<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
July 17, 1997
------------------------------------------------
Date of Report (Date of earliest event reported)
U.S. OFFICE PRODUCTS COMPANY
---------------------------------------------------
(Exact name of Registrant Specified in its Charter)
Delaware
----------------------------------------------
(State or other jurisdiction of incorporation)
0-25372
------------------------------------------------
(Commission File No.)
52-1906050
------------------------------------------------
(I.R.S. Employer Identification Number)
1025 Thomas Jefferson Street, N.W., Suite 600 East, Washington, D.C. 20007
--------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(202) 339-6700
---------------------------------------------------------
(Registrant's telephone number, including area code)
<PAGE>
Item 5 -- Other Events
U.S. Office Products Company (the "Company") filed a Current Report on
Form 8-K dated April 26, 1997 which incorporated by reference from Mail Boxes
Etc.'s ("MBE") Annual Report on Form 10-K for the fiscal year ended April 30,
1996 and the Quarterly Report on Form 10-Q for the interim period ended
January 31, 1997 (File No. 0-14821) the financial statements of MBE as of
April 30, 1996 and 1995 and for the years ended April 30, 1996, 1995 and 1994
and as of January 31, 1997 and for the nine months ended January 31, 1997
(unaudited), respectively. On July 9, 1997, MBE filed its Annual Report on
Form 10-K for its fiscal year ended April 30, 1997 which includes the
financial statements of MBE as of April 30, 1997 and 1996 and for the years
ended April 30, 1997, 1996 and 1995. Such financial statements are
incorporated by reference herein.
Item 7 -- Financial Statements, Pro Forma Financial Information and Exhibits
(c) Exhibits
23.1 Consent of Ernst & Young LLP
99.1 Financial Statements of MBE as of April 30, 1997 and 1996 and
for the years ended April 30, 1997, 1996 and 1995.
<PAGE>
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 hereunto duly authorized.
U.S. OFFICE PRODUCTS COMPANY
Dated: July 16, 1997 By: /s/Mark D. Director
------------------------------
Mark D. Director
Chief Administrative Officer,
General Counsel and Secretary
<PAGE>
EXHIBIT INDEX
Exhibit Description
- ------- -----------
23.1 Consent of Ernst & Young LLP.
99.1 Financial Statements of Mail Boxes Etc. as of April 30, 1997
and 1996 and for the years ended April 30, 1997, 1996 and 1995.
<PAGE>
Exhibit 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the use of our report dated June 6, 1997 with respect to
the consolidated financial statements of Mail Boxes Etc. included in this
Current Report on Form 8-K of U.S. Office Products Company, and to the
incorporation by reference of the above referenced report into U.S. Office
Products Company's previously filed Registration Statements on Form S-3, No.
333-10383 and No. 333-14025, and Registration Statement on Form S-4, No.
333-13133, and Registration Statements on Form S-8, No. 333-01574, No.
333-12789 and no. 333-24581.
Ernst & Young LLP
San Diego, California
July 17, 1997
<PAGE>
EXHIBIT 99.1
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, 1997 and 1996, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years in the
period ended April 30, 1997. 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, 1997 and 1996, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended April 30, 1997, in
conformity with generally accepted accounting principles.
