SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| Quarterly report pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1999
OR
|_| Transition report pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the transition period from ________ to ________
Commission File Number 0-21036
BLIMPIE INTERNATIONAL, INC.
(Exact name of issuer as specified in its charter)
New Jersey
(State or Other Jurisdiction of Incorporation or Organization)
13-2908793
(IRS Employer Identification No.)
740 Broadway, New York, NY 10003
(Address and Zip Code of Principal Executive Offices)
(212) 673-5900
(Issuer's Telephone Number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was re/uired to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |_| No |X|
There were 9,470,926 shares of the registrant's common stock outstanding as of
December 15, 1999.
Blimpie International, Inc.
Quarterly Report on Form 10-Q
For the Quarter Ended September 30, 1999
Table of Contents
Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets - September 30, 1999
and June 30, 1999 3
Condensed Consolidated Statements of Operations - Three
Months Ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows - Three
Months Ended September 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
2
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
BLIMPIE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands) September 30 June 30
1999 1999
------------ --------
Assets (Unaudited) (Note)
Current assets:
Cash and cash equivalents $ 5,950 $ 4,682
Investments 3,214 5,296
Accounts receivable, net 3,355 3,106
Prepaid expenses and other current assets 218 228
Deferred income taxes 85 85
Current portion of notes receivable 468 427
-------- --------
Total current assets 13,290 13,824
Property and equipment, net 1,733 1,749
Other assets:
Notes receivable less current portion, net 1,008 1,009
Investments 972 981
Trademarks, net 8,369 8,434
Deferred income taxes 1,828 1,828
Other 529 433
-------- --------
Total other assets 12,706 12,685
-------- --------
$ 27,729 $ 28,258
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and other current liabilities $ 3,462 $ 4,237
Income taxes payable 119 --
-------- --------
Total current liabilities 3,581 4,237
Deferred revenue, net 5,572 5,710
Trademark obligations 204 204
Shareholders' equity:
Common stock, $.01 par value 96 96
Additional paid-in capital 8,824 8,818
Retained earnings 9,923 9,640
Net unrealized gain on marketable securities 16 40
-------- --------
18,859 18,594
Treasury stock (427) (427)
Subscriptions receivable (60) (60)
-------- --------
Total shareholders' equity 18,372 18,107
-------- --------
$ 27,729 $ 28,258
======== ========
Note: The condensed consolidated balance sheet at June 30, 1999 has been derived
from the audited consolidated financial statements of the Company at that date
but does not include all of the information required by generally accepted
accounting principles for complete financial statements.
See notes to condensed consolidated financial statements.
3
BLIMPIE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended
(in thousands, except for per share amounts) September 30
1999 1998
-------- --------
Revenues
Continuing fees $ 4,937 $ 4,800
Subfranchisor fees, master license fees
and sale of franchises 1,108 1,119
Store equipment sales 2,098 2,592
License fees and other income 134 103
Company restaurant sales 125 --
-------- --------
8,402 8,614
Expenses
Subfranchisors' share of franchise
and continuing fees 3,037 2,980
Store equipment cost of sales 1,889 2,384
Selling, general and administrative expenses 2,991 2,697
Company restaurant operations 121 --
-------- --------
8,038 8,061
-------- --------
Operating income 364 553
Interest income 182 185
-------- --------
Income before income taxes and cumulative effect
of change in accounting principle 546 738
Income taxes on income before cumulative effect
of change in accounting principle 263 265
-------- --------
Income before cumulative effect of change in accounting principle 283 473
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 1 -- (3,373)
-------- --------
Net income (loss) $ 283 $ (2,900)
======== ========
Basic and diluted earnings (loss) per share:
Income before cumulative effect of change in accounting principle $ 0.03 $ 0.05
Cumulative effect of change in accounting principle -- (0.35)
-------- --------
Net income (loss) $ 0.03 $ (0.30)
======== ========
Weighted average basic shares outstanding 9,471 9,498
======== ========
Weighted average diluted shares outstanding 9,498 9,498
======== ========
See notes to condensed consolidated financial statements.
