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, 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 Ct. 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 11,120,890
(Class) (Outstanding at July 31, 1995)
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAIL BOXES ETC.
CONDENSED CONSOLIDATED BALANCE SHEETS
July 31, April 30,
ASSETS 1995 1995
(Unaudited)
Current Assets:
Cash and cash equivalents $ 1,439,456 $ 390,841
Restricted cash - franchisee deposits 1,758,042 1,613,569
Short-term investments 12,036,184 10,036,718
Accounts receivable, net 6,755,984 6,723,128
Receivable from National Media Fund 1,100,000 1,600,000
Inventories 770,043 983,095
Current portion of notes receivable 6,516,859 6,065,275
Current portion of net investment
in sales-type and direct financing
leases 2,474,882 2,488,654
Deferred income taxes 1,453,583 1,453,583
Re-acquired area and center rights
held for resale 772,924 1,015,744
Other 1,074,000 1,005,482
Total current assets 36,151,957 33,376,089
Notes receivable, net 11,973,457 11,429,381
Net investment in sales-type and
direct financing leases 8,561,192 8,839,949
Property and equipment, net 5,627,151 5,615,060
Excess of cost over assets acquired, net 483,729 498,078
Reacquired area rights 2,991,796 3,030,670
Deferred income taxes 651,322 651,322
Other assets 598,118 852,555
Total assets $67,038,722 $64,293,104
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $1,211,594 $1,151,375
Franchisee deposits 2,434,951 2,152,904
Royalties, referrals and commissions
payable 2,321,051 2,448,624
Accrued employee expenses and related
taxes 887,914 1,462,933
Other accrued expenses 1,523,590 1,173,580
Income taxes payable 1,662,875 717,381
Current maturities of debt and notes
payable 1,228,893 1,704,848
Total current liabilities 11,270,868 10,811,645
Long-term debt, net of current
maturities 1,390,045 1,336,627
Shareholders' equity:
Preferred stock, no par value,
10,000,000 shares authorized,
with none issued and outstanding -- --
Common stock, no par value,
40,000,000 shares authorized,
with 11,120,890 and 11,058,387
shares issued outstanding
at July 31, 1995 and April 30, 1995,
respectively 15,065,301 14,454,524
Retained earnings 39,312,508 37,690,308
Total shareholders' equity 54,377,809 52,144,832
Total liabilities and shareholders'
equity $67,038,722 $64,293,104
<FN>
See accompanying notes.
MAIL BOXES ETC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended July 31,
1995 1994
Revenue:
Royalty and marketing fees $6,463,486 $4,828,987
Franchise fees 1,779,559 1,510,216
Sales of supplies and equipment 2,457,860 1,804,989
Interest income on leases and other 1,683,959 1,212,134
Company centers 418,436 369,501
Total revenues 12,803,300 9,725,827
Cost and Expenses:
Franchise operations 3,073,603 2,440,985
Franchise development 1,263,523 1,013,909
Cost of supplies and equipment sold 1,940,539 1,379,430
Marketing 1,131,838 1,016,849
General and administrative 2,444,700 1,769,590
Company centers 424,775 342,055
Total cost and expenses 10,278,978 7,962,818
Operating Income 2,524,322 1,763,009
Interest on investments and other 133,880 118,910
Income before provision for income
taxes 2,658,202 1,881,919
Provision for income taxes 1,036,002 767,988
Net income $1,622,200 $1,113,931
Net income per common share: $ .14 $ .10
Weighted average common and common
equivalent shares outstanding 11,208,445 11,537,117
<FN>
See accompanying notes.
