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, 1995
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 11,229,879
(Class) (Outstanding at
January 31, 1995)
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAIL BOXES ETC.
CONSOLIDATED BALANCE SHEETS
January 31, April 30,
ASSETS 1995 1994
(Unaudited) (Note)
CURRENT ASSETS:
Cash and cash equivalents $1,297,659 $251,055
Restricted cash - franchisee
deposits 1,093,277 1,361,125
Short-term investments 11,976,048 10,439,792
Accounts receivable, net 8,243,130 5,864,072
Inventories 968,685 1,026,946
Current portion of notes receivable 5,157,993 4,046,767
Current portion of net investment in
sales-type and direct financing
leases 2,504,020 2,423,514
Deferred income taxes 853,938 822,178
Re-acquired area and center rights
held for resale 1,477,972 1,536,316
Other 813,028 1,426,237
TOTAL CURRENT ASSETS 34,385,750 29,198,002
Notes receivable 11,549,842 8,625,731
Net investment in sales-type and
direct financing leases 9,049,020 9,403,611
Property and equipment, net 5,683,659 6,148,525
Excess of cost over assets acquired,
net 3,279,471 422,912
Deferred income taxes 254,006 254,006
Other assets 1,019,026 1,158,551
TOTAL ASSETS $65,220,774 $55,211,338
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $891,879 $732,462
Franchisee deposits 2,005,585 1,405,606
Royalties, referrals and commissions
payable 2,882,867 1,838,654
Accrued employee expenses and
related taxes 1,234,948 766,283
Income taxes payable 723,695 -
Other accrued expenses 862,109 353,092
Current maturities of long-term debt 3,078,369 -
TOTAL CURRENT LIABILITIES 11,679,452 5,096,097
Long-term debt, net of current
maturities 1,345,500 -
SHAREHOLDERS' EQUITY:
Common stock, no par value, authorized
40,000,000 shares 11,229,879 and
11,569,146 issued and outstanding at
January 31, 1995 and April 30, 1994,
respectively 16,258,183 19,194,693
Retained earnings 35,937,639 30,920,548
TOTAL SHAREHOLDERS' EQUITY 52,195,822 50,115,241
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $65,220,774 $55,211,338
Note: The balance sheet at April 30, 1994 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
<FN>
See accompanying notes.
MAIL BOXES ETC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended Nine months ended
1/31/95 1/31/94 1/31/95 1/31/94
REVENUE:
Franchise fees $1,908,788 $1,379,309 $6,093,472 $7,006,754
Royalty and marketing
fees 8,419,256 7,001,231 18,467,986 15,311,531
Sales of supplies and
equipment 2,669,653 2,637,461 7,727,765 8,478,881
Company centers 468,508 301,787 1,189,891 839,468
Interest income on
leases and other 1,248,507 1,108,191 3,789,168 3,252,018
TOTAL REVENUES 14,714,712 12,427,979 37,268,282 34,888,652
COST AND EXPENSES:
Cost of supplies and
equipment sold 2,113,796 2,145,185 6,079,182 6,955,727
Sales 1,136,558 749,354 3,486,612 2,972,753
Marketing 1,217,979 889,784 3,437,287 2,721,393
Franchise operations 4,021,283 3,365,954 9,324,619 7,956,618
Company centers 522,257 288,494 1,229,025 807,696
General and
administrative 2,075,373 1,466,684 5,717,944 3,917,295
TOTAL COSTS AND
EXPENSES 11,087,246 8,905,455 29,274,669 25,331,482
Operating Income 3,627,466 3,522,524 7,993,613 9,557,170
OTHER:
Interest on
investments and
other, net 122,672 180,239 313,485 489,131
Income before provision
for income taxes 3,750,138 3,702,763 8,307,098 10,046,301
Provision for income
taxes 1,434,020 1,504,088 3,290,007 4,082,159
Net income $2,316,118 $2,198,675 $5,017,091 $5,964,142
Net income per common
share $0.20 $0.18 $0.44 $0.48
Weighted average common
and common equivalent
shares 11,373,723 12,510,175 11,417,487 12,511,171
<FN>
See accompanying notes.
