SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2000
Commission File Number 0-21036
BLIMPIE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
New Jersey 13-2908793
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
740 Broadway, New York, NY 10003
(Address and Zip Code of Principal Executive Offices)
(212) 673-5900
(Registrant's telephone number including area code)
Securities Registered Under Section 12(b) of the Exchange Act:
Common Stock, $.01 Par Value
Securities Registered Under Section 12(g) of the Exchange Act: None
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 past 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the registrant's common stock held by non-
affiliates of the registrant as of September 19, 2000 was approximately
$7,232,000. Solely for purposes of the foregoing calculation all of the
registrant's directors and officers are deemed to be affiliates.
There were 9,351,746 shares of the registrant's common stock outstanding as of
September 19, 2000.
Table of Contents
Item
Number Page
- ------ ----
PART I
1. Business 3
Forward-looking Statements 3
General 3
Financial Information About Business Segments 5
The BLIMPIE Outlet Franchise 5
The PASTA CENTRAL Outlet Franchise 5
The MAUI TACOS Outlet Franchise 6
Our Subfranchises and Master Licenses 6
Services to Franchisees 7
Outlet Properties 8
Outlet Locations 9
Government Regulation 10
Trademarks, Trade Names, Service Marks and
Logos; Know-How and Methods of Operation 10
Research and Development 12
Business Expansion 12
Competition 14
Employees 14
2. Properties 15
3. Legal Proceedings 15
3a. Our Executive Officers 16
4. Submission of Matters to a Vote of Security Holders 18
PART II
5. Market for Common Equity and Related Stockholder Matters 18
6. Selected Financial Data 19
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
8. Financial Statements 27
9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 27
PART III
10. Directors, Executive Officers 28
11. Executive Compensation 28
12. Security Ownership of Certain Beneficial Owners and
Management 28
13. Certain Relationships and Related Transactions 28
PART IV
14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K 28
14(a)(1) Financial Statements 28
14(a)(2) Financial Statement Schedule 28
14(a)(3) Exhibits 28
14(b) Reports on Form 8-K 31
SIGNATURES 32
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PART I
ITEM 1. BUSINESS
Forward-looking Statements
Certain forward-looking statements are included in this report. They use
such words as "may," "will," "expect," "believe," "plan," "anticipate" and other
similar terminology. These statements reflect management's current expectations
and involve a number of risks and uncertainties. Actual results could differ
materially due to changes in: global and local business and economic conditions;
legislation and governmental regulation; competition; success of operating
initiatives and advertising and promotional efforts; food, labor and other
operating costs; availability and cost of land and construction; adoption of new
or changes in accounting policies and practices; consumer preferences, spending
patterns and demographic trends; political or economic instability in local
markets; and currency exchange rates.
General
We engage in franchising, subfranchising and master licensing of the
trademarks, trade names, service marks, logos, know-how, marketing concepts and
marketing programs for each of our brands. We franchise our BLIMPIE Subs &
Salads and PASTA CENTRAL brands directly through our Company, and we franchise
the MAUI TACOS and SMOOTHIE ISLAND brands through our majority owned subsidiary,
Maui Tacos International, Inc. ("MTII"). Our menu of BLIMPIE Subs & Salads,
consisting of quick-service, healthy, sub sandwiches, is offered by
approximately 2,000 franchise outlets operating throughout the United States and
in 13 other countries. BLIMPIE is our registered trademark. Unless otherwise
specified, the term "BLIMPIE" includes BLIMPIE. As of June 30, 2000, there were
five PASTA CENTRAL restaurants operating in the United States and Puerto Rico,
eight MAUI TACOS restaurants operating in the United States, including three in
which we own all or part of the operation, 50 SMOOTHIE ISLAND locations located
throughout the United States, and 3 Company-owned SMOOTHIE ISLAND JUICE BAR
locations operating in Houston, TX. The baked pasta meals served at our PASTA
CENTRAL outlets address current eating trends for eat-in or take home
replacement meals. MAUI TACOS restaurants provide a healthy, affordable menu of
"Maui-Mex" items, including traditional Mexican food marinated in Hawaiian
spices. SMOOTHIE ISLAND is a selection of blended beverages of frozen yogurt,
fruit and nutritional supplements sold through the BLIMPIE, PASTA CENTRAL, and
MAUI TACOS locations. We also provide professional store design service and
equipment sales through our wholly-owned subsidiary, B I Concept Systems, Inc.
Currently, we do not operate any of the subfranchisor or master licensor areas
within the Blimpie International system.
A franchisee pays a non-refundable initial franchise fee in connection with
an executed franchise agreement which grants to the franchisee the right to use
the various trademarks, trade names, service marks, logos, marketing concepts
and marketing programs, and to operate an outlet at a location to be agreed upon
by the franchisee and us in accordance with the operations manual which we issue
to our franchisees (the "Operations Manual").
Each franchisee is obligated to purchase raw materials, both food and non-
food, from authorized and designated distributors who may only sell authorized
and approved raw materials purchased from approved manufacturers and suppliers.
We negotiate relationships with manufacturers and suppliers on a national level
for all products except produce, whether or not they bear our logos. We
negotiate and enter into recognition agreements authorizing approved
distributors to deliver raw products to our franchise outlets from approved
manufacturers and suppliers. All products purchased by franchisees on a local
level must meet our quality standards. Franchisees may request approval of
additional manufacturers, suppliers or distributors subject to our approval. We
base our approval upon a number of conditions including price, quality, ability
to service the system on a national basis and such other reasonable standards as
we may promulgate from time to time. Currently, there are no other
manufacturers, suppliers or distributors approved by us other than those that we
have designated.
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We believe that we could easily obtain alternate manufacturers, suppliers
and distributors should any of our current manufacturers, suppliers or
distributors become unwilling or unable to provide our franchisees with the
authorized required raw materials.
Our rights regarding the various BLIMPIE trademarks employed by all of our
BLIMPIE outlets located throughout the world, and the methodology and know-how
which comprise our BLIMPIE marketing concepts and programs, are limited to
specific geographic regions throughout the world, pursuant to written licensing
agreements between us and Metropolitan Blimpie, Inc. ("MBI"), a company with
which we have no affiliation. See "Business - Trademarks, Trade Names, Service
Marks and Logos; Know-How and Methods of Operation." Since our incorporation in
1977, the chain of franchised BLIMPIE outlets has expanded to encompass 1,990
outlets located in 47 states, Argentina, Canada, Cyprus, Dominican Republic,
Great Britain, Panama, Poland, Portugal, Puerto Rico, Romania, Saudi Arabia,
South Africa and Venezuela (as of June 30, 2000). See "Business - Outlet
Locations." There are approximately 250 additional BLIMPIE outlets which are
controlled by MBI that are located in areas of the country in which we do not
possess rights to license the BLIMPIE trademarks or sell franchises or
subfranchises.
Commencing in 1977, we began selling individual outlet franchises and area
subfranchises. In 1995, we began selling master licenses for various territories
located outside of the United States. We and MBI own, respectively, undivided
60% and 40% interests in the BLIMPIE Trademarks. We distribute the
internationally registered BLIMPIE Trademarks pursuant to an agreement with MBI
which provides for automatic annual renewals until July, 2090. See "Business -
Trademarks, Trade Names, Service Marks and Logos; Know-How and Methods of
Operation."
We derive our revenue primarily from four sources: (1) store equipment
sales, (2) continuing franchise fees based upon each franchisee's gross sales,
(3) fees from the grant of individual outlet franchises and (4) fees from the
grant of subfranchises to Subfranchisors and the grant of master licenses to
Master Licensors worldwide. Individual outlet franchises are granted for both
"traditional" locations such as free-standing buildings, shopping malls, and in-
line urban store clusters, and "nontraditional" locations, i.e., convenience
stores, institutional food service entities, colleges, schools, mass feeders
(such as institutional food service providers and in-facility commissaries) and
hospitals. These locations may sell or otherwise make all or part of our various
food product brands available to their customers, clientele or attendees through
facilities that may or may not contain all of the components normally associated
with a traditional outlet, such as kitchen, food preparation and customer dining
areas. We also have commenced developing several new types of product
distribution formats, some of which we have begun to introduce and some of which
we anticipate introducing in the future.
The initial franchise fee currently is $18,000 for a traditional BLIMPIE
location, $28,000 for a co-branded BLIMPIE / PASTA CENTRAL location, $20,000 for
a co-branded MAUI TACOS / SMOOTHIE ISLAND location and $2,500 for a SMOOTHIE
ISLAND location. The initial franchise fee for a nontraditional franchise can
range between $1.00 and $15,000 depending on the number of nontraditional
transactions executed, the location of the nontraditional franchisee, the
marketing area in question and other subjective factors. After a location has
been found and the lease or purchase thereof has been negotiated by the
franchisee and approved by us, the franchisee then constructs and installs the
outlet in accordance with design and layout specifications provided by us.
Franchisees are required to maintain specified standards as to food quality,
menu items, uniforms, appearance, sanitation and all other aspects of outlet
operations.
In addition to the initial franchise fee, a franchisee also pays all other
costs and expenses related to the installation of the outlet at an approved
location. An equipment package, which typically includes slicing machines,
refrigeration cases, food preparation counters and signs bearing the registered
logos, costs approximately $25,000 to $40,000 for a BLIMPIE outlet, and may cost
in excess of $100,000 for a co-branded BLIMPIE / PASTA CENTRAL or MAUI TACOS /
SMOOTHIE ISLAND outlet. Construction of an outlet, which generally includes
walls, floor, ceiling, plumbing and electrical work required to modify an
existing premises to an approved design costs between $10,000 to $80,000 to
complete. These costs, plus the initial lease security payable to the owner of
the leased premises and utility deposits to the various
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utility companies and recommended minimum opening inventory and working capital
aggregating approximately $5,000 to $15,000, comprise the approximate cash
investment of an average franchise.
Franchisees are required to pay continuing franchise fees of 6% of their
weekly gross sales, as well as mandatory advertising contributions of 4% of
weekly gross sales. BLIMPIE outlet Franchisees who acquired their franchise
agreements before the fall of 1994 are required to pay 6% continuing fees, but
mandatory advertising contributions of 3%. Two percent of the advertising
contributions made by franchisees in the same general marketing area are used
for the payment of advertising which benefits all franchisees in that local
marketing area, while the remainder is used for national advertising. During
fiscal 2001, we will convert to a program in which only 1% of the advertising
fees will be used for national advertising, and the remainder will be used in
the local marketing area. International franchisees pay continuing franchise
fees of 8% and advertising contributions of 2%.
Financial Information About Business Segments
See Note 13 to our audited consolidated financial statements.
The BLIMPIE Outlet Franchise
A BLIMPIE outlet is a non-cooking sandwich outlet characterized by portion-
controlled meat and cheese combinations generally sold on six inch or twelve
inch French/Italian white or wheat bread garnished with special BLIMPIE spices
and dressings along with salads and other food items. The sandwich products sold
in these outlets are known as BLIMPIE sandwiches and the outlets themselves are
known as BLIMPIE outlets.
We require each of our franchisees to offer food products from a list of
products authorized by us. Such products for a BLIMPIE outlet include hot
sandwiches, including items such as Italian meatball sandwiches and chicken
breast sandwiches, and cold sandwiches, including items such as roast beef and
club sandwiches. Our "signature" item is the "BLIMPIE Best" sandwich, which
consists of ham, salami, cappacola, prosciuttini and provolone. In addition, all
BLIMPIE sandwiches are dressed at no additional charge with tomatoes, lettuce,
onions, oil and vinegar and oregano. We establish recommended prices for food
products that franchisees may or may not adopt. Accordingly, such prices differ
depending upon geographic location. For example, in New York City a "BLIMPIE
Best" may sell for $4.19, while in Atlanta, Georgia, the same sandwich may be
purchased for $3.19.
In addition to the authorized BLIMPIE sandwich line, BLIMPIE outlets also
offer a variety of salads, baked products, and a variety of other products
produced mostly from raw frozen dough products and baked in the approved BLIMPIE
deck oven installed in each BLIMPIE outlet. Prices for all authorized products
vary depending upon geographic location.
The PASTA CENTRAL Outlet Franchise
A PASTA CENTRAL outlet offers Italian-style baked pasta dishes, gourmet
pizzas, and salads for in-store dining, take-away, or for final preparation and
consumption at home. The concept is currently being developed as a co-brand with
our BLIMPIE Subs & Salads franchises as a way to increase the sales potential,
particularly during the dinner day part for co-branded locations, with only a
small increase in the initial investment.
PASTA CENTRAL's menu items include baked pasta dishes, gourmet pizzas,
salads, and dessert items. Its "signature" item is the "Central Special," which
consists of penne pasta tossed with a cream-based tomato sauce and served with
grilled chicken and shaved cheese. Menu items are offered individually or in
various combinations at recommended price points, which the franchisee may or
may not adopt.
5
The MAUI TACOS Outlet Franchise
A MAUI TACOS outlet offers quality Mexican items like tacos and burritos in
a quick-service restaurant atmosphere. The menu includes typical Mexican
offerings using beef, chicken or seafood that has been marinated in Hawaiian
spices. The outlets are known as MAUI TACOS outlets.
The MAUI TACOS product line consists of traditional Mexican items such as
tacos, quesadillas, and burritos filled with charbroiled steak, chicken, and
seafood entrees marinated in pineapple and lime juices with Hawaiian spices. As
an accompaniment, tortilla chips, guacamole, and a variety of salsas are
available.
Our Subfranchises and Master Licenses
Each Subfranchisor of one of our brands pays a subfranchise fee that is
based upon the population of the subfranchise territory. At present, the fee,
which can typically range from $10,000 to over $1,000,000, is based upon a
calculation of $.10 per person located within the area that is the subject of
the subfranchise for BLIMPIE and MAUI TACOS subfranchise territories. Domestic
PASTA CENTRAL territories are managed by BLIMPIE subfranchisors, and SMOOTHIE
ISLAND territories are managed by either the BLIMPIE or MAUI TACOS subfranchisor
in the area. We do not charge a separate fee for the right to subfranchise our
PASTA CENTRAL or SMOOTHIE ISLAND brands for existing BLIMPIE or MAUI TACOS
subfranchisors located in the United States. In addition to paying our
subfranchise fees, each Subfranchisor must join and make contributions to a
Subfranchisor advertising cooperative association sponsored by us, which
purchases franchise advertisements in national periodicals for the benefit of
all Subfranchisors. A Subfranchisor's annual contribution to the advertising
cooperative typically ranges between $1,200 and $6,000. We make voluntary
contributions to the cooperative association that match the contributions made
by the Subfranchisors.
We award subfranchises consisting of a specifically defined territory
within which the Subfranchisor has the exclusive right to solicit potential
purchasers of our franchises for a period of 50 to 60 years. Such individual
purchasers of our franchises then purchase, or sublicense, the right to use our
trademarks, trade names, service marks, logos, marketing concepts and marketing
programs directly from us.
Our standard form of subfranchise agreement grants to the Subfranchisor the
exclusive license to purchase the territory for a one year period, followed by
four to six renewal terms, all but the last of which are annual in duration. The
license is subject to our continuing right to market and sell the trademarks,
trade names, service marks, logos, marketing concepts and marketing programs
within specified territories. If all terms and conditions of the subfranchise
agreement have been met during the initial one-year term and each of the
subsequent one year renewal terms, a 50 to 60 year right is granted during the
final renewal term upon payment of the fee set forth in the agreement. Each
subfranchise agreement obligates the Subfranchisor to satisfy all of the
operational obligations owed by us to each franchisee within the Subfranchisor's
territory at the sole expense of the Subfranchisor; to use his best efforts to
promote the sale of franchises within his territory; and to meet certain sales
quotas. In the event of the Subfranchisor's default, each such agreement is
terminable by us upon giving thirty days' notice under certain provisions of the
agreement. The Subfranchisor may terminate the agreement upon certain defaults
by us, if such defaults remain uncured for more than 30 days to more than 75
days, depending on the nature of the default.
Subfranchisors who are in full compliance with the obligations imposed upon
them pursuant to the subfranchise agreement are entitled to receive one half of
each initial franchise fee (after deductions for sales commissions, design, and
training fees) paid by new franchisees establishing outlets within the
Subfranchisor's territory, and one half of the 6% of gross sales continuing
franchise fees paid by such franchisees pursuant to their respective franchise
agreements.
For territories outside of the United States, Canada and Puerto Rico, we
grant master license agreements that are generally equivalent to a domestic
subfranchise agreement. The significant
6
differences between a master license and a subfranchise are that the master
license fee may be as low as $0.01 per person located in the master license
territory; the individual franchisees pay a continuing fee royalty of 8% of
gross sales, which is split 5% to the master licensor and 3% to us; the
individual franchisee pays an advertising contribution of 2% of gross sales; and
the master licensor, not us, is responsible for establishing and managing the
advertising cooperatives within the territory.
We market and sell franchises, subfranchises and master licenses through
advertisements placed in local and national periodicals, through presentations
at trade shows and franchise conventions, through referrals from existing
franchisees, Subfranchisors and Master Licensors and through informational
materials placed in operating outlets.
As of June 30, 2000 there were 85 existing domestic BLIMPIE subfranchisors,
at least one of which is located in each of the 46 states in which the 1,933
domestic BLIMPIE outlets are located; five Canadian BLIMPIE subfranchisors, one
of which is located in each of the Provinces of Alberta, British Columbia,
Manitoba and Ontario in which 15 BLIMPIE outlets are located; one BLIMPIE
subfranchisor in Puerto Rico in which seven BLIMPIE outlets are located; and 14
Master Licensors for the countries of Argentina, Bahrain, Cyprus, Dominican
Republic, Great Britain, Greece, Guam, Kuwait, Lebanon, Mexico (primarily states
in the northeastern part of the country), Northern Ireland, Oman, Panama,
Poland, Portugal, Qatar, The Republic of Ireland, Romania, Saipan, Saudi Arabia,
South Africa, United Arab Emirates, Uruguay and Venezuela in which collectively
there are 35 outlets located. Included in these BLIMPIE outlets were five
BLIMPIE / PASTA CENTRAL co-branded outlets, one in Alabama and four in Puerto
Rico.