4
BLIMPIE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended
(in thousands) September 30
1999 1998
------- -------
Cash Flows From Operating Activities
Income before cumulative effect of change in accounting principle $ 283 $ 473
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization 223 181
Incentive stock granted 6 10
Changes in operating assets and liabilities:
Accounts receivable (249) (323)
Prepaid expenses and other current assets 10 14
Other assets (96) --
Notes receivable (40) 12
Accounts payable and other current liabilities (775) 683
Income taxes payable 119 207
Deferred revenue, net (138) (104)
------- -------
Net cash (used in) provided by operating activities (657) 1,153
Cash Flows From Investing Activities
Purchases of available-for-sale securities -- (1,384)
Proceeds from sale of available-for-sale securities 2,068 1,440
Reinvested dividends of available-for-sale securities (1) --
Purchase of trademarks (8) (98)
Purchases of property and equipment (134) (204)
------- -------
Net cash (used in) provided by investing activities 1,925 (246)
Cash Flows From Financing Activities
Purchases of treasury stock -- (104)
------- -------
Net cash by used in financing activities -- (104)
------- -------
Net increase in cash and cash equivalents 1,268 803
Cash and cash equivalents at beginning of period 4,682 4,021
------- -------
Cash and cash equivalents at end of period $ 5,950 $ 4,824
======= =======
See notes to condensed consolidated financial statements.
5
Notes To Condensed Consolidated Financial Statements
For the Three Months Ended September 30, 1999 (Unaudited)
Note 1: Basis of Presentation
The unaudited interim financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial statements and
should be read in conjunction with the Company's June 30, 1999 Annual Report on
Form 10-K.
The unaudited financial statements include all adjustments consisting of only
normal recurring accruals which are, in the opinion of management, necessary to
present a fair statement of financial position as of September 30, 1999 and the
results of operations and cash flows for the period then ended. Results of
operations for the period are not necessarily indicative of the results to be
expected for the full year.
As indicated in Note 2 to the Company's annual financial statements for the year
ended June 30, 1999, 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, effective July
1, 1998. The Company considers the new revenue recognition methodology to result
in a better matching of revenues and related expenses in the earnings process
related to such expenses. The amounts presented for the three months ended
September 30, 1998 have been restated to give effect to the change in accounting
principle. The effect of the change as of the beginning of the first quarter of
fiscal 1999 (i.e., July 1, 1998) has been presented as a cumulative effect of a
change in accounting principle, net of a $1,815,000 income tax benefit, of
$3,373,000, and has been recorded as of such date. The effect of this change on
operations for the first quarter of fiscal 1999 was to increase income before
cumulative effect of accounting change by $7,000, net of income taxes.
In addition, certain other 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.
Note 2: Earnings per Share
Earnings per share on a basic and diluted basis is calculated as follows:
Three months ended
September 30,
(in thousands, except per share amounts) 1999 1998
--------- --------
Income before cumulative effect of change
in accounting principle $ 283 $ 473
========= ========
Calculation of weighted average shares
outstanding plus assumed conversions:
Weighted average basic shares outstanding 9,471 9,498
Effect of dilutive employee stock options 27 --
--------- --------
Weighted average diluted shares outstanding 9,498 9,498
========= ========
Basic earnings per share $ 0.03 $ 0.05
========= ========
Diluted earnings per share $ 0.03 $ 0.05
========= ========
6
Note 3: Comprehensive Income (Loss)
Comprehensive income consists of the following:
Three months ended
September 30,
(in thousands) 1999 1998
------- -------
Net income (loss) $ 283 $(2,900)
Net unrealized (loss) gain on
marketable securities (24) 91
------- -------
Comprehensive income (loss) $ 259 $(2,809)
======= =======
Note 4: Segment Information
Interim financial information by identifiable segments is as follows:
(in thousands)
Operating
Three Months Ended Income
September 30, 1999 Revenue (Loss)
Franchise operations:
United States $ 6,075 $ 556
International 92 (137)
Equipment and design 2,110 (49)
Company restaurant 125 (6)
-------- -------
$ 8,402 364
========
Interest income 182
=======
Income before income taxes and
cumulative effect of change in
accounting principle $ 546
=======
Three Months Ended
September 30, 1998
Franchise operations:
United States $ 5,901 $ 735
International 110 (106)
Equipment and design 2,603 (76)
-------- -------
$ 8,614 553
========
Interest income 185
=======
Income before income taxes and
cumulative effect of change in
accounting principle $ 738
=======
7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains forward-looking statements subject to
the safe harbor created by the Private Securities Litigation Reform Act of 1995.
