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, 1999
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 |_| No |X|
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 November 15, 1999 was approximately
$8,027,000. Solely for purposes of the foregoing calculation all of the
registrant's directors and officers are deemed to be affiliates.
There were 9,470,926 shares of the registrant's common stock outstanding as of
November 15, 1999.
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Table of Contents
Item
Number Page
- ------ ----
PART I 3
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 6
The Maui Tacos Outlet Franchise 6
Our Subfranchises and Master Licenses 6
Services to Franchisees 7
Outlet Properties 8
Outlet Locations 10
Government Regulation 10
Trademarks, Trade Names, Service Marks and
Logos; Know-How and Methods of Operation 11
Research and Development 13
Business Expansion 13
Competition 15
Employees 15
2. Properties 16
3. Legal Proceedings 16
3a. Our Executive Officers 17
4. Submission of Matters to a Vote of Security Holders 19
PART II
5. Market for Common Equity and Related Stockholder Matters 19
6. Selected Financial Data 20
Management's Discussion and Analysis of Financial
7. Condition and Results of Operations 21
8. Financial Statements 29
Changes in and Disagreements With Accountants on
9. Accounting and Financial Disclosure 29
PART III
10. Directors, Executive Officers 30
11. Executive Compensation 30
Security Ownership of Certain Beneficial Owners and
12. Management 32
13. Certain Relationships and Related Transactions 33
PART IV
Exhibits, Financial Statements, Schedules and Reports of
14. Form 8-K 36
14(a)(1) Financial Statements 36
14(a)(2) Financial Statement Schedule 36
14(a)(3) Exhibits 36
14(b) Reports on Form 8-K 39
SIGNATURES 40
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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(R) Subs &
Salads and PASTA CENTRAL(TM) brands directly through our Company, and we
franchise the MAUI TACOS(TM) and SMOOTHIE ISLAND(TM) 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 2,100 franchise outlets operating throughout the United States
and in 13 other countries. Blimpie(R) is our registered trademark. Unless
otherwise specified, the term "Blimpie" includes Blimpie(R). As of June 30,
1999, there were three Pasta Central restaurants operating in the United States
and Puerto Rico, one Company-owned Maui Tacos restaurant located in Atlanta,
Georgia and 30 Smoothie Island locations located throughout the United States.
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.
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
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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 2,097
outlets located in 46 states, Argentina, Canada, Cyprus, Dominican Republic,
Jordan, Panama, Poland, Portugal, Saudi Arabia, South Africa, Spain, Venezuela,
and Great Britain (as of June 30, 1999). 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, Service Marks, Trade Names 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 "new-concept" 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. One such program involves the sale of a
limited number of prepared Blimpie sandwiches and salads maintained in
"Grab'nGo" refrigeration cases at Company-approved "distribution points"
operated by franchisees and non-franchisees. There are approximately 200
Grab'nGo locations operating in the United States. Currently, we are developing
new types of carts, kiosks, vending machines and other mobile branded product
delivery systems. We further anticipate the development of a format that would
allow the sale of some of our branded products at supermarkets and other retail
locations.
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 new-concept franchise can range
between $1.00 and $15,000 depending on the number of new-concept transactions
executed, the location of the new-concept 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
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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 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.
International franchisees pay continuing franchise fees of 8% and advertising
contributions of 2%. Currently, we are considering changing the allocation of
these advertising contributions for our domestic markets. In the upcoming year,
we expect to increase the percentage of the advertising contributions which are
used in the local marketing areas, and to decrease the percentage used for
national advertising. The total advertising contributions by franchisees will
remain unchanged as a percentage of their weekly gross sales.
Financial Information About Business Segments
See Note 14 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 which 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 $3.89, while in Atlanta, Georgia, the same sandwich may be
purchased for $2.89.
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.
5
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.
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 which 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. 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. 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
6
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 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, 1999 there were 85 existing domestic Blimpie
subfranchisors, at least one of which is located in each of the 46 states in
which the 2,040 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 19 Blimpie outlets are located;
one Blimpie subfranchisor in Puerto Rico in which three Blimpie outlets are
located; and 15 Master Licensors for the countries of Argentina, Bahrain,
Cyprus, Dominican Republic, Egypt, Great Britain, Greece, Jordan, Kuwait,
Lebanon, Northern Ireland, Oman, Panama, Peru, Poland, Portugal, Qatar, The
Republic of Ireland, Romania, Saudi Arabia, South Africa, Spain, United Arab
Emirates, Uruguay and Venezuela in which collectively there are 35 outlets
located. Included in these Blimpie outlets were three Blimpie / Pasta Central
co-branded outlets, one each in Idaho, Missouri and Puerto Rico.
Also as of June 30, 1999, there were five domestic Maui Tacos
subfranchisors and one Company-owned outlet in operation.
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) forty hours of pre-training classes at an existing outlet
approved by us, (ii) one week of classroom training at our Georgia training
center, and (iii) an additional 80 hours of operational post-training at an
existing outlet
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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.
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 which 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
8
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 2,097 existing Blimpie and Blimpie / Pasta Central outlets and
the one Maui Tacos outlet (as of June 30, 1999) are operating in premises
located in free-standing buildings, shopping malls, shopping centers, in-line
urban store clusters, convenience stores, institutional food service 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.
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Outlet Locations
As of June 30, 1999, we operated one Maui Tacos outlet in Atlanta,
Georgia. The following table sets forth the number of Blimpie franchised outlets
in operation as of June 30, 1999, and includes three co-branded Blimpie / Pasta
Central locations, which were located in Idaho, Missouri and Puerto Rico:
Number
of
Location Outlets
United States outlets:
Alabama 23
Alaska 7
Arizona 79
Arkansas 26
California 80
Colorado 44
Connecticut 35
Florida 189
Georgia 205
Hawaii 9
Idaho 16
Illinois 39
Indiana 60
Iowa 64
Kansas 15
Kentucky 29
Louisiana 46
Maine 3
Massachusetts 5
Michigan 87
Minnesota 31
Mississippi 15
Missouri 60
Montana 7
Nebraska 26
Nevada 30
New Hampshire 2
New Jersey 51
New Mexico 13
New York 85
North Carolina 70
North Dakota 6
Ohio 93
Oklahoma 13
Oregon 15
Pennsylvania 50
Rhode Island 7
South Carolina 56
South Dakota 3
Tennessee 76
Texas 135
Utah 36
Washington 38
West Virginia 18
Wisconsin 32
Wyoming 11
-----
United States total 2,040
-----
International outlets:
Argentina 8
Canada 19
Cyprus 3
Dominican Republic 1
Jordan 2
Panama 2
Peru 0
Poland 3
Saudi Arabia 3
South Africa 2
Spain 1
Great Britain 4
Portugal 1
Venezuela 5
Puerto Rico 3
-----
International total 57
-----
Total 2,097
=====
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
10
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 which 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
new-concept 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
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 which 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.
11
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 the Counties of
Morris, Warren, Sussex, Bergen, Passaic and Essex, but including the Cities of
Alpine, Belville, Cliffside Park, Cloister, Cresskill, Demarest, Dumont, East
Rutherford, Edgewater, Englewood, Englewood Cliffs, Fairview, Fort Lee,
Hackensack, Harrington Park, Haworth, Old Tappan, Northvale, Nutley, Norwood,
Palisades Park, Paterson, Ridgefield, Ridgefield Park, Rock Leigh, Rutherford,
South Hackensack and Tenafly), 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, including the counties
of Monterrey, San Benito, Santa Cruz, Santa Clara, San Mateo, Alameda, Mariposa,
San Francisco, Contra Costa, Marin Novato, Mono, Tudumne, Calaveras, Napa,
Solano, Sonoma, Amedor, Alpine, Sacramento, Yolo, Sutter, El Dorado, Placer,
Colusa, Nevada, Lake, Yuba, Mendocino, Glenn, Sierra, Butte, Tehama, Plumas,
Humboldt, Trinity, Shasta, Lassen, Del Norte, Siskiyou and Modoc. 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, 1999, we paid approximately
$3,365,000 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.
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
12
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 any of our
trademarks in any territory where any of our franchisees has established or
attempted to establish operations which 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, 1999, we were participants
in the financing of 60 of such equipment leases totaling $497,000. We believe
that such programs will result in an increase in financing profits and an
increase in franchise sales due to the greater availability of equipment to new
and existing franchisees. However, no assurances can be given in that regard.
Domestic Expansion. We plan to grow through continued development of
traditional and new-concept 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, commencing a 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, 1999, 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, Egypt,
Great Britain, Greece, Jordan, Kuwait, Lebanon, Northern Ireland, Oman, Panama,
Peru, Poland, Portugal, Puerto Rico, Qatar, The Republic of Ireland, Romania,
Saudi Arabia, South Africa, Spain, United Arab Emirates, Uruguay and Venezuela.
The master licensor for Puerto Rico has 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.
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.
13
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 intend
to expand 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 which
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, 1999, five subfranchise territories have been
awarded in the United States. The first company-owned restaurant is operating in
Atlanta, with leases signed on three other locations in New York, North
Carolina, and Delaware.
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 lunch time. 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. The first
location opened in Missouri in March of 1999, with two subsequent locations
opened in Idaho 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, 1999, there were 30 locations open and operating in 17
states and in Puerto Rico. We currently are developing a stand-alone Smoothie
Island Juice Bar location in Houston, Texas which will 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 which will exceed the
initial revenues derived. Furthermore, no assurances can be given that we will
be able to develop 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
14
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(R) 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, 1999, we employed 118 full-time employees (including eleven
officers). Twenty-two employees (including six officers) attend to our
franchisee operations support, executive management and legal staffing needs at
our New York City office; 16 employees (including one officer) provide
construction and design and franchisee operations support services at our
Houston, Texas office; and 80 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, seven 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 is 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.
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.