Also as of June 30, 2000, there were fourteen domestic MAUI TACOS
subfranchisors. There were three MAUI TACOS outlets in operation in Georgia, two
in New York, two in Hawaii, and one in Minnesota. We own all or part of three of
these locations.
Such subfranchises and master licenses range in size, depending upon the
specific geographical area involved, from entire countries or states to a
specific county or counties. See "Business - Outlet Locations"; "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Results of Operations."
Services to Franchisees
On a continuing basis, franchisees in the U.S., Canada and Puerto Rico are
furnished with advisory assistance from us regarding outlet operations, new menu
items and new marketing aids developed by us. No additional fees are charged to
franchisees for these services or for the training program described below. We
also provide, when we, in our sole discretion deem it appropriate to do so,
services to franchisees by visiting their outlets and inspecting them for
quality, cleanliness and service. A written operation inspection analysis is
provided after each inspection. Outside of the U.S., Canada and Puerto Rico,
Master Licensors provide all such services, with our assistance.
We provide training for new franchisees in the U.S., Canada and Puerto Rico
consisting of (i) 40 hours of pre-training classes at an existing outlet
approved by us, (ii) 80 hours of classroom training at our Georgia training
center, and (iii) an additional 80 hours of operational post-training at an
existing outlet approved by us. We provide training for new Subfranchisors and
Master Licensors consisting of two weeks of classroom training at our Georgia
training center, plus 80 hours of operational training at an existing outlet
approved by us. The training program addresses all phases of outlet operations
from service training to financial management, including the various controls of
the marketing system specified in the Operations Manual. The training program
covers inventories, ordering procedures, hiring and firing, equipment
maintenance, product controls, bookkeeping and accounting. The training provided
to Subfranchisors and Master Licensors also encompasses franchisor-related
activities including, but not limited to, franchise sales, communication,
analysis of franchisee construction needs and the fulfillment thereof.
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After an outlet is constructed or renovated and the equipment installed,
one of our representatives or a representative of the Subfranchisor or Master
Licensor generally is on site for one week after the outlet opens for the
purpose of providing additional operational assistance and supervisory
functions. Each Subfranchisor or Master Licensor is responsible for providing
each franchisee within his territory with operational assistance throughout the
term of his subfranchise or master license agreement. Generally, our
representative is only on site as described above for the opening of the first
three outlets that open within a territory. However, our representatives remain
available on a continuing basis to provide additional support to franchisees,
Subfranchisors and Master Licensors. As an additional means of support, we
maintain a toll-free hotline by which franchisees and Subfranchisors may contact
our representatives for advice and assistance regarding operational matters.
Outlet Properties
Each traditional franchisee in the U.S., Canada and Puerto Rico generally
is required to lease the outlet premises from one of our designated leasing
subsidiaries. Each franchisee outside of the U.S., Canada and Puerto Rico
generally is required to lease the outlet premises from a corporation in which
the Master Licensor owns 50% and we or our designee owns 50%, or such franchisee
is required to provide a collateral assignment of the lease to the jointly owned
corporation. In all such cases, it is the franchisee's sole obligation to find
the premises to be leased and to obtain our approval of the site of his
franchised outlet. Once the location is approved, we (or our leasing subsidiary)
will negotiate and enter into a lease of the premises, subject to the
franchisee's approval. Subsequently, we (or our leasing subsidiary) will enter
into a sublease with the franchisee for the entire term and renewal term, if
any, of the lease of the premises less one day (generally 10 to 20 years). The
percentage royalty and advertising payments due under the franchise agreement
constitute additional rent under the sublease. Payment of the percentage
royalties and advertising fees under the franchise agreement satisfies the
additional rental payment obligation under the sublease. All rents specified in
the lease are paid directly by the franchisee to the landlord specified in the
lease pursuant to the cancelable authorization by the subsidiary leasing
corporation set forth in the sublease. Accordingly, except in a rare case in
which we or one of our subsidiaries may be the owner and landlord of a
franchisee's outlet, no funds that constitute rental payments are ever collected
for use by us. We have no payment or performance obligations with respect to any
of the existing outlet location leases, except for less than one percent of
those leases.
The leasing/subleasing mechanism described above enables us to maintain
control of each outlet premises and to enforce franchisee compliance with our
authorized product line and quality standards. Additionally, since percentage
royalties and advertising fees constitute additional rent under the subleases,
the leasing/subleasing mechanism gives us an additional vehicle through which to
enforce our rights regarding receipt of such payments and payments to the
landlord of the outlet premises. Typically, upon a franchisee's failure to make
timely rental payments, our leasing subsidiary will receive notice from the
landlord. The franchisee is then notified of its default and is given the
opportunity to cure the default. If the franchisee fails to cure the default,
eviction proceedings usually will be instituted by either the unaffiliated
landlord or our leasing subsidiary. Following eviction of the franchisee, we,
with the landlord's approval, will attempt to sell the existing franchised
outlet to a new franchisee who will take possession of the premises subject to
the terms of the prior lease and sublease, or under a new lease negotiated by us
with the landlord, and a new sublease. In cases where a lease has been
terminated and/or a franchisee has been evicted and a replacement franchisee
cannot be obtained by us to cure all defaults and operate or re-open the outlet
in question, it is our general policy either to abandon the location and the
leasing subsidiary, or to dispose of ownership of the leasing subsidiary to
unaffiliated parties for nominal consideration.
Substantially all leases executed by our various leasing subsidiaries
during the past five years include provisions (and it is our intention that all
future leases will include provisions) that the respective landlords thereunder
will not directly or indirectly claim or institute legal proceedings against us.
All of the 1,990 existing BLIMPIE and BLIMPIE / PASTA CENTRAL outlets and
the one MAUI TACOS outlet (as of June 30, 2000) are operating in premises
located in free-standing buildings, shopping malls, shopping centers, in-line
urban store clusters, convenience stores, institutional food service
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facilities, colleges, schools, mass feeders, hospitals, bowling alleys, golf
courses and subway stations. The size of an outlet varies from 400 square feet
to approximately 3,500 square feet. Since the cost of renovating pre-existing
premises into an approved outlet is dependent upon the condition and prior use
of the premises, an exact estimation is impossible. Historically, the cost of
outlet construction/renovation, which must be completed in accordance with
design and layout specifications provided by us, and at the franchisee's sole
expense, has ranged from as low as $10,000 to as high as $80,000. The franchisee
must also equip the outlet at the franchisee's sole cost and expense. Such
equipment costs total, in the aggregate, approximately $25,000 to $100,000.
Outlet Locations
As of June 30, 2000, we operated one MAUI TACOS outlet in Atlanta, Georgia,
one in New York City, had partial ownership of another outlet in New York City,
and had two franchised MAUI TACOS locations in Georgia, two in Hawaii, and one
in Minnesota. The following table sets forth the number of BLIMPIE franchised
outlets in operation as of June 30, 2000, and includes five co-branded BLIMPIE /
PASTA CENTRAL locations, four of which were located in Puerto Rico and one in
Alabama:
Number of Number of
Location Outlets Location Outlets
United States outlets: United States outlets (cont'd):
Alabama 22 Oregon 16
Alaska 7 Pennsylvania 46
Arizona 80 Rhode Island 6
Arkansas 27 South Carolina 55
California 70 South Dakota 2
Colorado 41 Tennessee 63
Connecticut 37 Texas 120
Florida 184 Utah 37
Georgia 208 Vermont 1
Hawaii 9 Washington 36
Idaho 19 West Virginia 15
Illinois 32 Wisconsin 32
Indiana 55 Wyoming 10
Iowa 61 -----
Kansas 13 United States total 1,933
Kentucky 28 -----
Louisiana 43 International outlets:
Maine 2 Argentina 5
Massachusetts 4 Canada 15
Michigan 95 Cyprus 4
Minnesota 31 Dominican Republic 1
Mississippi 10 Great Britain 4
Missouri 62 Panama 2
Montana 8 Poland 6
Nebraska 28 Portugal 1
Nevada 22 Puerto Rico 7
New Hampshire 2 Romania 1
New Jersey 50 Saudi Arabia 5
New Mexico 11 South Africa 2
New York 72 Venezuela 4
North Carolina 62 -----
North Dakota 7 International total 57
Ohio 77 -----
Oklahoma 15 Total 1,990
=====
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Government Regulation
The Federal Trade Commission and various state governmental authorities
have adopted laws regulating franchise operations and the franchisor-franchisee
relationship. Such laws vary from merely requiring the filing of disclosure
documents concerning the offer and sale of franchises to the application of
statutory standards regulating established franchise relationships. The most
common provisions of those laws regulate the substance of franchisor-franchisee
relationships and establish restrictions on the ability of franchisors to
terminate or to refuse to renew franchise agreements. Some states' laws contain
provisions designed to ensure the fairness of the franchise agreements to
franchisees by, among other means, including limitations, prohibitions and/or
restrictions pertaining to the assignability of the rights of franchisees; a
franchisee's right to own or be involved in other businesses; franchisee
membership in trade associations; and franchisor interference with franchisee
employment practices.
In addition to the foregoing state regulations, the Federal Trade
Commission has adopted rules and guidelines that require franchisors to make
certain disclosures to prospective franchisees prior to the offer or sale of
franchises. In addition to requiring the disclosure of information necessary for
a franchisee to make an informed decision on whether to enter into a franchise
relationship, the guidelines delineate the circumstances in which franchisors
may make predictions on future sales, income and profits. We do not furnish or
authorize our salespersons to furnish any oral or written information on the
actual or projected sales, costs, income or profits of a franchise. Failure to
comply with such rules constitutes an unfair trade practice under Section 5 of
the Federal Trade Commission Act.
Several state and federal courts have revealed a tendency to be sympathetic
to and desirous of protecting the rights and interests of franchisees in
litigation with their franchisors. Taking such tendencies into consideration, we
may modify our licensing activities, or we may choose not to enforce certain of
our rights and remedies under certain franchise and lease agreements. However,
we do not believe that such modifications, delays, or failures will have a
materially adverse effect on our operations. The law applicable to franchise
operations and relationships is rapidly developing, and we are unable to predict
the effect on our operations of additional requirements or restrictions, which
may be enacted or promulgated, or of court decisions which may generally be
adverse to the franchise industry. We believe that we have conducted and are
conducting our business in substantial compliance with all applicable laws and
regulations governing our operations.
The franchisees' outlets are also subject to regulatory provisions relating
to the wholesomeness of food, sanitation, health, safety, fire, land use and
environmental standards. Suspension of certain licenses or approvals, due to
failure to comply with applicable regulations or otherwise, could interrupt the
operations of the affected outlet or otherwise adversely affect the outlet. The
franchisees are also subject to federal and state laws establishing minimum
wages and regulating overtime and working conditions. Changes in such laws could
result in an increase in labor costs that could adversely affect the outlet.
We believe that we are conducting our business in substantial compliance
with all applicable laws and regulations governing our operations.
Trademarks, Trade Names, Service Marks and Logos; Know-How and Methods of
Operation
We regard our trademarks and the methodologies and know-how which comprise
each of the marketing concepts and programs employed by our various brands
(each, a "Marketing System") as having significant value and as being important
to our marketing efforts. Each of our franchise and subfranchise agreements
authorizes our franchisees and subfranchisors, respectively, to use the
trademarks and Marketing System pertaining to the brand that is the subject of
such agreements, along with all other future trademarks pertaining thereto.
Our trademarks and Marketing Systems may only be used by traditional and
nontraditional outlets that sell our products, and by our licensed distribution
points. There are specific product limitations regulating each outlet so that
franchisees may sell only those products authorized by their particular
10
franchise agreement and Operations Manual, or that we otherwise approve. Any
variation from the authorized product line is actionable by us.
We currently own an undivided 60% interest in the domestic and
international BLIMPIE trademarks. The remaining 40% interest in those trademark
rights is owned by MBI. Through various agreements that we have entered into
with MBI, the trademark rights are shared by both MBI and us. Both companies
have the exclusive rights to the trademarks in certain domestic territories, and
for the remaining territories, we have licensed the rights to the trademarks
from MBI in exchange for a licensing fee generally equal to 30% of the revenues,
after deducting direct expenses, incurred by us in the territories.
The territories for which we have licensed the right to distribute the
BLIMPIE trademarks and license the BLIMPIE Marketing System from MBI include:
Alaska, Arkansas, Northern California, Colorado, Hawaii, Iowa, Kansas, Missouri,
Nebraska, Nevada, North Dakota, Oklahoma, South Dakota, and all territories
outside of the United States.
The territories in which MBI has retained the right to distribute the
BLIMPIE trademarks and license the BLIMPIE Marketing System (the "MBI
Territories") include Delaware, Maryland, New Jersey (except for portions of the
northeastern section of the State), the counties of New York, Queens, Kings,
Richmond, Rockland, Bronx and Westchester in New York, Pennsylvania (from the
eastern border westward to and including Harrisburg), Virginia and Washington,
D.C.
We possess the exclusive right to license the BLIMPIE trademarks and
BLIMPIE Marketing System in the area of Northern California between the southern
border of Monterrey and the northern border of the state. Blimpie of California,
Inc. ("BOC"), a corporation which is not affiliated with us, possesses the
exclusive right to license the BLIMPIE trademarks and BLIMPIE Marketing System
throughout the balance of the state of California. A number of franchised
BLIMPIE outlets located in Southern California have been established pursuant to
trademark licenses granted by BOC. We receive 2.5% of the gross sales by such
franchisees, and share half of such receipts with MBI.
The agreement we entered into with MBI in 1991 with respect to the
licensing of the BLIMPIE trademarks and the BLIMPIE marketing system outside of
the United States (the "1991 Agreement") provides for automatic annual renewals
until July 2090, provided that we make all payments due to MBI, subject to a
minimum annual payment of $100,000. If we ever failed to satisfy our payment
obligations under that agreement, we would lose the right to license the BLIMPIE
trademarks and BLIMPIE Marketing System outside of the U.S. and throughout the
MBI Territories. From July 1991 through June 30, 2000, we paid approximately
$4,065,000 to MBI pursuant to the 1991 Agreement. We have no reason to believe
that MBI would ever seek to cancel or terminate the 1991 Agreement. Furthermore,
we believe that we will continue to comply with the terms of the agreement, and
that it will remain in effect throughout its entire permissible term. However,
no assurance can be given that the agreement will remain in full force and
effect until July 2090.
We acquired our 60% interest in the trademark rights noted above through
various transactions with Anthony P. Conza, our Chairman and Chief Executive
Officer ("Conza") and David L. Siegel, our Chief Operating Officer ("Siegel").
We received a 99-year license in the domestic rights in the BLIMPIE trademarks
from Conza and Siegel in 1976. In 1997, we purchased our share of the
international rights to the BLIMPIE trademarks from Conza and Siegel under an
agreement which was negotiated on our behalf by a Committee of the Board of
Directors that consisted solely of outside directors. We agreed to pay $4.5
million ($3 million to Conza and $1.5 million to Siegel), plus certain
contingent fees which were to take effect after cumulative international
revenues exceeded $5 million, in consideration for their sale of such rights to
us. That agreement further provided that Conza and Siegel could receive annual
payments totaling $150,000 per year for 50 years, or could elect, at any time
prior to January 1, 2001, to receive a lump sum distribution of $3 million on
January 1, 2001, with $2 million payable to Conza and $1 million payable to
Siegel.
11
In February 1999, both Conza and Siegel elected to receive the lump-sum
payment. They also agreed to terminate the 99-year license for the domestic
trademark rights and contribute those rights to us. In consideration for the
contribution of these trademark rights and in satisfaction of the lump-sum
payment due in 2001, we amended our 1997 international trademark agreement with
Conza and Siegel, and paid the full $3 million payment in February 1999.
In 1997, we acquired, in connection with our majority interest in MTII, all
of the MAUI TACOS trademarks. MTII owns all of those trademarks, as well as the
MAUI TACOS name. Additionally, MTII owns the trademarks relating to SMOOTHIE
ISLAND and SMOOTHIE ISLAND JUICE BAR.
Also, we are the sole owners of the trademark rights relating to PASTA
CENTRAL.
To our knowledge, there are no infringing uses of any of our trademarks in
any territory where any of our franchisees has established or attempted to
establish operations that would in any way materially affect the use of such
trademarks by us or by any of our franchisees.
Research and Development
We conduct ongoing development of new menu items and test markets such
items, as well as new company-developed food marketing aids, in selected
outlets. Although such research and development activities are important to our
business, the amounts that we have previously expended for these activities have
not been material.
Business Expansion
Equipment Leasing. We provide financing to new and existing franchisees
-----------------
primarily through entering into participation arrangements with unaffiliated
third party finance/leasing entities. As of June 30, 2000, we were participants
in the financing of 56 of such equipment leases totaling $370,000. We have
decreased our involvement in these programs, and expect to continue to decrease
the amount of leasing receivables outstanding during fiscal 2001.
Domestic Expansion. We plan to grow through continued development of
------------------
traditional and nontraditional BLIMPIE outlets, co-branded BLIMPIE / PASTA
CENTRAL outlets, MAUI TACOS outlets and SMOOTHIE ISLAND outlets co-branded with
the other outlets throughout the U.S. We also plan to continue to develop new
types of BLIMPIE distribution points throughout the U.S., including expanding
the vending machine program, the school lunch program, and other initiatives.
International Expansion. We continue to grow internationally through the
-----------------------
sale of master license agreements. The agreements are analogous to subfranchise
agreements, except that the master licensor or one of our wholly-owned
subsidiaries enters into franchise agreements directly with the franchisees in
each international market. The master licensor, in effect, is our representative
in that specific country and is obligated to provide all of the support services
and selling activities required to develop the franchised market. Initially,
however, we will provide administrative support to assist the master licensors.
