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, 1997
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ____________ to ___________
Commission File Number 0-14821
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MAIL BOXES ETC.
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(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0010260
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(State of Incorporation) (I.R.S. Employer Identification No.)
6060 Cornerstone Ct. West, San Diego, California 92121
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (619) 455-8800
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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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 11,264,878
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(Class) (Outstanding at January 31, 1997)
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAIL BOXES ETC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
January 31, April 30,
ASSETS 1997 1996
(Unaudited)
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Current Assets:
Cash and cash equivalents $4,659 $1,416
Restricted cash - franchisee deposits 1,726 2,073
Short-term investments 25,386 21,825
Accounts receivable, net 6,105 6,799
Receivable from National Media Fund -- 770
Inventories 698 544
Current portion of notes receivable 7,109 6,756
Current portion of net investment in
sales-type and direct financing leases 2,349 2,414
Deferred income taxes 1,846 1,846
Re-acquired area and center rights held
for resale 784 638
Other current assets 1,143 1,063
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Total current assets 51,805 46,144
=========== =========
Notes receivable, net 10,601 10,831
Net investment in sales-type and direct
financing leases 6,449 7,518
Property and equipment, net 5,110 5,381
Excess of cost over assets acquired, net 398 441
Re-acquired area rights 6,530 3,240
Deferred income taxes 1,307 1,307
Other assets 1,017 904
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Total assets $83,217 $75,766
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $1,104 $2,096
Franchisee deposits 2,308 2,619
Royalties, referrals and commissions
payable 3,647 2,515
Accrued employee expenses and related
taxes 1,620 1,963
Other accrued expenses 1,731 2,012
Income taxes payable 847 838
Current maturities of debt and notes
payable 430 958
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Total current liabilities 11,687 13,001
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Long-term debt, net of current maturities 4,023 1,402
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 11,264,878 and
11,139,698 shares issued outstanding
at January 31, 1997 and April 30, 1996,
respectively 15,931 14,944
Retained earnings 51,576 46,419
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Total shareholders' equity 67,507 61,363
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Total liabilities and
shareholders' equity $83,217 $75,766
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See accompanying notes.
MAIL BOXES ETC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three months ended Nine months ended
01/31/97 01/31/96 01/31/97 01/31/96
Revenue:
Royalty and marketing fees $11,063 $10,088 $26,648 $23,390
Franchise fees 2,211 1,871 6,742 6,293
Sales of supplies and equipment 3,049 2,163 9,978 8,048
Interest income on leases and other 2,190 1,584 6,341 4,947
Company centers 325 458 956 1,387
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Total revenues 18,838 16,164 50,665 44,065
Cost and Expenses:
Franchise operations 5,521 4,871 14,010 11,370
Franchise development 1,392 1,150 4,345 3,902
Cost of supplies and equipment sold 2,273 1,619 7,462 6,426
Marketing 1,452 907 4,513 3,081
General and administrative 2,246 2,843 6,587 7,747
Company centers 320 480 1,001 1,426
Litigation settlement expenses -- -- 5,000 --
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Total cost and expenses 13,204 11,870 42,918 33,952
Operating Income 5,634 4,294 7,747 10,113
Interest on investments and other 233 165 709 441
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Income before provision
for income taxes 5,867 4,459 8,456 10,554
Provision for income taxes 2,310 1,751 3,299 4,132
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Net income $3,557 $2,708 $5,157 $6,422
======== ======== ======== ========
Net income per common share: $ .30 $ .24 $ .44 $ .56
======== ======== ======== ========
Weighted average common and common
equivalent shares outstanding 11,798 11,495 11,782 11,410
======== ======== ======== ========
See accompanying notes.