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
15
Corporation. The monthly payments under this lease currently approximate $21,439
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. The building was purchased by us in 1984 for
$80,855 and is currently subleased 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 AAA entitled Trafalgar Holdings, LLC, et al v. Blimpie
International, Inc. (case no. 54 114 00384 99). The claimants seek compensatory
damages in excess of $350,000 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. The
demand seeks rescission of claimant's franchise agreements, restitution of
monies spent by the claimant and consequential damages amounting to
approximately $737,000 and injunctive relief. A decision in favor of the
claimant in the amount of approximately $200,000, plus expenses to be borne by
us in the amount of approximately $15,000 was rendered in October, 1999. We
accrued a charge for the payment we must make pursuant to the arbitrator's
decision in our audited financial statements for the year ended June 30, 1999.
An arbitration proceeding was commenced in March 1999 in the New York, New
York office of the AAA entitled B.A.E. Enterprises, Inc., et al v Blimpie
International, Inc. The claimants, who formerly operated a Blimpie franchise in
Harris, Texas, allege we violated the Texas Deceptive Trade Practices Act, and
committed fraud and breach of contract based upon alleged misrepresentations and
omissions in the sale of their franchise. Claimants allege that they suffered
damages in the amount of $100,000 (which they are seeking to treble under the
Texas Deceptive Trade Practices Act). A hearing, at which we denied all
liability and vigorously defended our position, was held with respect to the
claim in late September 1999. As of the date of this report, no decision has
been issued.
An arbitration proceeding was commenced in November 1998 in the New York,
New York office of the AAA entitled Mohinder Parkash and Satish Walia v Blimpie
International, Inc. (case no.
16
131140120698). The claimants, who formerly operated a Blimpie outlet in
Waterford, Michigan, claim that we breached our franchise agreement with them by
opening another Blimpie outlet within two miles of their outlet, and by failing
to assist the claimants with operational and financial problems. The claimants
have demanded damages in excess of $450,000, plus attorneys fees and costs. A
three day hearing, at which we denied all liability and vigorously defended our
position, was held in October 1999. A fourth day of hearings has been scheduled
in December 1999.
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 59 President and Chief Executive Officer
David L. Siegel 55 Chief Operating Officer and General Counsel
Patrick J. Pompeo 60 Executive Vice President, Research and Development
Charles G. Leaness 49 Executive Vice President - Senior Corporate
Counsel and Secretary, Chief Executive Officer,
Maui Tacos International, Inc.
Joseph A. Conza 45 Senior Vice President, President - B I Concept
Systems, Inc.
Robert S. Sitkoff 46 Senior Vice President, President - Maui Tacos
International, Inc.
Joseph W. Morgan 37 Senior Vice President, President - Blimpie Subs &
Salads
Brian D. Lane 37 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.
17
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, and of Manhattan Maui, Inc., our
subfranchisor for Maui Tacos for the County of New York in New York State. 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 B I 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
(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.
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
18
No matters were submitted to a vote of our security holders during the
fourth quarter of our fiscal year ended June 30, 1999.
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, 1998 and 1999 were as follows:
Quarter-End High Low Close
----------- ---- --- -----
9/97 5.500 4.500 4.625
12/97 5.500 3.188 3.438
3/98 4.438 3.500 4.438
6/98 4.375 3.000 3.063
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
As of November 15, 1999, there were 546 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 fiscal year ended June 30,
1994 (the "1994 Stock Split"). During the fiscal years ended June 30, 1995,
1996, 1997, 1998 and 1999 we paid cash dividends aggregating $.05 $.06, $.07,
$.07 and $.07 per share, respectively. 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, 1997, 1998 and 1999, 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,
--------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------------
(Dollars in 000's, Except Per Share and Outlets Open Data)
Revenues (a) $ 33,550 $ 37,107 $ 37,337 $ 34,235 $ 25,887
Continuing Fees 18,956 17,343 15,391 12,465 8,734
Income before cumulative effect of change
in accounting principle 1,156 2,444 3,278 4,040 2,340
Cumulative effect adjustment (3,373) -- -- -- --
Net (loss) income (2,217) 2,444 3,278 4,040 2,340
Basic earnings per share before cumulative
effect adjustment $ 0.12 $ 0.26 $ 0.34 $ 0.43 $ 0.27
Diluted earnings per share before cumulative
effect adjustment $ 0.12 $ 0.26 $ 0.34 $ 0.41 $ 0.27
Basic (loss) earnings per share $ (0.23) $ 0.26 $ 0.34 $ 0.43 $ 0.27
Diluted (loss) earnings per share $ (0.23) $ 0.26 $ 0.34 $ 0.41 $ 0.27
Pro forma amounts assuming the new revenue
recognition method is
19
applied retroactively (b):
Net income $ 1,156 $ 2,428 $ 2,816 $ 2,940 $ 1,790
Basic earnings per share $ 0.12 $ 0.25 $ 0.30 $ 0.31 $ 0.21
Diluted earnings per share $ 0.12 $ 0.25 $ 0.29 $ 0.30 $ 0.21
Total assets $ 28,258 $ 28,323 $ 27,704 $ 21,823 $ 15,252
Long term debt -- -- -- 5 13
Long term trademark obligations 204 3,408 3,509 -- --
Total shareholders' equity 18,107 20,625 18,865 15,675 7,308
Cash dividends declared per
common share $ 0.07 $ 0.07 $ 0.07 $ 0.06 $ 0.05
Outlets open at end of year 2,097 1,972 1,684 1,407 986
- ---------------------
(a) Results for fiscal 1998, 1997, 1996 and 1995 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, 1996 and 1995
20
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
We have centered our operations around the Blimpie Subs & Salads chain of
quick service restaurants. We and our subfranchisors have more than doubled the
number of operating restaurants over the past four years, increasing from 986
restaurants at June 30, 1995 to 2,097 restaurants at June 30, 1999. Continuing
fees based upon each franchisee's gross sales have increased 117.0% in the same
time period, increasing from $8.7 million in fiscal 1995 to $19.0 million in
fiscal 1999. In fiscal 1996, we achieved record profitability by generating over
$4 million in net income and $0.41 per diluted share. Despite the continued
increases in the number of restaurants and in continuing fees, our profitability
declined in each year subsequent to 1996 due primarily to a decrease in revenues
from the sale of subfranchise territories and fewer new outlet openings.
Generally, we pay our subfranchisors approximately half of the continuing
fees and franchise fees we receive, and we realize a low gross margin on
equipment sales. Sales of subfranchises and master licenses are our most
profitable sources of revenue, since the only direct expense for such sales is
commissions and trademark license fees of approximately 24% of the related
revenues. During fiscal 1996, we recognized over $3.1 million in subfranchise
and master license fees, but this amount declined to $2.3 million in fiscal 1997
and $1.4 million in fiscal 1998. Since most of the available domestic Blimpie
subfranchise territories had been sold, we began focusing on the international
market beginning in fiscal 1996. Sales of master license territories were strong
in fiscal 1997, but decreased in fiscal 1998 and fiscal 1999 as we focused on
assisting our existing Master Licensors in developing their territories. While
we believe that the international marketplace represents a vast potential for
growth, there are many barriers to success in this arena, and no assurances can
be given that we will be successful in our attempt to develop outside of the
United States.
Faced with declining profitability despite the consistent growth in the
number of Blimpie outlets and continuing fees, we began to develop several new
initiatives, the most notable of which was the introduction of three new brands.
During fiscal 1998, we restructured our management personnel in order to provide
better support to our subfranchisors and franchisees in the Blimpie Subs &
Salads Group, as well as to allow others to focus on building new franchise
opportunities. We believe that we can continue to improve our Blimpie Subs &
Salads operations while using our franchising expertise to introduce new
franchise concepts that complement the Blimpie brand. The development of new
franchise concepts is an expensive endeavor. We have incurred additional
expenses in fiscal 1998 and fiscal 1999 relating to these efforts, and will
continue to incur similar costs in fiscal 2000 and beyond.
We believe that our three new concepts, Maui Tacos(TM), Pasta Central(TM),
and Smoothie Island(TM), will be well received and that the Blimpie brand will
continue to be successful. Looking forward, we anticipate that fiscal 2000 will
include many changes in our operations. We are already operating the first Maui
Tacos store, and we expect to generate store sales and store costs associated
with the operation of that store as well as future Company-owned outlets. In
addition, all three new concepts are expected to generate new revenues in fiscal
2000, and to continue to increase selling, general and administrative expenses
through additional personnel, legal and advertising costs necessary to support
these initiatives.
21
No assurance can be given that the introduction of these concepts will result in
increased revenues, or that such revenues, if received, will exceed the related
costs.
Results Of Operations
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.
22
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 $ -0- $ 791 n/a
Master license fees -0- 575 n/a
Amortization of deferred subfranchise
and master license fees 1,170 -0- n/a
Franchise fees 2,713 3,169 -14.4%
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 $1,119,000 in fiscal 1998
as compared to $1,170,000 in fiscal 1999, or an increase of 4.6% 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 14.4% 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 27 countries,
and 57 Blimpie outlets operating in 13 of these countries. Our focus in 2000
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 increments in
revenue.
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. We believe this expansion will
continue to increase the percentage of outside sales; however, no assurances can
be given that this expansion will generate any additional revenue or net income.
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.
23
Company restaurant sales were $338,000 for the portion of fiscal 1999 that the
outlet was in operation. We intend to continue to open and operate a limited
number of Company-owned outlets for Maui Tacos and possibly for co-branded
Blimpie / Pasta Central / Smoothie Island locations.
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 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. However, we also believe the additional fiscal 1999 expenses noted above
will not be incurred again in fiscal 2000. Therefore, we expect selling, general
and administrative expenses will decrease in fiscal 2000, but no assurance can
be made that such decrease will be realized.
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, and we believe that the
outlet will be profitable in fiscal 2000. However, no assurances can be made
that the outlet will be profitable or will remain in operation in the coming
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."
24
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.
Fiscal Year Ended June 30, 1998 Compared With Fiscal Year Ended June 30, 1997.