As of June 30, 2000, we had entered into BLIMPIE master license agreements for
the following countries: Argentina, Bahrain, Canada (provinces of Alberta,
British Columbia, Manitoba and Ontario), Cyprus, Dominican Republic, Great
Britain, Greece, Guam, Kuwait, Mexico (primarily states in the northeastern part
of the country), Northern Ireland, Oman, Panama, Poland, Portugal, Puerto Rico,
Qatar, The Republic of Ireland, Romania, Saipan, Saudi Arabia, South Africa,
United Arab Emirates, Uruguay and Venezuela. The master licensors for Puerto
Rico and Mexico have purchased the master license for PASTA CENTRAL as well.
We anticipate that we will execute master license agreements for our
BLIMPIE and other brands in various other countries in the near future. We also
plan to develop joint venture agreements with various entities such as petroleum
marketers or convenience store chains for the installation of BLIMPIE and other
outlets in such entities' locations. There can be no assurance, however, that we
will consummate any such transactions.
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Development of BLIMPIE Branded Products. Our long term strategic plan
---------------------------------------
includes developing products for sale at distribution points such as BLIMPIE
restaurants, supermarkets and convenience stores. We began selling BLIMPIE
branded peppers, potato chips and potato sticks during the year ended June 30,
1998 in a limited number of BLIMPIE outlets. We have expanded this initiative by
increasing the number of BLIMPIE branded products and the number of locations in
which they are sold. No assurances can be given, however, that the sale of
BLIMPIE branded products will continue to generate increased revenue for us.
Acquisition of Existing Franchise Concept. On October 29, 1997 we entered
-----------------------------------------
into an agreement with Maui Tacos International, Inc. (MTII) which resulted in
our acquisition of a majority interest in MTII. See "Business - Business
Expansion - Development of New Franchise Concepts" below. We believe that our
mature infrastructure is capable of supporting additional franchise systems, and
that additional acquisitions of this nature will open up additional market
segments for our development. However, no assurances can be given that
additional acquisitions will be consummated, and if consummated, that they will
generate increased revenues or net income for us.
Development of New Franchise Concepts. We are actively engaged in the
-------------------------------------
development of new franchised food concepts involving product offerings that
will not be directly competitive with the products offered by the chain of
BLIMPIE outlets.
MAUI TACOS(TM) - In October 1997 we acquired a majority interest in MTII, a
concept featuring a health-oriented, affordable restaurant-quality menu of
"Maui-Mex" items, including traditional Mexican foods marinated in Hawaiian
spices. Our intention in acquiring the trademarks and development rights for
MAUI TACOS is to convert the pre-existing MAUI TACOS full service restaurant
concept with six locations operating in Hawaii into a quick-service restaurant
concept. We intend to accomplish that goal by awarding development rights to
subfranchisors and master licensors across the United States and
internationally. As of June 30, 2000, we had awarded fourteen subfranchise
territories in the United States, and had eight locations operating, including
two Company-owned locations and one location in which we had partial ownership.
PASTA CENTRAL(TM) - This Company-created concept features baked pasta and
pizza offerings in the HMR (Home Meal Replacement) category that address current
eating trends for eat-in or take home meals. Our strategy for this concept is to
co-brand PASTA CENTRAL with BLIMPIE outlets to create natural synergies and cost
efficiencies. In the typical BLIMPIE location, the majority of sales take place
at lunchtime. We anticipate that PASTA CENTRAL will generate significant evening
traffic, since it includes meals for in-store dining, take-away, or for final
preparation and consumption at home. We expect that the two concepts can co-
exist in the same location and generate greater returns to the franchisee and us
based on higher revenues and lower costs as a percentage of these revenues. The
concept may eventually be developed as a stand-alone location. As of June 30,
2000, we had five franchised locations operating within BLIMPIE outlets in the
United States and Puerto Rico.
SMOOTHIE ISLAND(TM) - This MTII-created concept features offerings of
blended beverages of frozen yogurt, fruit and nutritional supplements. SMOOTHIE
ISLAND will be co-branded with BLIMPIE and MAUI TACOS locations, and may also
stand alone in other venues such as airports, sporting arenas, and fitness
centers. As of June 30, 2000, there were 50 locations open and operating in 21
states and in Puerto Rico.
SMOOTHIE ISLAND JUICE BAR(TM) - We developed a stand-alone SMOOTHIE ISLAND
JUICE BAR concept during fiscal 2000, and opened three outlets in Houston, Texas
by June 30, 2000. We opened an additional outlet in July 2000 and expect to open
two additional outlets in September 2000. These outlets feature juice drinks,
nutritional supplements, and health-related products for retail sale.
No assurances can be given that we will be able to successfully develop any
or all of these new franchise food concepts. We have incurred substantial
initial costs associated with the development of these new concepts and we will,
in all likelihood, continue to incur substantial costs that will exceed the
initial revenues derived. Furthermore, no assurances can be given that we will
be able to develop
13
sufficient market acceptance and market penetration with respect to any of the
new franchise concepts, or that we will be able to derive any revenues or net
income from such undertakings.
COMPETITION
We and our franchisees compete in the quick-service restaurant industry,
which is highly competitive with respect to price, service, outlet location and
food quality, and is often affected by changes in consumer tastes, local and
national economic conditions affecting consumer spending habits, population
trends and traffic patterns. We and our franchisees compete with an increasing
number of national chains of quick-service outlets, a number of which have
dominant market positions, and possess substantially greater financial resources
and longer operating histories than we possess.
Our most significant competitor is the Subway chain of sandwich outlets,
whose outlets offer food products substantially similar to those offered by
BLIMPIE outlets, at comparable prices. We and our franchisees also compete with
regional and local franchised and independently owned outlet operations, many of
which are larger in terms of financial resources and sales volume, than our
chain of franchised outlets and our franchisees, respectively.
Our outlets compete principally on the basis of price, nature of product,
food quality and quality of service. In selling franchises, we compete with a
number of franchisors of outlets and other business concepts. In general, there
is also active competition for management personnel, as well as for attractive
commercial real estate sites suitable for outlets.
We also are required to respond to various consumer preferences, tastes and
eating habits; demographic trends and traffic patterns; increases in food and
labor costs; and national, regional and local economic conditions. In the past,
several quick-service restaurant companies have experienced flat growth rates
and declines in average sales per outlet, in response to which certain of such
companies have adopted "value pricing" strategies. Such strategies could have
the effect of drawing customers away from companies that do not engage in
discount pricing and could also negatively impact the operating margins of
competitors that do attempt to match competitors' price reductions. Continuing
or sustained price discounting in the fast food industry could have an adverse
effect on our business and financial condition.
EMPLOYEES
As of June 30, 2000, we employed 120 full-time employees (including eleven
officers) in our corporate offices. Twenty-one employees (including six
officers) attend to our franchisee operations support, executive management and
legal staffing needs at our New York City office; 13 employees (including one
officer) provide construction and design and franchisee operations support
services at our Houston, Texas office; and 86 employees (including four
officers) are engaged in accounting, franchisee operations support and training,
marketing and franchise development activities at our Atlanta, Georgia office.
In addition, five of the employees included above (including one officer) of
MTII are engaged in franchisee operations support, executive management and
franchise development activities in an office adjacent to our Atlanta, Georgia
office. None of our employees are covered by collective bargaining agreements.
All of our full-time employees, including executive officers, are covered by a
health plan and our 401(k) profit sharing plan.
As of June 30, 2000, we employed 47 full- and part-time employees in our
Company-owned store operations that are located in Houston, Texas; Atlanta,
Georgia; and New York, New York.
We consider our employee relations to be good. We believe that we provide
working conditions and pay salaries and bonuses that compare favorably with
those of our competitors.
14
We have adopted a stock incentive plan for our employees and officers. See
"Executive Compensation - Omnibus Stock Incentive Plan."
ITEM 2. PROPERTIES
Our principal office is located at 740 Broadway, New York, New York, where
we lease, through a wholly-owned subsidiary, 740 Broadway Top Floor Corp.,
approximately 6,000 square feet of office space from an unaffiliated landlord.
We have guaranteed the obligations of our subsidiary under that lease. Our
subsidiary pays a monthly rent of $9,200, which is subject to escalations, plus
certain utilities and other fees. The term of the lease expires in February
2003. We also lease 18,710 square feet of office space in Atlanta, Georgia from
an unaffiliated landlord, through our wholly owned subsidiary Blimpie Capital
Corporation. The monthly payments under this lease currently approximate $22,187
and escalate to $23,777 per month during the last year of the lease term in
2003.
We also sublease 3,585 square feet of office space in Houston, Texas, on a
month-to-month basis pursuant to an oral agreement with Vet Con Management
Company, Inc. ("Vet Con"), a company wholly owned by Joseph Conza. Vet Con holds
the lease relating to such office space with a landlord unaffiliated with us. We
make monthly payments under such sublease directly to the landlord. The monthly
payments under such sublease made by us are currently $3,954 and, if we continue
to occupy the premises pursuant to our oral sublease, may escalate to include
annual common area maintenance payments during the final three years of the
lease term, which may require moderate increased payments to the landlord for
expenses incurred by the landlord in maintaining common areas.
We also own a building and are the lessee of a ground lease relating to
property in Marietta, Georgia. We purchased the building in 1984 for $80,855 and
currently sublease it to a BLIMPIE franchisee for use as a BLIMPIE outlet. There
is no mortgage on that building.
Each franchisee is required to lease the outlet premises from one of our
wholly owned leasing subsidiaries. Each leasing subsidiary leases such premises
from a landlord unaffiliated with us. See "Business - Outlet Properties."
ITEM 3. LEGAL PROCEEDINGS
An arbitration proceeding was commenced in August 1999 in the Southfield,
Michigan office of the American Arbitration Association ("AAA") entitled
Trafalgar Holdings, LLC, et al v. Blimpie International, Inc. (case no. 54 114
00384 99). The claimants seek a total award of $689,000 based upon allegations
of common law fraud and violations of the Michigan Franchise Investment Law
arising from alleged misrepresentations and omissions attributed to our
subfranchisor for the Northern Michigan area in connection with the sale of
Blimpie franchises to the claimants, claims for breach of fiduciary duty by us
and an accounting in connection with our administration of the advertising
cooperative to which the claimants belonged and a claim for breach of contract
by us relating to the claimants' alleged plan to open additional franchises at
six month intervals. We have denied all liability, and are vigorously defending
all of these claims.
An arbitration proceeding was commenced in February 1998 in the San
Francisco, California office of the AAA entitled Peacox Ventures LLC v Blimpie
International, Inc. (case no. 74-114-0209-98). The claim alleges violations of
the California Franchise Investment Law, the California Unfair Practices Act,
fraud and negligent misrepresentation based on alleged misrepresentations and
omissions in the sale of franchises by our subfranchisor, who is alleged to be
our agent, as well as a claim for breach of contract based on our alleged
failure to provide operational support and assistance to the claimant. A
decision in favor of the claimant in the amount of approximately $215,000 was
rendered in October, 1999. We deposited the entire amount of the award in
court, commenced proceedings to recover approximately $50,000 owed to us by the
claimants and accrued a charge for the payment we made pursuant to the
arbitrator's decision in our audited financial statements for the year ended
June 30, 2000.
15
An arbitration proceeding was commenced in March 2000 in the New York, New
York office of the AAA entitled Upchurch v Blimpie International, Inc. (case no.
13 114 00425 00). The claimant, one of our franchisees who formerly operated a
Blimpie outlet in California, is seeking damages in an unspecified amount in
excess of $250,000 based upon allegations that a representative of one of our
Subfranchisors in California, who is alleged to be our agent, made
representations regarding sales volumes of our restaurants which amounted to
earnings claims in violation of the California Franchise Investment Law, as well
as statutory and common law fraud and an unfair trade practice. Claimant also
alleged that we breached the franchise agreement as well as an implied covenant
of good faith and fair dealing. We have denied all liability, and are vigorously
defending all of these claims.
An arbitration proceeding was commenced in June 2000 in the New York, New
York office of the AAA entitled Pile v Blimpie International, Inc. and Maui
Tacos International, Inc. (case no. 13 114 00585 00). The Claimant, who
formerly operated a combined Blimpie/Pasta Central/Smoothie Island restaurant in
Missouri pursuant to three separate franchise agreements, alleges that various
representatives of our company misrepresented the nature of the Pasta Central
concept and the expected revenue of Claimant's business. Claimant also alleges
that such misrepresentations constituted common law fraud and violations of the
New York franchise statute. Claimant further alleges that we violated
Missouri's franchise law by utilizing franchise agreements that contained
provisions not sanctioned under such law. Additionally, the Claimant alleges
that his franchise agreements were breached by reason of our failure to provide
inadequate training and operational assistance, and by our failure to designate
a competent food supplier. Based upon such allegations, the Claimant is seeking
rescission of the agreements, damages in an undetermined amount in excess of
$100,000, as well as punitive damages, costs and counsel fees. We intend to
interpose a number of defenses to such claims, and to vigorously defend against
all of the claims.
An arbitration proceeding was commenced in February 2000 in the New York,
New York office of the AAA entitled Sheskier, et al v Blimpie International,
Inc. (case no. 13 114 00309 00). Claimants are franchisees who formerly owned a
Blimpie outlet in Montgomery, NY. They claim that we violated New York's
franchise law by failing to disclose the litigation history of one of our
franchise development managers in our franchise disclosure document. They also
allege, that the franchise development manager, who is alleged to have been our
agent, made various misrepresentations in connection with the purchase of their
franchises, and that we failed to provide operational assistance that we were
contractually obligated furnish to them. Based upon those claims, the Claimants
are seeking damages in an unspecified amount, as well as costs and counsel's
fees. We intend to interpose a number of defenses to such claims, and to
vigorously defend against all of the claims.
It is the opinion of management that the liability, if any, arising from
all pending claims and lawsuits will not have a material adverse impact upon our
consolidated earnings, financial position or cash flows.
Item 3a. Our Executive Officers
The following table sets forth certain information concerning all of our
executive officers. Executive officers are elected by the Board of Directors to
serve at the pleasure of the Board.
Name Age Position
- ---- --- --------
Anthony P. Conza 60 President and Chief Executive Officer
David L. Siegel 56 Chief Operating Officer and General Counsel
Patrick J. Pompeo 61 Executive Vice President, Research and Development
Charles G. Leaness 50 Executive Vice President - Senior Corporate
Counsel and Secretary, Chief Executive Officer,
Maui Tacos International, Inc.
16
Joseph A. Conza 46 Senior Vice President, President - B I Concept
Systems, Inc.
Robert S. Sitkoff 47 Senior Vice President, President - Corporate
Services
Joseph W. Morgan 38 Senior Vice President, President - BLIMPIE Subs &
Salads
Brian D. Lane 38 Vice President, Chief Financial Officer
Mr. Anthony P. Conza, together with two individuals who are not affiliated
with us, originally created the BLIMPIE concept in 1964. He is one of the
original founders of the BLIMPIE outlet chain, and is one of our co-founders. He
has been Chairman of our Board of Directors, and our President and Chief
Executive Officer since we commenced business operations in 1977. In 1992, the
"Entrepreneur of the Year" for New York, an award sponsored by Ernst & Young,
Merrill Lynch and Inc. Magazine, was presented to Mr. Conza. In the same year,
he was also named Chain Operator of the Year by the New York State Restaurant
Association. He is a member of the Board of the Jose Limon Dance Company, a
member of the Board of Governors of The Boys & Girls Clubs of America and he
serves on the Dean's Council at Harvard University's JFK School of Government.
Mr. Conza is the brother of Joseph A. Conza, the brother-in-law of Patrick
Pompeo and the father-in-law of Joseph Morgan.
Mr. Siegel, one of our co-founders, served as our Executive Vice President
and General Counsel and as a member of our Board of Directors since our
formation in 1977. In September 1995, he was appointed as our Vice Chairman of
the Board, Chief Operating Officer and General Counsel. He also served as our
Treasurer from 1977 until January 1991. He is also a practicing attorney in the
City of New York. Mr. Siegel received a Bachelor of Arts degree in 1965 from
Marietta College, a Juris Doctor Degree in 1968 from New York University School
of Law and a Master of Laws Degree in 1970 from New York University School of
Law. During the past five years, Mr. Siegel has also served as an officer of
each of our leasing subsidiaries.
Mr. Pompeo has served as a director and Senior Vice President in charge of
operations since the time of commencement of our business operations in 1977. In
September 1995, he became Executive Vice President of Research Development and
Procurement. Mr. Pompeo was employed for 16 years as a floor supervisor by E.F.
Hutton & Co., the former New York Stock Exchange member firm. Mr. Pompeo is also
a principal shareholder, officer and director of Georgia Enterprises, Inc., our
Subfranchisor for the State of Georgia. Mr. Pompeo is the brother-in-law of
Anthony Conza.
Mr. Leaness has been a member of our Board of Directors since we commenced
business operations, and served as our Senior Vice President-Corporate Counsel
for more than the past five years. He was appointed Chief Executive Officer of
Maui Tacos International, Inc. in February 1999. In September 1995, he was
appointed as one of our Executive Vice Presidents. Mr. Leaness is also a
principal shareholder, officer and director of Llewellyn Distributors, Inc., our
BLIMPIE Subfranchisor for a part of New Jersey, of Manhattan Maui, Inc., our
subfranchisor for MAUI TACOS for the County of New York in New York State, and
of New Jersey Maui, Inc., our subfranchisor for parts of New Jersey, including
Bergen, Essex, Hudson, Morris, and Middlesex counties. Mr. Leaness received a
Bachelor of Arts degree from Tulane University in 1972 and a Juris Doctor degree
from New York Law School in 1982. Mr. Leaness is a practicing attorney in New
York State. He currently serves as Director of the New York State Restaurant
Association and is President of the New York City Chapter. Mr. Leaness also
serves on the Board of Directors of the International Franchise Association
(IFA).
Mr. Joseph A. Conza held the position of Vice President - Construction and
Design from February 1991 through August 1995. In September 1995, he was
appointed Senior Vice President - Equipment and Design Services. In November
1997, he was appointed President of BI Concept Systems, Inc., our wholly-owned
equipment and design subsidiary. From 1986 through his appointment as one of our
Vice Presidents, Mr. Conza was employed as President of Lone Star Blimpie, Inc.