San Diego, California
June 6, 1997
<PAGE>
MAIL BOXES ETC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
APRIL 30,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
ASSETS
Current Assets:
Cash and cash equivalents.................................................................... $ 3,992 $ 1,416
Restricted cash--franchisee deposits......................................................... 1,613 2,073
Short-term investments....................................................................... 27,342 21,825
Accounts receivable, net of allowance for doubtful accounts of $1,334 and $1,507, at April
30, 1997 and 1996, respectively............................................................ 6,547 6,799
Receivable from National Media Fund.......................................................... 250 770
Inventories.................................................................................. 447 544
Current portion of notes receivable.......................................................... 6,048 6,756
Current portion of net investment in sales-type leases....................................... 2,322 2,414
Deferred income taxes........................................................................ 1,272 1,846
Re-acquired area and center rights held for resale........................................... 629 638
Other........................................................................................ 1,394 1,063
--------- ---------
TOTAL CURRENT ASSETS..................................................................... 51,856 46,144
Notes receivable, net........................................................................ 12,977 10,831
Net investment in sales-type leases.......................................................... 6,067 7,518
Property and equipment:
Land....................................................................................... 1,200 1,200
Building and improvements.................................................................. 5,076 4,201
Office furniture and equipment............................................................. 4,307 4,018
Vehicles................................................................................... 209 209
--------- ---------
Total property and equipment............................................................. 10,792 9,628
Less accumulated depreciation and amortization........................................... 4,831 4,247
--------- ---------
NET PROPERTY AND EQUIPMENT............................................................... 5,961 5,381
Excess of cost over assets acquired, net of accumulated amortization of $607 and $549 at
April 30, 1997 and 1996, respectively...................................................... 383 441
Re-acquired area rights, net of accumulated amortization of $511 and $240 at April 30, 1997
and 1996, respectively..................................................................... 6,443 3,240
Deferred income taxes........................................................................ 1,249 1,307
Other assets................................................................................. 739 904
--------- ---------
TOTAL ASSETS............................................................................. $ 85,675 $ 75,766
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................................................. $ 1,363 $ 2,096
Franchisee deposits.......................................................................... 2,097 2,619
Royalties, referrals and commissions payable................................................. 1,760 2,515
Accrued employee expenses and related taxes.................................................. 2,390 1,963
Other accrued expenses....................................................................... 1,550 2,012
Income taxes payable......................................................................... 769 838
Current maturities of long term debt......................................................... 692 958
--------- ---------
TOTAL CURRENT LIABILITIES................................................................ 10,621 13,001
Long-term debt, net of current maturities...................................................... 3,916 1,402
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 11,300,273 and 11,139,698
shares issued and outstanding at April 30, 1997 and 1996, respectively..................... 16,728 14,944
Retained earnings............................................................................ 54,410 46,419
--------- ---------
TOTAL SHAREHOLDERS' EQUITY............................................................... 71,138 61,363
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................................... $ 85,675 $ 75,766
--------- ---------
--------- ---------
</TABLE>
(See accompanying notes)
<PAGE>
MAIL BOXES ETC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED APRIL 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Royalty and marketing fees..................................................... $ 35,254 $ 30,947 $ 24,673
Franchise fees................................................................. 9,915 8,557 8,670
Sales of supplies and equipment................................................ 12,775 10,839 10,020
Interest income on leases and other............................................ 8,687 6,975 5,424
Company centers................................................................ 1,206 1,789 1,564
--------- --------- ---------
TOTAL REVENUES............................................................. 67,837 59,107 50,351
Cost and expenses:
Franchise operations........................................................... 18,463 14,881 12,506
Franchise development.......................................................... 6,383 5,883 5,090
Cost of supplies and equipment sold............................................ 9,585 8,465 7,915
Marketing...................................................................... 6,219 4,068 4,630
General and administrative..................................................... 9,060 10,293 7,878
Company centers................................................................ 1,265 1,842 1,598
Litigation settlement expenses................................................. 5,000 -- --
--------- --------- ---------
TOTAL COST AND EXPENSES.................................................... 55,975 45,432 39,617
--------- --------- ---------
Operating income................................................................. 11,862 13,675 10,734
Interest on investments and other................................................ 963 674 447
--------- --------- ---------
Income before provision for income taxes......................................... 12,825 14,349 11,181
Provision for income taxes....................................................... 4,834 5,620 4,411
--------- --------- ---------
NET INCOME................................................................. $ 7,991 $ 8,729 $ 6,770
--------- --------- ---------
--------- --------- ---------
NET INCOME PER COMMON SHARE...................................................... $ 0.68 $ 0.77 $ 0.60
--------- --------- ---------
--------- --------- ---------
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING............................................................. 11,780 11,403 11,357
--------- --------- ---------
--------- --------- ---------
</TABLE>
(See accompanying notes)
<PAGE>
MAIL BOXES ETC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
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
--------- --------- --------- ---------
Exercise of employee stock options and other........................... 180 1,590 1,590
Common stock repurchased............................................... (19) (410) (410)
