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, 1997
------------------------------
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.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0010260
- ------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
6060 Cornerstone Court West, San Diego, California 92121
- -------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (619) 455-8800
-----------------
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 11,377,252 Shares
- -------------------------- -----------------------------------
(Class) (Outstanding at September 10, 1997)
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 1997 1997
------ ----------- ---------
(Unaudited) (Audited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $782 $3,992
Restricted cash - franchisee deposits 2,401 1,613
Short-term investments 32,281 27,342
Accounts receivable, net 6,612 6,547
Receivable from National Media Fund --- 250
Inventories 454 447
Current portion of notes receivable 8,068 6,048
Current portion of net investment
in sales-type leases 3,440 2,322
Deferred income taxes 1,272 1,272
Re-acquired area and center rights held
for resale 625 629
Other 1,830 1,394
-------- --------
Total current assets 57,765 51,856
Notes receivable, net 13,422 12,977
Net investment in sales-type leases 5,494 6,067
Property and equipment, net 6,503 5,961
Excess of cost over assets acquired, net 279 383
Re-acquired area rights 4,875 6,443
Deferred income taxes 1,249 1,249
Other assets 698 739
-------- --------
Total assets $90,285 $85,675
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
-------------------------------------
Current Liabilities:
Accounts payable $994 $1,363
Franchisee deposits 2,886 2,097
Royalties, referrals and commissions payable 2,519 1,760
Accrued employee expenses and related taxes 1,678 2,390
Other accrued expenses 3,526 1,550
Income taxes payable 1,524 769
Current maturities of long-term debt 442 692
-------- --------
Total current liabilities 13,569 10,621
Long-term debt, net of current maturities 3,738 3,916
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 11,356,252
and 11,300,273 shares issued outstanding
at July 31, 1997 and April 30, 1997,
respectively 17,479 16,728
Retained earnings 55,499 54,410
-------- --------
Total shareholders' equity 72,978 71,138
-------- --------
Total liabilities and shareholders' equity $90,285 $85,675
======== ========
</TABLE>
See accompanying notes.
<TABLE>
MAIL BOXES ETC.
---------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(In Thousands, Except Share Amounts)
(Unaudited)
<CAPTION>
Three months ended July 31,
1997 1996
----------- -----------
<S> <C> <C>
Revenue:
Royalty and marketing fees $8,694 $ 7,600
Franchise fees 2,342 1,795
Sales of supplies and equipment 2,513 3,030
Interest income on leases and other 1,876 1,988
Company centers 255 366
----------- -----------
Total revenues 15,680 14,779
Cost and Expenses:
Franchise operations 4,083 4,081
Franchise development 1,476 1,289
Cost of supplies and equipment sold 1,844 2,277
Marketing 1,275 1,421
General and administrative 2,340 2,170
Company centers 263 396
Merger costs 2,510 ---
----------- -----------
Total cost and expenses 13,791 11,634
Operating Income 1,889 3,145
Interest on investments and other 322 256
----------- -----------
Income before provision for income taxes 2,211 3,401
Provision for income taxes 1,122 1,331
----------- -----------
Net income $ 1,089 $ 2,070
=========== ===========
Net income per common share: $ .09 $ .18
=========== ===========
Weighted average common and common
equivalent shares outstanding 12,075,204 11,740,649
=========== ===========
</TABLE>
See accompanying notes.
<TABLE>
MAIL BOXES ETC.