He has also served as President of International Southwest Blimpie, Inc. since
1990. Mr. Conza is also a principal shareholder, officer and was director of
International Southwest Blimpie, Inc., our Subfranchisor for the Harris County
17
(Houston), Texas market through the sale of this market to an unrelated party in
November 1998. Mr. Conza also is a principal shareholder of Georgia Enterprises,
Inc., our Subfranchisor for the State of Georgia. Mr. Conza is the brother of
Anthony P. Conza.
Mr. Sitkoff served as our Vice President, Treasurer and Chief Financial
Officer from January 1991 through August 1995. In September 1995, he was
appointed Senior Vice President, Treasurer and Chief Financial Officer. In
September 1997, he was appointed President of Maui Tacos International, Inc. In
April 1999, he was appointed Senior Vice President, Corporate Services. Between
1980 and 1985, he was self-employed as a distributor for Pepperidge Farms'
Biscuit Division. Between 1986 and 1988, he was a principal shareholder and
President of Blimpie of Central Florida, Inc., our Subfranchisor for the
Orlando, Florida market. From 1989 through 1990 he was employed as our
Controller. Mr. Sitkoff received a B.S. degree in Industrial Management from
Georgia Institute of Technology in 1974.
Mr. Morgan joined us in 1992 in the capacity as a corporate counsel. From
1994 through August 1995, he served as our director of strategic planning. In
September 1995, he was appointed as Vice President of Strategic Planning and in
December 1996 he was appointed to Senior Vice President of Strategic Planning.
In September 1997 he was appointed President of our BLIMPIE Subs & Salads
division. During the three-year period prior to joining us, Mr. Morgan attended
the University of Miami School of Law, and received a J.D. degree from said
institution in June 1992.
Mr. Lane joined us in May 1998 in the capacity of Vice President, Chief
Financial Officer. After graduating from the University of Georgia in 1984 with
a Bachelor of Business Administration in Accounting, Mr. Lane joined Ernst &
Young LLP as a staff accountant. He progressed to the position of Audit Senior
Manager before leaving the firm in 1995. Mr. Lane then joined Checkmate
Electronics, Inc., an electronics manufacturer in Roswell, Georgia, as Director
of Finance. He was promoted to Vice President of Finance before leaving that
company to join us.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
fourth quarter of our fiscal year ended June 30, 2000.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock traded on the Nasdaq National Stock Market through March
16, 1998. On March 17, 1998, the Common Stock was listed on the American Stock
Exchange under the symbol BLM. The quarter by quarter ranges of the high, low
and closing prices of our Common Stock on these markets during the fiscal years
ended June 30, 1999 and 2000 were as follows:
Quarter-End High Low Close
----------- ----- ----- -----
9/98 3.938 1.750 2.250
12/98 2.625 2.000 2.188
3/99 2.750 2.000 2.438
6/99 3.063 1.938 2.750
9/99 3.319 2.000 2.000
12/99 2.063 1.250 1.875
3/00 1.907 1.292 1.846
6/00 2.215 1.563 1.813
As of September 15, 2000, there were 537 holders of record of our Common
Stock.
We paid our first cash dividends on our Common Stock in the amount of $.025
per share during the fiscal year ended June 30, 1993 ($.017 per share as
adjusted for a 3:2 stock split effected during the
18
fiscal year ended June 30, 1994 (the "1994 Stock Split"). During the fiscal year
ended June 30, 1996, we paid cash dividends aggregating $.06. During the fiscal
years ended June 30, 1997, 1998, 1999 and 2000, we paid cash dividends
aggregating $.07 per share in each fiscal year. It is our present intention to
pay dividends in or about October and April of each year, subject to such
factors as earnings levels, anticipated capital requirements, our operating and
financial condition and other factors deemed relevant by the Board of Directors.
During the fiscal years ended June 30, 1998, 1999 and 2000, we did not
sell any securities which were not registered under the Securities Act of 1933.
ITEM 6. SELECTED FINANCIAL DATA
Fiscal Year Ended June 30,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(Dollars in 000's, Except Per Share and Outlets Open Data)
Revenues (a) $31,017 $33,550 $37,107 $37,337 $34,235
Continuing Fees 19,129 18,956 17,343 15,391 12,465
Income before cumulative effect of
change in accounting principle 1,095 1,156 2,444 3,278 4,040
Cumulative effect adjustment - (3,373) - - -
Net income (loss) 1,095 (2,217) 2,444 3,278 4,040
Basic earnings per share before
cumulative effect adjustment $ 0.12 $ 0.12 $ 0.26 $ 0.34 $ 0.43
Diluted earnings per share before
cumulative effect adjustment $ 0.12 $ 0.12 $ 0.26 $ 0.34 $ 0.41
Basic earnings (loss) per share $ 0.12 $ (0.23) $ 0.26 $ 0.34 $ 0.43
Diluted earnings (loss) per share $ 0.12 $ (0.23) $ 0.26 $ 0.34 $ 0.41
Pro forma amounts assuming the new
revenue recognition method is
applied retroactively (b):
Net income $ 1,095 $ 1,156 $ 2,428 $ 2,816 $ 2,940
Basic earnings per share $ 0.12 $ 0.12 $ 0.25 $ 0.30 $ 0.31
Diluted earnings per share $ 0.12 $ 0.12 $ 0.25 $ 0.29 $ 0.30
Total assets $27,060 $28,258 $28,323 $27,704 $21,823
Long term debt - - - - 5
Trademark obligations - 204 3,408 3,509 -
Total shareholders' equity 18,486 18,107 20,625 18,865 15,675
Cash dividends declared per
common share $ 0.07 $ 0.07 $ 0.07 $ 0.07 $ 0.06
Outlets open at end of year (c) 1,990 2,097 1,972 1,684 1,407
___________________
(a) Results for fiscal 1998, 1997, and 1996 have been adjusted to reflect a
reclassification of certain management fees from Management fees and other
income to Selling, general and administrative expenses.
(b) Pro forma amounts assuming the new revenue recognition method is applied
retroactively are unaudited for fiscal 1998, 1997 and 1996.
(c) Outlets includes only BLIMPIE Subs & Salads outlets.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-looking Statements
The following discussion contains certain forward-looking statements
subject to the safe harbor created by the Private Securities Litigation Reform
Act of 1995. These statements use such words as "may," "will," "expect,"
"believe," "plan," "anticipate" and other similar terminology. These statements
reflect management's current expectations and involve a number of risks and
uncertainties. Actual results could differ materially due to changes in: global
and local business and economic conditions; legislation and governmental
regulation; competition; success of operating initiatives and advertising and
promotional efforts; food, labor and other operating costs; availability and
cost of land and construction; adoption of new or changes in accounting policies
and practices; consumer preferences, spending patterns and demographic trends;
political or economic instability in local markets; and currency exchange rates.
Overview
During the past several years, we diversified our operations from being a
franchisor of BLIMPIE Subs & Salads outlets into franchising several concepts
and operating Company-owned outlets. We acquired or developed four new brands,
including MAUI TACOS, PASTA CENTRAL, SMOOTHIE ISLAND and SMOOTHIE ISLAND JUICE
BAR, all of which are quick-service restaurant concepts. We also opened a
Company-owned MAUI TACOS location in Atlanta, Georgia and one in New York City,
invested in another MAUI TACOS location in New York City, and opened three
Company-owned SMOOTHIE ISLAND JUICE BAR locations in Houston, Texas.
We started the above initiatives in an effort to expand our opportunities
for growth. The five restaurant concepts that we are franchising do not compete
directly with one another. Further, several are intended to co-brand with each
other, offering the ability to generate greater sales from each franchised
outlet in operation. In fiscal 2000, the incremental revenues generated by these
new concepts exceeded $1 million, and we expect these revenues to more than
double in fiscal 2001.
During fiscal 1998 and 1999, we invested heavily in these new concepts.
With the opening of several Company-owned locations in fiscal 2000, we increased
our investments in these new concepts through higher S,G&A expenses and also
incurred losses in the outlets during their start-up phase. Losses from Company
restaurant operations were $553,000 in fiscal 2000, compared to only $4,000 in
fiscal 1999. We expect that we will continue to incur losses in our restaurant
operations in fiscal 2001, but believe that these losses will be significantly
lower in fiscal 2001 as the restaurants and the related concepts begin to
mature, and pre-opening costs decrease due to fewer new Company-owned store
openings.
As we predicted last year, fiscal 2000 saw many changes to our operations.
We diversified our business, and now have a family of brands and a number of
Company-owned restaurants. This diversification has been expensive, and likely
will continue to negatively impact earnings in fiscal 2001. But, we believe the
losses from these new concepts will decrease in fiscal 2001, which will lead to
improved profitability for Blimpie International, Inc. No assurance can be given
that the losses from the new concepts will decrease in fiscal 2001, or that the
Company will improve its net income or its earnings per share.
Results Of Operations
Fiscal Year Ended June 30, 2000 Compared With Fiscal Year Ended June 30, 1999.
Our income before income taxes and cumulative effect of change in
accounting principle increased 10.1% to $2,154,000 in fiscal 2000 from
$1,956,000 in fiscal 1999. Our basic and diluted earnings per share before
cumulative effect of change in accounting principle was $0.12 per share in both
years. The improvement in income before income taxes and cumulative effect of
change in accounting
20
principle was due primarily to lower S,G&A expenses, partially offset by losses
from Company restaurant operations. Due to a higher effective tax rate, income
before cumulative effect of change in accounting principle decreased 5.3% to
$1,095,000 in fiscal 2000 from $1,156,000 in fiscal 1999. These changes and
others are discussed further below.
Our continuing fees derived from franchises increased 0.9% to $19,129,000
in fiscal 2000 from $18,956,000 in fiscal 1999. This increase resulted from an
increase in the sales in stores open during both fiscal 2000 and fiscal 1999,
but partially offset by a decrease in the number of locations open. BLIMPIE Subs
& Salads' traditional location same store sales increased 2.7% in fiscal 2000.
For the year, BLIMPIE Subs & Salads opened 206 locations and closed 313
locations, a net decrease of 107 locations. There were 1,990 BLIMPIE Subs &
Salads locations open at June 30, 2000 as compared to 2,097 locations open at
June 30, 1999.
During fiscal 2000, we experienced a shift in demand for our traditional
and nontraditional locations. From fiscal 1995 to 1999, nontraditional
development outpaced the growth in traditional locations. Nontraditional
locations include convenience stores, hospitals, universities, and other
locations within another structure. In fiscal 2000, which included the opening
of 122 new traditional locations and 84 nontraditional locations, this trend
reversed. Historically, traditional locations have had significantly higher
sales volumes than nontraditional locations.
In fiscal 2000, we and several of the convenience store chains who operate
nontraditional locations reviewed the growth and performance of their BLIMPIE
Subs & Salads operations. After these reviews, locations with poor performance
were closed. In addition, a greater number of traditional locations closed
during the past year than in prior years due to a variety of factors. Certain
international stores and domestic stores in areas in which we do not have a
strong presence were closed as a result of poor sales. Many older locations were
closed as either rents escalated too much, which made operations too costly, or
demographics shifted, which lowered sales below acceptable levels. Accordingly,
during fiscal 2000, 143 traditional locations and 170 nontraditional locations
were closed. We believe that certain convenience store operators will continue
to close weaker locations, while others will continue to expand their BLIMPIE
Subs & Salads operations. Similar fluctuations will continue to occur with
traditional locations as well. Our current focus is on helping our franchised
locations improve their operating performance, which we believe will diminish
the number of store closings. However, we can give no assurances that our
efforts in this area will be successful, or that store closings will not
increase from the levels experienced in fiscal 2000.
Subfranchisor fees, master license fees and fees from the sales and resales
of franchises decreased 9.5% to $4,026,000 in fiscal 2000 from $4,451,000 in
fiscal 1999. The following table summarizes the components of these fees for
fiscal 2000 and 1999:
Year Ended June 30,
(amounts in 000's) 2000 1999 Change
-----------------------------
Amortization of deferred subfranchise
and master license fees $1,565 $1,437 8.9%
Franchise fees 1,993 2,446 -18.5%
Resale fees 468 568 -17.6%
-----------------------------
Total $4,026 $4,451 -9.5%
=============================
During fiscal 2000, we granted development rights for nine MAUI TACOS
subfranchise territories, one international BLIMPIE territory, one international
PASTA CENTRAL territory, and one domestic BLIMPIE territory. During fiscal 1999,
we granted development rights for five MAUI TACOS subfranchise territories and
two international BLIMPIE territories. In fiscal 2000, the amortization of these
fees was 8.9% higher than in fiscal 1999 due primarily to increased amortization
of MAUI TACOS subfranchise fees. Revenues from sales of franchises decreased
18.5% in fiscal 2000 due primarily to a 28.7% decrease in new outlets opened,
from 289 new outlets in fiscal 1999 to 206 new outlets in fiscal 2000. The lower
decrease in revenues as compared to outlets opened is due to a higher average
franchise fee for
21
locations opened, as well as revenues recognized for outlets sold more than two
years ago, but not opened as of June 30, 2000. Resale fees decreased 17.6% in
fiscal 2000 due primarily to fewer outlets and subfranchise territories being
transferred to new owners.
As of June 30, 2000, we had Master Licensors operating in 25 countries, and
57 BLIMPIE outlets operating in 13 of these countries. Our focus in 2001 will be
to continue to sell new international territories while assisting our Master
Licensors with the aggressive development of the existing areas. Although we
have strengthened our infrastructure and created an international department to
support international expansion, the international market has not developed as
rapidly as expected with regard to master license fees and outlet openings. No
assurances can be given that our investment in the international marketplace
will increase either franchise grants, master license fees or outlet openings,
or if such increases do occur, that they will result in material increases in
revenue.
Store equipment sales decreased 31.9% to $6,351,000 in fiscal 2000 from
$9,328,000 in fiscal 1999. This decrease was consistent with the 28.7% decrease
in new outlets opened in the two years. In addition, we stopped soliciting new
business from sales to customers other than our franchisees, and stopped selling
the point-of-sale systems to the franchisees. In most of fiscal 2000, the point-
of-sale vendor sold systems directly to the franchisees.
License fees and other income for the year ended June 30, 2000 increased
36.9% to $653,000 from $477,000 in fiscal 1999. This increase was due primarily
to greater license fees from the Canteen Vending Service Program.
Company restaurant sales increased 153.8% to $858,000 in fiscal 2000 from
$338,000 in fiscal 1999. In fiscal 1999, we operated one MAUI TACOS location. In
fiscal 2000, we opened a MAUI TACOS location with two other investors, opened a
second Company-owned MAUI TACOS location, and opened three Company-owned
SMOOTHIE ISLAND JUICE BAR locations. We intend to continue to open and operate a
limited number of Company-owned outlets for MAUI TACOS and SMOOTHIE ISLAND JUICE
BAR. We opened a fourth SMOOTHIE ISLAND JUICE BAR location in July 2000, and
expect to open another two locations in September 2000. Additionally, we have
secured a lease for a co-branded BLIMPIE / PASTA CENTRAL / SMOOTHIE ISLAND
location, and expect to open the outlet soon.
The Subfranchisors' shares of franchise and continuing fees decreased 2.4%
to $11,499,000 in fiscal 2000 from $11,782,000 in fiscal 1999. The most
significant portion of this expense is the subfranchisor's share of continuing
fees, which generally is 50% of the fees we collect. Continuing fees increased
0.9%, but franchise fees and resale fees both decreased in fiscal 2000,
resulting in the decrease in this expense.
Store equipment cost of sales decreased 35.0% to $5,285,000 in fiscal 2000
from $8,137,000 in fiscal 1999. This decrease was due to the 31.9% decrease in
store equipment sales, combined with an increase in the profit margin on the
sales. The gross margin on store equipment sales increased to 16.8% in fiscal
2000 from 12.8% in fiscal 1999 due to lower sales in two segments with low gross
profit margins, including sales to customers other than our franchisees and of
point-of-sale systems.
Selling, general and administrative expense declined 7.1% to $11,294,000 in
fiscal 2000 from $12,156,000 in fiscal 1999. This decrease was due primarily to
abnormally high expenses in fiscal 1999, when we incurred higher professional
fees related to changing to a different subfranchisor and master license fee
revenue recognition method, increased our allowance for doubtful accounts and
wrote off certain deferred franchise fees and start-up costs. We continue to try
to reduce selling, general and administrative expenses, but no assurances can be
made that we will be successful in that regard in fiscal 2001.
Company restaurant operations increased 312.6% to $1,411,000 in fiscal 2000
from $342,000 in fiscal 1999. As noted above, we opened several Company-owned
MAUI TACOS and SMOOTHIE ISLAND JUICE BAR locations in fiscal 2000. Company
restaurant sales increased 153.8% in fiscal 2000 as a result of these openings.
We incurred losses of $553,000 from these restaurant operations, due primarily
22
to high pre-opening costs and low sales as the new concepts develop a customer
base. We believe the operating performance of the Company-owned outlets will
improve in 2001, but cannot give any assurances that these operations will
improve. We intend to open additional Company-owned outlets, and will incur
additional pre-opening costs in fiscal 2001.
Interest income in fiscal 2000 decreased by 23.9% to $626,000 from $823,000
in fiscal 1999. This decrease was the result of the selling of a portion of the
U.S. Treasury notes we owned in February 1999 in order to satisfy the remaining
$3,000,000 trademark obligation, as well as lower average notes receivable in
fiscal 2000.
The effective income tax rates (income taxes expressed as a percentage of
pre-tax income) were 49.2% in fiscal 2000, as compared to 40.9% in fiscal 1999,
excluding the impact of the change in accounting principle. The increase in
fiscal 2000 was due to an increase in non-deductible losses as a percentage of
our overall taxable income. Certain losses of our subsidiary, Maui Tacos
International, Inc., currently are not deductible for income tax purposes
because we cannot consolidate this subsidiary in our income tax returns.
Fiscal Year Ended June 30, 1999 Compared With Fiscal Year Ended June 30, 1998.