MAIL BOXES ETC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended January 31,
1995 1994
Cash flows provided from (used for)
operating activities:
Net income $5,017,091 $5,964,142
Adjustments to reconcile net income to
net cash provided for (used for)
operating activities:
Depreciation and amortization 773,758 795,993
Gain on sale of equipment under
sales-type lease agreements (509,336) (835,598)
Loss on retirement of fixed assets 129,293 -
Changes in assets and liabilities:
Restricted cash 267,848 748,872
Accounts and notes receivable (6,414,395) (4,864,354)
Assets leased to franchisees and
inventories (1,554,638) (3,654,636)
Reacquired area and center rights
held for resale 58,344 (376,416)
Other current assets 613,209 (180,608)
Other assets 6,963 (226,336)
Accounts payable 159,417 (369,692)
Franchisee deposit 599,979 (734,167)
Royalties, referrals and commissions
payable 1,044,213 1,038,833
Accrued employee expenses and
related taxes 468,665 (502,654)
Income taxes payable 723,695 7,221
Other accrued expenses 509,017 238,129
Net cash flows provided from
(used for) operating activities 1,893,123 (2,951,271)
Cash flows provided from (used for)
investment activities:
Net change in short-term
investments (1,616,254) 73,940
Additions to property and equipment (352,222) (410,912)
Principal payments received on
sales-type leases 2,396,321 3,317,346
Reacquired area and center rights (1,336,762) -
Net cash flows provided from
(used for) investment activities (908,917) 2,980,374
Cash flows provided from financing
activities:
Borrowings under revolving loan 3,800,000 -
Repayments under revolving loan (849,329) -
Repurchase of common shares (3,160,673) (57,907)
Proceeds from the issuance of
common shares 272,400 425,143
Net cash flows provided from
financing activities 62,398 367,236
Increase in cash and cash equivalents 1,046,604 396,339
Cash and cash equivalents at
beginning of the period 251,055 1,344,886
Cash and cash equivalents at end of
the period $1,297,659 $1,741,225
Supplemental disclosure for cash flows
information:
Cash paid during the period for:
Income taxes $3,452,164 $4,475,223
Interest $70,913 $11,328
Supplemental schedule with non-cash
investment and financing activities:
Equipment sold under sales-type
lease agreements $2,122,235 $4,177,990
Reacquired areas under notes payable $1,495,000 -
<FN>
See accompanying notes.
PART I - FINANCIAL INFORMATION
MAIL BOXES ETC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 1. BASIS OF PRESENTATION:
Note 1. Presentation
The consolidated balance sheet as of January 31, 1995, the
consolidated statements of income for the three-month periods and
nine-month periods ended January 31, 1995 and 1994, and the
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 consolidated financial statements be read in conjunction
with the financial statements and notes thereto included in the 1994
Annual Report on Form 10-K. The results of operations for the quarter
and the nine months ended January 31, 1995 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. Summary of Significant Accounting Policies
Change in method of Accounting for Investments.
The Company adopted FASB Statement No. 115, Accounting For Certain
Investments in Debt and Equity Securities as of May 1, 1994.
Management determines the appropriate classification of debt
securities at the time of purchase and reevaluates such designation as
of each balance sheet. Debt securities are classified as available-
for-sale and are stated at fair value, with the unrealized gains and
loss, net of tax, reported in a separate component of shareholders'
equity. Adoption of the new standard did not have a material effect
on shareholders' equity.
Note 3. Long-Term Debt
During the nine months ended January 31, 1995, MBE entered into a
$7,000,000 line of credit with a bank. The credit agreement provides
for a revolving line of credit for 24 months, which is convertible to
a term loan of up to 36 months. Advances under the 24 month revolving
line of credit bear interest at a rate per annum equal to, at the
Company's option, a) the bank's reference rate or b) LIBOR plus 1.12%.
The term loan rate is, at the Company's option a) the bank's reference
rate or b) the bank's cost of funds plus 1.37%. All borrowings under
this agreement are unsecured and there are no fees.
As of January 31, 1995, the Company had borrowed $3,800,000 and
repaid $849,329 resulting in a balance of $2,950,671. The money was
used to make advance purchases for the national TV advertising program
to obtain significantly better rates. The Credit Agreement contains
restrictive and financial covenants relating to, among other things,
maintenance of a minimum tangible net worth, semi-annual and annual
profitability, certain other financial ratios, and cash balances. In
addition, limitations are imposed on new debt.
