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 January 31, 1996
-----------------------------------
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
-----
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 11,089,744
- -------------------------- ---------------------------------
(Class) (Outstanding at January 31, 1996)
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
MAIL BOXES ETC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<CAPTION>
January 31, April 30,
1996 1995
------------ ---------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 5,468,643 $ 390,841
Restricted cash - franchisee deposits 1,379,676 1,613,569
Short-term investments 15,110,475 10,036,718
Accounts receivable, net 7,028,195 6,723,128
Receivable from National Media Fund 2,820,000 1,600,000
Inventories 681,246 983,095
Current portion of notes receivable 7,998,404 6,065,275
Current portion of net investment
in sales-type and direct financing
leases 2,450,607 2,488,654
Deferred income taxes 1,453,583 1,453,583
Re-acquired area and center rights
held for resale 489,568 1,015,744
Other current assets 933,163 1,005,482
----------- -----------
TOTAL CURRENT ASSETS 45,813,560 33,376,089
Notes receivable, net 10,217,023 11,429,381
Net investment in sales-type and
direct financing leases 7,883,762 8,839,949
Property and equipment, net 5,362,508 5,615,060
Excess of cost over assets
acquired, net 455,031 498,078
Re-acquired area rights 3,182,923 3,030,670
Deferred income taxes 651,322 651,322
Other assets 997,894 852,555
----------- -----------
TOTAL ASSETS $74,564,023 $64,293,104
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities:
Accounts payable $1,947,517 $1,151,375
Franchisee deposits 2,029,449 2,152,904
Royalties, referrals and commissions
payable 3,626,722 2,448,624
Accrued employee expenses and
related taxes 1,629,274 1,462,933
Other accrued expenses 2,002,312 1,173,580
Income taxes payable 159,749 717,381
Current maturities of debt and notes
payable 2,989,330 1,704,848
----------- -----------
TOTAL CURRENT LIABILITIES 14,384,353 10,811,645
Long-term debt, net of current
maturities 1,414,099 1,336,627
Shareholders' equity:
Preferred stock, no par value,
10,000,000 shares authorized,
with none issued and outstanding -- --
Common stock, no par value, 40,000,000
shares authorized, with 11,089,744
and 11,058,387 shares issued
outstanding at January 31, 1996
and April 30, 1995, respectively 14,653,493 14,454,524
Retained earnings 44,112,078 37,690,308
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 58,765,571 52,144,832
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $74,564,023 $64,293,104
=========== ===========
</TABLE>
See accompanying notes.
<TABLE>
MAIL BOXES ETC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three months ended Nine months ended
01/31/96 01/31/95 01/31/96 01/31/95
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Royalty and marketing fees $10,088,377 $8,419,256 $23,389,834 $18,467,986
Franchise fees 1,870,833 1,908,788 6,292,818 6,093,472
Sales of supplies and equipment 2,162,774 2,669,653 8,047,529 7,727,765
Interest income on leases and other 1,583,887 1,248,507 4,947,265 3,789,168
Company centers 458,378 468,508 1,387,355 1,189,891
----------- ----------- ----------- -----------
TOTAL REVENUES 16,164,249 14,714,712 44,064,801 37,268,282
COST AND EXPENSES:
Franchise operations 4,740,592 3,842,847 10,982,284 8,902,994
Franchise development 1,245,614 1,286,170 4,196,727 3,835,592
Cost of supplies and equipment sold 1,618,679 2,113,796 6,425,824 6,079,182
Marketing 866,356 1,176,583 2,952,052 3,306,274
General and administrative 2,918,802 2,145,593 7,969,549 5,921,602
Company centers 480,212 522,257 1,426,184 1,229,025
----------- ----------- ----------- -----------
TOTAL COST AND EXPENSES 11,870,255 11,087,246 33,952,620 29,274,669
Operating Income 4,293,994 3,627,466 10,112,181 7,993,613
Interest on investments and other 165,159 122,672 441,484 313,485
Income before provision for income taxes 4,459,153 3,750,138 10,553,665 8,307,098
Provision for income taxes 1,750,981 1,434,020 4,131,895 3,290,007
----------- ----------- ----------- -----------
NET INCOME $ 2,708,172 $ 2,316,118 $ 6,421,770 $ 5,017,091
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE: $ .24 $ .20 $ .56 $ .44
=========== =========== =========== ===========
Weighted average common and common
equivalent shares outstanding 11,495,085 11,373,723 11,409,608 11,417,487
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
<TABLE>
MAIL BOXES ETC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine months ended January 31
1996 1995
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<S> <C> <C>
Operating Activities:
Net income $6,421,770 $5,017,091
Adjustments to reconcile net income
to net cash provided from (used in)
operating activities:
Depreciation and amortization 768,895 773,758
Gain on sale of equipment under
sales-type lease agreements (437,092) (509,336)