Prior to July 1, 1998, we recognized fees relating to subfranchisor and
master licensor territory sales when collected or due. If fees were collectible
over an extended period and no reasonable basis existed for estimating
collectibility, we recognized those fees as we collected them or when the
uncertainty regarding collectibility was resolved. Effective July 1, 1998, we
changed our methodology of accounting for fees relating to subfranchisor and
master licensor territory sales to recognize such fees as revenue on a straight-
line basis over a 10-year period. We estimate that 10 years is approximately the
period over which our performance obligation to the subfranchisor and master
licensor extends. We consider the new revenue recognition methodology to result
in a better matching of revenues and related expenses we incur in the earnings
process related to such revenues. The effect of the change in fiscal 1999 was to
increase income before the cumulative effect adjustment by approximately
$274,000 ($0.03 per share). The adjustment of $3,373,000 (after reduction for
income taxes of $1,815,000) to apply retroactively the new method is included in
the net loss in fiscal 1999.
Our income before cumulative effect of change in accounting principle
decreased 52.7% to $1,156,000 in fiscal 1999 from $2,444,000 in fiscal 1998. Our
basic and diluted earnings per share before cumulative effect of change in
accounting principle decreased 53.8% to $0.12 per share in fiscal 1999 from
$0.26 per share in fiscal 1998. Such decreases are attributable primarily to
decreases in subfranchise, master license and franchise fees and equipment
sales, and an increase in selling, general and administrative expenses, all of
which are discussed below.
Our continuing fees derived from franchises increased 9.3% to $18,956,000
in fiscal 1999 from $17,343,000 in fiscal 1998. This increase was due primarily
to the 6.3% increase in the number of open outlets from 1,972 at June 30, 1998
to 2,097 at June 30, 1999. Continuing fees increased at a faster rate than the
rate of outlet openings primarily because a large number of low volume outlets
closed during the year.
23
Subfranchisor fees, master license fees and fees from the sales and resales
of franchises decreased 10.7% to $4,451,000 in fiscal 1999 from $4,983,000 in
fiscal 1998. The following table summarizes the components of these fees for
fiscal 1999 and 1998:
Year Ended June 30,
(amounts in 000's) 1999 1998 Change
----------------------------------------------
Subfranchisor fees $ - $ 791 n/a
Master license fees - 575 n/a
Amortization of deferred subfranchise
and master license fees 1,437 - n/a
Franchise fees 2,446 3,169 -22.8%
Resale fees 568 448 26.8%
----------------------------------------------
Total $4,451 $4,983 -10.7%
==============================================
Deferred subfranchise and master license
fees (assuming retroactive change in
accounting policy) $4,745 $5,188 -8.5%
==============================================
In fiscal 1999, we changed our accounting policy relating to subfranchise
and master license fees. The fiscal 1998 amounts presented above are based on
the previous policy, and the fiscal 1999 amounts are based on the new policy. If
the new policy was in place in fiscal 1998, amortization of deferred
subfranchise and master license fees would have been $1,371,000 in fiscal 1998
as compared to $1,437,000 in fiscal 1999, or an increase of 4.8% in fiscal 1999.
During fiscal 1999, we granted development rights for five MAUI TACOS
subfranchise territories and two international BLIMPIE territories. In fiscal
1998, we granted development rights for 4 international BLIMPIE territories. In
fiscal 1999, the amortization of these fees was greater than the fees generated
by new development grants, so the deferred revenue balance decreased 8.5% during
the year. Revenues from sales of franchises decreased 22.8% in fiscal 1999 due
primarily to a 36.3% decrease in new outlets opened, from 454 new outlets in
fiscal 1998 to 289 new outlets in fiscal 1999. The lower decrease in revenues as
compared to outlets opened is due to a higher average franchise fee for
locations opened, as well as revenues recognized for outlets sold more than two
years ago, but not opened as of June 30, 1999. Resale fees increased 26.8% in
fiscal 1999 due primarily to more outlets and subfranchise territories being
transferred to new owners.
As of June 30, 1999, we had Master Licensors operating in 25 countries, and
57 BLIMPIE outlets operating in 13 of these countries.
Store equipment sales decreased 35.1% to $9,328,000 in fiscal 1999 from
$14,374,000 in fiscal 1998. This decrease was consistent with the 36.3% decrease
in new outlets opened in the two years. The decrease in sales to BLIMPIE
franchisees was partially offset by an increase in sales to non-affiliates. In
fiscal 1998, we expanded BI Concept Systems in order to sell equipment to
franchisees of other chains. Outside sales approximated 9.6% of equipment sales
in fiscal 1999, up from 3.0% in fiscal 1998.
License fees and other income for the year ended June 30, 1999 increased
17.2% to $477,000 from $407,000 in fiscal 1998. This increase was due to greater
license fees from the sale of BLIMPIE branded products, as well as royalties
from the Canteen Vending Service Program.
In October 1998, we opened the first mainland MAUI TACOS location in
Atlanta, Georgia. The location is owned and operated by a subsidiary of ours,
and currently is the only outlet operated by us. Company restaurant sales were
$338,000 for the portion of fiscal 1999 that the outlet was in operation.
The Subfranchisors' shares of continuing and franchise fees increased 5.3%
to $11,782,000 in fiscal 1999 from $11,188,000 in fiscal 1998. The most
significant portion of this expense is the subfranchisor's share of continuing
fees, which generally is 50% of the fees we collect. The overall increase in
this expense was due primarily to the 9.3% increase in continuing fees. Another
component of this expense is the subfranchisor's share of franchise and resale
fees. This share generally amounts to
24
between 40% and 60% of the franchise fee for new franchises and between 30% and
50% of the resale fees collected. Due to the overall decrease in franchise and
resale fees, this portion of the total expense decreased in fiscal 1999 from
fiscal 1998. The final component of this expense is the trademark license fee
paid to MBI. See "Business - Trademarks, Trade Names, Service Marks and Logos;
Know-How and Methods of Operation." MBI receives a fee on BLIMPIE Subs & Salads
revenues earned in all international markets and certain domestic markets, which
consist of all or a portion of 13 states in which we had open franchises as of
June 30, 1999. Generally, the fee earned by MBI is 30% of the amount received by
us, net of direct costs, including amounts paid to subfranchisors and master
licensors and the cost of equipment. The trademark license fees earned by MBI
decreased to $778,000 in fiscal 1999 from $837,000 in fiscal 1998 due primarily
to the decrease in BLIMPIE franchise, master license and subfranchise fees
collected.
Store equipment cost of sales decreased 33.3% to $8,137,000 in fiscal 1999
from $12,192,000 in fiscal 1998. This decrease was due to the 35.1% decrease in
store equipment sales, combined with a decline in the profit margin on the
sales. The gross margin on store equipment sales decreased to 12.8% in fiscal
1999 from 15.2% in fiscal 1998 due to price increases received from
manufacturers which were not fully passed on to customers.
Selling, general and administrative expense rose 14.2% to $12,156,000 in
fiscal 1999 from $10,649,000 in fiscal 1998. This increase was due primarily to
additional personnel and related costs associated with the growth in number of
BLIMPIE outlets, as well as personnel, legal and other costs incurred in the
development of the MAUI TACOS, SMOOTHIE ISLAND and PASTA CENTRAL brands.
Additionally, we incurred higher professional fees related to changing to a
different subfranchisor and master license fee revenue recognition method,
increased our allowance for doubtful accounts and wrote off certain deferred
franchise fees and start-up costs during fiscal 1999. We believe that the number
of BLIMPIE outlets will continue to increase and the new brands will continue to
require increased support as franchises and/or subfranchise territories are
sold.
Company restaurant operations were $342,000 in fiscal 1999, with no
comparable expense in fiscal 1998. The first Company-owned outlet was opened in
October 1998. Through June 30, 1999, restaurant operating expenses exceeded
restaurant sales due primarily to high food costs associated with testing
alternative product sources and preparation methods. Operating results for the
outlet have improved consistently through the year.
Interest income in fiscal 1999 decreased by 2.7% to $823,000 from $846,000
in fiscal 1998. This decrease was the result of the selling of a portion of the
U.S. Treasury notes we owned in February 1999 in order to satisfy the remaining
obligation from the purchase of the international trademarks and service marks
in February 1997. See "Business - Trademarks, Trade Names, Service Marks and
Logos; Know-How and Methods of Operation."
The effective income tax rates (income taxes expressed as a percentage of
pre-tax income) were 40.9% excluding the impact of the change in accounting
principle in fiscal 1999 and 37.7% in fiscal 1998. The increase in fiscal 1999
was due to certain losses of our subsidiary, Maui Tacos International, Inc.,
which are not deductible for tax purposes in fiscal 1999.
Liquidity And Capital Resources
During fiscal years 2000, 1999 and 1998 we did not incur any material
capital commitments. As of June 30, 2000, our working capital was $9,276,000 and
total cash and investments were $9,860,000.
We generated cash flows from operating activities of $1,224,000, $3,217,000
and $2,090,000 in the fiscal years ended June 30, 2000, 1999 and 1998,
respectively. The decrease in fiscal 2000 was due primarily to decreases in
accounts payable and accrued expenses, and customer equipment deposits and an
increase in income taxes receivable, partially offset by a decrease in accounts
receivable. The increase in fiscal 1999 was primarily the result of a smaller
increase in accounts receivable and an increase in accounts payable and accrued
expenses, and was partially offset by a decrease in income taxes payable
25
and lower income before cumulative effect of change in accounting principle.
Net cash provided by investing activities was $3,293,000 in fiscal 2000.
Net cash used in investing activities during fiscal 1999 and 1998 totaled
$1,868,000 and $688,000, respectively. The cash provided in fiscal 2000 was due
to the proceeds from U.S. Treasury bills, which were reinvested in money market
funds and therefore classified as cash and cash equivalents as of June 30, 2000.
This increase was partially offset by higher purchases of property and equipment
due to opening several Company-owned restaurants during the year. The greater
use of cash in fiscal 1999 as compared to fiscal 1998 was due to payments made
for international trademark rights, partially offset by lower purchases of
investments.
Net cash used in financing activities during fiscal 2000, 1999 and 1998
totaled $927,000, $688,000 and $913,000, respectively. The increase in the use
of cash in fiscal 2000 was due to higher purchases of treasury stock and the
absence of collections on subscriptions receivable in fiscal 2000. We
repurchased 148,000 shares in fiscal 2000, up from 67,000 shares in fiscal 1999
and 66,000 shares in fiscal 1998. The decrease in the use of cash from 1998 to
1999 was due to lower purchases of treasury stock in 1999, and to collections on
subscriptions receivable. In December 1999, we announced a plan to repurchase up
to 250,000 shares of our Common Stock. As of June 30, 2000, we had repurchased
148,000 shares under the 1999 repurchase program. We repurchased an additional
29,000 shares through September 15, 2000. We continue to believe that our stock
is undervalued, and intend to continue to repurchase our Common Stock under the
1999 repurchase program. We currently may repurchase an additional 73,000 shares
under the 1999 repurchase program, and may initiate additional repurchase
programs in the future.
Our primary liquidity needs arise from opening Company-owned outlets,
expansion and capital expenditures. These needs are primarily met by the cash
flows from operations and from our cash and investments. We believe that our
cash flows from operations and our cash and investments will be sufficient to
fund our liquidity needs for the foreseeable future.
26
Item 8. FINANCIAL STATEMENTS
Our financial statements described below and the reports of independent
auditors thereon are set forth following the Index to Financial Statements on
page F-1 of this report:
Reports of independent auditors
Consolidated balance sheets at June 30, 2000 and 1999
Consolidated statements of operations and comprehensive income (loss)
for each of the three years in the period ended June 30, 2000
Consolidated statements of shareholders' equity for
each of the three years in the period ended June 30, 2000
Consolidated statements of cash flows for each of the
three years in the period ended June 30, 2000
Notes to consolidated financial statements
Report of independent auditors on financial statement schedule
Consolidated schedule of valuation and qualifying accounts
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
At a meeting of the Audit Committee of our Board on October 30, 1998, the
committee approved the engagement of Ernst & Young LLP as our independent
auditors for the fiscal year ending June 30, 1999 to replace the firm of
PricewaterhouseCoopers LLP, who were dismissed as our auditors effective
November 3, 1998.
The reports issued by PricewaterhouseCoopers LLP with respect to its audits
of our financial statements for the fiscal years ended June 30, 1997 and 1998
did not contain an adverse opinion or a disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope, or accounting principles.
During our fiscal years ended June 30, 1997 and 1998, and the interim
period which commenced on July 1, 1998 and ended on the date of dismissal of
PricewaterhouseCoopers LLP, there were no disagreements with
PricewaterhouseCoopers LLP on any matters of accounting principles or practices,
financial statement disclosure, or auditing scope and procedures which, if not
resolved to the satisfaction of PricewaterhouseCoopers LLP would have caused
PricewaterhouseCoopers LLP to make reference thereto in any report issued or to
be issued by it in connection with its audit of our financial statements.
27
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS
Information regarding all of our executive officers and employee-directors
is included in Part I at Item 3a. Information regarding all of our non-employee
directors is incorporated herein by reference from our definitive proxy
statement which will be filed no later than 120 days after June 30, 2000.
Item 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from our definitive proxy statement which
will be filed no later than 120 days after June 30, 2000.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from our definitive proxy statement which
will be filed no later than 120 days after June 30, 2000.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from our definitive proxy statement which
will be filed no later than 120 days after June 30, 2000.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial statements:
Consolidated financial statements filed as part of this report are
listed under Part II, Item 8 of this Form 10-K.
2. Financial statement schedule:
The financial statement schedule filed as part of this report is
listed under Part II, Item 8 of this Form 10-K.
3. Exhibits:
The exhibits listed in the accompanying index are filed as part of
this report.
Exhibit
Number Description
- ------ -----------
3.1 Certificate of Incorporation, as Amended*
3.2 By-laws *
4.1 Specimen stock certificate of common stock*
10.1 Trademark Agreement dated as of August 1, 1976 among Peter DeCarlo,
Anthony P. Conza and David L. Siegel*
10.2 Modification Agreement dated as of November 15, 1977 by and among
Peter DeCarlo, Anthony P. Conza and David L. Siegel*
28
10.3 Agreement dated as of June 15, 1981 by and between Peter DeCarlo,
Anthony P. Conza and David L. Siegel*
10.4 Agreement dated as of June 1, 1977 by and between Anthony P. Conza and
David L. Siegel and International Blimpie Corporation*
10.5 Agreement dated as of December 15, 1980 by and between International
Blimpie of Illinois, Inc. and International Blimpie Corporation*
10.6 Trademark Distribution Agreement dated July 18, 1984 by and between
International Blimpie Corporation and ISM, Inc. and Anthony P. Conza,
Peter DeCarlo and David Siegel*
10.7 Agreement dated April 30, 1992 by and between Astor Restaurant Group,
Inc. and Blimpie of California, Inc. and ISM, Inc.*
10.8 Replacement Subfranchise Agreement dated as of October 17, 1991 by and
between Astor Restaurant Group, Inc. and Patrick J. Pompeo and Joseph
Conza*
10.9 Agreement dated July 19, 1991 by and between Metropolitan Blimpie,
Inc. and Astor Restaurant Group, Inc.*
10.10 Area Distributor's Agreement dated October 6, 1976 between
International Blimpie Corporation and Jeffrey P. Wiener and Charles
Leaness*
10.11 Subfranchise Agreement dated April 1, 1984 by and between
International Blimpie Corporation and Joseph P. Conza*
10.12 Lease dated as of December 2, 1987 by and between First Capital Income
Properties, Ltd. - Series IX and Blimpie Capital Corporation and Lease
Modification Agreement dated November 1, 1989 and Second Lease
Modification Agreement dated August 21, 1991 between the parties
thereto*
10.13 Service Agreement dated as of August 1, 1992 between the Company and
Mellon Securities Trust Company*
10.14 Option, Loan, and Pledge Agreements and Promissory note dated as of
December 20, 1991 between Astor Restaurant Group, Inc. and Patrick J.
Pompeo*
10.15 Option, Loan and Pledge Agreements and Promissory Note dated as of
December 20, 1991 between Astor Restaurant Group, Inc. and David L.
Siegel*
10.16 Option, Loan and Pledge Agreements and Promissory Note dated as of
December 20, 1991 between Astor Restaurant Group, Inc. and Charles G.
Leaness*
10.17 Option, Loan and Pledge Agreements and Promissory Note dated as of
December 20, 1991 between Astor Restaurant Group, Inc. and Anthony P.
Conza*
10.18 Agreement dated as of January 31, 1992 by and between Astor Restaurant
Group, Inc. and Barber & Bronson, Inc.*
10.19 Blimpie Retirement Plan 401(k) Profit Sharing Plan*
10.20 Copy of the Company's Group Life, Accident and Health Insurance
Policy*
10.21 Agreement dated December 18, 1991 between Astor Restaurant Group, Inc.
and Llewellyn Distributors, Inc.*
29
10.22 Agreement dated March 1, 1992 between Blimpie International, Inc. and
International Southwest Blimpie, Inc.*
10.23 Agreement dated March 1, 1992 between Blimpie International, Inc. and
Blimpie of Atlanta, Inc.*
10.24 1993 Stock Incentive Plan*
10.25 Form of Option Issuable Under the 1993 Stock Incentive Plan*
10.26 Standard Form of Franchise Agreement*
10.27 Standard Form of Subfranchise Agreement*
10.28 Agreement dated June 13, 1991 by and between International Blimpie
Co., an unincorporated division of Astor Restaurant Group, Inc. and
Blimpie Fifty-Seven, Inc.*
10.29 Form of indemnity agreement between the Company and its directors
and/or officers*
10.30 Standard Form of Sublease Agreement*
10.31 Lease dated February 18, 1993 between Lafayette Astor Associates and
740 Broadway Top Floor Corp. and Guaranty of Blimpie International,
Inc. with respect thereto*
10.32 Fourth Lease Modification Agreement dated April 27, 1994 between First
Capital Income Properties, Ltd., - Series IX and Blimpie Capital
Corporation*
10.33 Agreement dated July 19, 1993 by and between Marc Haskell, Andrew
Whitman, Riaz Baksh and The Border Cafe, Inc. and Blimpie
International, Inc.*
10.34 Agreement dated May 24, 1993 by and between Metropolitan Blimpie,
Inc., Anthony P. Conza, David L. Siegel and Blimpie International,
Inc.*
10.35 Equipment Lease Agreement dated January 24, 1992 by and between Rapid
Leasing International, Inc. and Consal Enterprises, Inc.*
10.36 License Agreement dated July 19, 1993 between The Border Cafe, Inc.
and Blimpie International, Inc.*
10.37 Promissory Note, Note Addendum and Pledge Agreement dated March 24,
1995 between Joseph Conza and the Company*
10.38 Form of Warrant Issued to Non-Employee Directors*
10.39 Warrant dated February 12, 1993 Issued to Barber & Bronson
Incorporated*
10.40 Option dated September 15, 1994 Issued to Kirschenbaum & Bond, Inc.*
10.41 Financial Consulting Agreement by and between Barber & Bronson
Incorporated and Blimpie International, Inc. (a copy of which was
filed with the Commission on July 19, 1995 as Exhibit 10.41 to
Amendment No. 1 to the Company's Registration Statement on Form SB-2
(Reg. No. 33-93738), and is hereby incorporated herein by this
reference).