Our net income decreased 25.4% to $2,444,000 in fiscal 1998 from
$3,278,000 in fiscal 1997. Our basic and diluted earnings per share decreased
23.5% to $0.26 per share in fiscal 1998 from $0.34 per share in fiscal 1997.
Such decreases are attributable primarily to decreases in subfranchise, master
license and franchise fees, and an increase in selling, general and
administrative expenses, all of which are discussed below.
Our continuing fees derived from franchises increased 12.7% to $17,343,000
in fiscal 1998 from $15,391,000 in fiscal 1997. This increase was due to the
17.1% increase in the number of open outlets from 1,684 at June 30, 1997 to
1,972 at June 30, 1998. Continuing fees increased at a slower rate than the rate
of outlet openings primarily because a greater percentage of the new outlets
were "new concept" outlets which have lower average unit volumes than
traditional outlets. New concept outlets include those located in convenience
stores, institutional food service facilities, colleges, schools, mass feeders,
hospitals, bowling alleys, golf courses and subway stations.
Subfranchisor fees, master license fees and fees from the sales and
resales of franchises decreased 23.5% to $4,983,000 in fiscal 1998 from
$6,516,000 in fiscal 1997. The following table summarizes the components of
these fees for fiscal 1998 and 1997:
Year Ended June 30,
(amounts in 000's) 1998 1997 Change
----------------------------
Subfranchisor fees $ 791 $ 969 -18.4%
Master license fees 575 1,368 -58.0%
Franchise and resale fees 3,617 4,179 -13.4%
============================
Total $4,983 $6,516 -23.5%
============================
Subfranchise fees decreased 18.4% due to fewer expansions of existing
territories and lower deferred subfranchise fees recognized in fiscal 1998
compared to fiscal 1997. Master license fees decreased 58.0% from fiscal 1997 to
fiscal 1998. In fiscal 1997, we granted development rights for 17 international
territories, including 16 countries and the Canadian province of Ontario. In
fiscal 1998, we granted development rights for four international territories,
including Panama, Portugal, Puerto Rico and the Canadian province of Manitoba.
This reduction in the number of master licenses sold was due to a shift in focus
from selling new territories to helping existing Master Licensors to develop
their respective territories. Revenues from sales of franchises and resale fees
decreased 13.4% in fiscal 1998 due primarily to a greater percentage of the new
outlets being "new concept" outlets, which generally have a lower franchise fee
per outlet. The number of new outlets opened increased 6.6% to 454 new outlets
in fiscal 1998 from 426 in fiscal 1997.
As of June 30, 1998, we had Master Licensors operating in 26 countries,
and 37 Blimpie outlets operating in 12 of these countries. Our focus in 1999
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 increments in
revenue.
Store equipment sales decreased 3.8% to $14,374,000 in fiscal 1998 from
$14,935,000 in fiscal 1997. This slight decrease was due to a greater percentage
of the new franchises being "new concept"
25
franchises, which typically purchase less equipment than traditional locations.
The decrease in sales to Blimpie franchises was partially offset by an increase
in sales to non-affiliates. In fiscal 1998, we expanded our equipment sales
department in Houston in order to sell equipment to franchisees of other chains.
For that year, such activities accounted for 3.0% of total equipment sales. We
believe this expansion will continue to increase revenue and in turn net income,
however no assurances can be given that this expansion will generate any
additional revenue or net income.
License fees and other income for the year ended June 30, 1998 decreased
17.8% to $407,000 from $495,000 in fiscal 1997. This decrease resulted primarily
from lower management fees from franchisees relating to services provided to the
advertising associations.
The Subfranchisors' shares of continuing and franchise fees increased 4.6%
to $11,188,000 in fiscal 1998 from $10,692,000 in fiscal 1997. 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 12.7% increase in continuing fees. Another
component of this expense is the subfranchisor's share of franchise and resale
fees. This share generally amounts to 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 1998 from fiscal 1997. 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 revenues earned in all international markets and certain
domestic markets, which consisted of all or a portion of 13 states in which we
had open franchises as of June 30, 1998. 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 $837,000 in fiscal 1998 from $968,000 in
fiscal 1997 due primarily to the decrease in master license and subfranchise
fees. In fiscal 1997, a trademark license fee totaling $134,000 also was paid to
Anthony P. Conza, our Chairman and Chief Executive Officer, and David L. Siegel,
our Vice Chairman and Chief Operating Officer, amounting to 30% of all
international revenues, net of direct expenses. This trademark license fee was
discontinued in February 1997, when we acquired the international trademark
rights owned by these individuals.
Store equipment cost of sales decreased 6.4% to $12,192,000 in fiscal 1998
from $13,024,000 in fiscal 1997. This decrease was due to the 3.8% decrease in
store equipment sales, combined with an improvement in the profit margin on the
sales. The gross margin on store equipment sales increased to 15.2% in fiscal
1998 from 12.8% in fiscal 1997 due to a small price increase in fiscal 1998 and
a favorable product mix.
Selling, general and administrative expense rose 15.5% to $10,649,000 in
fiscal 1998 from $9,218,000 in fiscal 1997. This increase was due primarily to
additional personnel and related costs associated with the 17.1% 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.
Management believes 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. Therefore, management expects selling,
general and administrative expenses will continue to increase for at least the
next year.
Interest income in fiscal 1998 decreased by 4.9% to $846,000 from $890,000
in fiscal 1997. This decrease was the result of the selling of a portion of the
U.S. Treasury notes we owned to purchase a portion 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 37.7% in fiscal 1998 and 38.1% in fiscal 1997. The slight
decrease was due to a lower effective state tax rate.
Liquidity And Capital Resources
26
During fiscal years 1999, 1998 and 1997 we did not incur any material
capital commitments. As of June 30, 1999, our working capital was $9,587,000 and
total cash and investments were $10,959,000.
We generated cash flows from operating activities of $3,217,000,
$2,090,000 and $1,919,000 in the fiscal years ended June 30, 1999, 1998 and
1997, respectively. 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 decreases in income taxes payable
and deferred revenues and lower income before cumulative effect of change in
accounting principle. The increase in fiscal 1998 as compared to fiscal 1997 was
due to collections on notes receivable, a decrease in income taxes payable,
lower prepaid expenses and other assets and higher depreciation, partially
offset by lower net income, an increase in accounts receivable, and a decrease
in accounts payable and accrued expenses.
Net cash used in investing activities during fiscal 1999, 1998 and 1997
totaled $1,868,000, $688,000, and $2,096,000, respectively. The greater use of
cash in fiscal 1999 and fiscal 1997 when compared to fiscal 1998 was due to
payments made for international trademark rights.
Net cash used in financing activities during fiscal 1999, 1998 and 1997
totaled $688,000, $913,000, and $619,000, respectively. 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. The increase in the use of cash
from fiscal 1997 to fiscal 1998 was due to the implementation of a plan we
announced in fiscal 1998 to repurchase up to 250,000 shares of our Common Stock.
As of June 30, 1999 we had repurchased 133,000 shares pursuant to this plan.
Currently, the time period allotted for the stock repurchase plan has expired,
and we do not intend to repurchase additional shares. However, we may implement
a new stock repurchase program and continue the repurchase of our Common Stock.
Our primary liquidity needs arise from expansion, capital expenditures and
trademark obligations. 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.
Impact of Year 2000
Our business and our relationships with our business partners and
customers depend significantly on a number of computer software programs,
internal operating systems and connections to other networks. The failure of any
of these programs, systems or networks to successfully address the Year 2000
data rollover problem could have a material adverse effect on our business,
financial condition and results of operations. Many installed computer software
and network processing systems currently accept only two-digit entries in the
date code field and may need to be upgraded or replaced in order to accurately
record and process information and transactions on and after January 1, 2000.
We utilize personal computers that are connected to a network for all of
our employee workstations. These personal computers all utilize Microsoft
Windows NT as their operating system. We believe that the Windows NT operating
system is Year 2000 compliant. Additionally, we recently installed new software
to operate all of our accounting operations. We believe this new software, and
the computer hardware on which it runs, to be Year 2000 compliant. We anticipate
that all accounting operations will be performed using Year 2000 compliant
software before December 31, 1999. The majority of the costs of installing and
implementing the aforementioned software and hardware was incurred prior to June
30, 1999. We anticipate that any additional expenditures to complete the
implementation will be funded from cash flow generated by operations.
We do business primarily with our subfranchisors and franchisees, who in
turn deal with retail customers and food distribution companies. We have
considered the transactions we conduct with our subfranchisors and franchisees
in our analyses of the Year 2000 issue, and believe that we have completed
substantially all modifications to the computer systems used in these
transactions to ensure the systems are Year 2000 compliant. We are not certain
whether the computer software and business systems of our franchisees' suppliers
are Year 2000 compliant. The failure or delay of these distributors to
27
successfully address the Year 2000 issue may result in delays in placing or
receiving orders for goods and services at the store level. Such delays may
result in lost revenues for the franchisees, and in turn, lower continuing fee
revenue for us. We anticipate that such delays and lost revenues, if any, would
be minimal.
We intend to continue to monitor our Year 2000 compliance and to correct
any noncompliance as it is discovered. We anticipate funding such efforts out of
operating cash flow. We believe that the effects of any noncompliance on our
part, or by our customers and suppliers, will not have a material adverse effect
on our business, financial condition, results of operations or cash flows.
28
Item 8. FINANCIAL STATEMENTS
Our financial statements described below and the reports of independent
auditors thereon are set forth following the Index of Financial Statements on
page F-1 of this report:
Reports of independent auditors
Consolidated balance sheets at June 30, 1999 and 1998
Consolidated statements of operations and comprehensive (loss) income for
each of the three years in the period ended June 30, 1999
Consolidated statements of shareholders' equity for each of the three
years in the period ended June 30, 1999
Consolidated statements of cash flows for each of the three years in the
period ended June 30, 1999
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.
29
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. Following is information regarding all of our
non-employee directors.
Alvin Katz, Age 68
Mr. Katz was appointed to our Board of Directors on November 23, 1993. Mr.
