Net (loss) income (450,527) 4,278 (804,917) 108,817
Preferred stock dividend 66,500 33,250 66,500 66,500
----------- ----------- ----------- -----------
Net (loss) income attributable to common shares $ (517,027) $ (28,972) $ (871,417) $ 42,317
=========== =========== =========== ===========
Basic (loss) income per common share $ (0.13) $ (0.01) $ (0.22) $ 0.01
Weighted average number of common shares outstanding 3,873,738 3,523,928 3,873,738 3,258,182
See notes to consolidated financial statements.
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PAK MAIL CENTERS OF AMERICA, INC. AND SUBSIDIARY
Consolidated Statement of Cash Flows
SIX MONTHS ENDED
MAY 31, MAY 31,
(Un-audited)
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities
Net (loss) income $(871,417) $ 42,317
Adjustments to reconcile net (loss)income to net cash
From operating activities:
Depreciation 42,000 41,000
Amortization - Miscellaneous 14,508 12,275
Amortization - PSS Software 557,854 -0-
Deferred Rent 14,670 -0-
Deferred revenue, net (17,754) (74,911)
Change in operating assets and liabilities-
Accounts receivable (67,001) (26,945)
Inventories 24,557 (228)
Prepaids and deferred franchise costs (113,571) (52,170)
Notes receivable 73,268 66,094
Deposits and other (5,356) (33,739)
Trade accounts payable 438,255 211,913
Accrued expenses (162,402) (167,700)
Due to Ad Fund 10,242 (3,880)
--------- ---------
Net cash (used)/provided by operating activities (62,147) 14,026
--------- ---------
Cash flows from investing activities
Capital expenditures (5,706) (73,613)
Capitalized software costs (77,386) (173,276)
--------- ---------
Net cash used by investing activities (83,092) (246,889)
--------- ---------
Cash flows from financing activities
Short-term debt - Borrowing/(Payment) 260,000 -0-
Payment of declared dividends (133,000) (133,000)
Preferred stock dividends payable 66,500 66,500
Issuance of Common Stock -0- 88,425
--------- ---------
Net cash provided by financing activities 193,500 21,925
--------- ---------
Net increase/(decrease) in cash and cash equivalents 48,261 (210,938)
--------- ---------
Cash and cash equivalents, beginning of year 46,416 234,844
Cash and cash equivalents, end of period $ 94,677 $ 23,906
========= =========
Supplemental disclosure of cash flow information -
Cash paid during the period for interest $ 7,914 $ --
See notes to consolidated financial statements
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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 March 1, 2000 through
May 31, 2000, the Company awarded 6 individual franchises. As of March 31,
2000, the Company had 341 domestic and 35 international individual stores
operating, and 23 domestic and 7 international area franchises in
existence. In addition, 26 domestic franchise agreements have been issued
for stores not yet operating.
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
inter-company transactions and balances have been eliminated in
consolidation.
Note 2 BASIS OF PRESENTATION
----------------------------
The Company has prepared the accompanying consolidated financial
statements. 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 three months ended May 31, 2000 and for
the six months ended May 31, 2000 are not necessarily indicative of the
results to be expected for the full year.
Item 2. Management's Discussion and Analysis or Plan of Operation
-----------------------------------------------------------------
The following information should be read in conjunction with the un-audited
consolidated financial statements included herein. See Item 1.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company used cash of $62,147 in operations and $83,092 in investing
activities during the six months ended May 31, 2000. $193,500 in cash was
provided by financing activities during the six months ended May 31, 2000
with the primary source of these funds being $260,000 borrowed against a
$300,000 line of credit.
5
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Deferred revenue decreased $17,754 to $645,435 as a result of recognizing
the sale of new franchises as training was completed. Nine new franchisees
completed training or opened their store during the period and revenue of
$359,210 was recognized on these sales. The Company anticipates that all of
the currently deferred individual franchise fees and commissions will be
recognized in fiscal 2000.
RESULTS OF OPERATIONS
---------------------
Three months ended May 31, 2000, compared to three months ended May 31,
1999
-----------------------------------------------------------------------
Revenues
--------
Total revenues increased $245,731 (23.56%) from $1,043,072 for the three
months ended May 31, 1999, to $1,288,803 for the three months ended May 31,
2000. The increase is primarily attributable to increases in royalties from
franchisees (up 10.21% from $570,093 to $628,293), individual franchise
fees (up 57.70% from $193,600 to $305,310), sales of equipment, supplies
and services (up 29.06% from $196,568 to $253,689) and PSS licensing and
maintenance fees (up from $0 to $88,150).
The $58,200 increase in royalties for the three months ended May 31, 2000
as compared to the three months ended May 31, 1999, is due to an increase
in average store volume and the increase in number of stores open.
The $111,710 increase in individual franchise fees is due to the increased
number of store sales recognized during the three month period ended May
31, 2000 as compared to the same prior year period.
The $57,121 increase in sales of equipment, supplies and services is due to
the increased number of new franchisees that purchased equipment and the
Company's decision to assemble and sell computers during the three months
ended May 31, 2000 as compared to the same prior year period. New computers
are required to run the new PSS software developed by the Company. The
Company recognized revenue from PSS licensing and maintenance fees during
the quarter ended May 31, 2000, whereas the software had not been developed
or licensed during the quarter ended May 31, 1999.
Costs and Expenses
------------------
Total expenses increased $700,536 (67.44%) from $1,038,794 for the three
months ended May 31, 1999, to $1,739,330 for the three months ended May 31,
2000. The increase is primarily attributable to increases in selling,
general and administrative (up 51.95% from $459,574 to $698,309), cost of
sales of equipment, supplies and services (up 37.18% from $166,256 to
$228,073) and the $362,854 write-off of a significant portion of the
development cost of the PSS Version 1 software which did not function as
anticipated.