Income tax benefit from stock option activity.......................... 604 604
Net income............................................................. 7,991 7,991
--------- --------- --------- ---------
Balance, April 30, 1997................................................ 11,300 $ 16,728 $ 54,410 $ 71,138
--------- --------- --------- ---------
</TABLE>
(See accompanying notes)
<PAGE>
MAIL BOXES ETC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED APRIL 30
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
OPERATING ACTIVITIES:
Net income.......................................................................... $ 7,991 $ 8,729 $ 6,770
Adjustments to reconcile net income to net cash provided from operating activities:
Depreciation and amortization..................................................... 1,046 1,030 1,024
Gain on sale of equipment under sales type lease agreements....................... (429) (558) (681)
Increase (decrease) in allowance for doubtful accounts............................ (530) 880 1,236
Loss (gain) on disposal of property and equipment................................. (7) 4 122
Deferred income taxes............................................................. 632 (1,054) (1,023)
Changes in assets and liabilities:
Restricted cash................................................................... 460 (459) (252)
Accounts and notes receivable..................................................... (760) (1,049) (7,386)
Receivable from National
Media Fund........................................................................ 520 830 (1,600)
Assets leased to franchisees and inventories...................................... (1,338) (1,235) (1,999)
Re-acquired area and center rights held for resale................................ 109 378 261
Other current assets.............................................................. (331) (58) 421
Other assets...................................................................... (38) 152 173
Accounts payable.................................................................. (733) 945 419
Franchisee deposits............................................................... (522) 466 747
Royalties, referrals and commissions payable...................................... (755) 66 610
Accrued employee expenses and related taxes....................................... 427 500 697
Other accrued expenses............................................................ (369) 838 821
Income taxes payable.............................................................. 535 397 730
--------- --------- ---------
NET CASH FLOWS PROVIDED FROM OPERATING ACTIVITIES................................. 5,908 10,802 1,090
INVESTING ACTIVITIES:
Net change in short-term investments.............................................. (5,517) (11,773) 389
Additions to property and equipment............................................... (1,292) (472) (477)
Principal payments received on sales-type leases.................................. 3,407 3,628 3,223
Re-acquired area rights........................................................... (439) (185) (887)
--------- --------- ---------
NET CASH FLOWS PROVIDED FROM (USED IN) INVESTING ACTIVITIES....................... (3,841) (8,802) 2,248
FINANCING ACTIVITIES:
Borrowing under line of credit.................................................... 1,630 3,720 3,800
Repayments under line of credit................................................... (2,150) (4,550) (2,200)
Repayments on notes payable....................................................... (354) (146) (54)
Repurchase of common stock........................................................ (410) (1,922) (5,681)
Proceeds from the issuance of common stock........................................ 1,793 1,923 937
--------- --------- ---------
NET CASH FLOWS PROVIDED FROM (USED IN) FINANCING ACTIVITIES....................... 509 (975) (3,198)
--------- --------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS............................................. 2,576 1,025 140
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR........................................ 1,416 391 251
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR.............................................. $ 3,992 $ 1,416 $ 391
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for Income taxes........................................ $ 3,762 $ 6,348 $ 5,479
Cash paid during the year for interest expense.................................... $ 261 $ 155 $ 98
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
Equipment sold under sales-type leases............................................ $ 1,864 $ 2,232 $ 2,724
Cost of equipment sold under sales-type leases.................................... $ 1,435 $ 1,674 $ 2,043
Notes payable issued in connection with re-acquired area rights................... $ 3,123 $ 185 $ 1,495
Accounts and notes forgiven in connection with re-acquired area rights............ $ 104 -- $ 468
Exchange of area rights........................................................... -- -- $ 260
</TABLE>
(See accompanying notes)
<PAGE>
MAIL BOXES ETC.
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 communication services. The purchase price paid
by the Company to acquire this subsidiary exceeded the subsidiary's net assets
by $0.9 million; 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. During FY97 MBE acquired the remaining interest in
the United Kingdom and operated 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. At
the end of FY97, the MBE Master License for the United Kingdom was sold to a
group comprised of the individual principal owners of the MBE Master License for
Canada and several other MBE Area and Individual Franchisees.
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.
<PAGE>
MAIL BOXES ETC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue is recognized using the installment method when the revenue is
collectable over an extended period and no reasonable basis exists for
estimating collectability.
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, 1997 and 1996, the Company had advanced $250
thousand and $770 thousand to the National Media Fund, respectively, to fund
certain national advertising programs. These advances, including interest, are
repaid to the Company 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 accordance with Financial Accounting Standards Board Statement of
Financial Accounting Standard No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," 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, 1997 and 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 cash equivalents and the estimated
fair value of available for sale securities by balance sheet classification at
April 30;
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Cash and cash equivalents Cash.............................................................. $ 351 $ 1,339
Money market fund......................................................................... 3,641 77
Short-term investments:
U.S. Government securities................................................................ 5,842 4,000
Mutual fund preferred equity securities................................................... 21,500 17,825
--------- ---------
Total cash, cash equivalents and short-term investments..................................... $ 31,334 $ 23,241
--------- ---------
--------- ---------
</TABLE>
<PAGE>
MAIL BOXES ETC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The estimated fair value of each investment approximates the amortized cost,
and therefore, there are no unrealized gains or losses as of April 30, 1997 or
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 and other deposits received from its
franchisees.
