SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended July 31, 1996
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
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Commission File Number 0-14821
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MAIL BOXES ETC.
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(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0010260
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(State of Incorporation) (I.R.S. Employer Identification No.)
6060 Cornerstone Ct. West, San Diego, California 92121
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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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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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, No Par Value 11,188,639
- -------------------------- ------------------------------
(Class) (Outstanding at July 31, 1996)
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
MAIL BOXES ETC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<CAPTION>
July 31, April 30,
ASSETS 1996 1996
--------- ---------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $985 $1,416
Restricted cash - franchisee deposits 2,389 2,073
Short-term investments 23,772 21,825
Accounts receivable, net 7,063 6,799
Receivable from National Media Fund 125 770
Inventories 768 544
Current portion of notes receivable 7,153 6,756
Current portion of net investment
in sales-type and direct financing leases 2,402 2,414
Deferred income taxes 1,845 1,846
Re-acquired area and center rights held for resale 813 638
Other 1,273 1,063
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Total current assets 48,588 46,144
Notes receivable, net 10,522 10,831
Net investment in sales-type and direct financing leases 7,177 7,518
Property and equipment, net 5,355 5,381
Excess of cost over assets acquired, net 426 441
Re-acquired area rights 3,196 3,240
Deferred income taxes 1,307 1,307
Other assets 845 904
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Total assets $77,416 $75,766
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $1,676 $2,096
Franchisee deposits 2,911 2,619
Royalties, referrals and commissions payable 2,412 2,515
Accrued employee expenses and related taxes 878 1,963
Other accrued expenses 2,065 2,012
Income taxes payable 2,122 838
Current maturities of long-term debt 314 958
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Total current liabilities 12,378 13,001
Long-term debt, net of current maturities 1,328 1,402
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 11,188,639 and 11,139,698 shares issued outstanding
at July 31, 1996 and April 30, 1996, respectively 15,221 14,944
Retained earnings 48,489 46,419
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Total shareholders' equity 63,710 61,363
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Total liabilities and shareholders' equity $77,416 $75,766
========= =========
</TABLE>
See accompanying notes.
<TABLE>
MAIL BOXES ETC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
<CAPTION>
Three months ended July 31,
1996 1995
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<S> <C> <C>
Revenue:
Royalty and marketing fees $ 7,600 $ 6,463
Franchise fees 1,795 1,780
Sales of supplies and equipment 3,030 2,458
Interest income on leases and other 1,988 1,684
Company centers 366 418
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Total revenues 14,779 12,803
Cost and Expenses:
Franchise operations 4,160 3,198
Franchise development 1,212 1,164
Cost of supplies and equipment sold 2,277 1,940
Marketing 1,347 1,174
General and administrative 2,242 2,378
Company centers 396 425
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Total cost and expenses 11,634 10,279
Operating Income 3,145 2,524
Interest on investments and other 256 134
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Income before provision for income taxes 3,401 2,658
Provision for income taxes 1,331 1,036
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Net income $ 2,070 $ 1,622
========== ==========
Net income per common share: $ .18 $ .14
========== ==========
Weighted average common and common
equivalent shares outstanding 11,740,649 11,208,445
========== ==========
</TABLE>
See accompanying notes.
<TABLE>
MAIL BOXES ETC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
<CAPTION>
Three months ended July 31,
1996 1995
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<S> <C> <C>
Operating Activities:
Net income $2,070 $1,622
Adjustments to reconcile net income to net cash provided from
(used in) operating activities:
Depreciation and amortization 259 257
Gain on sale of equipment under sales-type lease agreements (134) (155)
Changes in assets and liabilities:
Restricted cash (316) (144)
Accounts and notes receivable (352) (1,029)
Receivable from National Media Fund 645 500
Assets leased to franchisees and inventories (606) (206)
Re-acquired area and center rights (175) 243
Other current assets (210) (69)
Other assets (144) 254
Accounts payable (420) 60
Franchisee deposits 292 282
Royalties, referrals and commissions payable (103) (128)
Accrued employee expenses and related taxes (1,085) (575)
Other accrued expenses 53 350
Income taxes payable 1,284 1,074
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Net cash flows provided from operating activities 1,058 2,336
Investing Activities:
Net change in short-term investments (1,947) (1,999)
Additions to property and equipment (173) (106)
Principal payments received on sales-type leases 869 866
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Net cash flows used in investment activities (1,251) (1,239)
Financing Activities:
Borrowings under revolving loan 730 450
Repayments under revolving loan (1,375) (950)
Repayments on notes payable (73) (32)
Repurchase of common shares (155) (191)
Proceeds from the issuance of common shares 635 674
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Net cash flows used in financing activities (238) (49)
Increase (decrease) in cash and cash equivalents (431) 1048
Cash and cash equivalents at beginning of period 1,416 391
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Cash and cash equivalents at end of period $ 985 $ 1,439
========== ========
Supplemental Disclosure for Cash Flow Information:
Cash paid during the period for income taxes $344 $112
Interest 31 47
Supplemental Schedule with Non-Cash Investment and Financing
Activities:
Equipment sold under sales-type leases $515 $574
</TABLE>
See accompanying notes.
