SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 1996
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OR
[ ] 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
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(Exact Name of Registrant as specified in its charter)
California 33-0010260
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6060 Cornerstone Court West, San Diego, California 92121-3795
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (619)455-8800
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Securities registered pursuant to Section 12(b) of the Act: None
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Name of each exchange on which
Title of each class registered
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N/A N/A
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock: No par value
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(Title of class)
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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
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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. [ ]
The aggregate market value of the Common Stock of the Registrant
held by nonaffiliates of the Registrant on July 1, 1996, was
approximately $160 million. The aggregate market value was computed
by reference to the closing sale price for shares of the Common Stock
of the Company on such date and excludes, for the purpose of this
calculation, shares held beneficially by officers, directors, and
ten percent shareholders.
The number of shares outstanding of the Registrant's Common Stock,
no par value, as of July 1, 1996 : 11,187,826 shares.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of Registrant's Annual Report to Shareholders for the year
ended April 30, 1996 are incorporated by reference into Parts II and IV
of this report. Portions of the Registrant's definitive proxy statement
for its Annual Meeting of Shareholders, to be held August 23, 1996 are
incorporated by reference into Part III of this report.
PART I
ITEM 1 : BUSINESS
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Mail Boxes Etc. ("MBE" or "Company") is the nation's largest franchisor
of neighborhood postal, packaging, business, and communication service
centers ("MBE Centers"). The Company offers both individual franchises
and area franchises in the United States and master licenses in foreign
countries. A typical MBE Center offers mail and parcel receiving,
packaging, and shipping services through a number of carriers and
provides small businesses with a wide range of products and services.
These products and services generally include telephone message service,
word processing, copying and printing, office supplies and communications
services. Communications services typically include fax, voice mail,
pagers, and wire transfers of funds. In addition, MBE Service Centers
usually offer convenience items such as stamps, packaging supplies,
stationery supplies, notary, passport photos, and money orders.
Except for the historical information contained herein, this Form 10-K
contains certain forward-looking statements regarding the Company's
business and prospects. These statements are subject to certain risks
and uncertainties, such as those inherent generally in the retail and
franchising industries, the impact of competitive products and pricing,
changing market conditions, risk detailed in the sections entitled
"Risk Factors" and "Legal Proceedings," and other risks detailed
throughout this Form 10-K. Actual results may differ materially from
those projected. These forward-looking statements represent the Company's
judgment as of the date of the filing of this Form 10-K. The Company
disclaims, however, any intent or obligation to update these
forward-looking statements. As a result, the reader is cautioned not
to place reliance on these forward-looking statements.
The Company provides its Franchise Owners and licensees with a system
of business training, including instruction at MBE University, assistance
in site selection, marketing, and advertising programs. Area franchisees
are granted the exclusive right to sell individual franchises for the
Company in their areas and also provide start-up assistance and continuing
support for individual franchises within that area.
The Company sells Master Licenses in foreign countries under which the
Master Licensee obtains the exclusive right to develop and operate MBE
Centers in one or more foreign countries and the right to sell franchises
to others who, in turn, own and operate individual MBE Service Centers.
The Company also offers licenses to own and operate individual MBE Service
Centers in foreign countries where no master license has yet been sold for
that country.
The Company was incorporated in California in November 1983. By January 1,
1984, it had acquired all of the outstanding stock of Mail Boxes Etc. USA,
Inc. ("MBE-USA"). MBE-USA was incorporated in May 1980, and has been
developing and franchising the MBE Service Center concept since that time.
MBE Service Corp. ("MBESC") was incorporated in August 1990 as a wholly
owned subsidiary of the Company to develop and provide new services to the
MBE Network. All such services to the MBE Network are currently being
provided through MBE-USA, and MBESC is presently inactive. Mail Boxes Etc.
is a holding company with no operations, except to the extent of providing
certain executive management services to MBE-USA. The "Company" or "Mail
Boxes Etc." or "MBE" refers to Mail Boxes Etc., together with its wholly
owned subsidiary, MBE-USA, unless the context otherwise indicates.
In November 1995, MBE acquired a controlling interest in Mail Boxes Etc.
(UK) Ltd. ("MBE-UK"), which holds the MBE Master License for the United
Kingdom. In June 1996, MBE acquired all of the equity interests in MBE-UK.
Except for MBE-UK, all other international operations are under the direct
operation and control of independent master licensees.
As of June 1, 1996, the Company employed approximately 200 full time
regular and 15 contract employees.
Stock Acquisition by United Parcel Service
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On October 3, 1990, United Parcel Service of America, Inc. ("UPS") purchased
1,066,666 shares of Company stock for an all cash price of $10.1 million or
$9.47 per share and warrants, exercisable over a three year period, to
purchase an additional 1,066,667 shares of MBE common stock, for an all cash
price of $1.168 million. On October 3, 1991, UPS exercised its first
warrant to acquire 355,555 shares for an all cash price of $3.6 million and
on October 3, 1992 UPS exercised its second warrant to acquire an additional
355,555 shares for an all cash price of $4.3 million. The third and last set
of warrants to purchase an additional 355,555 shares of stock for an all
cash price of $5.2 million was not exercised and expired on October 3, 1993.
UPS now has an approximately 16.3% equity interest in MBE.
Under the Agreement, UPS is also permitted to name a designee to MBE's
Board of Directors. All of the funds received from UPS for the purchase
of stock and the exercise of warrants have been, and are expected to be,
used to finance the development of the MBE system.
Products and Services Provided
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The typical MBE Center offers a broad range of services and products for
personal and business support, communications services and convenience
items and services. The use and importance of particular services and
products vary substantially at individual MBE Centers. Prices for services
and products are set by the individual Franchise Owners and depend on
competitive conditions in their respective franchise locations. Major
services and products offered at MBE Centers include the following:
Private Mail and Parcel Receiving Services
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A typical MBE Center can service a large number of mail service
customers at rates typically ranging from $10.00 to $30.00 per month.
The mail receiving service is accessible to the customer 24 hours a
day. In addition to the private mail receiving service, MBE Centers
provide certain value-added services, including "Telephone Mail-Check,
"which enables customers to check the status of their mail by phone,
and "Expedited Mail-Forwarding " which allows customers to request by
telephone that specific pieces of mail be immediately forwarded to them
at another location. MBE Centers act as receiving agents for parcels
shipped to their customers through the U.S. Postal Service, United
Parcel Service, and other express carriers.
Shipping
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MBE Centers also offer shipping service through UPS and other carriers,
and can assist the customer in selecting the most appropriate and
effective methods of packaging and sending parcels. MBE Centers advise
customers as to the packaging requirements of the various carriers,
provide packaging of items for shipment, and sell packaging materials
and postal supplies.
Business Support Products and Services
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Businesses of all sizes and small office/home office workers are often
frequent users of an MBE Center. A small business typically cannot
afford its own mail room and shipping department nor can it afford to
incur the overhead expense associated with running a fully equipped
office. MBE Centers provide a small business with a variety of business
services and products such as telephone message service, notary public,
word processing, copying and printing services and office supplies
through a national vendor.
Communications Services
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MBE Centers offer customers a wide range of communications services
such as fax, voice mail, pagers, and wire transfer of funds.
Facsimile machines are required in all MBE Centers and provide both
fax transmission and reception services for customers.
Convenience Items and Services
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MBE Centers generally offer convenience items such as postage stamps,
envelopes, rubber stamps, passport photos, film processing, and key
duplication, as well as office supplies, greeting cards, and other
related gift items.
The MBE Center Facility
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The typical MBE Center is an 800 to 1500 square foot facility. MBE
Centers are generally located in highly visible locations in strip centers
or in high foot traffic downtown areas.
The standardized design of new MBE Centers is used to control and
improve their appearance. The Company has a computerized design department
which utilizes custom computer aided drafting and design (CAD) programs to
improve the efficiency of MBE Center layouts. Layout of MBE Centers
basically consists of a customer area in front with 24 hour accessible
mailboxes and copying area, and a secured service/retail lobby adjacent.
The rear area contains equipment, package storage, and work areas. Actual
construction of each MBE Center is arranged and paid for by the individual
Franchise Owner. The Company provides financing to qualifying Franchise
Owners through its equipment leasing program, multiple Center ownership
program, and other programs to enable these Franchise Owners to construct
and equip new MBE Centers. As of April 30, 1996, the Company was providing
financing to approximately 1,327 of its individual Franchise Owners under
its equipment leasing program.
The Company has made arrangements with several national vendors which
manufacture display and cabinetry fixtures, making them more readily
available for timely distribution and facilitating the uniform appearance
of the Centers. Design compliance is monitored by the Company, and
research and development efforts are being continued to improve efficiency,
productivity and profitability of the MBE Centers.
To assist new Franchise Owners in the construction of their MBE Centers,
the Company has developed a prefabricated modular design package, which
includes walls, cabinets, display systems and other fixtures. The
modular design construction package, which can be shipped directly to
the site of the new MBE Center, expedites construction, helps control
costs, and assists in maintaining a standard appearance for all MBE Centers.
Software Development
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The Company has developed and continues to develop software programs
designed to assist Franchise Owners in the operation of their businesses
and to reduce the volume of paper transactions. With MBEnet, a wide area
network that links each MBE Center with every other MBE Center and the
Company, each user is able to communicate in a paperless environment.
A customized manifesting system has also been developed for use in each
MBE Center to control the package handling and shipping operations.
In FY95, the Company developed a customized accounting system that
automates the accounting functions of an MBE Center. The new
customized accounting system released during FY96 for use in MBE
Centers. In addition, during FY96, the Company redesigned its
World Wide Web Internet "Home Page" site to facilitate communication
between the Company and its Area Franchisees, Franchise Owners,
Master Licensees, customers and investors.
Domestic Franchise Development
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In the United States, the Company offers both individual and area
franchises with protected franchise areas or territories. MBE
Centers are currently located in all 50 states, and the District of
Columbia and Puerto Rico. The typical franchise area for an
individual franchise generally contains a population of approximately
15,000 to 30,000, although MBE Centers located in rural areas will
have populations less than 15,000. Area Franchises generally encompass
a population base of approximately 250,000 or more. Area Franchisees
are granted exclusive rights to sell individual franchises in their
protected areas and provide start-up assistance and continuing support
to the individual Franchise Owners in those areas. The Company locates
Franchise Owner prospects through advertising, referrals from existing
Franchise Owners, and the marketing efforts of the Company's Area
Franchise Owners and other independent contractors.
The following table sets forth the number of individual franchises
sold for each of the years indicated by the Company and by the Area
Franchisees.
<TABLE>
Individual U.S. Franchises Sold By:
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<CAPTION>
Fiscal Year Company Area Franchisees Total
----------- ------- ---------------- -----
<S> <C> <C> <C>
1991 90 197 287
1992 75 232 307
1993 34 300 334
1994 24 246 270
1995 23 289 312
1996 24 263 287
</TABLE>
The Company believes that there is still substantial opportunity
for expansion in the United States, particularly in non-traditional
MBE Center locations such as hotels, convention centers, college
campuses, and other similar locations. The MBE Area Franchise Network
in the United States is essentially built out, but the Company may
still receive additional revenues from the sale of several new Area
Franchises in the United States and from buying and selling selected
Areas. In addition, the Company will continue to sell smaller
additional territories to existing Area Franchisees who wish to expand
and increase the size of their existing Area Franchise exclusive
territories.
New Franchise Marketing Programs
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Several new programs have been designed and implemented to assist
the Company to achieve its goal of 5,000 MBE Centers worldwide by
the year 2000. These programs include the Conversion Store Program,
which targets potential independent operators in the industry to
convert to an MBE franchise; the Host Store concept which locates
MBE Centers within another retail environment; the Corporate Tour
Program, in which potential Franchise Owners are invited to attend
a tour of the Corporate headquarters in San Diego and receive formal
presentations by key departments; the introduction of the rural
store program; and the National Business Opportunity Month
involving national advertising and local area business opportunity
seminars. The Company ended its VetFran Program in FY95, but
continues to provide special financing to assist retired or
discharged U.S. military personnel in purchasing an MBE Franchise.
International Development
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The Company's first international Master License was sold in 1988
for the license rights to open MBE Centers in Canada. There are
currently 16 MBE area franchises in Canada, and the Canadian MBE
Master Licensee recently celebrated the opening of the 170th MBE
Center in Canada.
MBE now has Master Licensees in 51 countries and territories,
including Australia, Brazil, France, Italy, Mexico, Spain, the
United Kingdom, several countries in Asia, and most countries in
the Middle East and South America. A total of 92 Area Franchises
are in place in the MBE International Network and there are 449 MBE
Centers operating outside of the United States under the direction
of the MBE Master Licensees. The Company believes that the MBE
International Network still remains in the early stages of
development.
Although the MBE concept has been proven in the United States,the
concept sometimes develops more slowly in other countries due
to a variety of market and operational factors. The MBE Master
License that was sold in Japan in 1989 was re-acquired by MBE 3
years later. The Company also reversed the sale of the MBE Master
License for Germany. Both of these situations were due to the
Master Licensees' failure to effectively implement MBE business
systems in the local markets. MBE Canada also experienced similar
difficulties in its early stages, but following a transfer of the
license, the MBE network in Canada is growing steadily under its
current master licensee, who took possession of the Canadian master
license in 1990. In addition, development in other countries, such
as Italy has been dramatic with the celebration of the opening of
the 100th Center in April 1996. The Company remains confident of
the viability of the MBE concept internationally and is continuing
its discussions with interested parties in other countries concerning
the purchase of MBE master licenses.
During FY96, MBE entered into negotiations with the MBE Master
Licensee for the United Kingdom to buy a majority interest in the
Master License. These negotiations were successful and MBE formed
an English company, Mail Boxes Etc. (UK) Ltd. ("MBE-UK"), to own
and develop the UK Master License. In June 1996, MBE purchased the
remainder of the equity interests in the UK Company, MBE-UK, and
now owns all of the UK Master License.
Franchise Agreements and Fees
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Each individual Franchise Owner in the United States enters into a
franchise agreement with the Company. The individual franchise agreement
requires payment of an initial franchise fee, which is currently $24,950.