MAIL BOXES ETC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended July 31,
1995 1994
Operating Activities:
Net income $1,622,200 $1,113,931
Adjustments to reconcile net income
to net cash provided from
(used in) operating activities:
Depreciation and amortization 256,917 260,830
Gain on sale of equipment under
sales-type lease agreements (154,951) (110,407)
Changes in assets and liabilities:
Restricted cash (144,473) (417,487)
Accounts and notes receivable (1,028,516) (926,259)
Receivable from National Media Fund 500,000 (2,126,383)
Assets leased to franchisees and
inventories (205,888) (610,270)
Re-acquired area and center rights 242,820 3,272
Other current assets (68,518) (40,766)
Other assets 254,437 (111,911)
Accounts payable 60,219 284,167
Franchisee deposits 282,047 562,757
Royalties, referrals and commissions
payable (127,573) (174,933)
Accrued employee expenses and related
taxes (575,019) 43,426
Other accrued expenses 350,010 99,556
Income taxes payable 945,494 752,043
Net cash flows provided from (used in)
operating activities 2,209,206 (1,398,434)
Investing Activities:
Net change in short-term investments (1,999,466) 956,087
Additions to property and equipment (106,255) (81,731)
Principal payments received on
sales-type leases 866,420 801,200
Re-acquired area rights -- (514,960)
Net cash flows provided from
(used in) investment activities (1,239,301) 1,160,596
Financing Activities:
Borrowings under revolving loan 450,000 3,324,072
Repayments under revolving loan (950,000) --
Repayments on notes payable (32,067) --
Repurchase of common shares (191,471) (2,918,960)
Proceeds from the issuance of common
shares 673,736 272,400
Other changes in equity 128,512 (24,998)
Net cash flows provided from financing
activities 78,710 652,514
Increase in cash and cash equivalents 1,048,615 414,676
Cash and cash equivalents at beginning
of period 390,841 251,055
Cash and cash equivalents at end of
period $1,439,456 $ 665,731
Supplemental Disclosure for Cash Flow
Information:
Cash paid during the period for income
taxes $ 112,108 $ 45,518
Interest 47,259 4,617
Supplemental Schedule with Non-Cash
Investment and Financing Activities:
Equipment sold under sales-type
agreements $ 573,891 $ 501,851
Additions to debt for acquisition of
equipment 109,530 --
<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 condensed consolidated balance sheet as of July 31,
1995, the consolidated statements of income for the three-month
periods ended July 31, 1995 and 1994, and the 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. It is suggested that these consolidated financial
statements be read in conjunction with the financial statements and
notes thereto included in the 1995 Annual Report on Form 10-K. The
results of operations for the quarter ended July 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. Litigation
The company has become subject to various lawsuits and claims
from its franchisees and employees in the course of conducting its
business. The company intends to vigorously defend these actions
and believes that the ultimate resolution will not have a material
adverse effect on the company's financial condition or liquidity.
However, there can be no assurance that an unfavorable result would
not have a material adverse effect on the company's results of
operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Three months ended July 31, 1995 compared to Three months ended
July 31, 1994:
Revenues for Mail Boxes Etc. ("MBE" or the "Company") for the
three months ended July 31, 1995, increased by $3,077,473 or 32%
from the same quarter of the prior year. Revenues from royalty and
marketing fees increased by $1,634,499 or 34% over the prior
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued):
Three months ended July 31, 1995 compared to Three months ended
July 31, 1994:
period. The increase in royalty and marketing fees is due to the
23% same store sales increase experienced by the network during the
first quarter of FY 96 and the increased number of centers in
operation, 2789 at July 31, 1995, compared with 2447 at July 31,
1994. Revenue from franchise fees increased by $269,343 or 18%.
Revenues from individual franchise fees increased by $194,800 or
15% compared to the three months ended July 31, 1994 as the result
of the sale of 65 new Individual Franchises sold in the first
quarter of FY 96 as compared to 56 during the first quarter of FY
95. Revenues from the sale of foreign master licenses decreased by
$75,000 because no master license was sold in the first quarter of
FY 96. MBE believes that master license sales may be a less
significant source of revenue during FY 96 and beyond and that the
timing of these sales will not be predictable. The remainder of
this revenue category includes international sales of individual
and area franchises by master licensees for $108,687 which
represents more than 200% increase as compared to the first quarter
of FY 95, and transfer and renewal fees of $213,922 which
represents an 82% increase over same period in FY 95.
Revenues from the sale of supplies and equipment increased by
$652,871 or 36% because there were more individual centers opened
during the first quarter of FY 96 (84 compared to 77) and there was
a strong emphasis on center upgrades during this quarter. Interest
income on leases and other increased by $471,825 or 39% as compared
to the three months ended July 31, 1994. The major components of
this revenue category include interest income earned on leases and
notes receivable, late fees, finance charges, and various
administrative fees. Interest income on leases decreased slightly
by $21,000. Interest on notes receivable increased by $165,907 or
51%. This increase resulted from additional financing programs
available to franchisees. Administrative fees on national vendor
contracts increased more than 160% as the transaction volumes
increased. Late fees increased by $118,797 and finance charges
remained virtually the same.
Revenues from the Company owned and operated centers increased
by $48,935 or 13%. This slight increase is due to the third
company owned center which started its operation in November 1994.
Cost and expenses for the three months ended July 31, 1995
increased by $2,316,160 or 29% when compared to the three months
ended July 31, 1994. The increase in Franchise operations expense
was $632,618 or 26% over FY 95 and resulted primarily from the
increase in royalties paid to area franchisees for their share of
the royalty income, which they earn, in part by providing ongoing
support to the network. These costs will generally increase in the
same manner as the network's royalty revenue growth. Royalties
paid to area franchisees increased by $520,205 or 27% over first
quarter FY 95. This increase is directly related to the increase
in royalty and marketing fees booked during the first quarter of FY
96. Franchise development expenses increased by $249,614 or 25%.
The increase reflects increased domestic and international sales
efforts and the resultant higher commissions paid.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued):
Three months ended July 31, 1995 compared to Three months ended
July 31, 1994:
Cost of supplies and equipment increased by $561,109 or 41%.