Loss on retirement of fixed Assets 129,293
Changes in assets and liabilities:
Restricted cash 233,893 267,848
Accounts and notes receivable (1,025,838) (3,892,066)
Receivable from National Media Fund (1,220,000) (2,950,671)
Assets leased to franchisees and
inventories (1,082,275) (1,554,638)
Re-acquired area and center rights 526,176 58,344
Other current assets 72,319 613,209
Other assets (145,339) 6,963
Accounts payable 796,142 159,417
Franchisee deposits (123,455) 599,979
Royalties, referrals and commissions
payable 1,178,098 1,044,213
Accrued employee expenses and related
taxes 166,341 468,665
Other accrued expenses 828,732 509,017
Income taxes payable (557,632) 723,695
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NET CASH FLOWS PROVIDED FROM
OPERATING ACTIVITIES 6,400,735 1,464,781
Investing Activities:
Net change in short-term
investments (5,073,757) (1,616,254)
Additions to property and
equipment (246,019) (352,222)
Principal payments received on
sales-type leases 2,815,449 2,396,321
Re-acquired area rights (135,000) (886,618)
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NET CASH FLOWS USED IN
INVESTMENT ACTIVITIES (2,639,327) (458,773)
Financing Activities:
Borrowings under revolving loan 3,520,000 3,800,000
Repayments under revolving loan (2,300,000) (849,329)
Repayments on notes payable (102,576) (21,802)
Repurchase of common shares (1,129,214) (3,160,673)
Proceeds from the issuance of
common shares 996,952 272,400
Other changes in equity 331,232 --
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NET CASH FLOWS PROVIDED FROM
FINANCING ACTIVITIES 1,316,394 40,596
INCREASE IN CASH AND CASH EQUIVALENTS 5,077,802 1,046,604
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 390,841 251,055
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CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 5,468,643 $1,297,659
============= =============
Supplemental Disclosure for Cash Flow
Information:
Cash paid during the period for
income taxes $4,736,710 $3,452,164
Interest 117,555 70,913
Supplemental Schedule with Non-Cash
Investment and Financing Activities:
Equipment sold under sales-type
agreements $1,821,216 $2,122,235
Additions to debt for acquisition
of equipment 109,530 --
</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 January 31,
1996, the condensed consolidated statements of income for the
three-month periods and nine-month periods ended January 31, 1996
and 1995, and the condensed consolidated statements of cash flows
for the nine-month periods then ended have been prepared by the
Company without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of
operations, and cash flows have been made.
Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted. It is suggested that these condensed consolidated
financial statements be read in conjunction with the financial
statements and notes thereto included in the 1995 Annual Report
on Form 10-K. The results of operations for the quarter and the
nine months ended January 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 and employees in the course of conducting its
business. The company intends to vigorously defend these actions
and believes that the ultimate resolution will not have a material
adverse effect on the company's financial condition or liquidity.
However, there can be no assurance that an unfavorable result would
not have a material adverse effect on the company's results of
operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
- ----------------------
Three months ended January 31, 1996 compared to Three months ended
- ------------------------------------------------------------------
January 31, 1995:
- -----------------
Revenues for Mail Boxes Etc. ("MBE" or the "Company") for
the three months ended January 31, 1996, increased by $1,449,537 or
10% from the same quarter of the prior year. Revenues from royalty
and marketing fees increased by $1,669,121 or 20% over the prior
period. The increase in royalty and marketing fees is due to the
approximately 12% same-store sales increase experienced by the
network during the third quarter of FY 96 and the increased
number of centers in operation to 2,996 at January 31, 1996,
compared with 2,644 at January 31, 1995. Revenues from franchise
fees decreased slightly by $37,955 or 2%. Revenues from
individual domestic franchise fees decreased by $21,880 when
compared to the three months ended January 31, 1995 as the result
of the sale of 57 new Individual Franchises sold in the third
quarter of FY 96 as compared to 59 during the third quarter of FY
95. Individual franchise sales cannot be predicted and may vary
from quarter to quarter. The remainder of this revenue category
includes sales of 2 new area franchises for $255,000, sales of
individual and area franchises by master licensees for $84,871, and
transfer and renewal fees for $262,412 which represents a 47%
increase over same period in FY 95.