The initial franchise fee may vary for programs targeting specific markets,
such as encouraging the development of rural stores, converting independent
operators to MBE Franchise Owners, and enabling successful Franchise Owners
to purchase multiple franchises. Individual Franchise Owners pay a monthly
royalty of 5 percent of gross revenues, with the exception of certain
items having low profit margins, such as stamps, metered mail, and money
transfers, including Western Union money orders, upon which the 5
percent royalty relates only to gross profit margins. In addition,
under Franchise Agreements signed prior to approximately June 1,
1994, individual Franchise Owners were required to pay a common
advertising fee of 2 percent of monthly gross revenues. One half,
or 1 percent, of those fees are used as a marketing fund by the
Company for the development of advertising and marketing materials
to increase sales at MBE Centers and to promote the MBE Network,
and the other half was held by the Company for the benefit of the
franchise network and disbursed to the local MBE advertising
associations as matching funds for specific common advertising
programs. By early FY95, over 85% of the MBE Franchise Owners had
agreed to amend their franchise agreements to increase their
advertising marketing contributions by an additional 1 1/2 % for the
duration of a national advertising test program (the National Media
Fund or "NMF") which was scheduled to end November 30, 1996. In
November 1995, a year early, the overwhelming majority of MBE
Franchise Owners voted to make the NMF a permanent fund. The total
marketing/media fees now total 3.5% of gross revenues (as contrasted
to 2% previously) and a portion of these funds amounting to 2.5% are
contributed to the National Media Fund, which is discussed in more
detail below. All new MBE individual Franchise Owners sign
franchise agreements providing for marketing/media fees of 3.5% of
gross revenues.
The franchise agreement has an initial term of ten years, and
currently provides the Franchise Owner with an option to renew for
additional ten year terms upon the payment of franchise renewal
fees. With the approval of the Company, the Franchise Owner has
the right to sell the Center and to transfer and assign the
franchise agreement. The Company has a right of first refusal to
purchase the Center in the event of a proposed sale.
The area franchise agreement requires an initial franchise fee based
upon several factors, including population and other demo-graphic
factors in the designated geographic region. A significant portion
of the area franchise fee, up to 50%, is often financed by the Company
under a promissory note at market rates of interest, with the note
typically being paid over three to seven years.
In addition to payment of the area franchise fee, Area Franchise
Owners are also required to own and operate an MBE Center for which
they pay the standard $24,950 individual franchise fee. After
receiving training from the Company, the Area Franchisee assumes
responsibility for individual franchise marketing, site selection,
facility construction, in-store training and continuing local support
of the individual Franchise Owners in the Area Franchisee's exclusive
area. The Company believes the terms of the area franchise agreement
provide the Area Franchisee with guidelines and incentives to develop
and maintain good relationships with the individual Franchise Owners.
By using the area franchising concept, the Company believes that it
has achieved a more rapid growth rate than would have been possible
if the Company were required to perform all of its franchise marketing
and support services throughout the country.
Forty percent (40%) of individual franchise fees are paid as commissions
to the Area Franchisee and the remaining sixty percent (60%) is retained
by the Company. The individual franchise royalty fee of five percent
(5%) is divided equally between the Company and the Area Franchisee.
All franchise fees and royalties are paid directly to the Company, and
the appropriate portion is then remitted to the Area Franchisee. For
individual franchise centers in locations which have not yet been sold
to an Area Franchisee, all fees and royalties are retained by the Company.
In certain cases, if the Company deems it financially prudent, the
Company may elect to repurchase certain Areas in which case all franchise
fees and royalties will be retained by the Company.
As of April 30, 1996, the Company was providing financing for
approximately 60 Area Franchisees who met MBE's qualifying requirements.
Generally, this financing is for approximately one-half of the value of
the Area Franchise. In addition, the Company may elect to extend credit
to qualified Area Franchisees to further develop their Areas. None of
the Area Franchisees are affiliates of the Company, although the Company
has in the past re-purchased several Area Franchises and may resell them
or operate them as Company-owned Areas. In connection with the sale of
new Area Franchises, the Company expects to continue its practice of
financing a portion of the franchise fee for qualified Area Franchisees.
In FY96 the Company continued to purchase selected areas from existing
Area Franchisees. These purchases will provide the Company with the
benefit of the full amount of royalties and the Company will not be
required to pay sales commissions from the sale of new franchises in
those areas.
Franchise Support
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Although the Company's franchise agreements contain provisions designed
to assure quality of operation, the Company has less control over
franchise operations and personnel than it would if it owned and
operated each MBE Center. The Company, therefore, attempts to
continuously improve and standardize the operating methods it recommends
to its Franchise Owners. The Company's Training Department currently
offers individual Franchise Owner, Area Franchisee, and international
training programs at MBE University ("MBEU") in San Diego. MBE
University opened in August 1989 at the national training facility
located at the Corporate offices in San Diego. The MBEU curriculum
focuses on small business management skills. Basic retail, computer,
sales, telephone and customer service skills are taught in addition to
business planning.
The individual Franchise Owner training program is mandatory for all
new Franchise Owners, purchasers of existing centers (transferees),
and conversions from independents to MBE Centers. The individual
Franchise Owner training program currently consists of three days of
observing operations in an MBE Center, two weeks of classroom
instruction, and one week of in-center hands-on training. Upon
successful completion of the intensive training program, a "Masters
in Business Excellence" is awarded. The Company currently owns two
MBE Centers located in San Diego, California, which are used to test
market new products and services. These Company Centers may also be
utilized for in-store work experience of new Franchise Owners who do
not have an Area Franchise Owner.
Product Marketing
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The Company has developed a comprehensive advertising kit, which
consists of a series of advertising copy artwork and similar
promotional materials that can be combined by the Franchise Owner
to create a wide variety of newspaper and magazine advertisements
and flyers. In addition to the advertising kit, the Company has
created radio and television advertisements, numerous pamphlets and
flyers, and in-store posters for Franchise Owners. Advertising
generated by Franchise Owners is reviewed by the Company to assure
proper use of logos, trademarks and service marks. The Company uses
a system of pilot field testing of products and marketing techniques
to improve sales and margins. During FY96, a membership organization
for small business owners and those working out of their homes was
launched, Small Office Home Office Association (SOHOA). The Company
was a founding sponsor of the organization, which is expected to help
position MBE Centers as a vital resource to SOHOA members.
National Media Fund
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To finance the national advertising program, the Company established
a National Media Fund in FY95. Under this program, which is now a part
of the Franchise Agreement, each MBE Franchise Owner pays 3 1/2 % of
revenues subject to royalty to the fund. Of the 3 1/2 %, 1% will continue
to be used as a marketing fund, and 2 1/2 % will be contributed to the
National Media Fund to be used for national broadcast media advertising.
This advertising is designed to target consumers, as well as small and
home-based business operators, in order to increase MBE Center traffic
and attract new customers. The fund is now a permanent program.
National Account Clients
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The Company has developed a National Account program in which both
the customers and employees of corporations of all sizes can avail
themselves of the services and products of MBE Centers across the
country to obtain access to a large nationwide network of MBE Center
locations. The Company currently has national account agreements
with a number of major corporations, including Xerox, Hewlett-Packard,
Canon U.S.A., Ricoh, Philips Consumer Electronics, Thomson Consumer
Electronics, Insurance Express, Toshiba, and Mita Copystar. The
services commonly offered are as follows:
Packing and Shipping - Designed to support the equipment
maintenance and repair service industry, the program offers
nationwide locations for customers and employees to drop off
products to be packed and shipped for maintenance/repair and
to receive the serviced products at MBE locations for pickup.
This service also supports the needs of field technicians and
sales representatives. The program adds significant value to
the national accounts as an extension of their service
organizations while supporting the need to consolidate
operations and improve cost-efficiency.
Business Communications - Directed at financial institutions
such as insurance companies, major banks and credit card
companies, the program offers a nationwide network of
locations where customers and employees may receive, review,
sign and return documents at a conveniently located MBE
Center.
Merchandise Receiving and Product Distribution - Directed at
the catalog and mail order industries, this program offers
nationwide locations for customers who want a local MBE Center
to receive parcels and hold for pickup.
MBE Corporate Cards for Off-Site Office Needs: Total Services
Program ("TSP") - Targeted at companies with large field
technical and/or sales organizations, the program offers a
logistics and off-site office network and is also designed to
support the office and depot needs of the corporate employee
operating out of a home office. The MAIL BOXES ETC. "TSP"
corporate card authorizes national account client employees to
purchase products and services at MBE Centers nationwide under
national contract pricing, standardized procedures and
centralized billing. Companies such as Hewlett-Packard,
Motorola, Armstrong and LDDS/Worldcom have signed up with the
MBE TSP card, recognizing the value of increased productivity
and improved cost-efficiencies.
Copyright, Trademarks, Service Marks
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The Company is the owner of federal and, where appropriate, state
registered trademarks and servicemarks, which include Mail Boxes
Etc., Mail Boxes Etc. USA, MBE, Minute Mail, MBE and World Globe Design,
The Post Office Alternative, MBE and Square Globe design Money Back
Express, Minutemail, Big Or Small, We Ship It All, Making Business Easier,
and TicketNet . The Company has also developed various symbols or icons
representing MBE services and has obtained copyright registration for
those symbols. The Company filed for trademark registration for the
servicemarks It's Not What We Do, It's How We Do It ; We're The Biggest
Because We Do It Right, No Limit Shipping; and plans to file for
trademark protection for other marks as developed. The Company is aware
of a few limited geographic areas in which the use of the Mail Boxes Etc.
name by others apparently predates the Company's rights, but does not
consider such areas material to the future expansion of the Company's
business. The Company has also applied for registration in foreign
countries where it has expanded and plans to expand the MBE Network.
In Canada, the Canada Post Corporation is opposing the Company's
registration of its trademarks and the Company has instructed its
Canadian trademark counsel to resist the opposition and proceed with
the registration efforts.
CERTAIN RISK FACTORS RELATED TO THE COMPANY'S BUSINESS
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In addition to those risks identified elsewhere in this Annual Report
on Form 10-K, the Company's business and results of operations are
subject to other risks, including the following risk factors:
Fluctuations in Operating Results
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The Company's quarterly and annual operating results are
affected by a wide variety of factors that could materially and
adversely affect revenues and profitability, including factors
pertaining to (i) customer demand; (ii) general economic conditions
in the retail industry and countries in which franchisees and
Master Licensees do business; (iii) competition (described in more
detailed below); (iv) fluctuations in foreign currency exchange
rates and the possibility that one or more Master Licensees may
experience high rates of inflation or currency crises in their
respective countries; (v) new product development such as increased
research, development and marketing expenses associated with new
product introductions and risks associated with customer
acceptance; and (vi) sales and marketing risks. In addition,
expansion goals may not be met for all the reasons contained in
this section and elsewhere in this 10-K report.
Competition
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The Company experiences competition from several sources. Direct
competition comes from other national chains and independents and
from specialty service providers, such as copy centers, quick print
centers and office supply companies. There is growing competition
from the United States Postal Service as it attempts to compete with
the MBE concept with its Postal Service Centers located in shopping
centers. To meet these competitive threats, MBE is responding on
several fronts. The Company is continuing to explore ways of adding
additional profit centers, such as color copying, No-Limit Shipping,
selling long-distance phone services, and continued expansion of the
national accounts programs. MBE is also attempting to strengthen its
already strong customer service image by encouraging centers to extend
their hours to meet growing customer demands. Finally, MBE has ongoing
training and educational programs for its Franchise Owners that cover
topics ranging from customer service to marketing products to new and
existing customers. MBE believes that these programs, combined with
the national television advertising program, will enable it to more
effectively compete in a competitive world market.
Governmental Regulation
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The Federal Trade Commission has adopted a rule that requires
franchisors to make certain disclosures to prospective Franchise
Owners prior to the offer or sale of franchises. This rule
requires the disclosure of information necessary for a Franchise
Owner to make an informed decision as to whether to enter into a
franchise relationship and delineates the circumstances in which
franchisors may make predictions on future sales, income and
profits. Failure to comply with this rule constitutes an unfair or
deceptive act or practice under the Federal Trade Commission Act.
Numerous states have in recent years adopted laws regulating
franchise operations and the franchisor - franchisee relationship,
and similar legislation is pending in the U.S. Congress and several
other states. Existing laws and pending proposals vary from filing
and disclosure requirements in the offer and sale of franchises to
the application of statutory standards regulating the establishment
and termination of franchise relationships. These laws generally
apply to both area and individual franchises. Although the
foregoing matters may result in some modification in the Company's
franchising activities and some delays or failures in enforcing
certain of its rights and remedies under certain area or individual
franchise agreements, such modifications, delays or failures have
not had a material adverse effect on the Company's operations or
business. However, the law applicable to franchise operations and
relationships is still developing, and the Company is unable to
predict the effect, if any, on its operations of additional
requirements or restrictions that may be enacted or promulgated or
of court decisions that may be adverse to the franchise industry.
While it is difficult to assess potential effects of federal and
state legislation in the U.S. or new international laws that may
impact the industry, the Company does not anticipate any material
adverse effects from such legislation or laws at this time.
ITEM 2 : PROPERTIES
- -------------------
Currently the Company's executive offices are located in a 60,000
square-foot three-story office building. Approximately 2,000 square
feet of space is leased to other tenants. The Company purchased
the building and land during FY92 for $3.2 million and built out the
building at a cost of approximately $1.9 million. The Company believes
the building will be adequate to accommodate its current employees and
any near term expansion. The Company currently estimates that the
value of the land and building is $5.4 million.
The Company operates a warehouse and one storage facility which provide
approximately 10,000 square feet. The Company pays a base rent of
$3,975, subject to annual formula increases, for the warehouse storage
facilities.
ITEM 3 : LEGAL PROCEEDINGS
- --------------------------
In November 1988, a suit styled Kellert v. Mail Boxes Etc. USA et al.
was filed in New York State Supreme Court (trial court for New York
County), by one of the Company's franchisees against the Company, an
Area Franchisee, and several individual officers of the Area Franchisee.
Plaintiff sought rescission of the franchise agreement and damages in
excess of $425,000, alleging that the defendant Area Franchisee failed
to provide plaintiff with an offering prospectus in violation of New
York State franchise law and made false representations regarding
revenues, earnings and profits from both existing and new franchise
centers.
In response to the Company's prior termination notice to the plaintiff
franchisee for non-payment of royalties, the plaintiff franchisee also
secured a temporary restraining order pending their motion for a
preliminary injunction to prevent the termination of the franchise.
In December 1988, the plaintiff dropped its request for a preliminary
injunction to prevent termination of the franchise. Plaintiff thereafter
abandoned its franchise center and acknowledged the termination of the
franchise agreement. The franchise center has been sold to a new
franchisee and the defendants have dropped their counter claims against
the Plaintiff as part of the Agreement regarding the sale of the store and
disposition of the sales proceeds. In January 1993, the case was taken
off the civil active list by the court. In January 1996, the court denied
the plaintiff's motion to restore the case, and the case has now been
dismissed.