PART I - FINANCIAL INFORMATION
MAIL BOXES ETC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 1.BASIS OF PRESENTATION:
Note 1.Presentation
The condensed consolidated balance sheet as of July 31, 1996,
the consolidated statements of income for the three-month periods
ended July 31, 1996 and 1995, and the condensed consolidated
statements of cash flows for the three-month periods then ended
have been prepared by the Company without audit. In the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position,
results of operations, and cash flows have been made.
Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted. In addition, certain Risk Factors may also impact future
financial reports. It is suggested that the consolidated financial
statements contained in this report be read in conjunction with the
financial statements and notes thereto included in the 1996 Annual
Report on Form 10-K, as well as the Risk Factors discussed in the
Form 10-K Report. The results of operations for the quarter ended
July 31, 1996 are not necessarily indicative of the operating
results for the full year.
Certain reclassifications have been made to prior period
balances to conform to current period presentations.
Note 2. Litigation
The company has become subject to various lawsuits and claims
from its franchisees 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 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Three months ended July 31, 1996 compared to Three months ended
July 31, 1995:
Revenues for Mail Boxes Etc. ("MBE" or the "Company") for the
three months ended July 31, 1996, increased by $1.976 million or
15% from the same quarter of the prior year. Revenues from royalty
and marketing fees increased by $1.137 million or 18% over the
prior period. These increases are the result of growth of the
network through the opening of 68 domestic individual centers and
a 12 percent increase in same store sales during the first quarter
of FY 97. At close of business on July 31, 1996, there were 2,650
domestic centers and 483 centers outside the U.S.A. for a total of
3,133 centers operating worldwide.
Total franchise fees, which mostly consist of individual,
renewal and transfer, and international sales, increased slightly
by .8% during first quarter of FY 97 when compared to the same
quarter of FY 96. Revenues from domestic individual franchise fees
decreased by 3% compared to the three months ended July 31, 1995 as
the result of the sale of 62 new Individual Franchises sold in the
first quarter of FY 97 as compared to 65 during the first quarter
of FY 96. The remainder of this revenue category includes
international sales of individual and area franchises by master
licensees for $60 thousand which represents more than 50% decrease
as compared to the first quarter of FY 96, and transfer and renewal
fees of $306 thousand which represents a 43% increase over same
period in FY 96. Revenues from the sale of supplies and
equipment increased by $572 thousand or 23% despite the slight
decrease in the number of centers opening in the quarter ended July
31, 1996, compared to the same period ended July 31, 1995. This
increase was due to a strong emphasis on existing center upgrades
during first quarter of FY 97. The sales margin increased from 21%
to 25% due to a slightly more favorable sales mix in first quarter
of FY 97 compared to the same period of FY 96.
Interest income on leases and other increased by $304 thousand
or 18% as compared to the three months ended July 31, 1995. The
major components of this revenue category include interest income
earned on leases and notes receivable, late fees, finance charges,
and various administrative fees. Interest income on leases
decreased slightly by $51 thousand. Interest on notes receivable
increased by $15 thousand or 31%. This increase resulted from
additional financing programs available to franchisees.
Administrative fees on national vendor contracts increased $73
thousand or 68% as the transaction volumes increased. Late fees
decreased by $149 thousand or 85% and finance charges decreased by
$10 thousand or 67% during the three months ended July 31, 1996,
compared to the same period ended July 31, 1995. The drastic
decline in those two revenue categories was due to the Company's
increased emphasis on collecting delinquent accounts and
implementation of programs to reduce future delinquencies.
Revenues from the Company owned and operated centers decreased
by $52 thousand or 12% because of reduced operations at one of the
company's experimental centers.
Cost and expenses for the three months ended July 31, 1996
increased by $1.355 million or 13% when compared to the three
months ended July 31, 1995. The increase in Franchise operations
expense was $962 thousand or 30% over FY 96 and resulted primarily
from the increase in royalties paid to area franchisees for their
share of the royalty income, which they
Three months ended July 31, 1996 compared to Three months ended
July 31, 1995:
earn, in part by providing ongoing support to the network. These
costs will generally increase in the same manner as the network's
royalty revenue growth. Royalties paid to area franchisees
increased by $379 thousand or 16% over first quarter FY 96. This
increase is directly related to the increase in royalty and
marketing fees booked during the first quarter of FY 97.
Franchise development expenses increased slightly by $48 thousand
or 4%.