MAIL BOXES ETC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine months ended January 31,
1997 1996
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Operating Activities:
Net income $5,157 $6,422
Adjustments to reconcile net income to net cash provided from
(used in) operating activities:
Depreciation and amortization 805 769
Gain on sale of equipment under sales-type lease agreements (361) (437)
Changes in assets and liabilities:
Restricted cash 347 234
Accounts and notes receivable 466 (1,026)
Receivable from National Media Fund 770 (1,220)
Assets leased to franchisees and inventories (1,362) (1,082)
Re-acquired area and center rights (46) 526
Other current assets (80) 72
Other assets (316) (145)
Accounts payable (992) 796
Franchisee deposits (311) (123)
Royalties, referrals and commissions payable 1,132 1,178
Accrued employee expenses and related taxes (343) 166
Other accrued expenses and litigation (188) 829
Income taxes payable 9 (227)
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Net cash flows provided from operating activities 4,687 6,732
Investing Activities:
Net change in short-term investments (3,561) (5,074)
Additions to property and equipment (307) (246)
Principal payments received on sales-type leases 2,703 2,815
Re-acquired area rights (439) (135)
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Net cash flows used in investment activities (1,604) (2,640)
Financing Activities:
Borrowings under revolving loan 930 3,520
Repayments under revolving loan (1,700) (2,300)
Repayments on notes payable (260) (103)
Repurchase of common shares (283) (1,129)
Proceeds from the issuance of common shares 1,473 997
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Net cash flows provided from financing activities 160 985
Increase in cash and cash equivalents 3,243 5,077
Cash and cash equivalents at beginning of period 1,416 391
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Cash and cash equivalents at end of period $4,659 $5,468
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Supplemental Disclosure for Cash Flow Information:
Cash paid during the period for income taxes $3,351 $4,737
Interest 171 118
Supplemental Schedule with Non-Cash Investment and Financing
Activities:
Equipment sold under sales-type agreements $1,568 $1,821
Additions to debt for acquisition of equipment -- 109
Additions to debt for acquisition of Area rights 1,343 --
See accompanying notes.
PART I - FINANCIAL INFORMATION
MAIL BOXES ETC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 1.BASIS OF PRESENTATION:
Note 1.Presentation
The condensed consolidated balance sheet as of January 31,
1997, the condensed consolidated statements of operations for the
three-month periods and nine-month periods ended January 31, 1997
and 1996, and the condensed consolidated statements of cash flows
for the nine-month periods then ended have been prepared by the
Company without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of
operations, and cash flows have been made.
Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted. In addition, certain Risk Factors may also impact future
financial reports. It is suggested that these condensed
consolidated financial statements be read in conjunction with the
financial statements and notes thereto included in the 1996 Annual
Report on Form 10-K, as well as the Risk Factors discussed in the
Form 10-K Report. The results of operations for the quarter
and the nine months ended January 31, 1997 are not necessarily
indicative of the operating results for the full year.
Certain reclassifications have been made to prior period
balances to conform to current period presentations.
Note 2.Litigation
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 agreed to pay $4
million in cash and deliver an aggregate amount of 39,080 shares of
its common stock over a period of two years. This settlement
expense is reflected in the Company's financial results for the
second quarter ended October 31, 1996, by establishing a $5 million
reserve.
The Company is still involved in various other lawsuits and
potential claims from its franchisees and employees which arise in
the ordinary course of the Company's business. While the Company
cannot predict the outcome of all other matters, management does
not believe that the disposition of these other matters will have
a material adverse effect on the Company's results of operations or
financial position.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Three months ended January 31, 1997 compared to Three months ended
January 31, 1996:
Revenues for Mail Boxes Etc. ("MBE" or the "Company") for the
three months ended January 31, 1997, increased by $2.674 million or
17% from the same quarter of the prior year. Revenues from royalty
and marketing fees increased by $975 thousand or 10% over the same
quarter of the prior year. The increase in royalty and marketing
fees is due to the approximately 7% same-store sales increase
experienced by the network during the third quarter of FY 97 and
the increased number of centers in operation to 3,294 at January
31, 1997, compared with 2,994 at January 31, 1996. At the close of
business on January 31, 1997, there were 2,788 domestic centers and
506 centers outside the United States for a total of 3,294 centers
operating worldwide.
Franchise fees, which consist of individual, renewal,
transfer, master license and international sales, increased by $340
thousand or 18%. Revenues from domestic, individual franchise fees
increased by $109 thousand or 9% compared to the three months ended
January 31, 1996. This resulted from the sale of 62 new individual
franchises during the third quarter of FY 97 as compared to 57
during the third quarter of FY 96. The remainder of this revenue
category includes international sales of individual and area
franchises by master licensees for $94 thousand which represents
11% increase, and transfer and renewal fees of $357 thousand which
represents a 36% increase over same period in FY 96. During the
third quarter of FY 97 MBE sold the master license for Portugal for
$150 thousand. MBE believes that master license sales may be a
less significant source of revenue in the future and that the
timing of these sales will not be predictable. The other component
of this revenue category is the sale of an area franchise for
approximately $230 thousand in the quarter ended January 31, 1997
when compared to 2 new area franchises for $255 thousand in the
same period of last fiscal year.