In October 1993, a suit entitled Helm et al. v. Mail Boxes Etc. was filed
in Superior Court in San Diego, California, by nine individuals claiming
to be current or former franchisees against the Company. The plaintiffs
alleged fraud in the inducement, concealment, breach of contract, unfair
business practices, breach of fiduciary duty, and breach of the implied
covenant of good faith and fair dealing and sought general and punitive
damages, injunctive relief and restitution. By stipulation of the parties,
this action was consolidated for discovery with a prior action entitled
Mail Boxes Etc. U.S.A., Inc. v. B.J. Postal Services Corporation, which
was a suit by the Company against a franchisee in South Carolina to
collect royalties and other fees from the franchisee. That suit was
brought by the Company in Superior Court in San Diego, California in
April 1993. The defendant franchisee in that case filed an Answer and
Cross-Complaint against the Company making the same general allegations
as made in the above case, Helm et al. v. Mail Boxes Etc.
The Company filed a demurrer to the defendant franchisee's Cross-Complaint
in B.J. Postal Services, and the Court dismissed the defendant's causes
of action for fraud, breach of contract, and breach of the implied
covenant of good faith and fair dealing, but granted the defendant leave
to amend their Cross-Complaint. The Court dismissed the breach of
fiduciary duty claim without leave to amend but refused to dismiss the
unfair business practice claim.
On November 29, 1993, the defendant franchisee in B.J. Postal Services
filed a second Amended Cross-Complaint, to which the Company
unsuccessfully demurred. The Company filed an answer and discovery
commenced. Subsequently, the defendant franchisee filed a third
Amended Cross-Complaint dismissing one fraud and two contract causes
of action and the claim for breach of the implied covenant of good
faith and fair dealing. The defendant also added a cause of action
for negligent misrepresentation.
On November 30, 1993, the plaintiff franchisees in Helm, filed an
Amended Complaint, in which three additional franchisee plaintiffs
were added. Pursuant to an agreement between counsel, on March 1,
1994, plaintiff franchisees in Helm filed a Second Amended Complaint
adding six additional franchisee plaintiffs. On April 15, 1994, the
Company filed an Answer and a Cross-Complaint against a majority of
the franchisee plaintiffs seeking relief for breach of contracts,
breach of equipment leases, indemnity, inducing breach of contract,
tortious interference with contractual relations and common counts.
The cross defendants have filed an Answer. The Company has resolved
the dispute with one of the franchisee plaintiffs who has since
dismissed his claims against the Company.
On May 24, 1995, the court decided to proceed with trial of four of
the franchisees as "test cases" in an attempt to help resolve this
matter, and trial was scheduled for February 1996. In October 1995
the court permitted plaintiff franchisees to file a third Amended
Complaint in which plaintiff franchisees dismissed one fraud and one
contract cause of action and the cause of action for breach of the
implied covenant. Plaintiff franchisees also added a cause of action
for negligent misrepresentation. Two of the test-case plaintiffs
dismissed certain other causes of action as well. In March 1996,
the franchisees sought leave to file a fourth Amended Complaint adding
claims for alleged violation of the California Franchise Investment Act.
The court denied the test case franchisees' request to amend, but
granted the motion as to the remaining plaintiff franchisees. MBE has
filed motions for summary judgment on all fraud-based claims and a
ruling is expected before September. The four test cases are now
scheduled to go to trial in October 1996.
In August 1994, a suit entitled Conklin, et al. v. Mailboxes Etc. USA,
Inc. was filed in Superior Court of California, in San Diego County,
by a group of nine present and former franchisees.
The complaint alleges fraud in the inducement/concealment, breach of
contract, unfair business practices, and breach of the implied covenant
of good faith and fair dealing. Each of the plaintiffs is seeking
compensatory damages in an unspecified amount, $250,000 each in
punitive damages, and damages for emotional distress. Before filing an
answer, the Company filed a motion in this action asking the court to
dismiss certain claims and certain of the plaintiffs as improper.
The Company's motion in the Conklin suit requesting the Court to dismiss
certain claims and certain of the plaintiffs was granted in part and
denied in part. One franchisee plaintiff was dismissed from the action
and the claims of another franchisee plaintiff were dismissed with an
opportunity to amend. The remainder of the franchisee plaintiffs were
also granted an opportunity to replead their fraud claims with greater
specificity and to replead the majority of their contract-based claims
to state a cause of action.
Plaintiffs filed an amended complaint and have sought leave to file a
third Amended Complaint which adds nine more current and former
franchisees. The third Amended Complaint, in essence, makes the same
charges as does the third Amended Complaint on the Helm matter.
The claims in Conklin are essentially the same as the claims made in
the Helm and B.J. Postal Services cases, all of which have been brought
on behalf of the franchisees by the same attorney. All of those cases
are before the same trial judge in San Diego Superior Court. The
pleadings by the Plaintiffs in Conklin have not been finalized and the
Company has not yet answered or filed a Cross-Complaint. This matter
has, in essence, been stayed by the court pending resolution of the four
test cases discussed above.
The Company has become subject to various lawsuits and claims from its
Franchise Owners and former employees in the course of conducting its
business. While the Company intends to vigorously defend these actions,
management is unable to make a meaningful estimate of the amount or range
of loss that could result from an unfavorable outcome of all pending
litigation. It is possible that the Company's results of operations in
a particular quarter or annual period could be materially adversely
affected by an ultimate unfavorable outcome of certain pending litigation.
Management believes, however, that the ultimate outcome of all pending
litigation should not have a material adverse effect on the Company's
financial position or liquidity.
ITEM 4 : SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during
the fourth quarter of fiscal year 1996.
<TABLE>
ADDITIONAL ITEM: EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------
The executive officers of the Company are as follows:
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Michael Dooling 51 Chairman of the Board
of Directors
Anthony W. DeSio 66 Vice Chairman of the Board
of Directors, President and
Chief Executive Officer.
Roger A. Peters 50 Vice President - Network
Operations
Robert J. DeSio 61 Vice President - Training and
Communications
Gary S. Grahn 52 Vice President - Finance and
Administration and Chief
Financial Officer
Fred L. Morache 53 Vice President - Business
Development
Bruce M. Rosenberg 49 Vice President, General Counsel
and Secretary
William K. Lange 49 Vice President - Marketing
Ralph R. Askar 51 Vice President - Network
Development
</TABLE>
Anthony W. DeSio and Robert J. DeSio are brothers.
Officers serve at the pleasure of the Board. Biographical
information concerning Messrs. Michael Dooling, Anthony W. DeSio,
and Robert J. DeSio is set forth under the caption "ITEM NO. 1 -
ELECTION OF DIRECTORS - BIOGRAPHICAL INFORMATION" in the Company's
definitive Proxy Statement for its Annual Meeting of Shareholders
to be held August 23, 1996, and is incorporated by reference
herein.
Roger A. Peters joined MBE in January 1995 as Assistant to the
President and became Vice President - Network Operations in July
1996. Prior to joining MBE, Mr. Peters served in a variety of
management functions with Health and Tennis Corporation of America,
the owner/operator of some 350 fitness centers located throughout
North America where he worked since 1990. From 1986 to 1990 Mr.
Peters served as President of Developrise Incorporated, a
franchisee/sub-franchisor of two different nationally known
restaurant concepts and one national service concept. Before that,
Mr. Peters served as Director, Domestic and Foreign Development at
Burger King Corporation, an international restaurant chain. Mr.
Peters has over twenty-five years of retail and franchise system
management experience. Mr. Peters has a Bachelor of Arts Degree in
Business Administration from Cleary College and received a
postgraduate degree in Real Estate from the University of Michigan.
Gary S. Grahn joined the Company on July 1, 1992, as Vice
President, Finance and Administration and Chief Financial Officer.
Prior to joining the Company, Mr. Grahn was Vice President,
Director of Finance and Administration for Photon Research
Associates, Inc. in San Diego, California, where he had worked
since 1985. Mr. Grahn has twenty years experience in finance and
administrative positions and eleven years in financial management
positions. Mr. Grahn received a Bachelor of Business
Administration degree in Business and Economics and an MBA in
Finance and Marketing from California Western University, and a
Certificate in Information Systems from the University of
California in San Diego.
Fred L. Morache joined the Company as Vice President of Marketing
in September 1989 and assumed the position of Vice President -
Business Development in June 1995. Prior to joining MBE, Mr.
Morache had his own advertising and marketing consulting firm.
From 1985 to 1989 he was Vice President of Advertising for
Coldwell Banker Residential Real Estate, a national franchisor of
real estate offices. Mr. Morache also worked as an advertising
executive for McCann-Erickson and Grey Advertising, both national
advertising agencies. From 1973 to 1981, Mr. Morache worked for
McDonald's Corporation, an international restaurant chain, at
various positions in their marketing department. Mr. Morache has
a Bachelor of Arts degree from Illinois State University and a
Master of Arts degree in Journalism from the University of Missouri.
Bruce M. Rosenberg has been Vice President and General Counsel since
August 1989 and Corporate Secretary since February 1989. Prior to
joining MBE as Corporate Counsel in July 1988, Mr. Rosenberg was an
attorney for the San Diego Gas & Electric Company and prior to that,
he was employed as an attorney with Combustion Engineering, Inc. and
with the Tennessee Valley Authority. Mr. Rosenberg received a
Bachelor of Engineering Degree from The Copper Union, a Master of
Science Degree from the University of Illinois, and a Juris Doctorate
Degree from Catholic University of America.
Ralph R. Askar joined the Company as Vice President - Franchise
Development in June 1995. Before that time, he was an MBE Area
Franchisee for the Colorado, Wyoming and Montana Areas beginning in
1987. As an Area Franchisee, Mr. Askar received the MBE "Franchisee
of the Year" award in 1994 and the Highest Sales Award in 1992, 1993
and 1994. He also acted as an MBE Approved Consultant for Oklahoma,
Oregon, Washington State, France and Italy. Mr. Askar received his
Bachelor of Science Degree in 1969 from Chicago Technical College and
worked as a civil engineer/consultant/project manager from 1969-1977.
Mr. Askar was a Civil Engineer and Consultant for Ellis-Murphy, Inc.
and Schumacher & Bowman, Inc. in Arizona.
William K. Lange joined the Company as Vice President General Manager
of MBE Service Corp. in August 1990 and assumed the position of Vice
President - Marketing in June 1995. Prior to joining MBE, Mr. Lange
was Vice President of Marketing for a San Diego based firm engaged
in the business of electronic filing of income tax returns with the
federal government. Mr. Lange worked as Vice President, General
Manager of Schey Advertising from 1987-1988 and was President of
Augusta Advertising in Houston, Texafrom 1981-1987, both national
advertising agencies. From 1975-1981, Mr. Lange was Director of
Advertising and Public Relations for Porta-Kamp Mfg. Co., an
international oil field supply company. From 1970 to 1975, Mr. Lange
was a United States Naval Aviator. Mr. Lange has a Bachelor of Arts
in Humanities from Saint Lawrence University (N.Y.).
PART II
-------
Certain information in Part II is included in
the Company's Annual Report to Shareholders
for the year ended April 30, 1996, included
herein as Exhibit 13.1, which information is
hereby incorporated by reference.
ITEM 5 : MARKET FOR THE REGISTRANT'S COMMON EQUITY
---------------------------------------------------
AND RELATED SHAREHOLDER MATTERS
-------------------------------
Incorporated herein by this reference is the information appearing
under the caption "Common Stock Data" in the Company's Annual Report
to Shareholders for the year ended April 30, 1996, included herein as
Exhibit 13.1. As of July 1, 1996, there were approximately 800 holders
of record of the Company's Common Stock.
ITEM 6 : SELECTED FINANCIAL INFORMATION
---------------------------------------
Incorporated herein by this reference is the "Five Year Summary of
Selected Financial Data" found on page 12 of the Annual Report to
Shareholders.
ITEM 7 : MANAGEMENT'S DISCUSSION AND ANALYSIS OF
-------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Incorporated herein by this reference is the "Management's Discussion
and Analysis" found on Pages 13 to 15 of the Annual Report to Shareholders.
ITEM 8 : FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-----------------------------------------------------
Incorporated herein by this reference are the financial statements and
supplementary data found in the Annual Report to Shareholders on pages
16 to 23.
ITEM 9 : CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
------------------------------------------------------
ON ACCOUNTING AND FINANCIAL DISCLOSURE
---------------------------------------
Not Applicable
PART III
--------
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------------------------------
Incorporated herein by this reference is the information appearing in
the Company's definitive Proxy Statement (filed or to be filed with the
Securities and Exchange Commission within 120 days after April 30, 1996),
for its Annual Meeting of Shareholders to be held August 23, 1996.
Information concerning executive officers who are not members of the
Company's Board of Directors is provided as an Additional Item in Part I
of this report on Form 10-K under the subcaption "Executive Officers of
the Registrant".
ITEM 11 : EXECUTIVE COMPENSATION
--------------------------------
Incorporated herein by this reference is the information appearing in
the Company's definitive Proxy Statement (filed or to be filed with the
Securities and Exchange Commission within 120 days after April 30, 1996),
for its Annual Meeting of Shareholders to be held August 23, 1996.
ITEM 12 : SECURITY OWNERSHIP OF CERTAIN
---------------------------------------
BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------
Incorporated herein by this reference is the information appearing in
the Company's definitive Proxy Statement (filed or to be filed with the
Securities and Exchange Commission within 120 days after April 30, 1996),
for its Annual Meeting of Shareholders to be held August 23, 1996.
ITEM 13 : CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------
The Company is currently involved in two transactions with Ralph R. Askar,
who assumed the position of Vice President - Franchise Development for the
Company in June 1995.
Before assuming that position, Mr. Askar had owned the MBE Area Franchise
for the state of Colorado for over seven years. In January 1995, the
Company repurchased the Colorado Area Franchise from Mr. Askar for the
sum of $1.7 million. Mr. Askar received an $800,000 initial payment,
with the balance of $900,000 to be paid over ten years at an interest
rate of 8%.
In May 1995, in connection with Mr. Askar's acceptance of his position
as Vice President of Franchise Development, the Company loaned Mr. Askar
$200,000 to assist him in the purchase of his primary residence in
San Diego. That loan, which bears interest at 9%, has a current
principal balance of $101,878, which is all due and payable September 1,
1996. Mr. Askar's repayment obligations to the Company are secured by a
right of offset retained by the Company in connection with the Company's
obligation to pay a total of $900,000 to Mr. Askar for the repurchase of
the Area Franchise as described above.