Katz has been a member since September 1993 of the Board of Directors of Nastech
Pharmaceutical Company, Inc., a company engaged in the development of
pharmaceuticals. Since 1981, he has served as an adjunct professor of business
management at Florida Atlantic University. In 1991, Mr. Katz was appointed Chief
Executive Officer of Odessa Engineering Corp., a company engaged in the
manufacturing of pollution monitoring equipment. He held this position until
that company was sold in September 1992. Mr. Katz also serves on the Board of
Directors of Amtech Systems Inc. which is engaged in the manufacture of capital
equipment in the chip manufacturing business; and serves as Chairman of the
Board of Ozo Diversified Automation, Inc., a manufacturer of driller and
depaneling machines for circuit board manufacturers. Mr. Katz holds a B.S. in
Business Administration degree from New York University and has done graduate
work at C.U.N.Y.-Baruch School.
Harry G. Chernoff, Age 52
Dr. Chernoff was appointed to our Board of Directors on November 23, 1993.
For more than the past five years, Dr. Chernoff has been a principal of HMS
Properties, Inc., a real estate investment, development and management firm. Dr.
Chernoff has an active financial and operational consulting practice with major
financial institutions, and food and hospitality firms as his clients. Dr.
Chernoff received a Ph.D. in Operations Management from the New York University
Leonard N. Stern School of Business in 1985, and has been a member of the
faculty of New York University for 20 years. He also received a B.S. degree from
New York University in 1968 and an M.S. degree from that institution in 1975.
Item 11. EXECUTIVE COMPENSATION
The following table sets forth compensation awarded to, earned by or paid
to our Chief Executive Officer and our four highest-paid executive officers who
served as such at June 30, 1999 and whose annual compensation and bonus was
$100,000 or more (collectively, the "Named Executive Officers"). Information
with respect to salary, bonus, other annual compensation, restricted stock and
options is included for the fiscal years ended June 30, 1999, 1998 and 1997. We
have not paid any compensation
30
that would qualify as "Restricted Stock Awards," payouts pursuant to long-term
incentive plans ("LTIP Payouts"), or "All Other Compensation" in any of the
three years in the period ended June 30, 1999.
Long Term
Compen-
Annual Compensation sation
--------------------------------------- -----------
Fiscal Other Securities All
Year Annual Underlying Other
Name and Ended Compen- Options/ Compen-
Principal Position June 30 Salary($) Bonus ($) sation SARs(#) sation
------------------ ------- --------- --------- ------ ------- ------
Anthony P. Conza,
Chairman & CEO 1999 $235,330 $ 30,736 $ 919(1) 25,000 $ 2,715(3)
1998 217,375 41,006 1,172(1) -- --
1997 214,326 117,450 3,093(1) 40,000 --
David L. Siegel,
Vice Chairman & COO 1999 174,297 15,498 919(1) 25,000 1,914(3)
1998 156,748 21,558 1,172(1) -- --
1997 149,418 58,725 3,093(1) 40,000 --
Charles G. Leaness,
Exec. V.P 1999 141,250 8,391 3,399(1) 25,000 1,922(3)
1998 124,028 14,521 4,397(1) -- --
1997 114,654 39,233 10,982(1) 20,000 --
Patrick J. Pompeo,
Exec. V.P 1999 138,971 9,891 919(1) 25,000 2,000(3)
1998 115,615 14,521 1,172(1) -- --
1997 102,181 39,233 3,093(1) 20,000 --
Joseph W. Morgan,
Sr. V.P., President - 1999 136,437 6,856 919(1,2) 35,000 1,828(3)
Blimpie Subs & Salads 1998 114,654 10,451 3,938(1,2) -- --
and Pasta Central 1997 92,413 14,166 10,827(1,2) 25,000 --
(1) Represents commissions paid with respect to master license sales
consummated.
(2) Reflects the fair market value on the date of grant of shares of our
Common Stock granted to Mr. Morgan of $2,766 in 1998 and $7,734 in 1997.
(3) Represents matching contributions which we made to our 401(k) Plan on
behalf of each of the Named Executive Officers.
Options/SAR Grants In Last Fiscal Year
Individual Grants
Number of Potential Realizable Value
Securities % of Total at Assumed Annual Rates of
Underlying Options Stock Price Appreciation
Options Granted to Exercise or for Option Term
Granted Employees in Base Price Expiration --------------------------
Name (#) Fiscal Year ($/Sh) Date 5 ($) 10 ($)
---- --- ----------- ------ ---- ----- ------
Anthony P. Conza 25,000 4.9% $3.03 6/30/08 $ 96,657 $122,033
David L. Siegel 25,000 4.9% 3.03 6/30/08 96,657 122,033
Charles G. Leaness 25,000 4.9% 3.03 6/30/08 96,657 122,033
Patrick J. Pompeo 25,000 4.9% 3.03 6/30/08 96,657 122,033
Joseph W. Morgan 35,000 6.9% 3.03 6/30/08 135,320 170,847
31
Fiscal Year End Option Values
The following table sets forth the number of unexercised options held
by our Named Executive Officers during the fiscal year ended June 30, 1999. No
options were exercised during such period.
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End(#) at FY-End($)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise(#) Realized($) Unexercisable Unexercisable
---- -------------- ----------- ------------- -------------
Anthony P. Conza -- -- 34,000/31,000 $ -- / --
David L. Siegel -- -- 34,000/31,000 -- / --
Charles G. Leaness -- -- 22,000/23,000 -- / --
Patrick J. Pompeo -- -- 22,000/23,000 -- / --
Joseph W. Morgan -- -- 54,000/131,000 1,563 /6,250
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the holdings of our Common Stock as of
November 15, 1999 by (1) each person or entity known to us to be the beneficial
owner of more than five percent (5%) of the outstanding shares of our Common
Stock; (2) each director and executive officer; and (3) all directors and
executive officers as a group. All of the holders of our Common Stock are
entitled to one vote per share.
Number of Shares Percent
Name and Address of Beneficial Owner (1) Beneficially Owned (2) Owned (3)
---------------------------------------- ---------------------- ---------
Anthony P. Conza ......................... 2,979,308 (4) 31.3%
David L. Siegel .......................... 1,516,615 (5) 16.0%
Charles G. Leaness ....................... 455,065 (6) 4.8%
Patrick Pompeo ........................... 421,020 (7) 4.4%
Alvin L. Katz (8) ........................ 6,800 (9) *
Harry G. Chernoff (10) ................... 9,068 (11) *
Joseph W. Morgan ......................... 188,683 (12) 2.0%
All Directors and Executive Officers
As a Group (12 Persons) .................. 5,709,365 (13) 58.7%
- ----------
* Represents less than 1%.
(1) Except as otherwise noted, the address of each of the persons listed below
is 740 Broadway, New York, New York 10003.
(2) Includes shares actually and beneficially owned.
(3) Based upon 9,470,926 shares outstanding on November 15, 1999 (not
including 133,000 treasury shares), increased by the number of shares
under options which the holder(s) thereof have the right to acquire within
60 days from November 15, 1999.
(4) Includes 34,000 shares which Mr. Conza may acquire pursuant to options
exercisable within 60 days of November 15, 1999. Does not include (a)
37,050 shares owned by Mr. Conza's daughter, (b) 9,300 shares owned by Mr.
Morgan (Mr. Conza's son-in-law), (c) 125,000 shares owned jointly by Mr.
Conza's daughter and Mr. Morgan over which Mr. Morgan has sole voting
power, (d) 4,150 shares owned by Mr. Conza's parents, (e) 44,913 shares
owned by Joseph Conza, the brother of Mr. Conza,
32
and (f) 44,000 shares held by Mr. Conza's daughter as Trustee for the
Anthony P. Conza Charitable Remainder Trust, as to all of which Mr. Conza
disclaims beneficial ownership.
(5) Includes 34,000 shares which Mr. Siegel may acquire pursuant to options
exercisable within 60 days of November 15, 1999. Does not include 13,046
shares held by Mr. Siegel's daughter, as to which Mr. Siegel disclaims
beneficial ownership.
(6) Includes 22,000 shares which Mr. Leaness may acquire pursuant to options
exercisable within 60 days of November 15, 1999.
(7) Includes 22,000 shares which Mr. Pompeo may acquire pursuant to options
exercisable within 60 days of November 15, 1999. Does not include 6,300
shares held by Mr. Pompeo's sister and brother-in-law, as to which Mr.
Pompeo disclaims beneficial ownership.
(8) The address of Mr. Katz is 301 N. Birch Road, Ft. Lauderdale, Florida
33304.
(9) Includes 3,400 shares which Mr. Katz may acquire pursuant to options
exercisable within 60 days of November 15, 1999.
(10) The address of Mr. Chernoff is 286 Spring Street, Suite 401, New York, New
York 10013.
(11) Includes 3,400 shares which Dr. Chernoff may acquire pursuant to options
exercisable within 60 days of November 15, 1999.
(12) Includes 54,000 shares which Mr. Morgan may acquire pursuant to options
exercisable within 60 days of November 15, 1999. Does not include (a)
37,050 shares held by Mr. Morgan's wife (Mr. A. Conza's daughter), (b)
13,100 shares held by Mr. Morgan's children, (c) 700 shares held by Mr.
Morgan's wife as custodian for his son under the Transfers to Minors Act,
(d) 44,000 shares held by Mr. Morgan's wife as Trustee for the Anthony P.
Conza Charitable Remainder Trust, and (e) 16,500 shares held by a
corporation of which Mr. Morgan's wife is the sole shareholder, as to all
of which Mr. Morgan disclaims beneficial ownership.
(13) Includes 245,300 shares which all of such persons may acquire pursuant to
options exercisable within 60 days of November 15, 1999. Does not include
the shares excluded from the percentage ownership calculations made with
respect to Messrs. Conza, Siegel, Pompeo and Morgan pursuant to notes 4,
5, 7 and 12 above.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal years ended June 30, 1999, 1998 and 1997, we paid
$1,155,000, $1,149,000, and $984,000, respectively, to Georgia Enterprises, Inc.