Revenues from the sale of supplies and equipment increased by
$886 thousand or 41% because there were more individual centers
opened during the third quarter of FY 97 compared with that of FY
96 (97 centers compared to 67 centers).
Interest income on leases and other increased by $606
thousand or 38% as compared to the three months ended January 31,
1996. The major components of this revenue category include
interest income earned on leases and notes receivable, late fees,
finance charges, training fees, and various administrative fees.
Interest income on leases decreased by $61 thousand or
17%. Interest income on notes receivable remained virtually the
same when compared to the third quarter of FY 96. Training fees
increased by $46 thousand or 34%. Administrative fees on national
vendor contracts increased by $278 thousand or 72% as the
transaction volumes increased. Late fees increased by $109
thousand and finance charges remained virtually the same. Revenues
from the Company owned and operated centers decreased by $133
thousand or 29%. This decrease was due to closure of one of the
Company's experimental centers in the second quarter of FY 97.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued):
Three months ended January 31, 1997 compared to Three months ended
January 31, 1996:
Cost and expenses for the three months ended January 31, 1997
increased by $1.334 million or 11% when compared to the three
months ended January 31, 1996. The increase in franchise
operations expenses was $650 thousand or 13% over FY 96 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 $224 thousand or 6% over third quarter FY
96. This increase is lower than the 10% increase in royalty fees
booked in the third quarter of FY 97 because no royalties are paid
out on the company owned areas. The remaining increase in the
franchise operations expenses was the result of increased effort to
support a larger network. Franchise development expenses
increased by $242 thousand or 21%. This increase is due to the
increased domestic and international sales efforts during the third
quarter of FY 97 when compared to the same period of FY 96.
Cost of supplies and equipment increased by $654 thousand or
40%. This increase is directly related to the 41% increase in
sales of supplies and equipment in the third quarter of FY
97 as compared to the same period of FY 96. The sales margin
remained the same, 25%, as compared to the third quarter of FY 96.
Marketing expenses increased by $545 thousand or 60% when
compared to the third quarter ended January 31, 1996. This
increase is due to the production of more commercials and
promotional kits and increase in sales advertising in the third
quarter of FY 97. General and administrative expenses decreased by
$597 thousand or 21% over the third quarter of FY96. This decrease
is primarily due to reduction of the legal expenses resulting from
the settlement of the lawsuit on November 1996. The Company
centers' cost and expenses decreased by $160 thousand or 33% due to
the closure of one of the company owned centers in the second
quarter of FY 97.
Other income (interest on investments and other) increased by
$68 thousand or 41% for the quarter ended January 31, 1997,
compared to the quarter ended January 31, 1996. This increase is
due to the increase in short-term investments.
Net income for the three months ended January
31,1997,increased by $849 thousand or 31% for the quarter ended
January 31, 1997, and earnings per share increased from $.24 to
$.30, or 25% over the third quarter of 1996.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued):
Nine months ended January 31, 1997 compared to Nine months ended
January 31, 1996:
Revenues for the nine months ended January 31, 1997 increased
by $6.600 million or 15% over the prior year's same period.
Revenues from royalty and marketing fees increased by $3.258
million or 14% over the prior period. These increases are the
result of growth of the network through the opening of 245 domestic
individual centers and 73 centers outside of the United States
during the first nine months of FY 97 and the increase in the same
store sales.
Total revenues from franchise fees increased by $449 thousand
or 7% during the first nine months of FY 97 when compared to the
same period FY 96. This revenue category consists of individual,
renewal, transfer, master license and international sales. Revenues
from domestic individual franchise fees increased by $538
thousand or 12% due to the sale of 224 new centers in the nine
months of FY 97 when compared to 202 centers in the same period of
FY 96. Sales of master licenses decreased from $515 thousand to
$169 thousand because fewer countries were sold during the first
nine months of FY 97 as compared to the same period of FY 96. MBE
believes that master license sales may be a less significant source
of revenue in the future 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 for
$218 thousand which represents a 9% decrease, and transfer and
renewal fees for $956 thousand which represents a 33% increase as
compared to the same nine month period of FY 96.