PART IV
-------
ITEM 14 : EXHIBITS, FINANCIAL STATEMENT SCHEDULE
-------------------------------------------------
AND REPORTS ON FORM 8-K
------------------------
(a) (1) Financial Statements.
The following financial statements are included in and incorporated
by reference from the Company's Annual Report to Shareholders for
the year ended April 30, 1996, as provided in Item 8 of this report
on Form 10-K:
1. Mail Boxes Etc. Consolidated Balance Sheets
at April 30, 1996 and 1995.
2. Mail Boxes Etc. Consolidated Statements of
Income for the fiscal years ended April 30,
1996, 1995 and 1994.
3. Mail Boxes Etc. Consolidated Statements of
Shareholders' Equity for fiscal years ended
April 30, 1996, 1995 and 1994.
4. Mail Boxes Etc. Consolidated Statements of
Cash Flows for the fiscal years ended April
30, 1996, 1995 and 1994.
5. Mail Boxes Etc. Notes to Consolidated
Financial Statements.
(a) (2) Financial Statement Schedule.
The following financial statement schedule is filed in response to
this item:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted as the required information is
inapplicable, not material, or the information is presented in the
financial statements or related notes thereto.
(a) (3) EXHIBITS
The following exhibits are filed with or incorporated by reference
into this report (except as otherwise indicated). The exhibits
which are denominated by an asterisk (*) were previously filed as
a part of, and are hereby incorporated by reference to, the same
numbered exhibits (except as otherwise indicated) in the documents
as identified herein.
Exhibit No. Description
- ----------- -----------
3.1* Restated Articles of Incorporation (Filed with
Form 10-K for the fiscal year ending April 30,
1992).
3.2* Bylaws (filed with Form 10-K for the fiscal
year ending April 30, 1995).
10.1* Form of Area Franchise Agreement (Filed with
Registration Statement filed pursuant to the
Securities Act of 1933 (the "1933 Act") on
Form S-l, Registration Statement No. 33-4349
filed March 27, 1986, as amended by Amendment
No. 1, filed May 14, 1986, and Amendment No.
2, filed June 10, 1986 ("S-1 Registration
Statement")).
10.2* Form of Individual Franchise Agreement (Filed
with S-1 Registration Statement).
10.5* Restated 1985 Stock Option Plan (Filed with
S-1 Registration Statement as Exhibit No.
10.7).
10.6* Amended and Restated Stock Purchase and Salary
Savings Plan (Incorporated by reference to the
Company's Information Statement filed with the
Securities and Exchange Commission on November
3, 1988).
10.8* Form of Master Franchise Agreement. (Filed
with Form 10-K for the year ended April 30,
1990).
10.9* Sales contract for purchase of new office
facilities. (Filed with Form 10-K for the
year ended April 30, 1991).
10.10* UPS Purchase Agreement for stock and warrants.
(Filed with Form 8-K filed October 10, 1990).
10.12* Construction contract with Koll Construction
(Filed with the Form 10-K for the fiscal year
ending April 30, 1992.)
10.13* A.W. DeSio Employment Contract (Filed with the
Form 10-K for fiscal year ending April 30,
1992)
10.14* Split Dollar Agreement for A.W. DeSio (Filed
with the Form 10-K for fiscal year ending
April 30, 1992)
10.15* Mail Boxes Etc. 1995 Employee Stock Option
Plan (Filed with the Company's Proxy Statement
dated July 14, 1995 for Annual Shareholder's
Meeting of August 25, 1995)
10.16* Mail Boxes Etc. 1995 Stock Option Plan for
Non-Employee ("Outside") Directors (Filed with
the Company's Proxy Statement dated July 14,
1995 for Annual Shareholder's Meeting of
August 25, 1995)
13.1 Pages 12 to 24 of the Registrant's Annual
Report to Shareholders for the year ended
April 30, 1996.
23.1 Consent of Ernst & Young LLP, independent
auditors
(b) REPORTS ON FORM 8-K.
None filed during the quarter ended April 30, 1996.
<TABLE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
-----------------------------------------------
MAIL BOXES ETC. AND SUBSIDIARIES
--------------------------------
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
DESCRIPTION Balance at ADDITIONS DEDUCTIONS/ Balance at
- ----------- Beginning --------- DESCRIBE End
of period (1) (2) ---------- of period
---------- Charged to Charged to ---------
Costs and to Other
Expenses Accounts/
Describe
<S> <C> <C> <C> <C> <C>
Year ended
April 30, 1996:
Deducted from
asset accounts:
Allowance for $2,626,984 $3,290,927 $2,410,925 $3,506,986
doubtful accounts
and notes
receivable:
Year ended
April 30, 1995:
Deducted from
asset accounts:
Allowance for $1,391,000 $759,981 $726,984 $250,981 $2,626,984
doubtful accounts
and notes
receivable:
Year ended
April 30, 1994:
Deducted from
asset accounts:
Allowance for $733,000 $1,129,770 $471,770* $1,391,000
doubtful accounts
and notes
receivable:
</TABLE>
* - Uncollectible accounts written off net of recoveries
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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.
---------------
July 23, 1996: Anthony W. DeSio
by: -------------------------------------
Anthony W. DeSio, Vice Chairman,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated:
Signature Title Date
Michael Dooling
- ---------------
Michael Dooling Chairman of the Board, Director July 23, 1996
Anthony W. DeSio
- --------------------
Anthony W. DeSio Vice Chairman of the Board, July 23, 1996
President, and Chief Executive Officer
Robert J. DeSio
- --------------------
Robert J. DeSio Vice-President - Communications July 23, 1996
and Training
James F. Kelly
- --------------------
James F. Kelly Director July 23, 1996
Daniel L. La Marche
- --------------------
Daniel L. La Marche Director July 23, 1996
Joel Rossman
- --------------------
Joel Rossman Director July 23, 1996
Harry Casari
- --------------------
Harry Casari Director July 23, 1996
Gary S. Grahn
- --------------------
Gary S. Grahn Chief Financial Officer, Vice July 23, 1996
President - Finance & Administration
(Principal Financial and Accounting
Officer)
LIST OF EXHIBITS
----------------
EXHIBIT NO. PAGE
- ----------- ----
13.1 Mail Boxes Etc. 1996 Annual Report to
Shareholders 25-54
23.1 Consent of Independent Auditors 55
(Ernst & Young LLP)
1996 Annual Report
Making Business Easier
Worldwide
Company Profile
<TABLE>
Selected Financial
(Dollar and share amounts in millions except per share data)
<CAPTION>
Operating Highlights Years Ended April 30,
1996 1995 % Change
<S> <C> <C> <C>
Royalty and marketing fees $30.9 $24.7 25%
Franchise fees $ 8.6 $ 8.7 (1%)
Centers in operation 3,049 2,705 13%
</TABLE>
<TABLE>
Financial Highlights Years Ended April 30,
<CAPTION>
1996 1995 % Change
<S> <C> <C> <C>
Revenues $59.1 $50.4 17%
Net income $ 8.7 $ 6.8 29%
Net income per share $ .77 $ .60 28%
Average shares outstanding 11.4 11.4 -
Total assets $75.8 $64.3 18%
Shareholders' equity $61.4 $52.1 18%
Working capital $33.1 $22.6 47%
</TABLE>
The discussion of the Company's business in this annual report contains
certain forward-looking statements. For a discussion of factors which may
affect the outcome projected in such statements, please see "Risk Factors"
on page 15 of this report.
Started in 1980 by co-founder and current President and Chief Executive
Officer Anthony W. DeSio, Mail Boxes Etc. is the world's largest
franchisor of postal, business and communications retail service centers.
From its original location in Carlsbad, California, MBE began its franchise
sales program in 1980 and became a publicly held company in 1986.
There are 2,600 MBE Centers operating throughout the United States and 449
MBE Centers serving customers outside the U.S. With MBE master licenses in
place in 51 countries abroad, the Company's retail distribution network is
approximately eight times larger than its nearest competitor. MBE is on
target to reach its goal of 5,000 centers in the U.S. and overseas by the
year 2000.
MBE is a service-based company. It has grown far beyond its original
business of providing customers with alternative retail services to the U.S.
Post Office. MBE today offers a broad spectrum of business and
communications solutions, including packing and shipping, photocopying,
faxing, mail receiving service, office supplies and other related services.
The Company also offers its MBE Centers to large corporations requiring a
national distribution system to dispense a variety of services to their
customers and field based employees.
The primary sources of revenues for the Company are generated by (1) royalty
and marketing fees (the primary component of "recurring revenues") paid by
franchisees, (2) fees paid by buyers of new franchises, and (3) sales of
supplies and equipment to MBE Centers.
MBE sells new franchises in the United States through one of two ways:
direct sales and sales through its network of area franchisees. In
international markets, the Company sells master licenses for the rights to
operate in countries other than the United States. In both cases, the
Company provides sales and operational support to franchise and license
holders.
MBE has an excellent balance sheet, highlighted by a strong cash position
and minimal long-term debt. This will enable the Company to reinvest capital
into strategic programs, such as repurchasing the licenses of mature area
franchises in the U.S., sponsorship of national advertising campaigns, and
financing the re-imaging of older centers to be consistent with MBE
standards.
The Company has contracts with major corporations to provide their field
organizations and customers with professional business services at
participating MBE Centers. This "virtual office" market segment is growing
steadily and is expected to play a larger role in MBE's expansion. Another
important emerging market for the Company is the small office/home office
(SOHO) market, which is growing rapidly as a result of corporate downsizings
and increases in the number of people operating small and home-based
businesses. The Company has been providing a variety of support services
to home-based businesses since its inception in 1980.
President's Message
Dear Shareholders:
This has been an excellent year for Mail Boxes Etc. We have taken several
effective steps to protect and grow our core business revenues and have
also aggressively positioned MBE to expand still further in the marketplace
of tomorrow.
First, let's review where we've been, and where we are moving in order to
maintain the current dominant position we enjoy in our industry.
Net income this year was a record $8.7 million, a robust 29 percent
increase from the prior year. June 1996 was our 10th anniversary as a
publicly held Company, and I am pleased to announce that, adjusted for
stock splits, the price of our initial public offering was $1.91 compared
to the price on June 28, 1996 of $22.88. Net income per share in FY96 also
reached a record level, climbing by 28 percent, from the previous year, to
$.77 per share.
Everywhere you look in our revenue stream, results were impressive. Total
revenues rose by 17 percent, to $59.1 million. Recurring royalty revenue
and marketing fees, a key measure of network growth and of increases in
same-store sales, reached a new high of $30.9 million, a 25 percent gain
from FY95. Same-store sales climbed by 16 percent over FY95.
Franchise fees were down by one percent during FY96, but with its sales
performance in FY96, the Company remains on track to reach the 5,000
center mark by the year 2000.
These year-end numbers are superb. They confirm that MBE remains the
industry's undisputed leader in providing postal, business and
communications services. In terms of an ability to deliver these services
through an international distribution network, no other company comes
close to the strengths and geographic coverage offered by MBE.
During FY96, we undertook several initiatives to protect and grow the
core earnings that flow from packing and shipping, mailing services,
office supplies, No-Limit ShippingSM and other popular services widely
needed by individuals and businesses alike. Our highly successful Super
Bowl promotion in January 1996, national advertising campaigns and other
marketing strategies created substantial brand awareness among our
traditional customer profile base.
We also realize that this is an increasingly competitive market segment
and that the MBE Center of tomorrow will be different from the MBE Center
of today. Changes in the marketplace are creating new customer segments,
and as the Company grows in size and profitability, our strategic plan to
attract these new customers becomes more of a reality.
Fundamental to our future is continued growth of the center network. By
April 30, 1996 the MBE network stood at 3,049 franchise centers open
worldwide. While this is a significant number by itself, it by no means
represents a fully developed network. We believe significant potential
remains for continued network growth.
Domestically, MBE had 2,600 centers operating at the end of FY96. We
anticipate continued strong domestic growth by identifying successful
nontraditional locations (college campuses, hotels, convention centers),
by further expansion into rural communities, and by completing the
build-out of our domestic network in metropolitan areas.
The outlook for international growth is even brighter. With close to 450
centers operating abroad and master licenses in place in 51 countries, the
potential for global expansion is exceedingly bright. Western Europe
network development is in its early stages and central and eastern Europe,
Latin America, Asia and Australia represent additional opportunities.
Coupled with the impact of network expansion are the effects of dramatic
shifts in how work and production are defined. Growing numbers of
individuals are choosing to operate small and home-office businesses. Also
increasing in numbers are workers who telecommute and field service
workers of corporations who maintain "virtual" offices. With the network
coverage and scope of services we offer, MBE is positioned far better than
any other company in the industry to serve this emerging market.
Our expansive network also brings competitive advantages to companies with
widely scattered facilities and customer bases. Through MBE's national
account agreements, companies direct customers and employees into our
centers for such varied purposes as shipping or receiving electronic
components, transmitting financial documents, and forwarding warranty
repair work to service centers. No other network offers the benefits that
MBE offers to corporate accounts, and that value will grow as the network
expands still further.
This is an exciting time for MBE. Not only are we the market leader in a
traditional sense, but we also are creating new reasons for customers to
choose MBE and more ways to access them. All of us in the MBE family look
forward to meeting these challenges.
I cannot conclude this letter without expressing my thanks to the
franchise owners, employees, customers and shareholders for all they have
done to make this past year so exceptional and to prepare for continued
success in the future. As we move forward with our strategic plan, I am
confident we have the talented people and prudent vision necessary to
enable MBE to remain the leading retail distribution system around the
globe for postal, business and communication services.
Anthony W. DeSio
President and Chief Executive Officer
Investment Strengths
Record levels in FY96 of net income, net income per share and revenues
from royalty and marketing fees
Net income per share growth of 22% and 28% for FY95 and FY96
438 centers sold in the United States and abroad in FY96, with
excellent potential to reach 5,000 worldwide by the year 2000
Singularly positioned to deliver business and communications services
to customers anywhere in the vast MBE network, including corporate
accounts and the rapidly growing small office/home office market
segment
Global reach into 51 countries outside the United States
Strong market penetration: one in five U.S. households has used MBE
Focus on delivery of services with universal demand
Experienced management team, led by the industry's pioneering founder
Excellent balance sheet, with a strong cash position and minimal
long-term debt
Ranked in Entrepreneur magazine's annual Franchise 500 survey as the
#1 business services franchise in the world for 1993-1996. Also ranked
the #1 non-food fran-chise for 1993-1995.