("Georgia Enterprises"), a corporation partially owned by Patrick Pompeo, one of
our Executive Vice Presidents and directors, and Joseph Conza, one of our Senior
Vice Presidents and President of B I Concept Systems, Inc., in payment of the
fees that Georgia Enterprises earned as the Subfranchisor for the Georgia
market. During the same three fiscal years, we paid $305,000, $281,000, and
$289,000, respectively, to Llewellyn Distributors, Inc. ('Llewellyn"), a
corporation partially owned by Charles G. Leaness, one of our directors and
Executive Vice Presidents, who also serves as CEO of Maui Tacos International,
Inc., in payment of Llewellyn's share of the fees that it earned as the
Subfranchisor for the northern New Jersey market. We also paid $53,000,
$146,000, and $150,000, respectively, to International Southwest Blimpie, Inc.
('Southwest'), a corporation principally owned and controlled by Joseph Conza
until its sale to an unrelated third party in November 1998, in payment of said
corporation's share of the fees that it earned as the Subfranchisor for the
Houston, Texas market.
Each of the aforementioned transactions was effected pursuant to written
agreements between us and the parties thereto. Such agreements are substantially
identical to the standard form of subfranchise
33
agreement that we enter into with unaffiliated subfranchisors. In the opinion of
our management, each such agreement is on terms as favorable to us as would be
available from an unrelated third party.
During the fiscal years ended June 30, 1998, and 1997, we received $4,000
and $168,000, respectively, in reimbursements of expenses from Georgia
Enterprises. Such reimbursements relate to operational and administrative
support functions which we provided to Georgia Enterprises. In fiscal 1998, we
ceased providing these functions, and the related contract was terminated.
During the years ended June 30, 1999, 1998 and 1997, we paid $11,000,
$11,000 and $7,000, respectively, to Joseph Conza as compensation for the use of
his apartment in New York City by employees of our Atlanta and Houston offices
during business trips. In our estimation, this practice reduced our lodging
expense inasmuch as the per diem amounts paid to Mr. Conza were below the market
rates for hotel accommodations which we would have been required to pay in order
to house such employees during such trips to New York.
During the fiscal years ended June 30, 1999, 1998 and 1997, we received
$110,000, $119,000 and $101,000, respectively, in reimbursements of expenses
from Llewellyn. Such amounts were paid pursuant to a written agreement which
provides that we shall be reimbursed by Llewellyn for costs incurred by us in
providing operational support services to Llewellyn. The agreement also provides
that in the event the costs of such support services shall rise, then the fees
paid pursuant to the agreement shall rise accordingly. In the opinion of our
management, the agreement is on terms as favorable to us as would be available
from an unrelated third party.
During the fiscal years ended June 30, 1998 and 1997, we received $8,000
and $49,000, respectively, in reimbursements of expenses from Southwest. Such
reimbursements relate to operational and administrative support functions which
we provided to Southwest. In fiscal 1998, we ceased providing these functions,
and the related contract was terminated.
In April 1994, Mr. Leaness borrowed the sum of $20,000 from us, and
collateralized the payment thereof with the same 120,000 shares of Common Stock
which he pledged in connection with a $60,000 option exercise and loan
transaction consummated in December 1991. This $20,000 loan is payable upon
demand and bears interest at the rate of 5% per annum.
In March 1995, Joseph Conza borrowed the principal amount of $55,500 from
us. That indebtedness is payable in constant bi-monthly payments of principal
and interest computed at the rate of 8% per annum on the basis of a 20 year
amortization schedule, and the unpaid balance of principal and accrued but
unpaid interest shall become due and payable on April 16, 2000, provided,
however, that, Mr. Conza may extend the term of the loan through April 15, 2015
as long as no default exists with regard to the loan when it originally matures.
Mr. Conza pledged 10,000 unregistered shares of our Common Stock as collateral
security for the payment of all sums due under the loan. As of the end of the
fiscal year, Mr. Conza was current with respect to his payment obligations and
the outstanding principal balance had been reduced to $49,806.
In 1997, we acquired the rights possessed by Anthony P. Conza and David L.
Siegel regarding the licensing of the Blimpie trademarks and the Blimpie
Marketing System for all non-U.S. territories, pursuant to a 99 year license
Agreement. That agreement provided for payment of certain income-based fees to
Messrs. Conza and Siegel, and further provided for cancellation by them if we
failed to pay them a minimum annual fee aggregating $350,000 during the first
five years of the term, and a minimum aggregate fee of $150,000 per year
(subject to an annual cost of living adjustment) during the balance of such
term. The payments made to Messrs. Conza and Siegel under this agreement were
$137,029 during the fiscal year ended June 30, 1997. In February 1997, we
acquired, pursuant to a written agreement which we executed with Messrs. Conza
and Siegel, ownership of the undivided 60% interest in the international rights
to the Blimpie trademarks and Blimpie Marketing System owned by them. In
accordance with that agreement, we paid $3 million to Mr. Conza and $1.5 million
to Mr. Siegel. The agreement also provided that Messrs. 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
34
distribution of $3 million on January 1, 2001, with $2 million payable to Mr.
Conza and $1 million payable to Mr. Siegel. In February 1999, both of Messrs.
Conza and Siegel elected to receive the lump-sum payment. They also agreed to
terminate the 99-year license of the domestic rights to the Blimpie trademarks
that they had granted to us in 1976, and contributed 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 the 1997 international trademark
agreement, and paid the full $3 million payment in February 1999.
35
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*
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*
36
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.*
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*
37
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*
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*
38
The following document has been filed as an Exhibit solely with the
Securities and Exchange Commission:
23.1 Consent of Independent Auditors
23.2 Consent of Independent Auditors
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).
(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, 1999.
39
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: December 13, 1999 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: December 13, 1999 /s/ Anthony P. Conza
------------------------------------------
Anthony P. Conza, Chairman and Chief
Executive Officer
Principal Financial And Accounting Officer
Date: December 13, 1999 /s/ Brian D. Lane
------------------------------------------
Brian D. Lane, Vice President, Chief
Financial Officer
Date: December 13, 1999 /s/ David L. Siegel
------------------------------------------
David L. Siegel, Vice Chairman, Chief
Operating Officer and General Counsel
Date: December 13, 1999 /s/ Patrick J. Pompeo
------------------------------------------
Patrick J. Pompeo, Executive Vice
President and Director
Date: December 13, 1999 /s/ Charles G. Leaness
------------------------------------------
Charles G. Leaness, Executive Vice
President, Secretary and Director
Date: December 13, 1999 /s/ Alvin Katz
------------------------------------------
Alvin Katz, Director
Date: December 13, 1999 /s/ Harry G. Chernoff
------------------------------------------
Harry G. Chernoff, Director
40
INDEX TO FINANCIAL STATEMENTS
Reports of Independent Auditors F-2
Consolidated Balance Sheets at June 30, 1999 and 1998 F-4
Consolidated Statements of Operations and Comprehensive (Loss)
Income for each of the three years in the period ended June 30, 1999 F-5
Consolidated Statements of Shareholders' Equity for each of the
three years in the period ended June 30, 1999 F-6
Consolidated Statements of Cash Flows for each of the three
years in the period ended June 30, 1999 F-7
Notes to Consolidated Financial Statements F-8
Report of Independent Auditors on Financial Statement Schedule F-27
Consolidated Schedule of Valuation and Qualifying Accounts for each
of the three years in the period ended June 30, 1999 F-28
F-1
Report of Independent Auditors
Board of Directors and Shareholders
Blimpie International, Inc.
We have audited the accompanying consolidated balance sheet of Blimpie
International, Inc. and subsidiaries as of June 30, 1999, and the related
consolidated statements of operations and comprehensive (loss) income,
shareholders' equity, and cash flows for the year then ended. Our audit 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 based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1999 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Blimpie
International, Inc. and subsidiaries at June 30, 1999, and the consolidated
results of their operations and their cash flows for the year ended June 30,
1999, in conformity with generally accepted accounting principles. 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
December 3, 1999
F-2
Report of Independent Accountants
To the Board of Directors and Shareholders
Blimpie International, Inc. and Subsidiaries:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations and comprehensive (loss) income, of
shareholders' equity, and of cash flows present fairly, in all material
respects, the financial position of Blimpie International, Inc. and Subsidiaries
at June 30, 1998, and the results of their operations and their cash flows for
each of the two years in the period ended June 30, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards 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
audits provide 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 for per share amounts)
- --------------------------------------------------------------------------------
June 30
Assets 1999 1998
- --------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 4,682 $ 4,021
Investments 5,296 4,495
Accounts receivable, less allowance of $392 in 1999
and $207 in 1998 3,106 3,058
Prepaid expenses and other current assets 206 498
Income taxes receivable 22 --
Deferred income taxes 85 --
Current portion of notes receivable 427 569
-------- --------
Total current assets 13,824 12,641
Property and equipment - at cost less accumulated
depreciation of $1,776 in 1999 and $1,262 in 1998 1,749 1,584
Other assets:
Notes receivable, less allowance of $81 in 1999
and $65 in 1998 and less current portion 1,009 1,273
Investments 981 3,686
Trademarks - at cost, less accumulated amortization
of $739 in 1999 and $437 in 1998 8,434 8,568
Deferred income taxes 1,828 112
Other 433 360
-------- --------
Total other assets 12,685 13,999
-------- --------
$ 28,258 $ 28,224
======== ========
- --------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
- --------------------------------------------------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 3,691 $ 2,718
Customer equipment deposits 546 342
Income taxes payable -- 276
Deferred income taxes -- 119
-------- --------
Total current liabilities 4,237 3,455
Deferred revenue, net 5,710 736
Trademark obligations 204 3,408
Shareholders' equity:
Common stock, $.01 par value:
Authorized shares - 20,000,000
Issued and outstanding shares - 9,604,000 in 1999
and 9,574,000 in 1998 96 96
Additional paid-in capital 8,818 8,420
Retained earnings 9,640 12,519
Net unrealized gain on marketable securities 40 51
-------- --------
18,594 21,086
Treasury stock at cost - 133,000 shares in 1999 and
66,000 shares in 1998 (427) (251)
Subscriptions receivable (60) (210)
-------- --------
Total shareholders' equity 18,107 20,625
-------- --------
$ 28,258 $ 28,224
======== ========
See accompanying notes to consolidated financial statements.