The $238,735 increase in selling, general and administrative for the three
months ended May 31, 2000 as compared to the same prior year period relates
primarily to rent paid for two facilities due to the inability to rent the
Company's previous office space, an increase in monthly rent at the new
facility, an increase in the allowance for bad debt of $67,648, an increase
in wages in benefits of $57,434 due to hiring additional employees to
service the PSS software, and an increase in telephone expenses from adding
additional telephone lines to handle the PSS software.
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The $61,817 increase in cost of goods sold is due to an associated increase
in sales of equipment.
There is a $362,854 increase in impairment of capitalized software costs
for the three months ended May 31, 2000 as compared to the same prior year
period. Due to the non-functionality of certain pieces of the PSS software
program version 1, the decision has been made to completely re-write the
program using a different database to ease the maintenance and modularity
of the program. Significant costs were incurred to correct bugs in the
version 1 program during the month of February 2000. PSS version 1 is still
being used by the franchisees but the program is unstable, locks up
frequently and is not suitable for continued use. Portions of version 1
costing $293,000 will be integrated into PSS version 2 and will be
amortized over a three-year period along with the PSS version 2 development
costs now being incurred. The new PSS version 2 costs are expected to total
approximately $250,000 for a combined capital cost of $543,000.
Amortization of the capitalized costs will begin on the release date of PSS
version 2, currently estimated as September 1, 2000. For the three-month
period of March 1, 2000 to May 31, 2000, $362,854 of the original
development cost was impaired. This impairment, combined with the $195,000
impairment for the first quarter of 2000, totals a $557,854 write-off as
impaired on a total capitalized expenditure of $850,854, amounting to a
65.56% write-off.
Six months ended May 31, 2000 compared to the six months ended May 31, 1999
---------------------------------------------------------------------------
Revenue
-------
Total revenues increased 21.48% or $462,115 for the six months ended May
31, 2000 compared to the six months ended May 31, 1999. The main increases
were in royalties (up 10.36% from $1,311,993 to $1,447,929), sales of
equipment, supplies and services (up 41.15% from $347,082 to $489,909),
individual franchise fees (up 35.83% from $264,450 to $359,210), and PSS
license & maintenance fees (up from $0 to $149,500).
The $135,936 increase in royalties primarily results from the increased
number of stores operating and an increase in average store volume.
The increase of $142,827 in sales of equipment supplies and services is
attributable to the Company's entry into the computer hardware sales
business.
The $94,760 increase in individual franchise fees is due to the increased
number of store sales recognized during the period ended May 31, 2000 as
compared to the same prior year period.
The increase in PSS license & maintenance fees is a result of developing a
software package and selling licenses and maintenance services to the
Company's franchisees.
Costs and Expenses
------------------
Costs and expenses increased 67.36% or $1,375,849 for the six months ended
May 31, 2000 compared to the six months ended May 31, 1999. The main
increases for the six months ended May 31, 2000 as compared to the prior
year period were in selling, general and administrative (up 40.26% from
$948,770 to $1,330,726), cost of sales of equipment, supplies, and services
(up 73.74% from $301,719 to $524,207), royalties paid to area franchisees
(up 26.93% from $546,773 to $694,044), advertising (up 59.50% from $72,612
to $115,817) and the impairment of capitalized software costs.
7
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The increase of $381,956 in selling, general and administrative expense is
due primarily to rent expense up $108,000 a result of the inability to find
a sub-lessee for the facilities which were vacated on Parker Road, an
increase in monthly rent at the new facility on Havana Street and an
increase in the allowance for bad debt of $67,648.
The increase of $222,488 in cost of sales of equipment, supplies, and
services is due to the Company's decision to sell computer hardware to the
franchisees. In the six month period ended May 31, 1999, there were no
sales of computer hardware and no associated computer hardware cost of
goods sold.
The increase of $147,271 in royalties paid to area franchisees is due to
the increase in royalties and the area in which they are earned. At
present, the fastest growing area franchise has the highest percentage
payout of total royalties and therefore the percentage of royalties paid to
area franchisees is increasing as a percentage of total royalties.
The increase of $43,205 in advertising is due primarily to increased
spending resulting from decreased sales.
The 557,854 increase in impairment of capitalized software costs is due to
the write-off of non-functional portions of the PSS software program,
version 1.
PART II. OTHER INFORMATION
Item 3. Legal Proceedings.
As disclosed in the Company's Annual Report on Form 10-KSB for its fiscal
year ended November 30, 1999, on February 4, 2000 the Company filed
Arapahoe County District Court Case No. 00 CV 295, Division 5 against its
Ramona, California franchisee, Sherry Foreman. The Complaint asserted
causes of action for breach of contract and unjust enrichment seeking to
recover past due royalties and advertising fees, future royalties and
reimbursements of sums advanced on Foreman's behalf. On May 23, 2000, the
Company obtained a default judgment against Foreman in the amount of
$90,409.48. The Company has retained collection counsel located in Agoura
Hills, California.
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
27.0 Financial Data Schedule
(b) Reports on Form 8-K:
There were no Current Reports on Form 8-K filed during the three months
ended May 31, 2000.
8
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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: July 24, 2000
By: /s/ John E. Kelly
---------------------
John E. Kelly
President
By: /s/ James Q. Race
---------------------
James Q. Race
Controller, Secretary and Treasurer
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