Network Globalization Defines MBE; It's Who We Are and What We Can Do
MBE had 2,600 domestic centers open by the end of FY96, an increase of
nine percent over the prior year. The MBE network is by far the largest
network of locations in our industry, and continues to expand at a rate
faster than all of our competitors combined. We added more centers last
year than our eight largest competitors combined.
MBE's focus on network size has a strategic purpose. In this industry,
geographic reach is the key to success. To serve customers effectively and
efficiently, a company in our business must be able to provide services no
matter where customers and employees are located. MBE is the only company
in our industry positioned to do that.
During FY96, MBE and its international master licensees sold a combined
total of 438 centers in the United States and abroad, compared to 460 in
FY95. According to Entrepreneur magazine's annual Franchise 500 issue
(January 1996), MBE was the eighth top franchise company in the United
States (five of the leading seven were fast food companies).
Domestic Activities
Sales of new centers in the U.S. in FY96 totaled 287. Ownership of
multiple centers is on the rise which we believe confirms the value of
MBE's business concept. Out of 2,600 MBE domestic centers that are open
and operating, nearly 20 percent are owned by franchise owners who own
more than one MBE Center.
Since network growth is key to such fundamental strategies as our national
accounts program, advertising campaigns, favorable pricing arrangements
and selection of services, MBE is responding with direct steps to meet the
challenge of continued growth in an increasingly competitive market segment.
More and more MBE Centers are sinking roots and growing in non-traditional
locations such as hotels, convention centers, college campuses and smaller
rural towns. In these instances, centers tailor their services to the
unique needs of customer bases characterized by high mobility and
specialized needs.
We are also strengthening the Company through network restructuring. In
selected areas, the Company has repurchased area franchises for re-sale to
proven area franchisees. Special financing packages can be made available
to facilitate these transfers.
International Activities
International sales of MBE Centers continued on the strong pace
established in the previous year. A total of 151 centers were sold during
the year, an increase of one percent over FY95. This boosted the number of
MBE Centers operating outside the U.S. by 37 percent to 449 from 327 at
the end of FY95.
The number of international area franchisees increased five percent in
FY96 as master licensees continued to develop MBE's international
potential. Worldwide, MBE finished the year with 92 area franchisees in
place within the MBE international network. In FY96, our International
Partners Program, composed of highly successful area franchisees,
continued to provide master licensees with experienced, hands-on
development support to help grow the global network.
Among international highlights of FY96 were the following:
For the second consecutive year, an MBE master licensee opened the
100th center in a country outside the United States. The first was
Canada in 1995. In 1996, it was Italy.
The openings of centers in Athens, Jakarta, Tel Aviv and Jeddah
during FY96 marked the introduction of MBE services in Greece,
Indonesia, Israel and Saudi Arabia, respectively.
MBE reacquired the master license for the United Kingdom shortly after
the close of FY96 and established a regional office in London. We
are utilizing this office to support what we believe to be sizable
expansion opportunities present in the UK, and to provide more
comprehensive sales and operational support services to MBE Centers in
Europe.
Sales of master licenses in Israel and the South African region bring
the master license total to 51, up from 47 the previous year.
Western Europe continues to be a growth market for MBE. Our network there
nearly doubled between the June 1995 opening of a center in Paris (our
100th location in Europe) and May 1996 with the opening of a center in
Rome (our 100th center in Italy).
Although we are already in hundreds of markets in western Europe, we
anticipate further growth throughout the entire European continent.
Considerable potential exists in most other parts of the world, with Latin
America, the Middle East, Asia and Australia at the top of our near-term
development list.
Globalizing Our Customer Base Through An Unrivaled Distribution System
MBE made several advances in strategic initiatives during FY96 which
further demonstrated the value of our global distribution network for
services and added substantial value to the Company's brand equity.
A total of 34 companies, including 17 newly enrolled during the year, were
participating in our national accounts program by year-end FY96, bringing
the advantages of MBE's comprehensive retail business services available
to their field organizations and customers. This substantial growth in
participating companies resulted from new marketing tactics that targeted
companies in specific market segments and from greater awareness of
productivity benefits offered by our national accounts alliances.
Total revenue from our national account agreements in FY96 increased 106
percent over FY95.
The Company also made important strides in diversifying the mix of
revenues that accrue from national accounts activity. Nearly 43 percent of
FY96 national accounts revenue was derived from our consolidation,
business communications and Total Services Program, compared to 30 percent
in FY95. In creating more of a balance in service utilization, MBE Centers
have reduced dependence on packing and shipping as the primary source of
national account revenues.
As FY96 drew to a close, MBE was preparing to introduce the Small
Office/Home Office AssociationTM (SOHOATM) to its network as a strategic
initiative to capture the dominant market share among small office/home
office workers. This rapidly emerging market has swelled to an estimated
46 million full and part-time workers in the U.S., and is also growing in
other nations, as unprecedented corporate restructuring and downsizing
result in workers who telecommute or choose instead to operate home-based
businesses.
In addition to finding professional solutions for their postal, business
and communications needs by joining SOHOATM, members receive benefits that
include legal services and assistance, accounting and tax services,
financial planning and investment services, leasing services, affinity
telephone rates, and group insurance programs. MBE Centers are in a unique
position to capture a high market share of small office/home office
workers support business because of our network size and our reputation
for reliable services.
MBE is a founding sponsor of SOHOATM, which debuted in the U.S. in mid
1996 and will expand into selected international markets during 1996/1997.
Membership Services, Inc. is the managing partner of SOHOATM providing
member fulfillment services. Other participating sponsors include Dun &
Bradstreet, ISG/ITT Hartford, Day Runner, Scholastic Inc.'s Home Office
Computing Magazine, MCI, American International Group, Inc., American
Greetings, Ameracall, The Signature Group, Waddell & Reed and United
Investors Life. Each contributes a unique benefit to the association.
SOHOATM will continue to seek additional partners who can broaden the
desirability of membership in SOHOATM.
Groundwork was also nearly completed during FY96 on a strategic alliance
for telecommunications services that, when brought on-line, will provide
further cost efficiencies and convenience for MBE customers. These
benefits include resale of long distance telephone services, telephone
debit cards, pager and cellular phone sales and rentals, international
telephone call-back service, electronic mail and internet access.
In attracting new customers from outside our traditional customer base,
we believe strategies like the national accounts program, Small
Office/Home Office AssociationTM affinity group, telecommunications
benefits and similar business services will become primary sources for
growth. No other company in our industry can offer the services that MBE
can offer these cost-conscious customers.
National Accounts Clients
These are some of the companies MBE welcomed to its national accounts
program during FY96, providing the extensive reach of our network and
flexibility of our services to their field organizations and customers:
Armstrong World Industries, Building Products Division, Lancaster, PA;
world's largest manufacturer of acoustical ceilings, walls and suspension
systems
Motorola, Radio Parts Services Group, Schaumburg, IL; service
commercial radios
Sharp Electronics, Mahwah, NJ; manufacturer and sales of
consumer and business electronics
I.D. Link Company Inc., Spokane, WA; personal property identification and
recovery service
Konica Business Machines USA., Inc. Windsor, CT; copier, fax and
multifunctional office equipment supplier
D&J Glass & Art Clinic, Sioux Falls, SD; art and glass restoration
Monitech Inc., Moonachie, NJ; depot repair of all types of computer
displays, specializing in 19'' to 21'' models
Thermador, Los Angeles, CA; original equipment manufacturer and servicer
of high-end kitchen appliances
Checkwriter Systems, Encino, CA; largest independent organization for
check protection equipment
National PC Systems, Encino, CA; national third party depot service for
tens of thousands of computer users
Tracker Corporation of America, New York, NY; identification and recovery
of lost and/or stolen possessions
Associated Distribution Logistics, New Hyde Park, NY; servicer of computer
equipment
Focusing Global Resources To Build Local Strength
MBE aggressively supports the local marketing efforts of its franchise
owners with an effective range of activities designed to enhance brand
awareness and bring more customers into each center.
Creation of a permanent National Media Fund in FY96 was a watershed event
for domestic MBE franchisees. Begun in 1994 on a trial basis to support a
first-ever national advertising campaign, the fund was sustained by an
extra one and one-half percent advertising fee payment per month from each
participating MBE Center in the U.S. The positive impact on same-store
sales from the multi-million dollar advertising campaign that followed led
franchisees to approve the fund's conversion to permanent status well
before the 30-month trial was to conclude.
National advertising messages were integrated during the year within local
stores through special promotional materials, enabling individual centers
to leverage their marketing dollars.
We believe approximately four percent of the 16 percent increase in
domestic same-store sales during FY96 was due to the national TV campaign.
This came at a time when nationwide retail sales had virtually no
increase, attesting to the value of our advertising investment. The
National Media Fund will continue as a mainstay in network marketing
support.
In a related television advertising project, MBE was a sponsor of the
most-watched event in television history-the 1996 Super Bowl with 138.5
million viewers. MBE's 30-second commercial linked an American icon, the
Oscar Mayer Wienermobile, to our nationwide network of centers meeting the
driver's business services needs.
The campaign was supported by in-store point-of-purchase programs and a
direct mail campaign. MBE's name recognition in the U.S. climbed from 59.6
percent to 67.1 percent, according to a follow-up national market research
study. Within MBE's targeted household market segment, unaided awareness
more than doubled, from 12 percent to 28 percent. The survey also revealed
that one in five households had used MBE services in the previous 12 months,
and following the Super Bowl promotion, an additional 5 percent of
respondents said they were likely to turn to MBE for services.
MBE will continue to seek cross-promotional opportunities through
strategic partnerships with companies who share compatible customer
rofiles. Our goal is to not only build brand equity, but to also use the
promotional value of that equity to support in-store sales.
To insure the sense of reliability and professionalism inherent in a
consistent image, the Company places special emphasis on its re-imaging
program for older MBE Centers. During the past two years, approximately
1,200 centers have been re-imaged. These are centers which have been
resold to new owners or which have been voluntarily enhanced by existing
owners.
Computer technology is another area in which MBE is moving quickly,
reflecting its explosive growth as a business and communications tool.
Virtually every MBE Center now is linked to the corporate office and all
other centers via electronic mail, with connections to international
centers carried through the World Wide Web. Most of the Company's
important operations, sales and administrative information are distributed
over MBEnet, our internal wide-area network.
MBE also has a home page on the Internet (http://www.mbe.com) with
information on customer services, franchising opportunities, marketing
promotions and investor news. The bottom line for the Company's
integration of state-of-the-art hardware and software is to increase speed
and consistency in collecting and disseminating information, leading to
greater efficiencies and productivity for center operators.
Network Accomplishments Lead to Investment Value
Strong improvements in key performance measures for FY96 provided firm
support for network growth, service enhancement and increased market shares.
Net income, total revenues, recurring royalty and marketing fees, and
total sales reported by franchise centers all reached record levels. These
outstanding results gave still greater impact to the Company's
long-standing practice of strengthening the network through the
reinvestment of capital in new programs and services.
MBE continues to build its revenue generation base through sustained
growth in the number of centers. In FY96 we sold 287 new centers
domestically and our master licensees sold 151 centers internationally.
Total revenues of $59.1 million resulted chiefly from increases in royalty
and marketing fees, reflecting the strength of same-store sales and the
number of centers in our network. Total revenues rose 17 percent from the
prior year.
Revenues from royalty and marketing fees increased 25 percent in FY96 and
accounted for 52 percent of the Company's revenues. Total recurring
revenue, of which royalties and marketing fees are a major portion, were
69 percent, up from 61 percent in FY95. This growth is the result of
network expansion and improvements in same-store sales. Each of the
accomplishments outlined above helped sustain the Company's excellent cash
position of recent years, providing key resources for growing and
strengthening our network throughout the world.
MBE also selectively repurchases area franchise licenses in the U.S. that
have reached maturity. Because each transaction in this buyback program
means a doubling of recurring revenues and a favorable incremental
after-tax return, this strategy is a prudent deployment of the Company's
capital. As of April 30, 1996, the Company had re-acquired area franchise
licenses for Alameda County, CA; Montgomery County, MD; Washington, D.C.;
the state of Colorado; and a portion of northern California and Nevada.
Nearly 20 percent of MBE centers operating at the end of FY96 were owned
by individuals who owned one or more centers, which we recognize as a
clear endorsement of MBE's business philosophy. The Company supports
existing owners in these endeavors by offering special financing packages
for initial leasing and other startup costs.
The Company works to strengthen the network by re-acquiring
underperforming area franchises and individual centers or facilitating
their transfer to owners with a favorable track record.
In addition to the customers we serve, many investors also have recognized
the value of MBE. During the period between the beginning of FY96
(May 1, 1995) and the preparation of this annual report in July, 1996 the
price of our common stock more than doubled reaching a record of $23.00 on
July 1, 1996.
<TABLE>
Five-Year Summary of Selected Financial Data
(In thousands, except per share data)
Selected Financial Data
<CAPTION>
Fiscal Years Ended April 30,
1996 1995 1994 1993 1992
_________________________________________
<S> <C> <C> <C> <C> <C>
Revenue:
Royalty and marketing fees $30,947 $24,673 $19,972 $15,935 $12,796
Franchise fees 8,557 8,670 7,837 9,790 9,198
Sales of supplies
and equipment 10,839 10,020 10,820 9,416 9,203
Interest income on leases
and other 6,975 5,424 3,972 4,063 4,441
Company centers 1,789 1,564 1,059 1,051 1,019
_______ _______ ______ ______ ______
Total revenue 59,107 50,351 43,660 40,255 36,657
Cost and Expenses:
Franchise operations 14,881 12,506 10,480 8,484 7,158
Franchise development 5,883 5,090 3,896 4,077 4,085
Cost of supplies
and equipment 8,465 7,915 8,914 7,697 7,778
Marketing 4,068 4,630 3,713 3,112 3,260
Administration 10,293 7,878 6,105 4,776 4,664
Company centers 1,842 1,598 1,026 1,019 1,000
______ ______ ______ ______ ______
Total cost and expenses 45,432 39,617 34,134 29,165 27,945
Interest on investments
and other 674 447 642 509 418
______ ______ ______ _______ _____
Income before taxes 14,349 11,181 10,168 11,599 9,130
Provision for income taxes 5,620 4,411 4,136 4,716 3,670
______ ______ ______ _______ ______
Net income $ 8,729 $ 6,770 $ 6,032 $ 6,883 $ 5,460
======= ======= ======= ======= =======
Net income per share $ 0.77 $ 0.60 $ 0.49 $ 0.56 $ 0.46
======= ======= ======= ======= =======
Balance sheet data at April 30:
Total assets $75,766 $64,294 $55,211 $56,178 $44,148
Long-term debt 1,402 1,337 -- -- --
Shareholders' equity 61,363 52,145 50,115 49,508 38,097
Working capital 33,143 22,565 24,102 26,674 19,520
</TABLE>
To date, the company has not declared or paid any cash dividends on its
common stock.