F-4
Blimpie International, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(in thousands except for per share amounts)
- ----------------------------------------------------------------------------------------------------
Years Ended June 30
1999 1998 1997
-------- -------- --------
Revenues:
Continuing fees $ 18,956 $ 17,343 $ 15,391
Subfranchisor fees, master license fees
and sale of franchises 4,451 4,983 6,516
Store equipment sales 9,328 14,374 14,935
License fees and other income 477 407 495
Company restaurant sales 338 -- --
-------- -------- --------
33,550 37,107 37,337
Expenses:
Subfranchisors' share of franchise and continuing fees 11,782 11,188 10,692
Store equipment cost of sales 8,137 12,192 13,024
Selling, general and administrative expenses 12,156 10,649 9,218
Company restaurant operations 342 -- --
-------- -------- --------
32,417 34,029 32,934
-------- -------- --------
Operating income 1,133 3,078 4,403
Interest income 823 846 890
-------- -------- --------
Income before income taxes and cumulative effect
of change in accounting principle 1,956 3,924 5,293
Income taxes on income before cumulative effect
of change in accounting principle 800 1,480 2,015
-------- -------- --------
Income before cumulative effect of change in accounting principle 1,156 2,444 3,278
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 (loss) income $ (2,217) $ 2,444 $ 3,278
======== ======== ========
Basic and diluted earnings (loss) per share:
Income before cumulative effect of change in accounting principle $ 0.12 $ 0.26 $ 0.34
Cumulative effect of change in accounting principle (0.35) -- --
-------- -------- --------
Net (loss) income $ (0.23) $ 0.26 $ 0.34
======== ======== ========
Pro forma amounts assuming the new revenue recognition
method is applied retroactively (1998 and 1997 amounts are
unaudited):
Net income $ 1,156 $ 2,428 $ 2,816
Basic earnings per share $ 0.12 $ 0.25 $ 0.30
Diluted earnings per share $ 0.12 $ 0.25 $ 0.29
Weighted average basic shares outstanding 9,467 9,533 9,517
======== ======== ========
Weighted average diluted shares outstanding 9,472 9,549 9,761
======== ======== ========
Comprehensive (loss) income:
Net (loss) income $ (2,217) $ 2,444 $ 3,278
Other comprehensive (loss) income:
Unrealized (losses) gains on marketable securities:
Unrealized (losses) and gains, net of tax (12) 25 48
Less: reclassification adjustment for (gains) losses
included in net (loss) income, net of tax 1 -- (18)
-------- -------- --------
Other comprehensive (loss) income (11) 25 30
-------- -------- --------
Comprehensive (loss) income $ (2,228) $ 2,469 $ 3,308
======== ======== ========
See accompanying notes to consolidated financial statements.
F-5
Blimpie International, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended June 30, 1999, 1998, and 1997
(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, 1996 9,481 $ 95 $ 7,704 $ 8,132 $ (4) $ 15,927
Incentive stock granted/stock options exercised 20 267 267
Stock issued under Canadian trademark agreement 25 239 239
Dividends paid ($ .07 per share) (666) (666)
Net income 3,278 3,278
Net unrealized gain on marketable securities 30 30
---------- ------- -------- -------- --------- --------
Balance - June 30, 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/stock options exercised 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
========== ======= ======== ======== ========= ========
See accompanying notes to consolidated financial statements.
F-6
Blimpie International, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands except for per share amounts)
- -------------------------------------------------------------------------------------------------
Years Ended June 30
1999 1998 1997
- -------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Income before cumulative effect of change in accounting principle $ 1,156 $ 2,444 $ 3,278
Adjustments to reconcile income before accounting change
to net cash provided by operating activities:
Depreciation and amortization 846 706 441
Incentive stock granted 104 98 255
Changes in operating assets and liabilities:
Accounts receivable (48) (973) (629)
Prepaid expenses and other current assets 292 204 (27)
Other assets (99) 118 (228)
Income taxes receivable (22) -- --
Deferred income taxes (105) (32) (115)
Notes receivable 406 663 (474)
Accounts payable and accrued expenses 973 (1,159) 328
Customer equipment deposits 204 342 --
Income taxes payable (276) 268 (556)
Deferred revenue, net (214) (589) (354)
------- ------- -------
Net cash provided by operating activities 3,217 2,090 1,919
Cash Flows from Investing Activities
Purchases of available-for-sale securities (2,646) (4,573) (5,322)
Proceeds from sales of available-for-sale securities 4,605 4,832 8,463
Reinvested dividends of available-for-sale securities (66) (75) (5)
Purchase of international trademarks (3,077) (147) (4,646)
Proceeds from sale of property and equipment -- -- 14
Purchases of property and equipment (684) (725) (600)
------- ------- -------
Net cash used in investing activities (1,868) (688) (2,096)
Cash Flows from Financing Activities
Purchases of treasury stock (176) (251) --
Proceeds from stock warrants/options exercised -- 12 12
Collections on officers' notes receivable for stock purchase 150 -- 42
Cash dividends paid (662) (669) (666)
Repayment of long term debt -- (5) (7)
------- ------- -------
Net cash used in financing activities (688) (913) (619)
------- ------- -------
Net increase (decrease) in cash and cash equivalents 661 489 (796)
Cash and cash equivalents at beginning of year 4,021 3,532 4,328
------- ------- -------
Cash and cash equivalents at end of year $ 4,682 $ 4,021 $ 3,532
======= ======= =======
See accompanying notes to consolidated financial statements.
F-7
Blimpie International, Inc. and Subsidiaries
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 CentralTM and is the majority owner of Maui
Tacos International, Inc. ("Maui Tacos"), the franchisor of Maui TacosTM and
Smoothie IslandTM. BLIMPIE Subs & Salads offers a quick-service, healthy, sub
sandwich in approximately 2,100 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, 1999,
the Company operates one Maui Tacos restaurant, and does not operate any
subfranchisor or master licensor areas within the Blimpie International system.
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 short-term debt securities purchased with a
maturity of three months or less to be cash equivalents.
F-8
Blimpie International, Inc. and Subsidiaries
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
carried 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, debt and investments.
The Company believes that the carrying amounts included in the consolidated
balance sheets do not differ significantly from fair value 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 $337,000 in 1999, $295,000 in 1998, and $135,000
in 1997.
Advertising
The Company follows the policy of charging the costs of advertising to
expense as incurred. Advertising expense was $404,000 in 1999, $429,000 in 1998,
and $477,000 in 1997.
The Company administers several advertising and promotional funds on
behalf of the franchisees. The franchisees contribute 4% of 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 Subsidiaries
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 funds and the Blimpie Brand
Building funds 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, in conjunction 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
$13,000,000 each for fiscal 1999. Total assets were approximately $6,000,000 and
total liabilities were approximately $5,000,000 as of June 30, 1999. 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 generally accepted accounting principles 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 Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 2: Summary of Significant Accounting Policies (continued)
Supplemental Disclosure of Cash Flow Information
Years Ended June 30
----------------------------------------
1999 1998 1997
----------- ----------- -----------
Cash paid during the year for:
Interest $ -- $ 3,000 $ 3,000
Income taxes 1,232,000 1,143,000 2,571,000
Noncash investing and financing activities:
Stock issued under Canadian trademark
agreement 204,000 101,000 239,000
Purchase of international trademarks -- -- 3,509,000
Warrants and options issued for services and
trademark 180,000 -- --
Net unrealized (loss) gain on marketable
securities (11,000) 25,000 30,000
Reclassifications
Certain amounts have been reclassified to conform with the current year
presentation. Primarily, expenses incurred by the Company and reimbursed by an
advertising fund administered by the Company on behalf of franchisees were
reclassified from management fees and other income to selling, general and
administrative expenses. Such reimbursements are reflected as offsets to the
related expenses.
F-11
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 3: Investments
The following is a summary of available-for-sale securities included in
investments as of June 30:
Unrealized Fair
1999 Cost Gain (Loss) Value
----------- ----------- -----------
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
=========== =========== ===========
1998
Available-for-Sale Securities:
Current:
Common stocks $ 61,000 $ 28,000 $ 89,000
Preferred stocks 258,000 3,000 261,000
Mutual funds 149,000 1,000 150,000
U. S. Government securities 3,966,000 29,000 3,995,000
----------- ----------- -----------
4,434,000 61,000 4,495,000
Long-Term
U. S. Government securities 3,696,000 (10,000) 3,686,000
----------- ----------- -----------
$ 8,130,000 $ 51,000 $ 8,181,000
=========== =========== ===========
The long-term U.S. Government securities mature in 2004.
On February 19, 1997, the Company sold held-to-maturity securities with an
aggregate cost of $2,646,000 and realized a gain of $28,000. The proceeds from
the sale were $2,674,000. These securities were sold to acquire the trademark
and marketing system rights as described in Note 9.
At June 30, 1997, United States Treasury notes previously categorized as
being held-to-maturity were recategorized as available-for-sale. Accordingly,
this group of securities has been marked to market with the resulting adjustment
reported in shareholders' equity.