Note 4. Litigation
The Company has become subject to various lawsuits and claims from
its franchisees and employees in the course of conducting its
business. While management believes the ultimate outcome of these
matters will not result in a material adverse effect on the Company's
financial position or liquidity, the Company cannot accurately predict
the eventual outcome of these matters. An unfavorable outcome could
have a material adverse effect in the future 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, 1995 compared to Three
months ended January 31, 1994:
Revenues for Mail Boxes Etc. ("MBE" or the "Company") for the three
months ended January 31, 1995, increased by $2,286,733 or 18% over the
prior year's same quarter. Revenues from franchise fees increased by
$529,479 or 38%. Revenues from individual franchise fees increased
by $266,186 or 25%, compared to the three months ended January 31,
1994. Individual franchise fee revenues increased because of a 37%
increase in the sale of individual franchises, 59 new individual
franchises were sold in the third quarter of FY 95 as compared to 43
during the third quarter of FY 94. Revenues from sale of master
licenses increased by $235,000 over the prior year's same quarter.
During 3rd quarter of FY 95 master license for countries of Saudi
Arabia, Bahrain, Kuwait, and Yemen was sold for $350,000. The
remainder of this revenue category includes transfer and renewal fees
of $179,136 and international franchise fees of $72,222.
Revenues from royalty and marketing fees increased by $1,418,025 or
20% over the prior period. The increase in royalty and marketing fees
is primarily due to the 20% same store sales increase experienced by
the network during the 3rd quarter of FY 95. The increase in royalty
and marketing fees is also due to the increased number of centers in
operation, 2,644 at January 31, 1995, compared with 2,323 at January
31, 1994. The revenue increase was 34% due to the same store sales
increase and 66% due to the addition of new centers. Revenues from
the sale of supplies and equipment slightly increased by $32,192
during the 3rd quarter of FY 95. During 3rd quarter FY 95, 100
centers were opened compared to 99 centers in the same period of the
prior year. Revenues from the company-owned and operated centers
increased by $166,721 or 55% when compared to the same quarter in FY
94. This increase is primarily due to the fact that in the first
quarter of FY 95 MBE purchased an existing center in San Diego County
and started operating it as Company-owned center. In addition, in 3rd
quarter of FY 95 MBE opened a new center in downtown San Diego to test
the concept of a center in a downtown highrise location. This program
will test future strategies for MBE centers in downtown areas in which
the center's business will depend largely upon the building's tenants.
Currently, MBE owns 3 centers as compared to 1 in FY 94. Interest
income on leases and other revenues increased by $140,316 or 13%.
This revenue category includes interest income on leases, interest on
notes receivable, late fees, finance charges and various
administrative fees. The primary cause of the increase was due to
interest on notes receivable, which increased $159,300 or 63% over the
same quarter of FY 94. This increase is primarily due to MBE's
expanded financing programs to promote network growth.
Costs and expenses for the three months ended January 31, 1995
increased by $2,181,791 or 24% when compared to the three months ended
January 31, 1994. Costs of supplies and equipment decreased slightly
by $31,389 or 1% as compared to the three months ended January 31,
1994. This decrease was due to a product mix with higher margins.
Gross margin increased from 19% in 3rd quarter of FY 94 to 20% in 3rd
quarter of FY 95.
Franchise sales expenses increased by $387,204 or 52% in the third
quarter of FY 95. This increase is primarily due to the sale of more
centers which resulted in more commissions being paid to area
franchisees. Commissions being paid to area franchisees increased by
$177,842 or 51% over the same quarter FY 94. Expenses also increased
because of expanded international support.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three months ended January 31, 1995 compared to Three months ended
January 31, 1994: (Continued)
Marketing expenses for the quarter ended January 31, 1995,
increased by $328,195 or 37% when compared to the third quarter ended
January 31, 1994 because of the requirements to spend more to support
a larger network which increased from 2,141 domestic centers to 2,353
centers in operation at January 31, 1995. There were also increased
expenditures to support the national TV advertising program launched
in May, 1994.