---------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In Thousands)
(Unaudited)
<CAPTION>
Three months ended July 31,
1997 1996
-------- --------
<S> <C> <C>
Operating Activities:
Net income $1,089 $2,070
Adjustments to reconcile net income to net cash provided
from operating activities:
Depreciation and amortization 278 259
Gain on sale of re-acquired area rights (643) -----
Gain on sale of equipment under sales-type lease agreements (65) (134)
Changes in assets and liabilities:
Restricted cash (788) (316)
Accounts and notes receivable (459) (352)
Receivable from National Media Fund 250 645
Assets leased to franchisees and inventories (266) (606)
Re-acquired area and center rights (held for resale) 4 (175)
Other current assets (436) (210)
Other assets 133 (144)
Accounts payable (369) (420)
Franchisee deposits 789 292
Royalties, referrals and commissions payable 759 (103)
Accrued employee expenses and related taxes (712) (1,085)
Other accrued expenses 1,976 53
Income taxes payable 755 1,284
-------- --------
Net cash flows provided from operating activities 2,295 1,058
Investing Activities:
Net change in short-term investments (4,939) (1,947)
Additions to property and equipment (722) (173)
Principal payments received on sales-type leases (219) 869
-------- --------
Net cash flows used in investing activities (5,880) (1,251)
Financing Activities:
Borrowings under line of credit -- 730
Repayments under line of credit (250) (1,375)
Repayments on notes payable (126) (73)
Repurchase of common stock (47) (155)
Proceeds from the issuance of common stock 798 635
-------- --------
Net cash flows provided from (used in) financing activities 375 (238)
Decrease in cash and cash equivalents (3,210) (431)
Cash and cash equivalents at beginning of period 3,992 1,416
-------- --------
Cash and cash equivalents at end of period $ 782 $ 985
======== ========
Supplemental Disclosure for Cash Flow Information:
Cash paid during the period for income taxes $411 $344
Interest $83 $31
Supplemental Schedule of Non-Cash Investment and Financing Activities:
Equipment sold under sales-type leases $324 $515
</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, 1997, the
consolidated statements of income for the three-month periods ended
July 31, 1997 and 1996, 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 1997 Annual Report on Form 10-K, as well as the
Risk Factors discussed in such Form 10-K. The results of operations
for the quarter ended July 31, 1997 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 is involved in 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations:
Three months ended July 31, 1997 compared to Three months ended July 31, 1996:
- ------------------------------------------------------------------------------
Revenues for Mail Boxes Etc. ("MBE" or the "Company") for the three months
ended July 31, 1997, increased by $901 thousand or 6% from the same quarter of
the prior year. Revenues from royalty and marketing fees increased by $1.1
million or 14% over the same quarter of the prior year. These increases are
the result of growth of the network through the opening of 58 domestic
individual centers and a 9% increase in same store sales during the first
quarter of fiscal year 1998 ("FY98"). As of July 31, 1997, there were
2,859 domestic centers and 556 centers outside the U.S.A. for a total of
3,415 centers operating worldwide.
From August 4, 1997 through August 19, 1997 (during the second quarter
of FY98), the International Brotherhood of Teamsters was on strike against
United Parcel Service ("UPS"). As a result, UPS effectively ceased providing
shipping services to the Company's franchisees for a period of 16 calendar
days. The Company's franchisees used the services of alternative carriers,
including Federal Express and the U.S. Postal Service, but such alternative
carriers did not, during this period, fully accommodate the shipments that
would have been handled by UPS in the absence of the strike. In addition,
the Company believes that during the strike many shipments were deferred by
customers. The strike had an adverse impact on the MBE franchisees during
this period and will, in turn, adversely affect MBE's revenues from royalty
and marketing fees with respect to the period of the strike. Based on
information available to date, however, the Company does not anticipate
that the strike will have a material adverse effect on the Company's results
of operation for the second quarter of FY98.
Total franchise fees, which are primarily generated from the sale of
individual and area franchises and renewal and transfer fees associated
with individual and area franchises, as well as international sales,
increased by $547 thousand, or 30%, during the first quarter of FY98
compared to total franchise fees for the same quarter of fiscal year 1997
("FY97"). Revenues from domestic individual franchise fees decreased by $391
thousand, or 28%, compared to the total recorded for the comparable prior
year period. This decrease resulted from the sale of 17 fewer individual
franchises sold during the first quarter of FY98 (45 franchises sold) compared
to the first quarter of FY97 (62 franchises sold). Revenues from area
franchise fees increased by $623 thousand in the first quarter of FY98 as
compared with the total for such revenues recorded for the first quarter of
FY97. MBE believes that the revenues from the sale of area franchises may
not be a significant source of revenue in the future since the domestic
area network is essentially complete and the only available area franchises
for sale are those currently owned by MBE. Revenues from transfer and
renewal fees increased from $306 thousand to $635 thousand during the first
quarter of FY98 as compared to the same period of FY97. Finally,
international sales of individual and area franchises by master licensees
were the same for the first quarter of FY98 ($56 thousand) as for the
year-earlier period. There were no sales of master licenses during the
quarter ended July 31, 1997.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (Continued):
Revenues from the sale of supplies and equipment decreased by $517
thousand, or 17%, during the first quarter of FY98, from such revenues
recorded for the first quarter of FY97. This decrease resulted from the
decline in the number of centers opening in the FY98 first quarter, compared
with the number for the same period of FY97 (58 centers compared to 68
centers). The sales margin increased from 25% to 27% due to a slightly more
favorable sales mix in the first quarter of FY98 than in the same period of
FY97.
Interest income on leases and other income decreased slightly by $112
thousand, or 6%, from the figure for the year-earlier period due to lower
interest rates. The major components of this revenue category include
interest income earned on leases and notes receivable, various administrative
fees, late fees and finance charges. Interest income on leases decreased by
$54 thousand, or 17%. Interest on notes receivable increased by $15
thousand, or 3%. This increase resulted from additional financing programs
available to franchisees. Administrative fees on national vendor contracts
increased $46 thousand, or 8%, as the transaction volumes increased. Late
fees and finance charges decreased by $35 thousand, or 51%, during the first
quarter of FY98 compared with such fees and charges for the year-earlier
period 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 $111
thousand, or 30%, because of the sale of one of the company owned centers
in July 1997.