F-12
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 4: Notes Receivable
Notes receivable consist of the following as of June 30:
1999 1998
----------- -----------
Notes from subfranchisors, with interest ranging from 5%
to 13% due at various dates through December, 2008 $ 909,000 $ 1,110,000
Notes receivable from sale of discontinued segment due
in weekly installments including interest of 10% per
annum through March, 2000 61,000 67,000
Notes receivable from an officer due in semi-monthly
installments including interest of 8% per annum through
April, 2000 50,000 51,000
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 497,000 679,000
----------- -----------
1,517,000 1,907,000
Allowance for doubtful accounts (81,000) (65,000)
----------- -----------
1,436,000 1,842,000
Current maturities 427,000 569,000
----------- -----------
$ 1,009,000 $ 1,273,000
=========== ===========
Note 5: Property and Equipment
The major components of property and equipment and related depreciation
periods as of June 30 are:
Cost
------------------------- Depreciation
Item 1999 1998 Period
- ----------------------------------- ---------- ---------- ------------
Building and other $ 186,000 $ 160,000 7-14 years
Office furniture and fixtures 2,601,000 2,169,000 5-10 years
Automobiles 185,000 185,000 5 years
Software 553,000 332,000 5 years
---------- ----------
3,525,000 2,846,000
Less accumulated depreciation 1,776,000 1,262,000
---------- ----------
$1,749,000 $1,584,000
========== ==========
Depreciation expense totaled $519,000 in 1999, $394,000 in 1998, and
$306,000 in 1997.
Note 6: Trademark Obligations
Trademark obligations consist of the following as of June 30:
1999 1998
---------- ----------
Amount payable to related parties in connection with
acquisition of international trademarks (see Note 9) $ -- $3,000,000
Common shares issuable in connection with
acquisition of Canadian trademark (see Note 9) 204,000 408,000
---------- ----------
$ 204,000 $3,408,000
========== ==========
F-13
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 7: Income Taxes
The provision for income taxes is comprised as follows for the years ended
June 30:
1999 1998 1997
----------- ----------- -----------
Federal
Current $ 789,000 $ 1,264,000 $ 1,810,000
Deferred (91,000) (28,000) (98,000)
----------- ----------- -----------
698,000 1,236,000 1,712,000
----------- ----------- -----------
State
Current 116,000 248,000 320,000
Deferred (14,000) (4,000) (17,000)
----------- ----------- -----------
102,000 244,000 303,000
----------- ----------- -----------
$ 800,000 $ 1,480,000 $ 2,015,000
=========== =========== ===========
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:
1999 1998 1997
----------- ----------- -----------
Federal statutory rate - 34% $ 665,000 $ 1,334,000 $ 1,800,000
State or local taxes, net of federal benefit 65,000 159,000 198,000
Non-deductible expenses 34,000 48,000 23,000
Valuation allowance 385,000 -- --
Other (349,000) (61,000) (6,000)
----------- ----------- -----------
$ 800,000 $ 1,480,000 $ 2,015,000
=========== =========== ===========
The components of temporary differences and their tax effects which comprise the
Company's net deferred tax asset (liability) are as follows at June 30:
1999 1998
----------- -----------
Deferred tax assets:
Subfranchisor revenues $ 1,508,000 $ --
Franchisee revenues 283,000 197,000
Allowance for doubtful accounts 165,000 103,000
Start up costs for Maui Tacos 108,000 --
Net operating loss carryforward of Maui Tacos 188,000 --
Other 186,000 5,000
Valuation allowance (385,000) --
----------- -----------
2,053,000 305,000
----------- -----------
Deferred tax liabilities:
Subfranchisor revenue recognition -- (312,000)
Trademark amortization (140,000) --
----------- -----------
(140,000) (312,000)
----------- -----------
$ 1,913,000 $ (7,000)
=========== ===========
F-14
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 7: Income Taxes (continued)
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 of approximately $537,000 expiring in 2019.
Note 8: 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, 1999 for each
of the next five years and in the aggregate, are as follows:
Year Amount
------------------- ---------
2000 $ 479,000
2001 446,000
2002 456,000
2003 342,000
2004 40,000
2005 and thereafter 194,000
----------
$1,957,000
==========
The Company is also obligated for increases in real estate taxes and
operating costs. Rent expenses including real estate taxes and operating costs
amounted to $520,000 in 1999, $425,000 in 1998, and $383,000 in 1997.
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, convenants 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, 1999, there were 587 leasing subsidiaries with aggregate net assets of
$337,000, 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
------------------- ------------
2000 $ 14,646,000
2001 13,116,000
2002 11,309,000
2003 9,193,000
2004 7,697,000
2005 and thereafter 17,381,000
------------
$ 73,342,000
============
F-15
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 8: Commitments and Contingencies (continued)
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 franchise
restaurants in their territory, and in return receive compensation approximating
half of the fees collected from the individual Blimpie franchises. These
services are performed under the Company's supervision.
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, 1999 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.
Note 9: Trademarks
Messrs. Anthony P. Conza and David L. Siegel (both of whom are officers,
directors and principal shareholders of the Company), and Metropolitan Blimpie,
Inc. ("MBI"), an unrelated company, own respectively, undivided 40%, 20% and 40%
interests in the Blimpie trademarks and the Blimpie marketing system. Pursuant
to various agreements made by and among such parties, (1) Prior to the
acquisition of such rights by the Company in 1997 and 1999, Messrs. Conza and
Siegel possessed the exclusive right to exploit, directly or indirectly, the
Blimpie trademarks and Blimpie marketing system in 35 entire states and various
portions of other states throughout the USA (the "Conza-Siegel Territory"); (2)
MBI possessed the exclusive right to exploit, directly or indirectly, the
Blimpie trademarks and Blimpie marketing system in the balance of the USA
outside of the Conza-Siegel Territory (the "MBI Territories"); and (3) Messrs.
Conza and Siegel and MBI possess the exclusive right to exploit, directly or
indirectly, the Blimpie trademarks and Blimpie marketing system throughout the
world outside of the USA.
Prior to the acquisition of the trademark rights in 1999, the Company,
pursuant to 99 year grants made to it in 1976 by Messrs. Conza and Siegel, had
the exclusive right to distribute the Blimpie trademarks and license the use of
the Blimpie marketing system throughout the Conza-Siegel Territory. By agreement
dated July 19, 1991 (the "1991 Agreement"), MBI granted to the Company the right
to license the Blimpie trademarks and Blimpie marketing system throughout the
MBI Territories (with specific exceptions). Pursuant to the 1991 Agreement, the
Company may also exploit the rights possessed by MBI outside of the USA with
respect to the Blimpie trademarks and Blimpie marketing system. In consideration
for the grants made to the Company by the 1991 Agreement, the Company agreed to
pay specified percentages of all revenues derived by the Company from the sales
of franchises within the MBI Territories and outside of the USA, subject to a
minimum annual payment requirement of $100,000. The 1991 Agreement provided for
an initial term of 42 months, and further provides for automatic annual renewals
until July, 2090, provided that the Company continues to pay said minimum annual
payments. The payments made to MBI under this arrangement were $778,000 in 1999,
$837,000 in 1998, and $968,000 in 1997.
On February 18, 1997, the Company entered into an agreement (the "1997
agreement") with Anthony P. Conza and David L. Siegel to acquire the ownership
of the undivided 60% interest in the international rights to the Blimpie
trademarks and Blimpie marketing system owned by such individuals. The agreement
superseded a licensing agreement pertaining to such international trademark and
marketing system rights which the Company had previously entered into with such
individuals. Pursuant to the agreement, the Company acquired the rights for $4.5
million of cash paid at closing, plus certain contingent payments. The
contingent payments would generally be required once cumulative international
F-16
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 9: Trademarks (continued)
revenues exceed $5,000,000. The contingent payments of $150,000 per year would
generally commence on January 1, 2002 and continue for 50 years. The agreement
also provided Messrs. Conza and Siegel with an option to require the Company to
pay $3,000,000 to Messrs. Conza and Siegel on January 2, 2001 in exchange for a
cancellation of their right to receive the contingent payments. As of June 30,
1998, the Company believed it was probable that Messrs. Conza and Siegel would
elect to effect a cancellation of contingent payments in exchange for the
receipt of $3,000,000. Therefore, the Company recorded, at June 30, 1998, the
remaining international trademark rights and related trademark obligation of
$3,000,000 in the balance sheet as trademark assets and trademark obligations,
respectively.
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 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, 1999, 100,000 shares of common stock had been issued to
the claimant. The future issuances of such shares are subject to the claimant's
ongoing compliance with various conditions specified in the agreement.
F-17
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 10: 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 1999 1998 1997
- -------------------------------- -------------------------- ---------- ---------- ----------
Georgia Enterprises, Inc., a Revenue derived from area $2,514,000 $3,814,000 $3,122,000
corporation partially owned by Reimbursement of expenses -- 4,000 168,000
two officers of the Company Fees paid to subfranchisor 1,155,000 1,149,000 984,000
Llewellyn Distributors, Inc., Revenue derived from area 525,000 649,000 716,000
a corporation partially owned Reimbursement of expenses 110,000 119,000 101,000
by an officer of the Company Fees paid to subfranchisor 305,000 281,000 289,000
International Southwest Blimpie, Revenue derived from area 123,000 544,000 532,000
Inc., a corporation principally Reimbursement of expenses -- 8,000 49,000
owned and controlled by an Fees paid to subfranchisor 53,000 146,000 150,000
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.
During fiscal year ended June 30, 1992, certain officers of the Company
issued demand notes to the Company in the amount of $270,000 for the purchase of
shares of the Company's common stock. The balances of these notes were recorded
as a reduction to equity as subscriptions receivable. In April 1994, an officer
was granted an additional loan of $20,000 against these shares. In February
1999, two of these notes were paid in full totaling $150,000 in conjunction with
the final payment of the trademark obligation to two officers as described in
Note 9. These notes bear interest at the rate of 5% per annum, payable
quarterly. Interest income of $9,000, $12,000, and $12,000 was recognized by the
Company for the years ended June 30, 1999, 1998, and 1997, 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 2000
(see Note 4). Such note receivable was $50,000 and $51,000 at June 30, 1999 and
1998, 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 $11,000,
$11,000, and $8,000 was recognized for the years ended June 30, 1999, 1998, and
1997, respectively. (See Note 6 and Note 9 with regard to trademark transactions
with related parties).
Note 11: 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, 1999, the Company has issued incentive and nonstatutory stock
options and stock grants 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. In connection with the
issuance of the stock grants, the Company recognized compensation expense of
$14,000 in 1999, $98,000 in 1998, and $255,000 in 1997.