This increase is due to the increase in sales of supplies and
equipment as discussed earlier. The gross margin decreased from
24% to 21% because of the product mix.
Marketing expenses increased by $114,989 or 11% when compared
to the first quarter ended July 31, 1994. Marketing expenses will
continue to grow as the network grows. General and administrative
expenses increased by $675,110 or 38% over the first quarter of FY
95. This increase is primarily attributed to the growth of
franchise centers in operation, and increase in the reserves.
These expenses will continue to grow with domestic and
international growth of the Network. As of July 31, 1995, there
were 2,435 MBE centers operating in the USA and 354 MBE centers
operating outside the USA.
The Company centers' cost and expenses increased by $82,720 or
24%. The Company centers' combined operating margin was negative
in first quarter FY 96. One of the primary objectives of the
Company centers is to develop and test new products and services
and, as a result, their operating expenses are higher than might be
experienced by a typical owner-operated franchise.
Other income (interest on investments and other) increased
slightly by $14,970 or 13% for the quarter ended July 31, 1995,
compared to the quarter ended July 31, 1994.
Net income increased by 46% in first quarter FY 96. Earnings
per share increased from $.10 to $.14.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at July 31, 1995 was $24,881,089 compared to
$22,564,444 at April 30, 1995. The Company believes it has
adequate financial resources for its present and projected
operating requirements. The Company has become subject to various
lawsuits and claims from its franchisees and employees in the
course of conducting its business. The Company intends to
vigorously defend these actions and believes that the ultimate
resolution will not have a material adverse effect on the Company's
financial condition or liquidity. However, there can be no
assurance that an unfavorable result would not have a material
adverse effect on the Company's operating results.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In Helm et al v. Mail Boxes Etc. and MBE v. B.J. Postal
Service Corp. et al, which is described in the Company's 10-K
Report for the year ended April 30, 1995, the court has ordered the
parties to proceed with the trial of test cases for four individual
franchisees. Discovery efforts are continuing and those cases are
scheduled to begin trial in February 1996.
Plaintiff franchisees in Helm and B.J. Postal Service have
also filed a motion seeking leave to amend their complaint and
delete several causes of action, including one based on fraud,
breach of contract, and breach of the implied covenant of good
faith, and add a new cause of action for negligent
misrepresentation. The Company is opposing the Plaintiff's motion.
In Conklin et al v. Mail Boxes Etc. USA, Inc. which is
described in the Company's 10-K Report for the year ended April 30,
1995, the Plaintiffs have filed an amended complaint which added
three additional franchisees as Plaintiffs. The Plaintiffs also
abandoned their claims for breach of the implied covenant of good
faith and are seeking declaratory relief to determine their
obligations under the franchise agreements. Other than MBE's right
to seek injunctive and other equitable relief, the court has stayed
all further action in this case, including discovery.
The Company intends to vigorously defend these actions and
believes that the ultimate resolution will not have a material
adverse effect on the Company's financial condition or liquidity.
However, there can be no assurance that an unfavorable result would
not have a material adverse effect on the Company's results of
operations.
ITEM 4. SHAREHOLDER VOTING
On August 25, 1995, the Annual Meeting of Shareholders was
held. The Shareholders elected all of the nominees for Director,
approved the Company's 1995 Employee Stock Option Plan, approved
the Company's 1995 Stock Option Plan for Non-Employee (Outside)
Directors, and ratified the Board's selection of auditors. The
results of the shareholder voting are set forth below.
Each of the nominees for director was elected with the following
votes:
VOTES VOTES
NOMINEE STATUS FOR WITHHELD
Michael Dooling Re-elected 9,241,553 230,028
Anthony W. DeSio Re-elected 9,247,868 223,713
Robert J. DeSio Re-elected 9,233,322 238,259
James F. Kelly Re-elected 9,334,041 137,540
Daniel L. La Marche Re-elected 9,328,637 142,944
Harry Casari New Nominee 9,341,335 130,246
Joel Rossman New Nominee 9,252,688 218,893
ITEM 4. SHAREHOLDER VOTING (Continued)
The proposal to adopt the 1995 Stock Option Plan for Employees
received the following votes:
For Against Abstain Broker Non-Votes
6,341,254 1,078,132 29,740 2,022,455
The proposal to adopt the 1995 Stock Option Plan for Non-
Employee (Outside) Directors received the following votes:
For Against Abstain Broker Non-Votes
6,755,050 595,171 40,710 2,080,650
The proposal to ratify the selection of Ernst & Young LLP as
independent auditors for the next fiscal year received the
following votes:
For Against Abstain Broker Non-Votes
8,841,629 613,335 16,617 -0-
ITEM 6. REPORTS ON FORM 8-K
(b) No reports on Form 8-K were filed during the quarter
ended July 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: Gary S. Grahn Date: 9-12-95
Gary S. Grahn
Chief Financial Officer