<TABLE>
Operating Data 1996 1995 1994 1993 1992
_______________________________________
<CAPTION>
Domestic Centers Fiscal Years
Ended April 30,
<S> <C> <C> <C> <C> <C>
MBE Centers opened 281 264 305 333 270
Left system 23 25 17 16 7
MBE Centers closed 36 26 20 25 29
MBE Centers operating 2,600 2,378 2,165 1,897 1,605
International Centers Fiscal
Years Ended April 30,
MBE Centers opened 136 114 113 70 24
MBE Centers closed 14 2 6 1 0
MBE Centers operating* 449 327 215 108 39
</TABLE>
*These centers are under different arrangements than the domestic centers
for the payment of franchise fees and royalties to the master licensees
and MBE.
Management's Discussion and Analysis
(for Fiscal Years Ended April 30, 1996, 1995, and 1994)
Overview
Mail Boxes Etc. ("MBE" or the "Company") demonstrated that it is
continuing to rebound during FY96. Revenue, net income and net income per
share grew to all-time highs during FY96. Revenue increased to $59.1
million, a 17% increase, net income grew to $8.7 million, a 29% increase
and net income per share was $.77, a 28% increase.
The network grew to a total of 3,049 centers worldwide (2,600 in the U.S.
and 449 internationally). This helped propel the strong royalty and
marketing fee growth of 25% achieved during FY96. Recurring revenues, of
which royalties and marketing fees are the primary component, increased
to about 69% of total revenues, up from 61% in FY95.
During FY96, MBE continued to record strong individual center sales in the
U.S. with 287 new franchises sold. Management continues to make increasing
domestic franchise sales a top priority, but cautions that market factors
plus the saturation of a few key markets may make this a challenging
process.
Except for the historical information contained herein, the matters
discussed in this annual report are forward-looking statements that
involve risks and uncertainties. These are discussed more fully in the
section entitled "Risk Factors" on page 15 and include such items as
pending litigation, increasing competition and the possibility of a strike
against UPS by its union. Consequently, actual results may differ
materially from those projected. These forward-looking statements
represent the Company's judgement as of June 7, 1996. The Company
disclaims, however, any intent or obligation to update these
forward-looking statements.
Revenues
Total revenues increased 17% for FY96 and 15% for FY95. As more fully
described below, the FY96 revenue growth resulted primarily from an
increase in royalty and marketing fees which resulted from an increase in
same-store sales and an increase in the number of centers in the system.
Revenues from royalty and marketing fees increased by 25% during FY96 and
24% during FY95. These increases are the result of growth of the network
through the opening of 281 individual centers and a 16 percent increases
in same-store sales.
MBE believes that the growth in same-store sales during FY96 was due in
part to the national television advertising program launched at the
beginning of FY95. Without this program, management believes that this
increase would have been about 12%. Management believes the effect of the
national television advertising program will continue to be beneficial,
and produce same-store sales growth during the upcoming fiscal year.
The increase in royalty and marketing fees attributable to these two
factors for each fiscal year is:
FY96 FY95 FY94
(In thousands)
__________________________________
Centers open less than 1 year $1,686 $1,450 $1,418
Centers open more than 1 year $4,588 $3,252 $2,619
The increase in these revenues amounted to $6.3 million in FY96 and $4.7
million in FY95. New centers opened (281 in FY96, 264 in FY95 and 305 in
FY94) also contributed to the strong royalty growth rates shown above.
Total franchise fees, which consist of individual, area, renewal and
master license sales, decreased by 1% during FY96 and increased by 11% in
FY95. The following table shows the number of sales for the primary
categories during each of the last three years:
FY96 FY95 FY94
------------------------
Domestic individual franchise sales 287 312 270
International individual franchise sales 151 148 120
Domestic individual center franchise fees were down by 6% during FY96 and
up by 7% in FY95. The decrease during FY96 resulted because 25 fewer
franchises were sold. The increase in FY95 was due to 42 more franchises
being sold. International master license sales weakened during FY96. MBE
believes that master license sales may not be a significant source of
revenue during FY97 and beyond and that the timing of these sales will not
be predictable.
Sales of supplies and equipment increased by 8% in FY96 and decreased by
7% in FY95. The sales margin was 22% in FY96 and 21% in FY95. The sales
margin increased due to a slightly more favorable sales mix in FY96
compared to FY95 and FY94.
Interest income on equipment leases and other income increased by 29%
during FY96 and by 37% during FY95. The components of this revenue
category include interest income earned on leases and notes, finance
charges, late fees, and various administrative fees. The FY96 increase
resulted from additional financing programs made available to franchisees,
the sale of MBEnet software to the network and other added service
revenues. In addition, the administrative fees on national vendor
contracts increased as the transaction volumes increased.
Company centers' revenues grew by 14% in FY96 compared to 48% in FY95. The
Company centers' combined operating margin was negative in both FY96 and
FY95. These centers serve as test sites for new products and ideas and to
train Company employees and new franchisees. As such, their primary
objective is to develop and test new products and services and the result
is that their operating expenses are higher and more volatile than might
be experienced by a typical owner-operated franchise.
Costs and Expenses
Total costs and expenses increased by 15% during FY96 and 16% during FY95.
Costs and expenses were 77% of revenues during FY96 and 79% during FY95
and 78% in FY94.
Franchise operations expenses, which are incurred to provide operational
support to the network, increased by 19% in FY96, and 19% in FY95. These
expenses include royalties paid to area franchisees to support the
network. These costs will generally increase as the network's royalty
revenues increase.
Franchise development expenses increased by 16% during FY96 and by 31%
during FY95. The smaller increase during FY96 was due, in part, to fewer
sales commissions paid resulting from lower franchise sales.
Marketing expenses decreased by 12% during FY96 and increased by 25% in
FY95. The decrease during FY96 was largely as a result of MBE not making a
contribution to the National Media Fund as it did in FY95.
General and administrative expenses increased by 31% during FY96 and 29%
during FY95. The increase in FY96 was primarily due, to increases in bad
debt reserves and in litigation expenses. Overall, these expenses will
tend to continue to increase as the domestic and international network
grows.
The Company's effective tax rates were 39.2% in FY96 and 39.5% in FY95 and
40.7% in FY94. The provision for income taxes is computed in accordance
with the Statement of Financial Accounting Standards No. 109, which became
effective for the Company's fiscal year 1994.
Net Income and Income Per Share
Net income increased by 29% in FY96 and by 12% in FY95. Net income per
share increased by 28% during FY96 and by 22% during FY95.
Liquidity and Capital Resources
The Company believes that it has adequate financial resources for its
present and projected operating requirements. The following table
summarizes MBE's cash and working capital position at the end of the last
three years:
FY96 FY95 FY94
(In thousands)
--------------------------
Cash and short-term investments $23,241 $10,428 $10,691
Working capital $33,143 $22,565 $24,102
The decline in the amount of cash and short-term investments and working
capital during FY95 and FY94 was the result of management's decision to
use a portion of these funds to repurchase shares of MBE's common stock.
During FY95, MBE repurchased 564 thousand shares of stock at a cost of
about $4.8 million. During FY94, MBE repurchased 765 thousand shares of
stock at a cost of about $6.3 million. During FY96, MBE repurchased only
84 thousand shares because this use of working capital was less attractive
than other alternatives. Management is authorized to repurchase slightly
over an additional one million shares.
During the second quarter of FY95, the Company obtained a $7 million line
of credit from a bank. At the end of FY96, MBE was using approximately
$0.8 million of the line of credit to advance funds to the franchisees'
National Media Fund for advanced media purchases. Interest on this advance
is paid by the National Media Fund.
Risk Factors
The Company has become subject to various lawsuits and claims from its
franchisees and former employees in the course of conducting its business.
While the Company intends to vigorously defend these actions management
is unable to make a meaningful estimate of the amount or range of loss that
could result from an unfavorable outcome of all pending litigation. It is
possible that the Company's results of operations in a particular quarter
or annual period could be materially, adversely affected by an ultimate
unfavorable outcome of certain pending litigation. Management believes,
however, that the ultimate outcome of all pending litigation should not
have a material adverse effect on the Company's financial position or
liquidity.
While it is difficult to assess potential effects of federal and state
legislation in the U.S. or new international laws that may impact the
industry, the Company does not anticipate any material adverse effects
from such legislation or laws at this time.
The Company experiences competition from several sources. Direct
competition comes from other national chains and independents and from
specialty service providers, such as copy centers, quick print centers and
office supply companies. There is growing competition from the United
States Postal Service as it attempts to compete with the MBE concept with
its Postal Service Centers located in shopping centers. To meet these
competitive threats, MBE is responding on several fronts. The Company is
continuing to explore ways of adding additional profit centers, such as
color copying, No-Limit ShippingSM, selling long-distance phone services,
and continued expansion of the national accounts programs. MBE is also
attempting to strengthen its already strong customer service image by
encouraging centers to extend their hours to meet growing customer demands.
Finally, MBE has ongoing training and educational programs for its
franchisees that cover topics ranging from customer service to marketing
products to new and existing customers. MBE believes that these programs,
combined with the national television advertising program, will enable it
to more effectively compete in a competitive world market.
UPS packing and shipping revenues are significant to the Company, as
described in note 12 on page 23. Because of this, a prolonged strike
against UPS by its union could have an adverse effect on the Company's
royalty and marketing fee revenues.
The Company has expanded its internal sales staff in an effort to keep the
sales of individual, domestic franchises at the current level of about
300 per year. However, because some markets are saturated and because of
competition from those that are imitating the MBE concept, this may not be
possible.
Changes in Financial Condition
At year-end, the Company had $1.4 million in cash and cash equivalents and
$21.8 million in short-term investments. The Company's operating
activities generated a cash flow of $10.8 million in FY96. In past years,
the primary use of cash in operations was to finance the growth and
expansion of the network, both domestically and internationally. The
Company has elected to finance this expansion internally because it
receives a higher return than can be achieved through short-term
investments.
The Company's investing activities used $8.8 million in FY96. Principal
re-payments on leases were the primary source of these funds while the net
purchase of short-term investments was the primary use. Financing
activities used $1.0 million in FY96 primarily to repurchase stock. The
borrowings by MBE were used to purchase up-front advertising for the
National Media Fund.
The Company does not plan to fundamentally change its operating practices
with regard to cash management in the foreseeable future. It believes that
the practice of primarily financing its growth and expansion internally is
appropriate for both the Company and the network. Management will,
however, continue to enter into external financing arrangements if
appropriate. Management further believes that its existing capital
resources, combined with the cash expected to be generated from its
operating activities, will be adequate to fund the Company's cash needs
for the foreseeable future unless substantial adverse judgements occur in
any of the lawsuits in which the Company is involved.