F-18
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 11: Stock Options and Warrants (continued)
Option activity under the Plan is as follows:
Weighted
Average
Number of Exercise
Options Price
---------- ---------
Outstanding at July 1, 1996 153,650 $ 5.92
Granted 267,000 6.39
Exercised (2,200) 6.77
Canceled (5,800) 11.00
--------
Outstanding at June 30, 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
========
Options exercisable at June 30, 1999 249,300 $ 4.82
========
The following table summarizes information concerning options outstanding
and exercisable under the Plan at June 30, 1999:
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 - $ 3.688 511,000 9.12 $ 2.75 102,900 $ 2.76
$5.500 - $ 6.063 229,500 2.77 6.05 136,400 6.05
$7.250 - $14.750 12,500 1.39 9.61 10,000 9.23
----------- ----------
753,000 7.06 3.87 249,300 4.82
=========== ==========
F-19
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 11: 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, 1999. The following table
summarizes information concerning common stock purchase warrants and options
held by non-employees as of June 30, 1999:
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
Unaffiliated advertising agency 10,985 7.51 May 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
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for fiscal
1999, 1998 and 1997: 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 $1.17, $2.22, and $3.00 for fiscal 1999, 1998, and 1997
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.
F-20
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 11: Stock Options and Warrants (continued)
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:
1999 1998 1997
----------- ----------- -----------
Income before cumulative effect of change in
accounting principle $ 1,156,000 $ 2,444,000 $ 3,278,000
Pro forma income before cumulative effect of
change in accounting principle 827,000 2,281,000 3,224,000
Proforma income per share before cumulative effect
of change in accounting principle:
Basic $ 0.09 $ 0.24 $ 0.34
Diluted $ 0.09 $ 0.24 $ 0.33
Note 12: 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 (the "Conversion Formula"). The
Conversion Formula is 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.
Note 13: 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, 1999, 1998, and 1997, the Company made matching
contributions of 20% of the elective deferral contributions. The matching
contributions charged to earnings were $66,000, $53,000, and $48,000 for fiscal
1999, 1998 and 1997, respectively. At June 30, 1999, the Plan held approximately
19,000 shares of the Company's common stock with a fair value of approximately
$52,000. The Plan received approximately $300 in dividends on Company shares in
fiscal 1999.
F-21
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 14: 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 restaurant.
During 1996, the Company began operations outside of the United States. As
of June 30, 1999, the Company has sold master licenses in Argentina, Bahrain,
Canada, Cyprus, Dominican Republic, Egypt, Greece, Jordan, Kuwait, Lebanon,
Northern Ireland, Oman, Panama, Peru, Poland, Portugal, Puerto Rico, Qatar, The
Republic of Ireland, Romania, Saudi Arabia, South Africa, Spain, United Arab
Emirates, Great Britain, Uruguay, and Venezuela. Franchisees are operating in
the following countries: Argentina, Canada, Cyprus, Dominican Republic, Jordan,
Panama, Poland, Portugal, Saudi Arabia, South Africa, Spain, Great Britain and
Venezuela. There were no capital expenditures outside of the United States in
1999, 1998, or 1997.
Financial information by identifiable segments is as follows for the years
ended June 30:
Operating Depreciation
Income Identifiable and
1999 Revenue (Loss) Assets Amortization
------------ ------------ ------------ ------------
Franchise operations:
United States $ 23,043,000 $ 1,577,000 $ 24,448,000 $ 675,000
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 $ 847,000
============ ============ ============ ============
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
============ ============ ============ ============
1997
Franchise operations:
United States $ 20,276,000 $ 3,178,000 $ 24,325,000 $ 281,000
International 2,028,000 221,000 1,620,000 112,000
Equipment and design 15,033,000 1,004,000 1,759,000 48,000
------------ ------------ ------------ ------------
$ 37,337,000 $ 4,403,000 $ 27,704,000 $ 441,000
============ ============ ============ ============
F-22
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 15: 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
non-traditional 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 non
traditional restaurant transactions executed, the location of the
non-traditional 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, 1999, 1998, and 1997 were 2,097 (2,040 United States, 57
International), 1,972 (1,935 United States, 37 International), and 1,684 (1,667
United States, 17 International) respectively. The Company operates one
Company-owned Maui Tacos restaurant.
The following is a summary of the deferred franchise revenues and costs.
Number
Revenues Costs of Units
----------- ----------- -----------
Balance June 30, 1996 $ 3,896,000 $ 2,910,000 878
Franchises awarded 3,356,000 2,612,000 632
Revenue recognized (3,711,000) (2,834,000) (737)
----------- ----------- -----------
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
=========== =========== ===========
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 for International. Subfranchisors and master
licensors in operation as of June 30, 1999, 1998, and 1997 were 106 (85 United
States, 21 International), 105 (86 United States, 19 International), and 121
(105 United States, 16 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-23
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 15: Subfranchisor Fees and Franchise Revenue (continued)
Subfranchisor and Master Licensor Fees (continued)
Prior to implementing the new form of agreement, the Company generally
entered into a 10-year agreement with four ten-year renewal periods. The Company
recorded a receivable for the full amount due under the contract, but deferred
the uncollected portion until payment was received, or until the revenue
generated by the related market was sufficient to ensure that payment would be
made.
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 July 1, 1996 $ 693,000
Revenue recognized (221,000)
-----------
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
=========== ===========
Note 16: Earnings Per Share
Earnings per share on a basic and diluted basis is calculated as follows:
1999 1998 1997
---------- ---------- ----------
Income before cumulative effect of change
in accounting principle $1,156,000 $2,444,000 $3,278,000
========== ========== ==========
Calculation of weighted average shares
outstanding plus assumed exercises:
Weighted average basic shares outstanding 9,467,000 9,533,000 9,517,000
Effect of dilutive employee stock options 5,000 16,000 244,000
---------- ---------- ----------
Weighted average diluted shares outstanding 9,472,000 9,549,000 9,761,000
========== ========== ==========
Basic earnings per share before cumulative effect
of change in accounting principle $ 0.12 $ 0.26 $ 0.34
========== ========== ==========
Diluted earnings per share before cumulative effect
of change in accounting principle $ 0.12 $ 0.26 $ 0.34
========== ========== ==========
F-24
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 17: 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, 1999 and June
30, 1998.
Quarter
------------------------------------------------------ -----------
1999 First Second Third Fourth Total
----------- ----------- ----------- ----------- -----------
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
Earnings (loss) per
share before
cumulative effect
of change in
accounting principle:
Basic $ 0.05 $ 0.06 $ 0.06 $ (0.05) $ 0.12
Diluted $ 0.05 $ 0.06 $ 0.06 $ (0.05) $ 0.12
1998
Total revenues $ 9,868,000 $ 9,470,000 $ 8,111,000 $ 9,658,000 $37,107,000
Gross profit 3,548,000 3,354,000 3,205,000 3,520,000 13,727,000
Net income 803,000 761,000 436,000 444,000 2,444,000
Earnings per share:
Basic $ 0.08 $ 0.08 $ 0.05 $ 0.05 $ 0.26
Diluted $ 0.08 $ 0.08 $ 0.05 $ 0.05 $ 0.26
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 both fiscal 1999 and 1998
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
(loss) income.
F-25
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 18: Year 2000 Issues (Unaudited)
The Company's business and relationships with its business partners and
customers depend significantly on a number of computer software programs,
internal operating systems and connections to other networks, and the failure of
any of these programs, systems or networks to successfully address the Year 2000
data rollover problem could have a material adverse effect on the Company's
business, financial condition and results of operations. Many installed computer
software and network processing systems currently accept only two-digit entries
in the date code field and may need to be upgraded or replaced in order to
accurately record and process information and transactions on and after January
1, 2000.
The Company utilizes personal computers that are connected to a network
for all of its employee workstations. These personal computers all utilize
Microsoft Windows NT as their operating system. The Company believes that the
Windows NT operating system is Year 2000 compliant. Additionally, the Company
recently installed new software to operate all of its accounting operations. The
Company believes this new software, and the computer hardware on which it runs,
to be Year 2000 compliant. Management anticipates that all accounting operations
will be performed using the Year 2000 compliant software by December 31, 1999.
The majority of the costs of installing and implementing the aforementioned
software and hardware had been incurred prior to June 30, 1999. The Company
anticipates that any additional expenditures to complete the implementation will
be funded from cash flow generated by operations.
The Company primarily does business with its subfranchisors and its
franchisees who in turn deal with retail customers and food distribution
companies. The Company has considered the transactions it conducts with its
subfranchisors and franchisees in its analyses of the Year 2000 issue, and
believes that it has completed substantially all modifications to the computer
systems used in these transactions to ensure the systems are Year 2000
compliant. The Company is not certain as to whether the computer software and
business systems of its franchisees' suppliers are Year 2000 compliant. The
failure or delay of these distributors to successfully address the Year 2000
issue may result in delays in placing or receiving orders for goods and services
at the store level. Such delays may result in lost revenues for the franchisees,
and in turn, lower continuing fee revenue for the Company. The Company
anticipates that such delays and lost revenues, if any, would be minimal.
The Company intends to continue to monitor its Year 2000 compliance and to
correct any noncompliance as it is discovered. Management anticipates funding
such efforts out of operating cash flow. The Company believes that the effects
of any noncompliance on its part, or by its customers and suppliers, will not
have a material adverse effect on the Company's business, financial condition,
results of operations or cash flows.
F-26
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 each of the two
years in the period ended June 30, 1998, which financial statements are included
in this Annual Report of Form 10-K, we have also audited the financial statement
schedule on page F-28 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-27
Blimpie International, Inc. and Subsidiaries
SCHEDULE II
CONSOLIDATED SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(in thousands except for per share amounts)
- -------------------------------------------------------------------------------------------------------
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, 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
Year ended June 30, 1997
Accounts receivable 47 78 -- 42 83
Notes receivable 47 13 -- -- 60
F-28