Revenues from the sale of supplies and equipment decreased
by $506,879 or 19% because there were less individual centers
opened during the third quarter of FY 96 compared with that of FY
95 (67 compared to 100). Interest income on leases and other
increased by $335,380 or 27% as compared to the three months ended
January 31, 1995. The major components of this revenue category
include interest income earned on leases and notes receivable, late
fees, and various administrative fees. Interest on notes
receivable increased by $110,124 or 27% because of additional
financing for franchisees. Administrative fees on national vendor
contracts which yet are not significant, increased 72% as the
transaction volumes increased. Revenues from the Company owned and
operated centers decreased slightly by $10,130 because of reduced
operations at one of the company's experimental centers.
Cost and expenses for the three months ended January 31,
1996 increased by $783,009 or 7% when compared to the three months
ended January 31, 1995. The increase in franchise operations
expenses was $897,745 or 23% over FY 95 and resulted primarily from
the increase in royalties paid to area franchisees for their share
of the royalty income, which they earn, in part by providing
ongoing support to the network. These costs will generally
increase in the same manner as the network's royalty revenue
growth. Royalties paid to area franchisees increased by $485,083
or 15% over third quarter FY 95. This increase is directly related
to the increase in royalty fees booked during the third quarter of
FY 96. Franchise development expenses decreased by 3%. This
decrease is due to the sale of less centers which resulted in less
commissions being paid to area franchisees during third quarter FY
96.
Cost of supplies and equipment decreased by $495,117 or 23%.
This decrease is due to the decrease in sales of supplies and
equipment as discussed earlier. Gross margins fluctuate from
period to period due to product mix.
Marketing expenses decreased by $310,227 or 26% when
compared to the third quarter ended January 31, 1995 because last
year's expenses reflect a contribution made by the Company
to the national advertising program to assist the start-up of
National Media Fund. General and administrative expenses increased
by $773,209 or 36% over the third quarter of FY 95. This
increase is primarily attributed to the growth of franchise centers
in operation, and an increase in legal expenses and reserves.
These expenses will continue to grow with domestic and
international growth of the Network. As of January 31, 1996,
there were 2,564 MBE centers operating in the USA and 432 MBE
centers operating outside the USA for a total of 2,996 worldwide.
The Company centers' cost and expenses decreased by $42,045
or 8%. This decrease is directly related to the decrease in
revenues.
Other income (interest on investments and other) increased
by $42,487 or 35% for the quarter ended January 31, 1996, compared
to the quarter ended January 31, 1995. This increase is due to the
increase in short-term investments.
Net income increased by $392,054 or 17% in third quarter FY
96. Earnings per share increased from $.20 to $.24 or 20%.
Nine months ended January 31, 1996 compared to Nine months ended
- ----------------------------------------------------------------
January 31, 1995:
- -----------------
Revenues for the nine months ended January 31, 1996
increased by $6,796,519 or 18% over the prior year's same period.
Revenues from royalty and marketing fees increased by $4,921,848 or
27% over the prior period because of the increased number of
centers in operation and the increase in the same store sales as
noted earlier. The increase in same store sales is due in part to
increased customer counts responding to our expanding national
media campaign, and the introduction of new profit centers such as
No-Limit Shipping and Color Copying. Revenues from franchise fees
increased by $199,346 or 3%. Revenues from individual domestic
franchise fees decreased by $306,080 or 6% during the first nine
months FY 96 when compared to the same period FY 95. This decrease
is due to the sale of fewer new individual franchises, 202 centers
in the first nine months of FY 96 compared to 220 centers in
the same period of FY 95. Revenues from master license fees
increased 21% because of sale of master licenses to countries of
Israel, Egypt, Jordan, Syria, and Lebanon. MBE believes that
master license sales may be a less significant source of revenue
during the remainder of FY 96 and beyond, and that the timing of
these sales will not be predictable. The remainder of this
revenue category includes sales of 2 new area franchises for
$255,000, international sales of individual and area franchises by
master licensees for $239,324, and transfer and renewal fees
of $717,444 which indicates a 39% increase over the same period of
FY 95.
Revenues from the sale of supplies and equipment increased
by $319,764 or 4%. This increase was due in part to the opening of
more centers in the first nine months of FY 96. During the first
nine months of FY 96, 223 centers opened as compared to 220 centers
in the same period of FY 95. Interest income on leases and other
increased by $1,158,097 or 31%. The major components of this
revenue category include interest income on leases, interest on
notes receivable, late fees, and various administrative fees.