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 leases are collateralized by the
leased equipment and fixtures.
Trade receivables are not collateralized. However, the center ownership
transfer process requires that all amounts owed be paid when a center ownership
is transferred.
Notes receivable from area franchisees and master licensees are
collateralized by the area rights or master license rights, respectively. The
Company has provided for estimated credit losses.
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 $629 thousand and $638 thousand in such individual and area rights
at April 30, 1997 and 1996, respectively. The
<PAGE>
MAIL BOXES ETC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. 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, 1997 no
adjustment is necessary. The Company had an investment of $6.4 million and $3.2
million in such area rights at April 30, 1997 and 1996, respectively. 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:
<TABLE>
<S> <C>
Building..................................................... 31.5 years
Building improvements........................................ 12.5-31.5
years
Office furniture and equipment............................... 3-5 years
Vehicles..................................................... 3 years
</TABLE>
EMPLOYEE STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25), and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's stock options generally equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
ACCOUNTING FOR ASSET IMPAIRMENT
The Company adopted Statement of Financial Accounting Standards No. 121
(SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", effective May 1, 1995. SFAS No. 121
required impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. SFAS No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. There was no effect on the financial
statements from the adoption of SFAS No. 121.
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.
<PAGE>
MAIL BOXES ETC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. NOTES RECEIVABLE
Notes receivable consist of the following at April 30;
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Notes with interest rates ranging from 8%-14%, from individual franchisees, due at varying
dates through 2005........................................................................ $ 11,688 $ 11,170
Notes with interest rates ranging from 8%-14%, from area franchisees, due at varying dates
through 2005.............................................................................. 7,252 6,611
Notes with interest rates ranging from 8.5%--11.75%, from master licensees, due at varying
dates through 2004........................................................................ 1,728 1,806
--------- ---------
20,668 19,587
--------- ---------
Less portion due within one year............................................................ (6,048) (6,756)
Less allowance for uncollectible notes...................................................... (1,643) (2,000)
--------- ---------
$ 12,977 $ 10,831
--------- ---------
--------- ---------
Interest earned for the fiscal year ended April 30:......................................... $ 1,997 $ 2,041
--------- ---------
--------- ---------
</TABLE>
Scheduled principal maturities for notes receivable as of April 30, 1997,
are as follows (in thousands): 1998--$6,048; 1999--$4,164; 2000--3,384;
2001--$2,582; 2002--$1,997; and thereafter $2,493
At April 30, 1997, the Company was obligated to fund approximately $281
thousand under certain financing programs offered to franchisees.
3. NET INVESTMENT IN SALES--TYPE LEASES
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 leases at April 30;
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Total minimum lease payments to be received................................................. $ 10,980 $ 13,241
Less unearned income........................................................................ (2,591) (3,309)
--------- ---------
Net investment in sales-type leases......................................................... 8,389 9,932
Less portion due within one year............................................................ (2,322) (2,414)
--------- ---------
$ 6,067 $ 7,518
--------- ---------
--------- ---------
Interest earned for the fiscal year ended April 30:......................................... $ 1,203 $ 1,420
--------- ---------
--------- ---------
</TABLE>
Annual minimum lease payments subsequent to April 30, 1997, are as follows
(in thousands): 1998-- $3,307; 1999--$2,736; 2000--$2,031; 2001--$1,330;
2002--$778; and thereafter--$798.
<PAGE>
MAIL BOXES ETC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. DEBT
The Company has a line of credit with a bank which allows maximum borrowings
of $7 million. As of April 30, 1997, $250 thousand has been borrowed and $6.750
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 (6.81% at April 30, 1997). 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 $51 thousand including interest at 8% to 8.5% per annum.
Aggregate principal maturities on notes payable at April 30, 1997 are as follows
(in thousands): 1998--$442; 1999--$452; 2000--$447; 2001--$457; 2002 - $463; and
thereafter-- $2,097.