Cost of supplies and equipment increased by $337 thousand or
17%. This increase is due to the increase in sales of supplies and
equipment as discussed earlier.
Marketing expenses increased by $173 thousand or 15% when
compared to the first quarter ended July 31, 1995. Marketing
expenses will continue to grow as the network grows. General and
administrative expenses decreased by $136 thousand or 6% over the
first quarter of FY 96.
The Company centers' cost and expenses decreased by $29
thousand or 7%. The Company centers' combined operating margin was
negative in first quarter FY 97. One of the primary objectives of
the Company centers is to develop and test new products and
services and, as a result, their operating expenses are higher than
might be experienced by a typical owner-operated franchise.
Other income (interest on investments and other) increased by
$122 thousand or 91% for the quarter ended July 31, 1996, compared
to the quarter ended July 31, 1995. This increase is primarily due
to the increase in the short term investments.
Net income increased by $448 thousand or 28% in first quarter
FY 97. Earnings per share increased from $.14 to $.18 or 29% over
first quarter FY 96.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at July 31, 1996 was $36 million compared to
$33 million at April 30, 1996. The Company believes it has
adequate financial resources for its present and projected
operating requirements. The Company has become subject to various
lawsuits and claims from its franchisees in the course of
conducting its business. The Company intends to vigorously
defend these actions and believes that the ultimate resolution will
not have a material adverse effect on the Company's financial
condition or liquidity. However, there can be no assurance
that an unfavorable result would not have a material adverse effect
on the Company's operating results.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In Helm et al v. Mail Boxes Etc. and MAil Boxes Etc. v. B.J. Postal
Service Corp. et al, which is described in the Company's 10-K
Report for the year ended April 30, 1996, the court issued a preliminary
ruling on a summary adjudication motion filed by MBE regarding the
four test case franchisees. The court's ruling dismissed the
franchisees' fraud and misrepresentation claims regarding
working capital, earnings claims, and the unfair business practices
claim, but left standing the franchisees' fraud and
misrepresentation claims regarding "success rate." Trial on that
issue, as well as franchisee contract claims regarding site
location and lack of support, and the Company's claims for unpaid
royalties and monies owed, is scheduled to begin in October 1996.
The Company intends to vigorously defend these actions and
believes that the ultimate resolution will not have a material
adverse effect on the Company's financial condition or liquidity.
However, there can be no assurance that an unfavorable result would
not have a material adverse effect on the Company's results of
operations.
Item 4. SHAREHOLDER VOTING
On August 23, 1996, the Annual Meeting of Shareholders was
held. The Shareholders elected all of the nominees for Director,
approved the amendments to the Company's 1995 Stock Option Plan for
Non-Employee (Outside) Directors, and rejected a shareholder
proposal to amend the Company's 1995 Employee Stock Option Plan.
Each of the nominees for director was elected with the following
votes:
VOTES VOTES
NOMINEE STATUS FOR WITHHELD
Michael Dooling Re-elected 10,291,751 52,096
Anthony W. DeSio Re-elected 10,290,918 52,929
Robert J. DeSio Re-elected 10,286.734 57,113
James F. Kelly Re-elected 10,268,351 75,496
Daniel L. La Marche Re-elected 10,314,249 29,598
Harry Casari Re-elected 10,314,317 29,530
Joel Rossman Re-elected 10,313,833 30,014
The proposal to amend the 1995 Stock Option Plan for Non-Employee
(Outside) Directors received the following votes:
For Against Abstain Broker Non-Votes
8,685,526 1,514,449 27,155 6,100
The proposal to approve the shareholder proposal received the
following votes:
For Against Abstain Broker Non-Votes
284,791 8,568,200 172,144 6,100
ITEM 6. REPORTS ON FORM 8-K
(b) No reports on Form 8-K were filed during the quarter ended
July 31, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
MAIL BOXES ETC.
Registrant
By: Gary S. Grahn Date: September 9, 1996
----------------------------- ------------------
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> JUL-31-1996
<PERIOD-TYPE> 3-MOS
<CASH> 3,374
<SECURITIES> 23,772
<RECEIVABLES> 28,423
<ALLOWANCES> 3,560
<INVENTORY> 768
<CURRENT-ASSETS> 48,588
<PP&E> 9,727
<DEPRECIATION> 4,372
<TOTAL-ASSETS> 77,416
<CURRENT-LIABILITIES> 12,378
<BONDS> 0
0
0
<COMMON> 15,221
<OTHER-SE> 48,489
<TOTAL-LIABILITY-AND-EQUITY> 77,416
<SALES> 3,030
<TOTAL-REVENUES> 14,779
<CGS> 2,227
<TOTAL-COSTS> 11,634
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,401
<INCOME-TAX> 1,331
<INCOME-CONTINUING> 2,070
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,070
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>