10.42 International Trademark Licensing Agreement among Anthony P. Conza,
David L. Siegel and the Company*
30
10.43 Agreement made as of the 18th day of February, 1997 by and between
Anthony P. Conza, David L. Siegel and Blimpie International, Inc.**
10.44 Amendment agreement made as of the 3rd day of February, 1999 by and
between Anthony P. Conza, David L. Siegel, and Blimpie International,
Inc.***
10.45 Form of basic MAUI TACOS Franchise Agreement****
10.46 Form of basic MAUI TACOS Subfranchise Agreement****
10.47 Form of basic PASTA CENTRAL Franchise Agreement****
10.48 Form of basic PASTA CENTRAL Subfranchise Agreement****
10.49 Form of basic SMOOTHIE ISLAND Franchise Agreement****
18 Letter dated December 13, 1999 from Ernst & Young LLP regarding change
in accounting principle related to subfranchise and master license fee
revenues
21 Subsidiaries of the Company*
23.1 Consent of Independent Auditors
23.2 Consent of Independent Accountants
The following document has been filed as an Exhibit solely with the
Securities and Exchange Commission:
27 Financial Data Schedule
__________________________
* (a copy of which was filed with the Commission on June 30, 1995 as an
Exhibit of corresponding number to the Company's Registration Statement on Form
SB-2 (Reg. No. 33-93738), and is hereby incorporated herein by this reference).
** (a copy of which was filed with the Commission on May 12, 1997 as an
Exhibit of corresponding number to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1997, and is hereby incorporated herein by this
reference).
*** (a copy of which was filed with the Commission on February 12, 1999 as an
Exhibit of corresponding number to the Company's Current Report on Form 8-K
dated February 10, 1999, and is hereby incorporated herein by this reference).
**** (a copy of which was filed with the Commission on December 15, 1999 as an
Exhibit of corresponding number to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1999, and is hereby incorporated herein by this
reference).
(b) Reports on Form 8-K:
The Company did not file any Current Reports on Form 8-K during the fourth
quarter of its fiscal year ended June 30, 2000.
31
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
BLIMPIE INTERNATIONAL, INC.
Dated: September 26, 2000 By: /s/ Anthony P. Conza
------------------------------
Anthony P. Conza, Chairman
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Principal Executive Officer
Date: September 26, 2000 /s/ Anthony P. Conza
-------------------------------------------
Anthony P. Conza, Chairman and Chief
Executive Officer
Principal Financial And Accounting Officer
Date: September 26, 2000 /s/ Brian D. Lane
-------------------------------------------
Brian D. Lane, Vice President, Chief
Financial Officer
Date: September 26, 2000 /s/ David L. Siegel
-------------------------------------------
David L. Siegel, Vice Chairman, Chief
Operating Officer and General Counsel
Date: September 26, 2000 /s/ Patrick J. Pompeo
-------------------------------------------
Patrick J. Pompeo, Executive Vice
President and Director
Date: September 26, 2000 /s/ Charles G. Leaness
-------------------------------------------
Charles G. Leaness, Executive Vice
President, Secretary and Director
Date: September 26, 2000 /s/ Alvin Katz
-------------------------------------------
Alvin Katz, Director
Date: September 26, 2000 /s/ Harry G. Chernoff
-------------------------------------------
Harry G. Chernoff, Director
32
INDEX TO FINANCIAL STATEMENTS
Reports of Independent Auditors F-2
Consolidated Balance Sheets at June 30, 2000 and 1999 F-4
Consolidated Statements of Operations and Comprehensive Income
(Loss) for each of the three years in the period ended June 30, 2000 F-5
Consolidated Statements of Shareholders' Equity for each of the
three years in the period ended June 30, 2000 F-6
Consolidated Statements of Cash Flows for each of the three
years in the period ended June 30, 2000 F-7
Notes to Consolidated Financial Statements F-8
Report of Independent Accountants on Financial Statement Schedule F-24
Consolidated Schedule of Valuation and Qualifying Accounts for each
of the three years in the period ended June 30, 2000 F-25
F-1
Report of Independent Auditors
Board of Directors and Shareholders
Blimpie International, Inc.
We have audited the accompanying consolidated balance sheets of Blimpie
International, Inc. and subsidiaries as of June 30, 2000 and 1999, and the
related consolidated statements of operations and comprehensive income (loss),
shareholders' equity, and cash flows for the years then ended. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 Blimpie
International, Inc. and subsidiaries at June 30, 2000 and 1999, and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, in 1999 the
Company changed its method of accounting for subfranchisor and master license
fee revenues.
/s/ Ernst & Young LLP
Atlanta, Georgia
September 15, 2000
F-2
Report of Independent Accountants
To the Board of Directors and Shareholders
Blimpie International, Inc. and Subsidiaries:
In our opinion, the accompanying consolidated statements of operations and
comprehensive income (loss), of shareholders' equity, and of cash flows present
fairly, in all material respects, the results of operations and cash flows of
Blimpie International, Inc. and Subsidiaries for the year ended June 30, 1998,
in conformity with accounting principles generally accepted in the United States
of America. 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 audit. We conducted our audit of these statements in
accordance with auditing standards generally accepted in the United States of
America, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Atlanta, Georgia
August 17, 1998
F-3
Blimpie International, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(dollars in thousands except share amounts)
- ------------------------------------------------------------------------------------------------------
June 30
Assets 2000 1999
- ------------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 8,272 $ 4,682
Investments 618 5,296
Accounts receivable, less allowance of $252 in 2000
and $392 in 1999 2,125 3,106
Prepaid expenses and other current assets 277 206
Income taxes receivable 812 22
Deferred income taxes 155 85
Current portion of notes receivable 540 427
-------- --------
Total current assets 12,799 13,824
Property and equipment - at cost less accumulated
depreciation of $2,412 in 2000 and $1,776 in 1999 2,390 1,749
Other assets:
Notes receivable, less allowance of $82 in 2000
and $81 in 1999 and less current portion 666 1,009
Investments 970 981
Trademarks - at cost, less accumulated amortization
of $1,044 in 2000 and $739 in 1999 8,249 8,434
Deferred income taxes 1,313 1,828
Other 673 433
-------- --------
Total other assets 11,871 12,685
-------- --------
$27,060 $28,258
======== ========
- ------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
- ------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 3,285 $ 3,691
Customer equipment deposits 238 546
-------- --------
Total current liabilities 3,523 4,237
Deferred revenue, net 5,051 5,710
Trademark obligations - 204
Shareholders' equity:
Common stock, $.01 par value:
Authorized shares - 20,000,000
Issued and outstanding shares - 9,632,000 in 2000
and 9,604,000 in 1999 96 96
Additional paid-in capital 9,028 8,818
Retained earnings 10,075 9,640
Net unrealized gain on marketable securities 41 40
-------- --------
19,240 18,594
Treasury stock at cost - 281,000 shares in 2000 and
133,000 shares in 1999 (694) (427)
Subscriptions receivable (60) (60)
-------- --------
Total shareholders' equity 18,486 18,107
-------- --------
$27,060 $28,258
======== ========
See accompanying notes to consolidated financial statements.
F-4
Blimpie International, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands except for per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended June 30
2000 1999 1998
--------- --------- ---------
Revenues:
Continuing fees $19,129 $18,956 $17,343
Subfranchisor fees, master license fees
and sale of franchises 4,026 4,451 4,983
Store equipment sales 6,351 9,328 14,374
License fees and other income 653 477 407
Company restaurant sales 858 338 -
--------- --------- ---------
31,017 33,550 37,107
Expenses:
Subfranchisors' share of franchise and continuing fees 11,499 11,782 11,188
Store equipment cost of sales 5,285 8,137 12,192
Selling, general and administrative expenses 11,294 12,156 10,649
Company restaurant operations 1,411 342 -
--------- --------- ---------
29,489 32,417 34,029
--------- --------- ---------
Operating income 1,528 1,133 3,078
Interest income 626 823 846
--------- --------- ---------
Income before income taxes and cumulative effect
of change in accounting principle 2,154 1,956 3,924
Income taxes on income before cumulative effect
of change in accounting principle 1,059 800 1,480
--------- --------- ---------
Income before cumulative effect of change in accounting principle 1,095 1,156 2,444
Cumulative effect on prior years (to June 30, 1998) of changing to
a different subfranchisor and master license fee revenue
recognition method (less tax benefit of $1,815) - Note 2 - (3,373) -
--------- --------- ---------
Net income (loss) $ 1,095 $(2,217) $ 2,444
========= ========= =========
Basic and diluted earnings (loss) per share:
Income before cumulative effect of change in accounting principle $0.12 $0.12 $0.26
Cumulative effect of change in accounting principle - (0.35) -
--------- --------- ---------
Net income (loss) $0.12 $(0.23) $0.26
========= ========= =========
Pro forma amounts assuming the new revenue recognition method
is applied retroactively (1998 amounts are unaudited):
Net income $ 1,095 $ 1,156 $ 2,428
Basic and diluted earnings per share $ 0.12 $ 0.12 $ 0.25
Weighted average basic shares outstanding 9,446 9,467 9,533
========= ========= =========
Weighted average diluted shares outstanding 9,453 9,472 9,549
========= ========= =========
Comprehensive income (loss):
Net income (loss) $ 1,095 $(2,217) $ 2,444
Other comprehensive income (loss):
Unrealized gains (losses) on marketable securities:
Unrealized gains and (losses), net of tax 1 (12) 25
Less: reclassification adjustment for losses
included in net loss, net of tax - 1 -
--------- --------- ---------
Other comprehensive income (loss) 1 (11) 25
--------- --------- ---------
Comprehensive income (loss) $ 1,096 $(2,228) $ 2,469
========= ========= =========
See accompanying notes to consolidated financial statements.
F-5
Blimpie International, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended June 30, 2000, 1999, and 1998
(in thousands except for per share amounts)
- --------------------------------------------------------------------------------
Common Stock
--------------------- Additional Unrealized
Shares Paid-In Retained Holding
Outstanding Amount Capital Earnings Gain (Loss) Total
----------- ------ ---------- -------- ---------- -----
Balance - July 1, 1997 9,526 $ 95 $8,210 $10,744 $ 26 $19,075
Incentive stock granted/stock options exercised 23 1 109 110
Stock issued under Canadian trademark agreement 25 101 101
Dividends paid ($ .07 per share) (669) (669)
Net income 2,444 2,444
Net unrealized gain on marketable securities 25 25
------ ------ ------ ------- ------ -------
Balance - June 30, 1998 9,574 96 8,420 12,519 51 21,086
Incentive stock granted 5 14 14
Stock issued under Canadian trademark agreement 25 204 204
Warrants and options issued for services and trademark 180 180
Dividends paid ($ .07 per share) (662) (662)
Net loss (2,217) (2,217)
Net unrealized loss on marketable securities (11) (11)
------ ------ ------ ------- ------ -------
Balance - June 30, 1999 9,604 96 8,818 9,640 40 18,594
Incentive stock granted 3 6 6
Stock issued under Canadian trademark agreement 25 204 204
Dividends paid ($ .07 per share) (660) (660)
Net income 1,095 1,095
Net unrealized gain on marketable securities 1 1
------ ------ ------ ------- ------ -------
Balance - June 30, 2000 9,632 $ 96 $9,028 $10,075 $ 41 $19,240
====== ====== ====== ======= ====== =======
See accompanying notes to consolidated financial statements.
F-6
Blimpie International, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
- -------------------------------------------------------------------------------------------------------------------------------
Years Ended June 30
2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Income before cumulative effect of change in accounting principle $ 1,095 $ 1,156 $ 2,444
Adjustments to reconcile income before accounting change
to net cash provided by operating activities:
Depreciation and amortization 941 846 706
Incentive stock granted 6 104 98
Changes in operating assets and liabilities:
Accounts receivable 981 (48) (973)
Prepaid expenses and other current assets (71) 292 204
Other assets (240) (99) 118
Income taxes receivable (790) (22) -
Deferred income taxes 445 (105) (32)
Notes receivable 230 406 663
Accounts payable and accrued expenses (406) 973 (1,159)
Customer equipment deposits (308) 204 342
Income taxes payable - (276) 268
Deferred revenue, net (659) (214) (589)
------- ------- -------
Net cash provided by operating activities 1,224 3,217 2,090
Cash Flows from Investing Activities
Purchases of available-for-sale securities (89) (2,646) (4,573)
Proceeds from sales of available-for-sale securities 4,786 4,605 4,832
Reinvested dividends of available-for-sale securities (7) (66) (75)
Purchase of international trademarks (120) (3,077) (147)
Purchases of property and equipment (1,277) (684) (725)
------- ------- -------
Net cash provided by (used in) investing activities 3,293 (1,868) (688)
Cash Flows from Financing Activities
Purchases of treasury stock (267) (176) (251)
Proceeds from stock warrants/options exercised - - 12
Collections on subscriptions receivable - 150 -
Cash dividends paid (660) (662) (669)
Repayment of long term debt - - (5)
------- ------- -------
Net cash used in financing activities (927) (688) (913)
------- ------- -------
Net increase in cash and cash equivalents 3,590 661 489
Cash and cash equivalents at beginning of year 4,682 4,021 3,532
------- ------- -------
Cash and cash equivalents at end of year $ 8,272 $ 4,682 $ 4,021
======= ======= =======
See accompanying notes to consolidated financial statements.
F-7
Blimpie International, Inc. and Subsidaries
Notes to Consolidated Financial Statements
________________________________________________________________________________
Note 1: Description of Company
Blimpie International, Inc. (the "Company") engages in franchising,
subfranchising and master licensing the BLIMPIE trademarks, trade names, service
marks, logos, marketing concepts and marketing programs. The Company franchises
BLIMPIE(R) Subs & Salads and PASTA CENTRAL(TM) and is the majority owner of Maui
Tacos International, Inc. ("Maui Tacos"), the franchisor of MAUI TACOS(TM) and
SMOOTHIE ISLAND(TM). BLIMPIE Subs & Salads offers a quick-service, healthy, sub
sandwich in approximately 2,000 franchise stores operating throughout the United
States and in 13 other countries. PASTA CENTRAL's baked pasta meals address
current eating trends for eat-in or take home meals. MAUI TACOS restaurants
provide a health-oriented, affordable menu of "Maui-Mex" items, including
traditional Mexican foods marinated in Hawaiian spices. SMOOTHIE ISLAND is a
selection of blended beverages of frozen yogurt, fruit and nutritional
supplements sold through the BLIMPIE, PASTA CENTRAL, and MAUI TACOS locations.
The Company also provides professional store design services and equipment sales
through its wholly-owned subsidiary, B I Concept Systems, Inc. At June 30, 2000,
the Company operates one MAUI TACOS restaurant, and does not operate any
subfranchisor or master licensor areas within the Blimpie International system.
The Company also owns and operates three SMOOTHIE ISLAND JUICE BAR restaurants
in Houston, TX. No franchising of this concept has occurred.
Note 2: Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned and majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Revenue Recognition and Change in Accounting Principle
Prior to July 1, 1998, the Company recognized fees relating to
subfranchisor and master licensor territory sales when collected or due. If fees
were collectible over an extended period and no reasonable basis existed for
estimating collectibility, those fees were recognized as they were collected or
when the uncertainty regarding collectibility was resolved. Effective July 1,
1998, the Company changed its methodology of accounting for fees relating to
subfranchisor and master licensor territory sales to recognize such fees as
revenue on a straight-line basis over a 10-year period. Such period is estimated
to approximate the period over which the Company's performance obligation to the
subfranchisor and master licensor extends. The Company considers the new revenue
recognition methodology to result in a better matching of revenues and related
expenses incurred in the earnings process related to such revenues. The effect
of the change in fiscal 1999 was to increase income before the cumulative effect
adjustment by approximately $274,000 ($0.03 per share). The cumulative effect
adjustment of $3,373,000 (after reduction for income taxes of $1,815,000) to
apply retroactively the new method is included in the net loss in fiscal 1999.
Initial fees from the awarding of individual franchises are recorded as
revenue when the franchisee's restaurant is opened. Commissions paid and the
subfranchisor's share of the initial fees are deferred and charged to expense
when the initial fees are recognized. Continuing fees from franchised
restaurants are recorded as revenue when earned. Revenue from equipment sales is
recognized when the equipment is shipped.
Cash and Cash Equivalents
The Company considers all liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
F-8
Blimpie International, Inc. and Subsidaries
Notes to Consolidated Financial Statements (continued)
________________________________________________________________________________
Note 2: Summary of Significant Accounting Policies (continued)
Cash and Cash Equivalents (continued)
The Company has cash deposits with financial institutions, which fluctuate
in excess of federally insured limits. If these financial institutions were not
to honor their contractual liability, the Company could incur losses. Management
believes that there is no significant risk of loss because of the financial
strength of the financial institutions.
Investments
Pursuant to Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," debt
securities that may be sold prior to maturity and all marketable equity
securities are classified as available-for-sale and carried at fair value. Fair
value is estimated based on quoted market prices for those or similar
investments. Net unrealized gains and losses, determined on the specific
identification method, on securities classified as available-for-sale are
recorded as a separate component of shareholders' equity.