The increase in Franchise operations expense was $655,329 or 19%
over FY 94 and reflects the increased royalties paid to the area
franchise owners. The increase in royalties remitted to area
franchisees was $505,394 or 17% during the third quarter FY 95
compared to the same period in FY 94. This increase is directly
proportional to the 20% increase in royalty fees recognized during the
third quarter, and is due to a greater number of area and individual
franchise owners in the system, as well as an increase in the volume
of business transacted by individual MBE centers as they mature.
The Company Centers' costs increased by $233,763 or 81%, during
the third quarter ended January 31, 1995 as compared to the same
quarter of FY 94. This large increase is mostly due to having 2
additional company owned centers as compared to 3rd quarter FY 94.
General and Administrative expenses increased by $608,689 or 42%
over the third quarter of FY95. This increase is largely attributed
to the growth of franchise centers in operation. These expenses will
continue to grow with the domestic and international growth. As of
January 31, 1995, there were 2,353 MBE centers operating domestically,
and 291 MBE centers operating internationally. In addition, the
Company is incurring increased litigation costs as it vigorously
defends itself in various lawsuits.
Other income decreased by $57,567 or 32% for the quarter ended
January 31, 1995, compared to the quarter ended January 31, 1994. The
major components of this revenue category include interest income on
investments which decreased by $51,707 or 28%, due to lower interest
rates, and interest expense which increased 92% as compared to 3rd
quarter FY 94. The increase in interest expense was due to the
payments on notes which were issued in the 1st and 3rd quarters of FY
95 in connection with the reacquisition of 3 area franchises.
Net income increased by $117,443 or 5% and earnings per share
increased by 11% for the three months ended January 31, 1995 compared
to the quarter ended January 31, 1994.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
Nine months ended January 31, 1995 compared to Nine months ended
January 31, 1994:
Revenues for the nine months ended January 31, 1995, increased by
$2,379,630 or 7% over the prior year's same period. Revenues from
franchise fees decreased by $913,282 or 13% because of a significant
decrease in the sale of master licenses. Revenue from master license
fees decreased from $1,570,000 in the first nine months of FY 94 to
$425,000 in the same period of FY 95. MBE believes that master
license sales may be a less significant source of revenue during
remainder of FY 95 and beyond, and that the timing of these sales will
not be predictable. Individual franchise fees decreased by $60,308 or
2% compared to the nine months ending January 31, 1994 despite the 3%
increase in the number of centers sold in FY 95. During the first
nine months of FY 95, 220 new individual franchises were sold as
compared to 213 in the same period of FY 94. The decrease in
individual franchise fees was the result of increased sales of
multiple centers which have lower franchise fees. Transfer and
renewal fees increased by $388,327 or 400%. The increase in the
renewal fees is due to more existing centers renewing their franchise
agreements. The remainder of this revenue category includes
international sales of individual and area franchises by master
licensees for $232,891, which represents a 46% increase as compared to
the first nine months of FY 94.
Revenues from royalty and marketing fees increased by $3,156,455 or
21% over the prior period because of the increased number of centers
in operation and the increase in same store sales noted earlier. The
revenue increase is 33% due to new centers and 67% to same store sales
increases. Revenues from the sale of supplies and equipment decreased
by $751,116 or 9%. This decrease was due to the opening of fewer
centers in the first nine months of FY 95. During the first nine
months of FY95, 220 centers opened as compared to 262 centers in the
same leases and other increased by $537,150 or 17%. The major
components of this revenue category include interest income on leases,
interest on notes receivable, finance charges, and various
administrative fees. Interest income on notes receivable increased by
$450,329 or 67% during the first nine months of FY 95 as compared to
the first nine months of FY 94. Revenues from other items included in
this category showed some increases in the nine months ended January
31, 1995 over the same period in the prior year.
Costs and expenses for the nine months ended January 31, 1995
increased by $3,943,187 or 16% when compared to the nine months ended
January 31, 1994. Costs of supplies and equipment decreased by
$876,545 or 13% as compared to the nine months ended January 31, 1994.
This decrease was due to decreases in sales as discussed above. Gross
margins on supplies and equipment increased from 18% to 21% for the
nine months ended January 31, 1995, as compared to the same period in
the prior year. This was due to the product mix.
Franchise sales expenses increased by $513,859 or 17% for the nine
months ended January 31, 1995. This was due to increased sales and
more international support.