6. INCOME TAXES
The provision for income taxes consists of the following for each of the
years ended April 30:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Current:
Federal............................................................................ $ 3,297 $ 5,324 $ 4,352
State.............................................................................. 905 1,344 1,088
--------- --------- ---------
4,202 6,668 5,440
Deferred:
Federal............................................................................ 557 (913) (890)
State.............................................................................. 75 (135) (139)
--------- --------- ---------
632 (1,048) (1,029)
--------- --------- ---------
$ 4,834 $ 5,620 $ 4,411
--------- --------- ---------
--------- --------- ---------
</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 $1.4 million has been
credited to common stock.
Significant components of the Company's deferred tax assets for federal and
state income taxes as of April 30 are:
<TABLE>
<CAPTION>
DEFERRED TAX ASSETS: 1997 1996 1995
- ------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Valuation reserves................................................................... $ 1,884 $ 2,646 $ 1,679
State taxes.......................................................................... 247 339 295
Deferred compensation................................................................ 390 168 131
--------- --------- ---------
Total deferred tax assets............................................................ $ 2,521 $ 3,153 $ 2,105
--------- --------- ---------
--------- --------- ---------
</TABLE>
<PAGE>
MAIL BOXES ETC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
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:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Statutory rate....................................................... 34.0% 35.0% 34.0%
State tax, net of federal tax benefit................................ 5.0% 5.5% 5.6%
Other................................................................ (1.3%) (1.3%) (0.1%)
--- --- ---
37.7% 39.2% 39.5%
--- --- ---
--- --- ---
</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, 1997, 473 thousand options were exercisable and the Company
had nearly 2.6 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 plan for outside directors.
A summary of the Company's stock option activity and related information is
as follows (shares in thousands):
<TABLE>
<CAPTION>
FY97
--------------------------
<S> <C> <C>
WGTD. AVG.
NUMBER OF EXERCISE
SHARES PRICE
----------- -------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Outstanding at beginning of year....................................................... 1,113 $ 9.85
Granted................................................................................ 489 $ 17.54
Exercised.............................................................................. (180) $ 9.97
Forfeited.............................................................................. (169) $ 13.12
----- ------
Outstanding at the end of the year..................................................... 1,253 $ 12.39
----- ------
Exercisable at the end of the year..................................................... 473* $ 10.75
----- ------
</TABLE>
- ------------------------
* Because of the Merger Agreement with U.S. Office Products described in Note
13, all stock options granted prior to May 22, 1997 (the date of the Merger
Agreement), will become vested and fully exercisable prior to the Merger. If
the Merger is not consummated, all options that were accelerated solely as a
result of the Merger Agreement, but were not exercised, will revert back to
their original vesting schedule.
<PAGE>
MAIL BOXES ETC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTIONS (CONTINUED)
<TABLE>
<CAPTION>
FY96
--------------------------
<S> <C> <C>
WGTD. AVG.
NUMBER OF EXERCISE
SHARES PRICE
----------- -------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Outstanding at beginning of year....................................................... 914 $ 9.93
Granted................................................................................ 441 $ 9.17
Exercised.............................................................................. (221) $ 8.70
Forfeited.............................................................................. (21) $ 13.30
----- ------
Outstanding at the end of the year..................................................... 1,113 $ 9.85
----- ------
Exercisable at the end of the year..................................................... 394 $ 12.49
----- ------
</TABLE>
<TABLE>
<CAPTION>
FY95
----------------------------
<S> <C> <C>
WGTD. AVG.
NUMBER OF EXERCISE
SHARES PRICE
------------- -------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Outstanding at beginning of year....................................................... 847 $ 9.90
Granted................................................................................ 258 $ 7.81
Exercised.............................................................................. (146) $ 6.29
Forfeited.............................................................................. (45) $ 9.31
--- ------
Outstanding at the end of the year..................................................... 914 $ 9.93
--- ------
Exercisable at the end of the year..................................................... 408 $ 10.77
--- ------
</TABLE>
Adjusted pro forma information regarding net income and earnings-per-share
is required by SFAS 123, and has been determined as if the Company had accounted
for its employee and non-employee directors stock options under the fair value
method of that Statement. The fair value for these options was estimated at the
date of grant using the "Black Scholes" method for option pricing with the
following weighted-average assumptions for FY97 and FY96: 1) risk free interest
rates of 6%; 2) dividend yields of 0%; 3) volatility factors of the expected
market value of the Company's common stock of .395; and a weighted-average
expected life of the options of 5 years.