Fair Market Value Disclosure
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments" (SFAS 107), requires disclosure of the fair
value of certain items, including receivables, payables and investments. The
Company believes that the carrying amounts included in the consolidated balance
sheets for such items do not differ significantly from their fair values as
defined in SFAS 107.
Accounts and Notes Receivable
The Company provides an allowance for doubtful receivables equal to the
estimated collection losses that will be incurred in the collection of such
receivables. The estimated losses are based on historical collection experience
coupled with a review of all outstanding receivables.
Property, Equipment and Depreciation
Property and equipment are carried at cost. Depreciation is computed over
the estimated useful lives of the assets using straight-line methods.
Significant expenditures for additions and improvements are capitalized and
expenditures for routine repairs and maintenance are charged to expense as
incurred.
Trademarks
Trademarks are carried at cost less accumulated amortization, which is
calculated on a straight-line basis over the estimated useful lives of 15-40
years. Amortization expense was $305,000 in 2000, $337,000 in 1999, and $295,000
in 1998.
Advertising
The Company follows the policy of charging the costs of advertising to
expense as incurred. Advertising expense was $374,000 in 2000, $404,000 in 1999,
and $429,000 in 1998.
The Company administers several advertising and promotional funds on behalf
of the franchisees. The franchisees contribute 4% of their gross sales to The
National Media Advertising Account. A portion of the 4% contribution is
transferred to Regional Advertising Associations. Franchisees form voluntary
regional advertising associations intended to coordinate advertising and
marketing efforts and programs for local
F-9
Blimpie International, Inc. and Subsidaries
Notes to Consolidated Financial Statements (continued)
________________________________________________________________________________
Note 2: Summary of Significant Accounting Policies (continued)
Advertising (continued)
advertising. Blimpie Brand Building Fund, Inc. is a non-profit entity that is
authorized to receive marketing allowances and payments from purveyors,
distributors and manufacturers. Its activities are controlled by franchisees
elected to the National Blimpie Franchisee Advisory Council, subfranchisors
elected to the National Blimipie Subfranchisor Advisory Council and Company
representatives. The National Media Advertising Account and the Blimpie Brand
Building Fund monies are spent for advertising and marketing uses, including
marketing and advertising personnel, advertising agencies, operating expenses of
all types, matching fund programs, research and development, production of
educational or training materials, production of commercials, focus groups and
other studies, television or radio media time, print advertising and other
marketing and advertising uses.
The Company also administers a grand opening fund and the local restaurant
marketing fund. New franchisees generally pay $3,000 to the grand opening fund
and $2,000 to the local restaurant marketing fund during their first year of
operation. The franchisee, together with the Company, develops the marketing
plan that will include the grand opening marketing, coupon events and monthly
promotions. As the franchisee implements the marketing plan, the Company pays
vendors or reimburses the franchisee for expenditures related to that plan up to
the amount contributed.
Aggregate receipts and expenditures for these funds were approximately
$26,000,000 each for fiscal 2000. Total assets were approximately $4,000,000 and
total liabilities were approximately $2,000,000 as of June 30, 2000. The net
assets of these funds are held in a manner analogous to escrow accounts by the
Company and are not consolidated.
Income Taxes
The provision for income taxes and corresponding balance sheet accounts are
determined in accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" (SFAS 109). Under SFAS 109, deferred tax
liabilities and assets are determined based on temporary differences between the
basis of certain assets and liabilities for income tax and financial reporting
purposes. A valuation allowance is provided for deferred tax assets for which
realization is uncertain.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect certain amounts
reported in the consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.
F-10
Blimpie International, Inc. and Subsidaries
Notes to Consolidated Financial Statements (continued)
________________________________________________________________________________
Note 2: Summary of Significant Accounting Policies (continued)
Supplemental Disclosure of Cash Flow Information
Years Ended June 30
------------------------------------------------------------------
2000 1999 1998
------------------ ----------------- ----------------
Cash paid during the year for:
Interest $ - $ - $ 3,000
Income taxes 1,049,000 1,232,000 1,143,000
Noncash investing and financing activities:
Stock issued under Canadian trademark agreement 204,000 204,000 101,000
Warrants and options issued for services and trademark - 180,000 -
Net unrealized gain (loss) on marketable securities 1,000 (11,000) 25,000
Note 3: Investments
The following is a summary of available-for-sale securities included in
investments as of June 30:
Unrealized Fair
2000 Cost Gain (Loss) Value
---------- ----------- ----------
Available-for-Sale Securities:
Current:
Common stocks $ 61,000 $ 108,000 $ 169,000
Preferred stocks 326,000 (24,000) 302,000
Mutual funds 163,000 (16,000) 147,000
---------- ----------- ----------
550,000 68,000 618,000
Long-Term
U. S. Government securities 997,000 (27,000) 970,000
---------- ----------- ----------
$1,547,000 $ 41,000 $1,588,000
========== =========== ==========
1999
Available-for-Sale Securities:
Current:
Common stocks $ 61,000 $ 58,000 $ 119,000
Preferred stocks 258,000 (6,000) 252,000
Mutual funds 156,000 (5,000) 151,000
U. S. Government securities 4,765,000 9,000 4,774,000
---------- ----------- ----------
5,240,000 56,000 5,296,000
Long-Term
U. S. Government securities 997,000 (16,000) 981,000
---------- ----------- ----------
$6,237,000 $ 40,000 $6,277,000
========== =========== ==========
The long-term U.S. Government securities held at June 30, 2000 mature in 2004.
F-11
Blimpie International, Inc. and Subsidaries
Notes to Consolidated Financial Statements (continued)
________________________________________________________________________________
Note 4: Notes Receivable
Notes receivable consist of the following as of June 30:
2000 1999
---------- ----------
Notes from subfranchisors, with interest ranging from 5%
to 13% due at various dates through December, 2008 $ 814,000 $ 909,000
Notes receivable from sale of discontinued segment due
in weekly installments including interest of 10% per
annum through June, 2007 56,000 61,000
Notes receivable from an officer due in semi-monthly
installments including interest of 8% per annum through
April, 2015 48,000 50,000
Receivable from a leasing company arising from participation
in franchisee equipment leases, with interest ranging from
7% to 17%, due at various dates through June, 2004 370,000 497,000
---------- ----------
1,288,000 1,517,000
Allowance for doubtful accounts (82,000) (81,000)
---------- ----------
1,206,000 1,436,000
Current maturities 540,000 427,000
---------- ----------
$ 666,000 $1,009,000
========== ==========
Note 5: Property and Equipment
The major components of property and equipment and related depreciation
periods as of June 30 are:
Cost
------------------------------------- Depreciation
Item 2000 1999 Period
---------------------------------------------------- ----------------- ----------------- -----------------
Building and other $ 739,000 $ 186,000 7-14 years
Office furniture and fixtures 3,087,000 2,601,000 5-10 years
Automobiles 223,000 185,000 5 years
Software 753,000 553,000 5 years
----------------- -----------------
4,802,000 3,525,000
Less accumulated depreciation 2,412,000 1,776,000
----------------- -----------------
$2,390,000 $1,749,000
================= =================
Depreciation expense totaled $636,000 in 2000, $519,000 in 1999, and $394,000
in 1998.
F-12
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 6: Income Taxes
The provision for income taxes is comprised as follows for the years ended
June 30:
2000 1999 1998
---------- ---------- ----------
Federal
Current $ 564,000 $ 789,000 $1,264,000
Deferred 409,000 (91,000) (28,000)
---------- ---------- ----------
973,000 698,000 1,236,000
---------- --------- ----------
State
Current 50,000 116,000 248,000
Deferred 36,000 (14,000) (4,000)
---------- --------- ----------
86,000 102,000 244,000
---------- --------- ----------
$1,059,000 $800,000 $1,480,000
========== ========= ==========
The following is a reconciliation of income taxes to normal expected Federal
income tax computed by applying statutory rates for the years ended June 30:
2000 1999 1998
---------- --------- ----------
Federal statutory rate - 34% $ 732,000 $ 665,000 $1,334,000
State or local taxes, net of federal benefit 57,000 65,000 159,000
Non-deductible expenses 25,000 34,000 48,000
Valuation allowance 287,000 385,000 -
Other (42,000) (349,000) (61,000)
---------- --------- ----------
$1,059,000 $ 800,000 $1,480,000
========== ========= ==========
The components of temporary differences and their tax effects which comprise
the Company's net deferred tax asset are as follows at June 30:
2000 1999
---------- ----------
Deferred tax assets:
Subfranchisor revenues $1,509,000 $1,508,000
Franchisee revenues 259,000 283,000
Allowance for doubtful accounts 117,000 165,000
Start up costs for Maui Tacos 83,000 108,000
Net operating loss carryforward of Maui Tacos 395,000 188,000
Other 20,000 186,000
Valuation allowance (672,000) (385,000)
---------- ----------
1,711,000 2,053,000
---------- ----------
Deferred tax liabilities:
Trademark amortization (243,000) (140,000)
---------- ----------
(243,000) (140,000)
---------- ----------
$1,468,000 $1,913,000
========== ==========
The valuation allowance for deferred taxes relates to net deferred tax assets
of Maui Tacos, a majority-owned subsidiary that is not consolidated for tax
purposes. The valuation allowance was established due to the uncertainty of the
related deferred tax assets' ultimate realization. Maui Tacos has net operating
loss carryforwards totaling approximately $1,113,000 expiring beginning in
2020.
F-13
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 7: Commitments and Contingencies
The Company leases its facilities under noncancelable operating leases,
expiring in various years through the year 2012. The minimum future annual
rentals under these noncancelable operating leases as of June 30, 2000 for each
of the next five years and in the aggregate, are as follows:
Year Amount
------------------- ----------
2001 $ 789,000
2002 792,000
2003 696,000
2004 401,000
2005 389,000
2006 and thereafter 2,253,000
----------
$5,320,000
==========
The Company also is obligated for increases in real estate taxes and operating
costs. Rent expenses including real estate taxes and operating costs amounted to
$765,000 in 2000, $520,000 in 1999, and $425,000 in 1998.
The Company's leasing subsidiaries execute leases for approved BLIMPIE
restaurant locations and then sublease the premises to franchisees. Under the
terms of the typical lease agreement, the Company's leasing subsidiary's
liability is limited to its net assets and the landlord agrees to not commence
any legal proceedings against Blimpie International, Inc. The franchisee assumes
the payment of rent and agrees to perform all terms, covenants and conditions of
the original lease. As a result, the Company has not recorded lease expense and
sublease income in the accompanying consolidated financial statements. As of
June 30, 2000, there were 600 leasing subsidiaries with aggregate net assets of
$333,000, which are included in cash and other assets in the accompanying
consolidated balance sheet. The terms of these leases range from 5 to 20 years.
The minimum annual lease payments for the fiscal years ending June 30 are as
follows:
Year Amount
------------------- -----------
2001 $14,777,000
2002 12,989,000
2003 10,872,000
2004 9,222,000
2005 7,323,000
2006 and thereafter 16,004,000
-----------
$71,187,000
===========
Various claims and lawsuits arise in the normal course of business. It is the
Company's practice to vigorously defend all actions. Although the amount of
liability as of June 30, 2000 with respect to all claims and lawsuits cannot be
ascertained, in the opinion of management, the resulting liability, if any, will
not materially affect the Company's results of operations or financial position.
F-14
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 8: Trademarks
The Company currently owns an undivided 60% interest in the domestic and
international BLIMPIE trademarks. The remaining 40% interest in those trademark
rights is owned by Metropolitan Blimpie, Inc. ("MBI"), an unrelated company.
Through various agreements that the Company has entered into with MBI, the
trademark rights are shared by both MBI and the Company. Both companies have the
exclusive rights to the trademarks in certain domestic territories, and for the
remaining territories, the Company has licensed the rights to the trademarks
from MBI in exchange for a licensing fee generally equal to 30% of the revenues,
after deducting direct expenses, incurred by the Company in the territories.
The territories for which the Company has licensed the right to distribute the
BLIMPIE trademarks and license the BLIMPIE Marketing System from MBI include:
Alaska, Arkansas, Northern California, Colorado, Hawaii, Iowa, Kansas, Missouri,
Nebraska, Nevada, North Dakota, Oklahoma, South Dakota, and all territories
outside of the United States.
The territories in which MBI has retained the right to distribute the BLIMPIE
trademarks and license the BLIMPIE Marketing System (the "MBI Territories")
include Delaware, Maryland, New Jersey (except for portions of the northeastern
section of the State), the counties of New York, Queens, Kings, Richmond,
Rockland, Bronx and Westchester in New York, Pennsylvania (from the eastern
border westward to and including Harrisburg), Virginia and Washington, D.C.
The agreement with MBI with respect to the licensing of the BLIMPIE trademarks
and the BLIMPIE marketing system outside of the United States (the "1991
Agreement") provides for automatic annual renewals until July 2090, provided
that the Company makes all payments due to MBI, subject to a minimum annual
payment of $100,000. The payments made to MBI under this arrangement were
$700,000 in 2000, $778,000 in 1999, and $837,000 in 1998.
The Company acquired its 60% interest in the trademark rights noted above
through various transactions with Anthony P. Conza, Chairman and Chief Executive
Officer ("Conza") and David L. Siegel, Chief Operating Officer ("Siegel"). The
Company received a 99 year license in the domestic rights in the BLIMPIE
trademarks from Conza and Siegel in 1976. In 1997, the Company purchased its
share of the international rights to the BLIMPIE trademarks from Conza and
Siegel. The Company agreed to pay $4.5 million ($3 million to Conza and $1.5
million to Siegel), plus certain contingent fees which were to take effect after
cumulative international revenues exceeded $5 million, in consideration for
their sale of such rights to the Company. That agreement further provided that
Conza and Siegel could receive annual payments totaling $150,000 per year for 50
years, or could elect, at any time prior to January 1, 2001, to receive a lump
sum distribution of $3 million on January 1, 2001, with $2 million payable to
Conza and $1 million payable to Siegel.
In February 1999, the Company amended the 1997 agreement with Messrs. Conza
and Siegel to allow earlier payment of the cancellation option in exchange for a
transfer of the domestic trademark rights held by such individuals to the
Company. The amended agreement permitted Messrs. Conza and Siegel to exercise
the lump-sum payment options and receive payment on or before February 15, 1999.
Both individuals exercised their options, and were paid their lump-sum payments
on February 10, 1999. In connection with such payment, the individuals repaid
certain demand notes aggregating $150,000, plus accrued interest, relating to
purchases of shares of the Company's stock. Such demand notes had been recorded
as a reduction of shareholders' equity. As a result of the above transactions,
the Company now owns an undivided 60% interest in the domestic and international
BLIMPIE trademark rights. The remaining 40% of such rights are owned by MBI.
Messrs. Conza and Siegel no longer own any of the rights to the BLIMPIE
trademarks or the BLIMPIE marketing system.
On October 1, 1995, the Company entered into an agreement to settle a
trademark infringement proceeding which it commenced in Canada against an
unaffiliated party ("claimant") who had filed trademark registration documents
seeking Canadian trademark protection for the name "Blimpie" prior to the time
the Company made such filings in Canada. Pursuant to the agreement, the Company
acquired all
F-15
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 8: Trademarks (continued)
rights held by the claimant in said Canadian trademark registration in
consideration for the payment of $40,000 and an agreement to issue 125,000
unregistered shares of the Company's common stock at the rate of 25,000 shares
per year. As of June 30, 2000, all 125,000 shares of common stock had been
issued to the claimant.
Note 9: Related Party Transactions
The Company had numerous transactions which result from written agreements
between the Company and subfranchisors who are related parties. The following is
a summary of the types of transactions and revenue or expense recognized related
to these transactions for the years ended June 30:
Revenue or Expense
Related Party Recognized 2000 1999 1998
- -------------------------------- -------------------------- ---------- ---------- ----------
Georgia Enterprises, Inc., a Revenue derived from area $2,511,000 $2,514,000 $3,814,000
corporation partially owned by Fees paid to subfranchisor 1,162,000 1,155,000 1,149,000
two officers of the Company
Llewellyn Distributors, Inc., Revenue derived from area 587,000 525,000 649,000
a corporation partially owned Fees paid to subfranchisor 280,000 305,000 281,000
by an officer of the Company
International Southwest Blimpie, Revenue derived from area - 123,000 544,000
Inc., a corporation principally Fees paid to subfranchisor - 53,000 146,000
owned and controlled by an
officer of the Company
Manhattan Maui, Inc. a Revenue derived from area 156,000 - -
corporation partially owned Fees paid to subfranchisor 8,000 - -
by an officer of the Company
In November 1998, International Southwest Blimpie, Inc. was sold to a party
unrelated to the Company. No additional revenue or expenses are expected to be
earned or paid to this officer related to this territory subsequent to November
15, 1998.
The Company has subscriptions receivable totaling $60,000 from an officer of
the Company at June 30, 2000 and 1999 related to a purchase of shares of the
Company's common stock in fiscal 1992. Such receivable bears interest at the
rate of 5% per annum, payable quarterly. Interest income of $4,000, $9,000, and
$12,000 was recognized by the Company for the years ended June 30, 2000, 1999,
and 1998, respectively.
The Company has a note receivable from an officer of the Company due in semi-
monthly installments including interest of 8% per annum through April, 2015 (see
Note 4). Such note receivable was $48,000 and $50,000 at June 30, 2000 and 1999,
respectively.
The Company pays rent based on use of an apartment in New York City, which is
owned by an officer/employee of the Company. Rental expense of $13,000, $11,000,
and $11,000 was recognized for the years ended June 30, 2000, 1999, and 1998,
respectively.
F-16
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 10: Stock Options and Warrants
The Company has established an Omnibus Stock Incentive Plan ("the Plan") which
permits the Company to award various forms of incentive compensation. Through
June 30, 2000, the Company has issued incentive and nonstatutory stock options
and stock grants under the Plan. A maximum of 950,000 shares may be issued under
the Plan. The options are exercisable at the fair market value on the date of
grant. The options and stock grants generally provide for vesting at the rate of
20% per annum and expire from five to ten years after issuance. In connection
with the issuance of the stock grants, the Company recognized compensation
expense of $6,000 in 2000, $14,000 in 1999, and $98,000 in 1998.