Marketing expenses increased by $715,894 or 26% when compared to
the nine months ended January 31, 1994. Marketing expenses are
expected to continue to grow as the network expands because of the
requirement to spend 1 percent of the gross revenues from the system
for marketing and development of the network.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
Nine months ended January 31, 1995 compared to Nine months ended
January 31, 1994:
The increase in franchise operations expense was $1,368,001 or 17%
over FY 94. This increase is mostly due to an increase in royalties
paid to area franchise owners which were $7,335,900 for the nine
months ended January 31, 1995 compared to $6,213,878 in the same
period last year. This increase is directly proportional to the 20%
increase in royalty and marketing fees recorded.
The Company Centers' costs increased by $421,329 or 52%, during the
nine months ended January 31, 1995. This increase is due to the
additional centers and the increase in centers as discussed above.
Administrative expenses increased by $1,800,649 or 46% over the
prior nine month period ended January 31, 1994. This increase is due
to the growth of franchise centers in operation and increased
litigation expenses as discussed above.
Other income (interest on investments and other) decreased by
$175,646 or 36% for the nine months ended January 31, 1995, compared
to the nine months ended January 31, 1994, due primarily to the
decline in interest rates and increase in interest expense as
discussed before.
Net income decreased by $947,051 or 16% and earnings per share
decreased by 8% for the nine months ended January 31, 1995 compared to
the nine months ended January 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at January 31, 1995 was $22,706,298 compared to
$24,101,905 at April 30, 1994. The decline in the working capital
during the first nine months of FY 95 was the result of the Company's
decision to repurchase MBE stock and some existing area franchises.
During the first nine months of FY 95, MBE repurchased 369,000 shares
of stock for approximately $2,888,000 and reacquired 3 existing area
franchises for approximately $2,800,000. At the end of February 1995,
MBE also repurchased an additional 100,000 shares of MBE stock at a
purchase price of $9.75 per share. During 2nd quarter of FY 95, MBE
obtained a $7,000,000 line of credit from a bank. Currently, MBE is
using approximately $2,950,000 of the line of credit to advance the
National Media Fund for national advertising programs.
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. While management
believes the ultimate outcome of these matters will not result in a
material adverse effect on the Company's financial position or
liquidity, the Company cannot accurately predict the eventual outcome
of these matters. An unfavorable outcome could have a material
adverse effect in the future on the Company's results of operations.
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
In connection with the suits entitled Helm et al. v. Mail Boxes
Etc. and Mail Boxes Etc. USA, Inc. v. B.J. Postal Services
Corporation, which involved claims by approximately 18 individual
franchise owners as described in the Company's Form 10-K Report for
the year ended April 30, 1994, the parties have continued with
preliminary discovery efforts. In February 1995, the Court indicated
that in an effort to help resolve the cases it will proceed with test
trials for three, and possibly four, of the individual franchisees.
These cases are not expected to go to trial before July 1995.
In connection with the suit entitled Conklin, et al v. Mailboxes
Etc. USA, Inc., which was described in the Company's Form 10-Q Report
for the quarter ended October 31, 1994, the Company's motion
requesting the Court to dismiss certain claims and certain of the
plaintiffs was granted in part and denied in part. One franchisee
plaintiff was dismissed from the action and the claims of another
franchisee plaintiff were dismissed with an opportunity to amend. The
remainder of the franchisee plaintiffs were also granted an
opportunity to replead their fraud claims with greater specificity and
to replead the majority of their contract-based claims to state a
cause of action.
As previously noted in the Company's 10-K Report for the fiscal
year ended April 30, 1994, the Company has also become subject to
various other lawsuits and claims from its franchisees and employees
in the course of conducting its business. An estimate of the possible
loss or range of loss from the adverse disposition of all of the
lawsuits and claims against the Company cannot be made, but any such
loss could have a material adverse effect on the Company's results of
operations. Management does not believe, however, that any such loss
would result in a material adverse effect on the Company's financial
position or liquidity.
ITEM 6
(b). REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended January
31, 1995.
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: A.W. DeSio Date: 3-13-95
Anthony W. DeSio
Chief Executive Officer
By: G.S. Grahn Date: 3-13-95
Gary S. Grahn
Chief Financial Officer