Total costs and expenses for the first quarter of FY98 increased by
$2.2 million, or 19%, when compared to the year-earlier period. Franchise
operation expenses during the first quarter of FY98 remained virtually the
same despite the $282 thousand, or 10%, 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. Although royalties paid to area
franchisees will generally increase proportionately with the network's
royalty growth, the increased royalties paid to area franchisees is lower
than the 14% increase in royalty fees booked in the first quarter of FY98
because no royalties are paid out in connection with Company-owned areas.
Excluding royalties paid, franchise operation expenses decreased in the
first quarter of FY98 as a result of the sale of the MBE master license for
the United Kingdom, which was sold by MBE during the fourth quarter of FY97.
Franchise development expenses for the first quarter in FY98 increased
by $187 thousand, or 15% over those for the year-earlier period. This
increase is primarily due to the Company's increased domestic and
international sales efforts. Costs of supplies and equipment decreased
by $433 thousand, or 19%, during the first quarter of FY98, as compared to
the first quarter of FY97. This decrease is directly related to the 17%
decline in revenues from the sale of supplies and equipment as discussed
above.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (Continued):
Marketing expenses for the FY98 first quarter decreased by $146 thousand,
or 10%, from the level recorded for the year-earlier period. This decrease
resulted from the renegotiation of advertising contracts and reduction in
advertising agency fees. General and administrative expenses increased by
$170 thousand, or 8%, during the first quarter of FY98, compared to the
same period of FY97. This increase is due to the growth of the domestic
and international network. At July 31, 1997, there were 2,859 centers
operating domestically and 556 centers operating internationally, or a total
of 3,415 centers in operation worldwide compared with a total of 3,133
centers in operation worldwide at July 31, 1996.
The Company centers' costs and expenses decreased by $133 thousand, or
34%, over the same period of FY97. This decrease is due to the sale of one
of the company centers in the first quarter of FY98. On May 22, 1997, MBE
announced that it had signed a definitive agreement to be acquired by U.S.
Office Products Company in an all-stock "pooling" transaction. It is
currently anticipated that this transaction will close in late October 1997
subject to MBE shareholder approval. In connection with this transaction,
the Company incurred non-recurring merger-related expenses of $2.5 million
in the first quarter of FY98 and expects to incur additional substantial
non-recurring expenses in the second quarter of FY98.
Other income (interest on investments and other) increased by $66
thousand, or 26%, for the quarter ended July 31, 1997, compared to the
quarter ended July 31, 1996. This increase is primarily due to the increase
in the Company's short term investments.
Net income decreased by $981 thousand, or 47%, in the first quarter of
FY98 compared with net income for the year-earlier period. Earnings per
share decreased from $.18 to $.09 or 50% as compared to results for the
first quarter of FY97. The first quarter of FY98 decrease in net income
and net income per share was caused by the $2.5 million merger related
expenses described above.
Liquidity and Capital Resources
Working capital at July 31, 1997 was $44 million compared to $41 million
at April 30, 1997. The Company believes it has adequate financial resources
for its present and projected operating requirements.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Agreement and Plan of Merger, dated May 22, 1997, by
and among MBE, USOP and Santa Fe Acquisition Corp.
(Filed with the Commission as an exhibit to the
Company's Current Report on Form 8-K dated May 22,
1997).
27.0 Financial Data Schedule
(b) Reports on Form 8-K:
During the period covered by this report, the Company filed with the
Commission a Current Report on Form 8-K dated May 22, 1997 to report
information under Item 5 thereof.
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: /s/ Gary S. Grahn
----------------------------------
Gary S. Grahn
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
Date: September 11, 1997
---------------------
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> JUL-31-1997
<PERIOD-TYPE> 3-MOS
<CASH> 3,183
<SECURITIES> 32,281
<RECEIVABLES> 31,112
<ALLOWANCES> 3,010
<INVENTORY> 454
<CURRENT-ASSETS> 57,765
<PP&E> 11,460
<DEPRECIATION> 4,957
<TOTAL-ASSETS> 90,285
<CURRENT-LIABILITIES> 13,569
<BONDS> 0
0
0
<COMMON> 17,479
<OTHER-SE> 55,499
<TOTAL-LIABILITY-AND-EQUITY> 90,285
<SALES> 2,513
<TOTAL-REVENUES> 15,680
<CGS> 1,844
<TOTAL-COSTS> 13,791
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,211
<INCOME-TAX> 1,122
<INCOME-CONTINUING> 1,089
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,089
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