Option activity under the Plan is as follows:
Weighted
Average
Number of Exercise
Options Price
--------- --------
Outstanding at July 1, 1997 412,650 $6.15
Granted 15,500 4.86
Exercised (3,750) 3.25
Canceled (44,000) 6.28
--------
Outstanding at June 30, 1998 380,400 6.11
Granted 509,000 2.74
Exercised - -
Canceled (136,400) 5.91
--------
Outstanding at June 30, 1999 753,000 3.87
Granted 130,000 2.69
Exercised - -
Canceled (90,500) 3.51
--------
Outstanding at June 30, 2000 792,500 $3.71
========
Options exercisable at June 30, 1998 212,600 $5.98
Options exercisable at June 30, 1999 249,300 $4.82
Options exercisable at June 30, 2000 378,800 $4.36
The following table summarizes information concerning options outstanding and
exercisable under the Plan at June 30, 2000:
Options Outstanding Options Exercisable
------------------------------------------------ -----------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- ------------------ ----------- ----------- -------- ----------- --------
$2.125 - $ 3.688 573,000 8.33 $ 2.77 203,800 $ 2.79
$5.500 - $ 6.063 215,000 1.76 6.05 171,200 6.05
$9.125 - $ 14.750 4,500 1.12 12.01 3,800 11.98
------- -------
792,500 6.51 3.72 378,800 4.36
======= =======
F-17
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 10: Stock Options and Warrants (continued)
The Company has issued common stock purchase warrants and stock options to
various entities in consideration of services provided to the Company. None of
these securities have been exercised as of June 30, 2000. The following table
summarizes information concerning common stock purchase warrants and options
held by non-employees as of June 30, 2000:
Number of Exercise Expiration
Security Holder Warrants/Options Price Date
- ----------------------------------------- ---------------- -------- ----------
Unaffiliated design firm 50,000 $4.39 Dec. 2002
Minority shareholder of majority-owned
subsidiary 50,000 4.75 Oct. 2002
Unaffiliated advertising agency 10,986 7.51 Sept. 2000
Underwriter of 1995 common stock offering 150,000 8.58 Aug. 2000
On July 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS 123). As
permitted by SFAS 123, the Company has chosen to apply APB Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its Plan and apply the disclosure-only provisions of SFAS 123.
Under APB 25, when the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required
by SFAS 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to June
30, 1995 under the fair value method of that Statement. The fair value of these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for fiscal 2000, 1999 and
1998: risk-free interest rates of approximately 6.0%; dividend yield of $0.07
per share; volatility factor of the expected market price of the Company's
common stock of .50; and a weighted-average expected life of the options of 4.5
years. The weighted-average fair value of options granted under the Plan was
$1.13, $1.17, and $2.22 for fiscal 2000, 1999, and 1998 respectively.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information, assuming SFAS 123 had been adopted, is as follows:
2000 1999 1998
---------------- ----------------- -------------
Income before cumulative effect of change in $1,095,000 $1,156,000 $2,444,000
accounting principle
Pro forma income before cumulative effect of 811,000 827,000 2,281,000
change in accounting principle
Pro forma income per share before cumulative effect of
change in accounting principle:
Basic and diluted $ 0.09 $ 0.09 $ 0.24
F-18
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 11: Convertible Shares of Subsidiary
The shareholders of the Company's majority-owned subsidiary, Maui Tacos, hold
common stock in Maui Tacos that is convertible into Blimpie common stock,
according to the terms stipulated in the Maui Tacos shareholder Agreement, as
amended. Such agreement states that during the period commencing with the first
day of Maui Tacos' third full fiscal year of operations (July 1, 2000) and
ending with the ninetieth day after the Company files its annual financial
statements, all Maui Tacos shareholders, except for the Company, have the right
to convert all or a portion of their respective shares of Maui Tacos common
stock into Company stock, pursuant to a formula calculated by dividing the lower
of Maui Tacos' current or prior year earnings per share value by the Company's
earnings per share value for the same period. The conversion privileges held by
the Maui Tacos shareholders are subject to limitations on the number of shares
of Company stock that are subject to such conversion rights, both for individual
Maui Tacos shareholders and for aggregate levels of conversions. Maui Tacos
incurred losses in both the current and prior year, and therefore no shares may
be converted pursuant to such formula.
Note 12: Employee Benefit Plan
The Company maintains a 401(k) Profit Sharing Plan (the "Plan") available to
substantially all employees. Under the Plan, the Company can elect to make
matching contributions of up to 100% of the elective deferral contributions.
During the years ended June 30, 2000, 1999, and 1998, the Company made matching
contributions of 20% of the elective deferral contributions. The matching
contributions charged to earnings were $76,000, $66,000, and $53,000 for fiscal
2000, 1999 and 1998, respectively. At June 30, 2000 and 1999, the Plan held
approximately 47,000 and 19,000 shares, respectively, of the Company's common
stock with a fair value of approximately $85,000 and $52,000, respectively. The
Plan received approximately $2,200 and $300 in dividends on Company shares in
fiscal 2000 and 1999, respectively.
Note 13: Business Segment Information
The Company's separately identifiable segments relate to: franchise
operations, store design services and equipment sales, and restaurant operations
of the Company-owned MAUI TACOS and SMOOTHIE ISLAND JUICE BAR restaurants.
During 1996, the Company began operations outside of the United States. As of
June 30, 2000, the Company has master licenses operating in Argentina, Bahrain,
Canada, Cyprus, Dominican Republic, Great Britain, Greece, Guam, Kuwait, Mexico
(primarily states in the northeastern part of the country), Northern Ireland,
Oman, Panama, Poland, Portugal, Puerto Rico, Qatar, The Republic of Ireland,
Romania, Saipan, Saudi Arabia, South Africa, United Arab Emirates, Uruguay, and
Venezuela. Franchisees are operating in the following countries: Argentina,
Canada, Cyprus, Dominican Republic, Great Britain, Panama, Poland, Portugal,
Puerto Rico, Romania, Saudi Arabia, South Africa, and Venezuela. There were no
capital expenditures outside of the United States in 2000, 1999, or 1998.
F-19
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 13: Business Segment Information (continued)
Financial information by identifiable segments is as follows for the years
ended June 30:
Operating Depreciation
Income Identifiable and
2000 Revenue (Loss) Assets Amortization
------------ ----------- ------------ ------------
Franchise operations:
United States $23,337,000 $2,584,000 $21,815,000 $726,000
International 415,000 (547,000) 1,556,000 105,000
Equipment and design 6,407,000 44,000 2,531,000 50,000
Company restaurants 858,000 (553,000) 1,158,000 60,000
------------ ----------- ------------ -----------
$31,017,000 $1,528,000 $27,060,000 $941,000
============ =========== ============ ===========
1999
Franchise operations:
United States $23,043,000 $1,577,000 $24,448,000 $674,000
International 760,000 (394,000) 1,454,000 101,000
Equipment and design 9,409,000 (46,000) 2,127,000 56,000
Company restaurant 338,000 (4,000) 229,000 15,000
============ =========== ============ ===========
$33,550,000 $1,133,000 $28,258,000 $846,000
============ =========== ============ ===========
1998
Franchise operations:
United States $22,068,000 $2,309,000 $24,584,000 $525,000
International 663,000 (314,000) 1,127,000 121,000
Equipment and design 14,376,000 1,083,000 2,513,000 60,000
------------ ------------ ----------- -----------
$37,107,000 $3,078,000 $28,224,000 $706,000
============ =========== ============ ===========
Note 14: Subfranchisor Fees and Franchise Revenue
Franchise Fees and Costs
The initial non-refundable fee for franchisees that have previously never
owned a traditional BLIMPIE or MAUI TACOS restaurant is $18,000 and $20,000,
respectively. MAUI TACOS agreements include franchise rights to SMOOTHIE ISLAND.
BLIMPIE franchisees may purchase a SMOOTHIE ISLAND franchise for $1 to $2,500.
These fees generally are payable in cash at the time of execution of the
franchise agreement. Additional franchises are awarded at lesser amounts based
upon the number of units awarded. The initial non-refundable franchise fee for
nontraditional BLIMPIE restaurants, such as those in convenience stores,
institutional food service entities, colleges, schools, mass feeders, hospitals
and others range from $1.00 to $18,000 (depending upon the number of
nontraditional restaurant transactions executed, the location of the
nontraditional franchised restaurant, the marketing area and other subjective
matters). The Company reserves the right to issue franchises to its
subfranchisors or their designees for $1.00 to $5,000 each in order to
accelerate the development of the area of the subfranchisor. The Company defers
recognition of the revenues and costs related to these transactions until the
restaurant is opened.
The number of franchised BLIMPIE restaurants open as of June 30, 2000, 1999,
and 1998 were 1,990 (1,933 United States, 57 International), 2,097 (2,040 United
States, 57 International), and 1,972 (1,935 United States, 37 International),
respectively. There were five PASTA CENTRAL locations co-branded with BLIMPIE
locations as of June 30, 2000 and three as of June 30, 1999. There were eight
MAUI TACOS restaurants operating as of June 30, 2000, five of which were
franchised and three of which the Company had full or partial ownership. There
was one Company-owned MAUI TACOS restaurant
F-20
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 14: Subfranchisor Fees and Franchise Revenue (continued)
Franchise Fees and Costs (continued)
operating as of June 30, 1999. There were 50 SMOOTHIE ISLAND locations co-
branded with either a BLIMPIE or MAUI TACOS restaurant as of June 30, 2000, and
30 as of June 30, 1999. There were three Company-owned SMOOTHIE ISLAND JUICE BAR
locations operating as of June 30, 2000.
The following is a summary of the deferred franchise revenues and costs.
Number
Revenues Costs of Units
----------- ----------- ----------
Balance June 30, 1997 $ 3,541,000 $ 2,688,000 773
Franchises awarded 2,672,000 2,092,000 439
Revenue recognized (3,308,000) (2,556,000) (697)
----------- ----------- ----------
Balance June 30, 1998 2,905,000 2,224,000 515
Franchises awarded 2,209,000 1,221,000 311
Revenue recognized (2,592,000) (1,888,000) (470)
----------- ----------- ----------
Balance June 30, 1999 2,522,000 1,557,000 356
Franchises awarded 1,319,000 758,000 236
Revenue recognized (1,939,000) (1,153,000) (316)
----------- ----------- ----------
Balance June 30, 2000 $ 1,902,000 $ 1,162,000 276
=========== =========== ==========
According to the terms of signed agreements between the Company and its
franchisees, the Company is obligated, among other things, to supply to the
franchisee logo types, dies, mats, etc., of its trademarks, along with sets of
materials, manuals and forms at a price equivalent to the Company's cost for
such materials, and certain training and continued support. The Company, in
conjunction with the subfranchisors and master licensors, assists in the
selection and purchase of equipment and helps the franchisee to obtain financing
of the initial cost of franchising. Subfranchisors and master licensors are
responsible for providing day-to-day operational support for BLIMPIE and MAUI
TACOS franchise restaurants in their territory, and in return receive
compensation approximating half of the fees collected from the individual
BLIMPIE and MAUI TACOS franchises. These services are performed under the
Company's supervision.
Subfranchisor and Master Licensor Fees
The subfranchisor and master licensor fee ranges from $10,000 to $575,000.
These fees typically are established by calculating the population of the area
of the subfranchisor or master licensor and multiplying the population by $0.10
for the United States and $0.01 to $0.10 for International. Subfranchisors and
master licensors in operation as of June 30, 2000, 1999 and 1998 were 107 (85
United States, 22 International), 106 (85 United States, 21 International) and
105 (86 United States, 19 International), respectively. During the year ended
June 30, 1995, the Company implemented new subfranchisor agreements that provide
for annual renewals. Pursuant to the new form of agreement, the Company sells a
territory to a subfranchisor or master licensor for a one-year period, followed
by four to ten renewal terms, all but the last of which are annual in duration.
If the subfranchisor or master licensor has met all terms and conditions of the
subfranchise or master license agreement during the initial one year term and
each of the one year renewal terms, a right is granted during the final renewal
term upon payment of the fee set forth in the agreement such that the entire
term of the agreement is 50 to 60 years.
F-21
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 14: Subfranchisor Fees and Franchise Revenue (continued)
Subfranchisor and Master Licensor Fees (continued)
Effective July 1, 1998, the Company changed its accounting policy related to
the recognition of subfranchisor and master licensor fees (see Note 2). This
change was accounted for as a cumulative effect adjustment in fiscal 1999, as
reflected in the table below. The following is a summary of the remaining
deferred subfranchisor fees:
Revenues Costs
----------- ----------
Balance June 30, 1997 $ 472,000
Subfranchisor fees 32,000
Contracts amended (180,000)
Revenue recognized (269,000)
-----------
Balance June 30, 1998 55,000
Cumulative effect of accounting change 6,840,000 $1,652,000
Sales of subfranchises and
master licenses 805,000 133,000
Revenue recognized (1,437,000) (267,000)
----------- ----------
Balance June 30, 1999 6,263,000 1,518,000
Sales of subfranchises and
master licenses 891,000 62,000
Revenue recognized (1,565,000) (302,000)
----------- ----------
Balance June 30, 2000 $ 5,589,000 $1,278,000
=========== ==========
Note 15: Earnings Per Share
Earnings per share on a basic and diluted basis is calculated as follows:
2000 1999 1998
---------- ---------- ----------
Income before cumulative effect of change
in accounting principle $1,095,000 $1,156,000 $2,444,000
========== ========== ==========
Calculation of weighted average shares
outstanding plus assumed exercises:
Weighted average basic shares outstanding 9,446,000 9,467,000 9,533,000
Effect of dilutive employee stock options 7,000 5,000 16,000
---------- ---------- ----------
Weighted average diluted shares outstanding 9,453,000 9,472,000 9,549,000
========== ========== ==========
Basic earnings per share before cumulative effect
of change in accounting principle $ 0.12 $ 0.12 $ 0.26
========== ========== ==========
Diluted earnings per share before cumulative effect
of change in accounting principle $ 0.12 $ 0.12 $ 0.26
========== ========== ==========
Certain options outstanding during each of the following years and their
related exercise prices were not included in the computation of diluted earnings
per share before cumulative effect of change in accounting principle because
their exercise price was greater than the average market price of the shares
and, therefore, the effect would be antidilutive: fiscal 2000 - 603,000 shares
at prices ranging from $2.69 to $14.75, fiscal 1999 - 590,000 shares at prices
ranging from $3.03 to $14.75, and fiscal 1998 - 182,000 shares at prices ranging
from $5.50 to $14.75.
F-22
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 16: Quarterly Information (Unaudited)
The following table sets forth a summary of the unaudited quarterly results of
operations for the twelve month periods ended June 30, 2000 and June 30, 1999.
Quarter
-------------------------------------------------------------------------------
2000 First Second Third Fourth Total
------------------ ----------------- ----------------- ----------------- -----------------
Total revenues $ 8,402,000 $7,191,000 $7,249,000 $8,175,000 $31,017,000
Gross profit 3,355,000 3,286,000 3,047,000 3,134,000 12,822,000
Net income 283,000 466,000 263,000 83,000 1,095,000
Earnings per share:
Basic and diluted $ 0.03 $ 0.05 $ 0.03 $ 0.01 $ 0.12
1999
Total revenues $ 8,614,000 $8,584,000 $7,798,000 $8,554,000 $33,550,000
Gross profit 3,250,000 3,287,000 3,348,000 3,404,000 13,289,000
Income (loss) before
cumulative effect of
change in
accounting principle 473,000 588,000 530,000 (435,000) 1,156,000
Net income (loss) (2,900,000) 588,000 530,000 (435,000) (2,217,000)
Earnings (loss) per share before
cumulative effect of change in
accounting principle:
Basic and diluted $ 0.05 $ 0.06 $ 0.06 $ (0.05) $ 0.12
The fourth quarter of fiscal 1999 included provisions, net of tax, of
approximately $255,000 to increase the allowance for doubtful accounts, $325,000
for additional professional fees and legal settlements, $260,000 write-down of
deferred franchise fees, and $100,000 write-off of start-up costs.
The quarterly amounts shown for fiscal 1999 above differ from those reported
in the Form 10-Q filed for each of the first, second and third quarters. The
amounts originally reported were adjusted to reflect the retroactive application
of changing to a different subfranchisor and master license fee revenue
recognition method (Note 2). Additionally, the amounts shown above for the
first, second and third quarters of fiscal 1999 differ from those reported in
the respective Form 10-Q due to a reclassification of certain management fees
from Management fees and other income to Selling, general and administrative
expenses, and for a reclassification of Company restaurant sales and Restaurant
operations from Management fees and other income to separate classification in
the Statements of operations and comprehensive income (loss).
F-23
Report of Independent Accountants
To the Board of Directors and Shareholders
Blimpie International, Inc. and Subsidiaries:
In connection with our audit of the consolidated financial statements of Blimpie
International, Inc. and Subsidiaries as of June 30, 1998 and for the year then
ended, which financial statements are included in this Annual Report of Form
10-K, we have also audited the financial statement schedule on page F-25 herein.
In our opinion, this financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
/s/PricewaterhouseCoopers LLP
-----------------------------
Atlanta, Georgia
August 17, 1998
F-24
Blimpie International, Inc. and Subsidiaries
SCHEDULE II
CONSOLIDATED SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
- ------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
-------------------------------------------------------------------------
Balance at Charged to Charged to Balance at
Beginning Cost and Other End of
Description of Period Expenses Account Deductions Period
Year ended June 30, 2000
Accounts receivable $ 392 $ - $ 102 (1) $ 242 $ 252
Notes receivable 81 6 21 26 82
Year ended June 30, 1999
Accounts receivable 207 306 - 121 392
Notes receivable 65 101 - 85 81
Year ended June 30, 1998
Accounts receivable 83 147 - 23 207
Notes receivable 60 5 - - 65
(1) Represents amounts recorded as receivables but fully reserved at inception
due to collectibility concerns.
F-25