<TABLE>
Consolidated Balance Sheets
(In thousands, except share amounts)
<CAPTION>
Assets April 30,
1996 1995
-------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,416 $ 391
Restricted cash - franchisee deposits 2,073 1,614
Short-term investments 21,825 10,037
Accounts receivable, net of allowance
for doubtful accounts of $1,507 and
$1,212, at April 30, 1996 and 1995,
respectively 6,799 6,723
Receivable from National Media Fund 770 1,600
Inventories 544 983
Current portion of notes receivable 6,756 6,065
Current portion of net investment
in sales-type and direct
financing leases 2,414 2,489
Deferred income taxes 1,846 1,454
Re-acquired area and center rights
held for resale 638 1,016
Other 1,063 1,005
------ ------
Total current assets 46,144 33,377
Notes receivable, net 10,831 11,429
Net investment in sales-type and direct
financing leases 7,518 8,840
Property and equipment:
Land 1,200 1,200
Building and improvements 4,201 4,178
Office furniture and equipment 4,018 3,486
Vehicles 209 195
----- -----
Total property and equipment 9,628 9,059
Less accumulated depreciation
and amortization 4,247 3,444
----- -----
Net property and equipment 5,381 5,615
Excess of cost over assets acquired, net of
accumulated amortization of $549 and $492
at April 30, 1996 and 1995, respectively 441 498
Re-acquired area rights, net of accumulated
amortization of $240 and $79 at
April 30, 1996 and 1995, respectively 3,240 3,031
Deferred income taxes 1,307 651
Other assets 904 853
------- -------
Total assets $75,766 $64,294
======= =======
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 2,096 $ 1,151
Franchisee deposits 2,619 2,153
Royalties, referrals and
commissions payable 2,515 2,449
Accrued employee expenses and
related taxes 1,963 1,463
Other accrued expenses 2,012 1,174
Income taxes payable 838 717
Current maturities of long-term debt 958 1,705
------ ------
Total current liabilities 13,001 10,812
Long-term debt, net of current maturities 1,402 1,337
Commitments and contingencies
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 11,139,698 and 11,058,387 shares
issued outstanding at
April 30, 1996 and 1995, respectively 14,944 14,455
Retained earnings 46,419 37,690
------ ------
Total shareholders' equity 61,363 52,145
Total liabilities and
shareholders' equity $ 75,766 $ 64,294
======== ========
</TABLE>
See accompanying notes
<TABLE>
Consolidated Statements of Income
(In thousands, except per share data)
<CAPTION>
Fiscal Years Ended April 30,
1996 1995 1994
-------------------------------
<S> <C> <C> <C>
Revenue:
Royalty and marketing fees $30,947 $24,673 $19,972
Franchise fees 8,557 8,670 7,837
Sales of supplies and equipment 10,839 10,020 10,820
Interest income on leases
and other 6,975 5,424 3,972
Company centers 1,789 1,564 1,059
------ ------ ------
Total revenue 59,107 50,351 43,660
Cost and Expenses:
Franchise operations 14,881 12,506 10,480
Franchise development 5,883 5,090 3,896
Cost of supplies and
equipment sold 8,465 7,915 8,914
Marketing 4,068 4,630 3,713
General and administrative 10,293 7,878 6,105
Company centers 1,842 1,598 1,026
------ ------ ------
Total cost and expenses 45,432 39,617 34,134
------ ------ ------
Operating income 13,675 10,734 9,526
Interest on investments and other 674 447 642
------ ------ ------
Income before provision for
income taxes 14,349 11,181 10,168
Provision for income taxes 5,620 4,411 4,136
-------- -------- --------
Net income $ 8,729 $ 6,770 $ 6,032
======== ======== ========
Net income per common share $ 0.77 $ 0.60 $ 0.49
======== ======== ========
Weighted average common and common
equivalent shares outstanding 11,403 11,357 12,433
======== ======== ========
</TABLE>
See accompanying notes
<TABLE>
Consolidated Statements of Shareholders' Equity
(In thousands)
<CAPTION>
Common Stock Retained
Shares Amount Earnings Total
----------------------------------------------
<S> <C> <C> <C> <C>
Balance, April 30, 1993 12,267 $24,620 $24,888 $49,508
Exercise of employee
stock options 72 429 429
Common stock repurchased (770) (6,317) (6,317)
Income tax benefit from
stock option activity 463 463
Net income 6,032 6,032
------ ------ ------ ------
Balance, April 30, 1994 11,569 19,195 30,920 50,115
Exercise of employee
stock options and other 146 928 928
Common stock repurchased (657) (5,681) (5,681)
Income tax benefit from
stock option activity 13 13
Net income 6,770 6,770
------ ------- ----- -----
Balance, April 30, 1995 11,058 14,455 37,690 52,145
Exercise of employee
stock options and other 221 2,135 2,135
Common stock repurchased (140) (1,922) (1,922)
Income tax benefit from
stock option activity 276 276
Net income 8,729 8,729
------ ------- ------- ------
Balance, April 30, 1996 11,139 $14,944 $46,419 $61,363
====== ======= ======= =======
</TABLE>
See accompanying notes
<TABLE>
Consolidated Statements of Cash flows
(In thousands)
<CAPTION>
Fiscal Years Ended April 30,
1996 1995 1994
------------------------------
<S>
Operating Activities: <C> <C> <C>
Net income $ 8,729 $ 6,770 $ 6,032
Adjustments to reconcile net
income to net cash provided
from (used in) operating
activities:
Depreciation and amortization 1,030 1,024 1,054
Gain on sale of equipment
under sales type lease
agreements (558) (681) (965)
Increase in allowance
for bad debts 880 1,236 658
Loss on retirement of
fixed assets 4 122 22
Deferred income taxes (1,054) (1,023) (843)
Changes in assets and liabilities:
Restricted cash (459) (252) 624
Accounts and notes receivable (1,049) (7,386) (4,772)
Receivable from National
Media Fund 830 (1,600) --
Assets leased to franchisees
and inventories (1,235) (1,999) (3,689)
Re-acquired area and center
rights held for resale 378 261 (427)
Other current assets (58) 421 (724)
Other assets 152 173 (206)
Accounts payable 945 419 (295)
Franchisee deposits 466 747 (630)
Royalties, referrals and
commissions payable 66 610 160
Accrued employee expenses
and related taxes 500 697 (173)
Other accrued expenses 838 821 17
Income taxes payable 397 730 (189)
------ ------ --------
Net cash flows provided
from (used in)
operating activities 10,802 1,090 (4,346)
Investing Activities:
Net change in short-term
investments (11,773) 389 5,685
Additions to property and
equipment (472) (477) (438)
Principal payments received
on sales-type leases 3,628 3,223 3,893
Re-acquired area rights (185) (887) --
--------- -------- -------
Net cash flows provided from
(used in) investing
activities (8,802) 2,248 9,140
Financing Activities:
Borrowing under line of credit 3,720 3,800 --
Repayments under line of credit (4,550) (2,200) --
Repayments on notes payable (146) (54) --
Repurchase of common shares (1,922) (5,681) (6,317)
Proceeds from the issuance of
common stock 1,923 937 429
-------- -------- --------
Net cash flows used in
financing activities (975) (3,198) (5,888)
-------- -------- --------
Increase (decrease) in cash and
cash equivalents 1,025 140 (1,094)
Cash and cash equivalents at beginning
of year 391 251 1,345
-------- -------- ---------
Cash and cash equivalents at end of year $ 1,416 $ 391 $ 251
======== ======== =========
Supplemental Disclosures of
Cash Flow Information:
Cash paid during the year for
income taxes $ 6,348 $ 5,479 $ 5,965
Interest expense 155 98 32
Supplemental Schedule of Non-Cash
and Financing Activities
Equipment sold under
sales-type leases $ 2,232 $ 2,724 $ 4,596
Cost of equipment sold
under sales-type leases 1,674 2,043 3,631
Notes payable issued in
connection with re-acquired
area rights 185 1,495 --
Accounts and notes forgiven
in connection with re-acquired
area rights -- 468 --
Exchange of area rights -- 260 --
</TABLE>
See accompanying notes
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Organization
Mail Boxes Etc. ("MBE" or "the Company") was incorporated in November,
1983, as a California corporation. It operates domestically through one
wholly-owned subsidiary, Mail Boxes Etc. USA, Inc. This subsidiary grants
territorial franchise rights for the operation or sale of service centers
specializing in postal, packaging, business, and communications services.
The purchase price paid by the Company to acquire this subsidiary exceeded
the subsidiary's net assets by $858 thousand; the excess is being amortized
on the straight-line method over 20 years.
The Company acquired a majority interest in the master license for the
United Kingdom during FY96. Subsequent to the end of the year MBE acquired
the remaining interest in the United Kingdom and intends to operate this
entity as a wholly-owned subsidiary MBE-UK. All accounts of this foreign
subsidiary have been measured using U.S. dollars as the functional currency.
The gains and losses arising from the measurement of the foreign
subsidiary's account have not been significant.
The Company provides franchisees with a system of business training,
advice regarding site location, marketing, advertising programs and
management support designed to assist the franchisee in opening and
operating MBE Centers.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
Revenue Recognition
The Company enters into area and individual franchise agreements in the
United States and master license agreements in other countries. Area
franchise agreements grant the area franchisee the exclusive right to
market individual franchise centers for the Company in the area
franchisee's territory. The area franchisee generally receives a
commission on individual franchises sold as well as a share of future
royalties earned by the Company from centers in the area franchisee's
territory. Individual franchise agreements grant the individual franchisee
the exclusive right to open and operate a franchise center in the
individual franchisee's territory.
Franchise fee revenue is recognized upon completion of all significant
initial services provided to the franchisee, area franchisee or master
licensee and upon satisfaction of all material conditions of the franchise
agreement, area franchise agreement or master license.
For individual franchise sales, the significant initial obligations that
must be completed before any revenue is recognized are: the site is
located, a store lease is in place, the franchise agreement has been
signed, the store design and layout is complete, all manuals and systems
have been provided, and training at MBE is completed.
For area franchise sales, the significant initial obligations that must be
completed before any revenue is recognized are: all operating manuals are
provided, training is completed and a pilot center is opened. For master
license agreements, the significant initial obligations that must be
completed before any revenue is recognized are: all operating manuals are
provided and training is completed.
Revenue is recognized using the installment method when the revenue is
collectable over an extended period and no reasonable basis exists for
estimating collectibility.
On a monthly basis, all individual franchisees are required to pay royalty
and marketing fees to the Company based upon a percentage of each
franchisee's sales (as defined). Such fees are recognized as revenue based
upon reported or estimated sales activity by the franchisees. Revenue from
sales of supplies and equipment is recognized when orders are shipped, or
the lease is completed, whichever is later.
In FY95, the National Media Fund was created to administer national
advertising programs. The National Media Fund is managed by a committee of
area franchisees, individual franchisees and MBE. Certain advertising
fees, based on franchisees' sales (as defined), are collected by the
Company for the National Media Fund. Such advertising fees are not
included in the accompanying financial statements. As of April 30, 1996,
the Company had advanced $770 thousand to the National Media Fund to fund
certain national advertising programs. These advances, including interest,
are to be repaid to the Company during FY97 based on the collection of the
advertising fees and availability of funds.
Cash, Cash Equivalents and Short-Term Investments
The Company considers cash equivalents to be those instruments which have
original maturities of three months or less.
In May 1993, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," effective for fiscal years
beginning after December 15, 1993. The Company adopted the new standard
beginning May 1, 1994. The cumulative effect of the adoption of Statement
No. 115 was immaterial. Management determines the appropriate
classification of debt securities at the time of purchase and reevaluates
such designation as of each balance sheet date. Debt securities for which
the Company does not have the intent or the ability to hold to maturity
are classified as available for sale along with the Company's investments
in equity securities.
Securities classified as available for sale are carried at fair value,
with unrealized gains and losses, net of tax, reported in a separate
component of stockholders' equity. At April 30, 1996, the Company had no
investments that were classified as trading or held to maturity as defined
by Statement No. 115.
Realized gains and losses are included in interest income. The cost of
securities sold is based on the specific identification method. Interest
on securities classified as available for sale is included in interest
income.
The following is a summary of cash and the estimated fair value of
available for sale securities by balance sheet classification at
April 30, 1996:
Cash and cash equivalents (In thousands):
Cash $ 1,339
Money market fund 77
Short-term investments (In thousands):
U.S. Government guaranteed securities 4,000
Mutual fund preferred equity securities 17,825
--------
Total cash, cash equivalents and short-term investments $ 23,241
========
The estimated fair value of each investment approximates the amortized
cost, and therefore, there are no unrealized gains or losses as of
April 30, 1996.
"Restricted cash-franchisee deposits"is the amount that prospective
franchisees have deposited into a separate account managed by MBE. When
all of the requirements for recognizing revenue for an individual, area
or master license sale are completed (see the "Revenue Recognition"
section of Note 1), then the deposit amount is transferred from this
separate account into MBE's regular account and the revenue from the sale
is recognized. If MBE's obligations are not completed then these deposits
are usually refundable. The account, "Franchisee deposits", in the
liability section of the balance sheet includes the restricted cash
deposit amount plus any other monies deposited with MBE by its
franchisees. These amounts are either not refundable or they are not
related to a sale.
Concentration of Credit Risk
The Company invests its excess cash in debt and equity instruments of
financial institutions and corporations with strong credit ratings. The
Company has established guidelines relative to diversification and
maturities that attempt to maintain safety and liquidity. These guidelines
are periodically reviewed and modified to take advantage of trends in
yields and interest rates. The Company has not experienced any significant
losses on its cash equivalents or short-term investments.
Receivables from franchisees include trade receivables, lease receivables
and notes receivable. Credit is extended based on an evaluation of the
franchisee's financial condition. Sales-type and direct financing leases
are collateralized by the leased equipment and fixtures.
Trade receivables are not collateralized. However, the center ownership
transfer process requires that amounts owed be paid when a center is
transferred.
Notes receivable from area franchisees and master licensees are
collateralized by the area rights or master license rights, respectively.
Credit losses are provided for in the financial statements.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect 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 resources and expenses
during the reporting period. Actual results could differ from those
estimates.
Inventories
Inventories consist of supplies and equipment held for resale to
franchisees and equipment held for lease. Inventories are recorded at the
lower of cost (first-in, first-out method) or market.
Re-Acquired Individual and Area Franchise Rights
The Company repurchases franchise rights for two primary reasons. The
Company may repurchase area rights with the intention of developing a
better support system and then reselling the areas within a short period
of time. The Company may acquire individual center rights to upgrade the
Center and then resell it within a short period of time. The Company had
an investment of approximately $638 thousand and $1.0 million in such
individual and area rights at April 30, 1996 and 1995, respectively. The
Company may also repurchase the area rights with the primary intention of
retaining the royalties normally shared with the former area franchisees
and maintaining such rights as long-term investments. The area repurchases
have been accounted for as purchases as opposed to pooling transactions.
The Company records these area repurchases at cost less accumulated
amortization. Periodically the Company assesses the fair value of these
areas based on estimated cash flows to determine if an impairment in the
value has occurred and an adjustment is necessary. As of April 30, 1996
no adjustment is necessary. The Company had an investment of $3.2 million
in such area rights at April 30, 1996. Area franchise rights held as
long-term investments are amortized over a period of 20 years.
Property and Equipment
Property and equipment is stated at cost. Depreciation and amortization
is computed using the straight-line method over the following estimated
useful lives:
Building 31.5 years
Building improvements 12.5-31.5 years
Office furniture and equipment 3-5 years
Vehicles 3 years
New Accounting Standards
During 1995, Financial Accounting Standards Board issued SFAS No. 123
"Accounting for Stock Based Compensation." The statement allows companies
to measure compensation cost in connection with employee stock
compensation plans using a fair value based method or to continue to use
an intrinsic value based method, which generally does not result in
compensation expense. The Company plans to continue using the intrinsic
value based method.
During FY96, the Company adopted SFAS No. 121, Accounting for the
Impairment of Long - Lived Assets. The effect of the adoption of SFAS 121
was not material.
Net Income Per Common Share
Earnings per share are based on the weighted average number of common
shares and common share equivalents (stock options) outstanding during
the period.
Income Taxes
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standard No. 109 "Accounting for Income Taxes."
2. Notes Receivable
<TABLE>
Notes receivable consist of the following at April 30:
<CAPTION>
1996 1995
(In thousands)
---------------------
<S> <C> <C>
Notes with interest rates ranging from
8%-14%, from individual franchisees,
due at varying dates through 2004. $11,170 $10,220
Notes with interest rates ranging from
8%-14%, from area franchisees,
due at varying dates through 2004. 6,611 6,220
Notes with interest rates ranging from
8.5% - 11.75%, from master licensees,
due at varying dates through 2001. 1,806 2,469
-------- --------
19,587 18,909
Less portion due within one year (6,756) (6,065)
Less allowance for uncollectible notes (2,000) (1,415)
-------- --------
$10,831 $11,429
======== ========
Interest earned for the fiscal year ended
April 30: $ 2,041 $ 1,537
======== ========
</TABLE>
Scheduled principal maturities for notes receivable as of April 30, 1996,
are as follows (in thousands): 1997 - $6,756; 1998 - $3,838;
1999 - $3,188; 2000 - $2,321; 2001 - $1,566 and thereafter - $1,918.
At April 30, 1996, the Company is obligated to fund approximately $350
thousand under certain financing programs offered to franchisees.