Interest income on notes receivable increased by $417,145 or 37%
during the first nine months of FY 96 as compared to the first
nine months of FY 95 because of MBE's expanded financing to promote
network growth. Administration fees on national vendor contracts
increased by 96% over the same period of FY 95. Interest income
earned on leases and late fees decreased slightly when compared to
the period ended January 31, 1995. Revenues from the company owned
and operated centers increased by $197,464 or 17% as compared to
the same period in FY 95 due to the addition of another center in
the third quarter of FY 95.
Costs and expenses for the nine months ended January 31,
1996 increased by $4,677,951 or 16% when compared to the nine
months ended January 31, 1995. The increase in franchise
operations expense was $2,079,290 or 23%. This increase is mostly
due to the increase in royalties paid to area franchisees. Total
royalties paid were $8,868,851, for the nine months ended January
31, 1996 compared to $7,335,900 in the same period last year. This
increase of 21% is lower than the 27% increase in royalty fees
booked in the first nine months of FY 96 because of the increase in
the number of company owned areas and the fact that no royalties
are paid out on company owned areas.
Franchise development expenses increased by $361,135 or 9%
for the nine months ended January 31, 1996. Costs of supplies and
equipment increased by $346,642 or 6% as compared to the nine
months ended January 31, 1995. This increase is due to the
increase in sale of supplies and equipment. Gross margin decreased
from 21% to 20% due to the product mix and a higher increase in
cost of sales than increase in revenues.
Marketing expenses decreased by $354,222 or 11% when
compared to the nine months ended January 31, 1995 for the reasons
discussed above.
Administrative expenses increased by $2,047,947 or 35% over
the prior nine months period ended January 31, 1995. This increase
is due to the growth of franchise centers in operation and other
items as discussed above. The company centers' costs increased by
$197,159 or 16% due to the addition of another center noted above.
Other income (interest on investments and other) increased
by $127,999 or 41% for the nine months ended January 31, 1996,
compared to the nine months ended January 31, 1995, due primarily
to the increase in investments.
Net income increased by $1,404,679 or 28% and earnings per
share increased from $.44 to $.56 or 27% for the nine months ended
January 31, 1996 compared to the nine months ended January 31,
1995.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at January 31, 1996 was $31,429,207 compared
to $22,564,444 at April 30, 1995. The Company believes it has
adequate financial resources for its present and projected
operating requirements. The Company has become subject to various
lawsuits and claims from its franchisees and employees in the
course of conducting its business. The Company intends to
vigorously defend these actions and believes that the ultimate
resolution will not have a material adverse effect on the Company's
financial condition or liquidity. However, there can be no
assurance that an unfavorable result would not have a material
adverse effect on the Company's results of operations.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In January 1996, the suit styled Kellert v. Mail Boxes Etc.
USA et al., which was filed in 1988 and is described in the
Company's 10-K Report for the year ended April 30, 1995, was
dismissed by the court on the grounds of abandonment of the action
by the plaintiff.
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, 1995, and 10-Q Report for
the quarter ended July 31, 1995, the court delayed the start of
trial until late spring 1996 to enable the parties to complete
discovery efforts.
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 6. REPORTS ON FORM 8-K
(b) No reports on Form 8-K were filed during the quarter
ended January 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: March 11, 1996
--------------------------------------- -------------
Gary S. Grahn
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-START> MAY-01-1995
<PERIOD-END> JAN-31-1996
<PERIOD-TYPE> 9-MOS
<CASH> 6,848
<SECURITIES> 15,110
<RECEIVABLES> 31,874
<ALLOWANCES> 3,810
<INVENTORY> 681
<CURRENT-ASSETS> 45,814
<PP&E> 9,390
<DEPRECIATION> 4,027
<TOTAL-ASSETS> 74,564
<CURRENT-LIABILITIES> 14,384
<BONDS> 0
0
0
<COMMON> 14,653
<OTHER-SE> 44,112
<TOTAL-LIABILITY-AND-EQUITY> 74,564
<SALES> 8,048
<TOTAL-REVENUES> 44,065
<CGS> 6,426
<TOTAL-COSTS> 33,953
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 10,554
<INCOME-TAX> 4,132
<INCOME-CONTINUING> 6,422
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,422
<EPS-PRIMARY> .56
<EPS-DILUTED> .56
</TABLE>