For purposed of adjusted pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. The
Company's adjusted pro forma information would have been as follows (in
thousands):
<TABLE>
<CAPTION>
FY97 FY96
--------- ---------
<S> <C> <C>
Adjusted pro forma net income.................................................................. $ 7,403 $ 8,549
Adjusted pro forma earnings-per-share.......................................................... $ 0.63 $ 0.75
</TABLE>
The results above are not likely to be representative of the effects of
applying FAS 123 on reported net income or loss for future years as these
amounts reflect the expense for only one or two years vesting.
<PAGE>
MAIL BOXES ETC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTIONS (CONTINUED)
The following summarizes information about the Company's stock options
outstanding at April 30, 1997 (number of options in thousands):
<TABLE>
<CAPTION>
SHARES SUBJECT TO OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ------------------------
OPTION WGTD. AVE NUMBER
RANGE OF SHARES REMAINING WGTD. AVE. EXERCIS- WGTD. AVE.
EXERCISE PRICE OUTSTANDING LIFE EXER. PRICE ABLE EXER. PRICE
- --------------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$4.13 8 1.0 yrs $ 4.13 8 $ 4.13
$6.81--$8.25 390 7.5 $ 7.84 112 $ 7.57
$9.00--$10.50 278 4.6 $ 10.00 195 $ 9.96
$11.50--$14.50 145 4.8 $ 13.80 140 $ 13.78
$16.50--$23.13 432 9.1 $ 17.70 18 $ 18.27
----- ---
1,253 473
</TABLE>
8. FRANCHISE FEES
Franchise fees consist of the following for each of the years ended April
30:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Individual franchises................................................................ $ 7,240 $ 6,397 $ 6,774
Area franchises...................................................................... 296 292 58
Master licenses & international fees................................................. 1,062 957 1,170
Transfer and renewal fees............................................................ 1,317 911 668
--------- --------- ---------
$ 9,915 $ 8,557 $ 8,670
--------- --------- ---------
--------- --------- ---------
</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): 1997--$12,875; 1996--$11,686; and 1995--$9,689.
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 $240 thousand, $450 thousand, and
$420 thousand for the years ended April 30, 1997, 1996 and 1995, respectively.
At the discretion of the Board of Directors, the Company may also make annual
matching contributions to the Plan. Matching contributions for 1997, 1996 and
1995 were $214 thousand, $162 thousand, and $136 thousand, respectively and
equal to 50% of the employee's contributions.
<PAGE>
MAIL BOXES ETC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company has entered into an employment agreement with its 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
FY97 and FY96 toward 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 FY97 will be determined annually by the Board of
Directors.
11. LITIGATION
On November 6, 1996, the Company entered into a comprehensive settlement of
various lawsuits and claims made by certain franchisees in several lawsuits
being pursued in San Diego County Superior Court. Under the settlement
agreement, the Company paid $4 million in cash and will deliver an aggregate
amount of 39,080 shares of its common stock over a period of two years. The
settlement expense reflected in the Company's financial results is $5 million.
The Company is still 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.
12. RELATED PARTY TRANSACTIONS
Nearly 40% of the franchisees' gross sales and almost 50% of their
subject-to-royalty revenues are generated by selling 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 $16.9 million, $14.9 million, and $11.8 million for the years ended
April 30, 1997, 1996, and 1995, respectively.
13. SUBSEQUENT EVENTS
On May 22, 1997, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with U.S. Office Products Company ("USOP"), pursuant to
which a newly-formed, wholly-owned subsidiary of USOP will be merged (the
"Merger") with and into MBE, with MBE to be the surviving corporation. Once the
merger is completed, MBE will be a wholly-owned subsidiary of USOP. Consummation
of the Merger is subject to certain conditions, including the approval of the
principal terms of the transaction by the Company's shareholders.
<PAGE>
MAIL BOXES ETC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. 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>
FY97 FIRST SECOND THIRD FOURTH
- ---------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total revenues........................................................ $ 14,779 $ 17,047 $ 18,838 $ 17,173
Total cost and expenses............................................... 11,634 18,078 13,204 13,059
Provision for (benefit from) income taxes............................. 1,331 (341) 2,310 1,534
Net income (loss)..................................................... 2,070 (470) 3,557 2,834
Earnings (loss) per share............................................. .18 (0.04) .30 .24
</TABLE>
<TABLE>
<CAPTION>
FY96 FIRST SECOND THIRD FOURTH
- ---------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total revenues........................................................ $ 12,803 $ 15,097 $ 16,164 $ 15,093
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
</TABLE>