3. Net Investment Sales -
Type and Direct Financing Leases
<TABLE>
The Company leases various types of office and computer equipment to
franchisees under three to eight-year lease agreements. The following
summarizes the components of the net investment in sales-type and direct
financing leases at April, 30:
<CAPTION>
1996 1995
(In thousands)
--------------------
<S> <C> <C>
Total minimum lease payments to be received $ 13,241 $ 15,429
Less unearned income (3,309) (4,100)
_________ _________
Net investment in sales-type and
direct financing leases 9,932 11,329
Less portion due within one year (2,414) (2,489)
_________ _________
$ 7,518 $ 8,840
========= =========
Interest earned for the fiscal year ended
April 30: $ 1,420 $ 1,525
========= =========
</TABLE>
Annual minimum lease payments subsequent to April 30, 1996, are as
follows (in thousands): 1997 - $3,608; 1998 - $3,176; 1999 - $2,506;
2000 - $1,759; 2001 - $1,122; and thereafter - $1,070.
4. Debt
The Company has a line of credit with a bank which allows maximum
borrowings of $7 million. As of April 30, 1996, $0.8 million has been
borrowed and $6.2 million is available for borrowing under the line of
credit.
The line of credit is unsecured and bears interest at a rate based on
LIBOR plus certain basis points (6.61% at April 30, 1996). The agreement
expires on September 1, 1998, at which time all outstanding borrowing can be
converted to a three-year term loan, which would be payable in equal
monthly installments. The line of credit agreement contains various
covenants, including limitations on additional indebtedness and
maintaining certain financial ratios.
5. Notes Payable
Long-term debt consists of notes payable to former area franchisees in
connection with the repurchase of area franchise rights. Payments are made
in monthly installments of $23 thousand including interest at 8% to 8.5%
per annum. Included in notes payable is $816 thousand payable to a former
area franchisee who is now an officer of the Company. Aggregate principal
maturities on notes payable at April 30, 1996 are as follows (in
thousands): 1997 - $162; 1998 - $176; 1999 - $174; 2000 - $154;
2001 - $167; and thereafter - $670.
6. Income Taxes
<TABLE>
The provision for income taxes consists of the following for each of the
years ended April 30:
<CAPTION>
1996 1995 1994
(In thousands)
---------------------------
<S> <C> <C> <C>
Current:
Federal $ 5,324 $ 4,352 $ 3,841
State 1,344 1,088 1,138
------- ------- -------
6,668 5,440 4,979
Deferred:
Federal (913) (890) (732)
State (135) (139) (111)
-------- ------- -------
(1,048) (1,029) (843)
-------- ------- -------
$ 5,620 $ 4,411 $ 4,136
======== ======== ========
</TABLE>
The Company has derived tax deductions measured by the excess of the
market value over the option price at the date employee stock options were
exercised. The cumulative related tax benefit of approximately $752
thousand has been credited to common stock.
<TABLE>
Significant components of the Company's deferred tax assets for federal
and state income taxes as of April 30 are:
<CAPTION>
Deferred tax assets: 1996 1995 1994
(In thousands)
---------------------------
<S> <C> <C> <C>
Valuation reserves $ 2,646 $ 1,679 $ 628
State taxes 339 295 352
Deferred compensation 168 131 96
------- ------- -------
Total deferred tax assets $ 3,153 $ 2,105 $ 1,076
======= ======= =======
</TABLE>
<TABLE>
A reconciliation between the amount of tax computed by multiplying
income before taxes by the applicable statutory rates and the amount of
reported taxes is as follows:
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Statutory rate 35.0% 34.0% 34.0%
State tax, net of federal
tax benefit 5.5% 5.6% 6.5%
Other (1.3%) (0.1%) 0.2%
------- ------- ------
39.2% 39.5% 40.7%
======= ======= ======
</TABLE>
7. Stock Options
The Company has granted options to directors, officers and key employees
under stock option plans to purchase shares of the Company's common stock.
Options are generally granted at prices equal to the fair market value of
the shares at the date of grant and are generally exercisable in equal
increments over three to five years, commencing one year after the date of
grant. At April 30, 1996, 394 thousand options were exercisable and the
Company had nearly 3.0 million shares available for future grant under the
stock option plan for employees and 160 thousand shares available for
future grant under the stock option plans for outside directors.
Transactions under the stock option plans during FY96, FY95 and FY94 are
summarized as follows:
<TABLE>
<CAPTION>
Number of Shares Price Per Share
(In thousands)
-------------------------------------
<S> <C> <C>
Outstanding at April 30, 1993 768 $ 2.91-20.50
Granted 227 10.50-12.75
Exercised (72) 2.91- 9.43
Cancelled (76) 7.03-13.75
---- -------------
Outstanding at April 30, 1994 847 4.13-20.50
Granted 258 6.81- 9.88
Exercised (146) 4.13- 7.74
Cancelled (45) 6.81-13.75
---- -------------
Outstanding at April 30, 1995 914 4.13-20.50
Granted 441 8.25-18.88
Exercised (221) 4.13-13.75
Cancelled (21) 9.44-13.75
------ -------------
Outstanding at April 30, 1996 1,113 $ 4.13-20.50
====== =============
</TABLE>
8. Franchise Fees
<TABLE>
Franchise fees consist of the following for each of the years ended
April 30:
<CAPTION>
1996 1995 1994
(In thousands)
----------------------------
<S> <C> <C> <C>
Individual franchises $6,397 $6,774 $6,310
Area franchises 292 58 218
Master licenses &
international fees 957 1,170 1,142
Transfer and renewal fees 911 668 167
------ ------- -------
$8,557 $8,670 $7,837
====== ====== =======
</TABLE>
9. Royalty Expenses
Royalties shared with area franchisees are included in franchise
operations in the accompanying consolidated statements of income and are
as follows (in thousands): 1996 - $11,686; 1995 - $9,689; and 1994 - $8,126.
10. Employee Benefit Plans
In November 1988, the Company adopted an amended and restated Stock
Purchase and Salary Savings Plan (Plan) covering substantially all
employees that have been employed for at least six months and meet other
age and eligibility requirements. Employees may contribute up to ten
percent of compensation per year (subject to a maximum limit by federal
tax law) into various funds.
Profit sharing contributions by the Company to the Plan are made at the
discretion of the Board of Directors and were $450 thousand, $420 thousand
and $120 thousand for the years ended April 30, 1996, 1995 and 1994,
respectively. At the discretion of the Board of Directors, the Company may
also make annual matching contributions to the Plan. Matching
contributions for 1996, 1995 and 1994 were equal to 50% of the employee's
contributions.
The Company has entered into an employment agreement with its president
and chief executive officer, under which the Company agreed to obtain a
split dollar life insurance policy for his benefit. The Company
contributed $100 thousand in both FY96 and FY95, towards the funding of
this policy. The Company has retained an equity interest in this policy
equal to the extent of its contributions. Consequently, there is no effect
on the Company's earnings as a result of these contributions.
Contributions after FY96 will be determined annually by the Board of
Directors.
11. Litigation
The Company has become subject to various lawsuits and claims from its
franchisees and former employees in the course of conducting its business.
While the Company intends to vigorously defend these actions, management
is unable to make a meaningful estimate of the amount or range of loss
that could result from an unfavorable outcome of all pending litigation.
It is possible that the Company's results of operations in a particular
quarter or annual period could be materially adversely affected by an
ultimate unfavorable outcome of certain pending litigation. Management
believes, however, that the ultimate outcome of all pending litigation
should not have a material adverse effect on the Company's financial
position or liquidity.
12. Related Party Transactions
A significant portion of the franchisees' revenues is generated by UPS
services. The Company receives royalty revenue based on revenues earned by
the franchisees. The Company recognized royalty and marketing fee revenues
generated from UPS services of $9.3 million, $7.4 million and $5.9
million for the years ended April 30, 1996, 1995, and 1994, respectively.
13. Quarterly Information (Unaudited)
The following quarterly information includes all adjustments which
management considers necessary for a fair statement of such information.
For interim quarterly financial statements, the provision for income taxes
is estimated using the best available information for projected results
for the entire year (in thousands, except for per share data).
<TABLE>
<CAPTION>
FY96 First Second Third Fourth
---------------------------------------
<S> <C> <C> <C> <C>
Total revenues $12,937 $15,240 $16,329 $15,275
Total cost and expenses 10,279 11,804 11,870 11,479
Provision for income taxes 1,036 1,345 1,751 1,488
Net income 1,622 2,091 2,708 2,308
Earnings per share .14 .18 .24 .20
FY95 First Second Third Fourth
---------------------------------------
Total revenues $ 9,845 $12,900 $14,837 $13,216
Total cost and expenses 7,963 10,225 11,087 10,342
Provision for income taxes 768 1,088 1,434 1,121
Net income 1,114 1,587 2,316 1,753
Earnings per share .10 .14 .20 .16
</TABLE>
Report of Ernst & Young LLP, Independent Auditors
Shareholders and Board of Directors
Mail Boxes Etc.
We have audited the accompanying consolidated balance sheets of Mail Boxes
Etc. as of April 30, 1996 and 1995, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the
three years in the period ended April 30, 1996. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Mail
Boxes Etc. at April 30, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period
ended April 30, 1996, in conformity with generally accepted accounting
principles.
June 4, 1996
San Diego, California
Shareholder Information
Communications
Mail Boxes Etc. shareholder publications (annual report, proxy statement
and mid-year report) are mailed to all shareholders.
Investor Relations and Franchise Opportunities
General questions about the Company should be directed to Mail Boxes Etc.,
Investor Relations, 6060 Cornerstone Court West, San Diego, CA 92121- 3795,
telephone (619) 455-8800, or Internet: [email protected]. MBE's home page
address on the Internet is http://www.mbe.com. If you would like to
receive the most recent MBE Company information via fax, please call
(800) 356-8065. For information on MBE franchise opportunities, call
(800) 456-0414.
Annual Report on Form 10-K
To receive a copy of MBE's most recent annual report or Form 10-K, as
filed with the Securities and Exchange Commission, write to: Investor
Relations, Mail Boxes Etc., 6060 Cornerstone Court West, San Diego,
CA 92121-3795.
Common Stock Information
The shares of the Company's common stock are traded in the
Over-The-Counter market as reported by the NASDAQ National Market System
under the symbol "MAIL". Options on MBE's common stock are traded on the
New York Stock Exchange under the symbol "MAQ."
Independent Auditors
Ernst & Young LLP, 501 West Broadway, Ste. 1100, San Diego, CA 92101.
Stock Transfer Agent and Registrar
First Interstate Bank, 707 Wilshire Blvd., Los Angeles, CA 90017.
Annual Meeting
Mail Boxes Etc. annual shareholders' meeting will take place on Friday,
August 23, 1996, at 10:30 a.m. (PDT) at the Wyndham Hotel,
5975 Lusk Blvd., San Diego, CA 92121.
Common Stock Data
NASDAQ price range of common stock.
FY Ended April 30, FY96 FY95
--------------------------------
Quarter High Low High Low
First $12.81 $ 8.25 $ 9.31 $6.63
Second 14.38 11.63 10.50 6.75
Third 15.75 12.38 11.25 9.50
Fourth 18.88 12.50 10.38 9.38
On July 1, 1996 the closing stock price was $23.00 The approximate number
of stockholders of record was 800 as of July 1, 1996.
To date, the Company has not declared or paid any cash dividends on its
common stock and does not expect to pay any cash dividends in the
foreseeable future.
Board of Directors
Michael Dooling,
Chairman of the Board
General Partner, Jacaranda Partners (investment partner-ship)
Anthony W. (Tony) DeSio,
President, Chief Executive Officer and Vice Chairman of the Board
Robert J. DeSio,
Vice President,
Training and Communications
Harry Casari,
Ernst & Young LLP
(retired partner)
James F. Kelly,
Chairman, Chief Executive Officer, Kelly, Anderson, Pethick & Associates,
Inc. (management consulting)
Daniel L. LaMarche,
Consultant to Integrated Marketing and Insurance Services
Joel Rossman,
Vice President,
Business Development, UPS
Committees of the Board
Executive Committee and Nominating Committee:
Michael Dooling, Chairman; Anthony W. (Tony) DeSio, and James F. Kelly
Audit Committee: Michael Dooling,Chairman; James F. Kelly, Joel Rossman,
and Harry Casari
Compensation Committee: James F. Kelly, Chairman; Michael Dooling, Joel
Rossman, and Harry Casari
Company Officers
Anthony W. (Tony) DeSio
President, Chief Executive Officer and Vice Chairman of the Board
Gary S. Grahn
Vice President, Finance and Administration, Chief Financial Officer
Bruce M. Rosenberg
Vice President, General Counsel and Secretary
Robert J. DeSio
Vice President, Training & Communications
Roger A. Peters
Vice President, Network Operations
William K. Lange
Vice President, Marketing
Ralph R. Askar
Vice President, Network Development
Fred L. Morache
Vice President, Business Development
Mail Boxes Etc.
6060 Cornerstone Court West, San Diego, CA 92121-3795
(619) 455-8800 Fax (619) 546-7488
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Mail Boxes Etc. of our report dated June 4, 1996, included in the 1996
Annual Report to Shareholders of Mail Boxes Etc.
Our audits also included the financial statement schedule of Mail Boxes Etc.
listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements (Form S-8, Nos. 33-37921 and 33-56486) pertaining to the Restated
1985 Stock Option Plan, the Registration Statement (Form S-8, No. 33-19726)
pertaining to the Stock Purchase and Salary Savings (401(k)) Plan of Mail
Boxes Etc., and the Registration Statements (Form S-8, Nos. 33-64941 and
33-64943) pertaining to the 1995 Employee Stock Option Plan and 1995
Stock Option Plan for Non-Employee ("Outside") Directors, respectively,
and in the related Prospectuses, of our report dated June 4, 1996 with
respect to the consolidated financial statements and schedule of Mail Boxes
Etc., included or incorporated by reference in this Annual Report (Form 10-K)
for the year ended April 30, 1996.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
San Diego, California
July 22, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-START> MAY-01-1995
<PERIOD-END> APR-30-1996
<PERIOD-TYPE> YEAR
<CASH> 3,489
<SECURITIES> 21,825
<RECEIVABLES> 28,663
<ALLOWANCES> 3,507
<INVENTORY> 544
<CURRENT-ASSETS> 46,144
<PP&E> 9,628
<DEPRECIATION> 4,247
<TOTAL-ASSETS> 75,766
<CURRENT-LIABILITIES> 13,001
<BONDS> 0
0
0
<COMMON> 14,944
<OTHER-SE> 46,419
<TOTAL-LIABILITY-AND-EQUITY> 75,766
<SALES> 10,839
<TOTAL-REVENUES> 59,107
<CGS> 8,465
<TOTAL-COSTS> 45,432
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 14,349
<INCOME-TAX> 5,620
<INCOME-CONTINUING> 8,729
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,729
<EPS-PRIMARY> .77
<EPS-DILUTED> .77
</TABLE>