Revenue from the sale of supplies and equipment increased by
$1.930 million or 24% due to the increase in the number of centers
opening in the first nine months ended January 31, 1997, compared
to the same period of FY 96 as discussed earlier. Interest income
on leases and other increased by $1.394 million or 28%. The major
components of this revenue category include interest income on
leases, interest on notes receivable, finance charges, late fees,
training fees, various administrative fees and miscellaneous other
income. Interest income on leases decreased by $162 thousand or\
15% due to the lower interest rates. Interest income on notes
receivable remained virtually the same. Training fees increased by
$81 thousand or 14%. Administration fees on national vendor
contracts increased by $749 thousand or 76% over the same period of
FY 96. Other miscellaneous revenue increased from $191 thousand to
$731 thousand in the nine months ended January 31, 1997, as
compared to the nine months ended January 31, 1996. Revenues from
late fees and finance charges both decreased slightly during
the period ended January 31, 1997. Revenues from the company owned
and operated centers decreased by $431 thousand or 31% as compared
to the same period in FY 96 due to the reasons cited earlier.
Costs and expenses for the nine months ended January 31, 1997
increased by $8.966 million or 26% when compared to the first nine
months ended January 31, 1996. The increase in franchise
operations expenses was $2.640 million or 23%. A significant
portion of this increase was due to the increase in royalties paid
to area franchisees. Total royalties paid were $9.836 million for
the first nine months ended January 31, 1997 compared to $8.869
million in the same period last year. This increase is lower than
the 14% increase in royalty fees booked
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued):
Nine months ended January 31, 1997 compared to Nine months ended
January 31, 1996:
In the nine months of FY 97 because no royalties are paid out on
company owned areas. The remaining increase in the franchise
operations expenses was the result of increased effort to
support a larger network.
Franchise development expenses increased by $443 thousand or
11% for the first nine months ended January 31, 1997. This
increase is primarily due to the increased domestic and
international sales efforts and the increased commissions paid to
area franchisees due to the sale of 22 more centers during the
first nine months of FY 97 as compared to the same period of FY
96. Costs of supplies and equipment increased by $1.036 million or
16% as compared to the nine months ended January 31, 1996. This
increase is directly related to the increase in sale of supplies
and equipment. Gross margin increased from 20% to 25% due to the
favorable mix of higher margin product.
Marketing expenses increased by $1.432 million or 46% when
compared to the nine months ended January 31, 1996. This increase
is due to the production of more commercials and increase in sales
advertising in the first nine month period of FY 97.
General and administrative expenses decreased by $1.160
million or 15% in the first nine months of FY 97 over the first
nine months period ended January 31, 1996. This decrease is
due to the decreased reserves for certain non-reoccurring items and
termination of the lawsuits. The company owned centers cost decreased
by $425 thousand or 30% over the same period of FY 96. This decrease
is due to the closure of one of the company centers in second quarter
of FY 97.
Litigation settlement expenses in FY 97 of $5 million resulted
from the settlement of long standing lawsuits involving 33 former
franchise owners and one current owner in the second quarter of FY
97.
Other income (interest on investments and other) increased by
$268 thousand or 61% for the first nine months ended January 31,
1997, compared to the nine months ended January 31, 1996, due
primarily to the increase in short-term investments.
Net income decreased by $1.265 million or 20% and earnings per
share decreased by 21% for the first nine months ended January 31,
1997, compared to the first nine months ended January 31, 1996.
This decrease is due to the settlement of the lawsuits discussed
above.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at January 31, 1997 was $40.118 million
compared to $33.143 million at April 30, 1996. The company
believes it has adequate financial resources for its present and
projected operating requirements.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
At a Board of Directors meeting on February 25, 1997, the
Board amended the Company's Bylaws to increase the size of the
Board from seven to eight directors. The Board then appointed
James H. Amos, Jr., the Company's President and Chief Operating
Officer, as a Director on the Board. In addition, the Board also
appointed A. W. DeSio, the Company's Chief Executive Officer, to
the position of Chairman of the Executive Committee of the Board.
ITEM 6.
(a) EXHIBITS
3(ii). Bylaws, as amended February 25, 1997
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended
January 31, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
MAIL BOXES ETC.
Registrant
By: Gary S. Grahn Date: March 3, 1997
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Gary S. Grahn
Chief Financial Officer