The words "may," "would," "could," "will," "expect," "estimate," "believe,"
"intends," "plans" and similar expressions and variations thereof are intended
to identify forward-looking statements. Management cautions that these
statements represent projections and estimates of future performance and involve
certain risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors including, without limitation, our ability to successfully implement the
new concepts currently being formulated; changes in global and local business
and economic conditions; consumer preferences, spending patterns and demographic
trends; food, labor and other operating costs; availability and cost of land and
construction; currency exchange rates; and other risks outside our control
referred to in the registration statements and periodic reports that we file
with the Securities and Exchange Commission.
Overview
Our principal operations are centered around the Blimpie Subs & Salads
chain of quick-service restaurants. As of September 30, 1999, there were 2,117
Blimpie locations franchised by us in operation in the United States and 13
other countries. The chain's growth has been achieved through a system of
subfranchisors that purchased the rights to develop certain territories. The
subfranchisor fees were a significant and profitable revenue source for us
through fiscal 1996. By the end of fiscal 1996, the majority of the domestic
subfranchise rights had been sold, and this revenue stream began to decline. As
a result, our profitability also declined, despite the continued growth in the
number of franchised units opened and an increase in continuing fee revenues.
Faced with declining profitability despite the consistent growth in the
number of Blimpie outlets and continuing fees, we implemented several new
initiatives, including the acquisition or development of three new brands. The
three new franchise concepts are Maui Tacos(TM), Pasta Central(TM) and Smoothie
Island(TM). Maui Tacos restaurants provide a health-oriented, affordable menu of
"Maui-Mex" items, including traditional Mexican foods marinated in Hawaiian
spices. Pasta Central's baked pasta meals are designed to address current eating
trends for eat-in or take home meals. Smoothie Island is a selection of blended
beverages of frozen yogurt, fruit and nutritional supplements sold through the
Blimpie, Maui Tacos and Pasta Central locations.
As of September 30, 1999, there were four Maui Tacos outlets operating or
soon to be opened and five subfranchise territories operating. There also were
three Pasta Central outlets operating, and a majority of the Blimpie
subfranchisors had agreed to sell Pasta Central franchises in their territories.
Finally, there were 36 Smoothie Island locations operating, all of which were
located in Blimpie or Maui Tacos locations. As anticipated, each of the new
brands was generating revenues for us as of September 30, 1999.
We believe that these new concepts will be well received and that the
Blimpie brand will continue to be successful. The new concepts have increased
selling, general and administrative expenses during the past year, and
management believes that these expenses will continue to increase as these
brands require additional support through the early stages of their growth.
There can be no assurance that the introduction of these concepts will continue
to result in increased revenues, or that such revenues will exceed the related
costs.
8
Results of Operations
Three Months Ended September 30, 1999 Compared with Three Months Ended September
30, 1998
Our income before cumulative effect of change in accounting principle
decreased 40.2% to $283,000 in the three months ended September 30, 1999 from
$473,000 in the three months ended September 30, 1998. Our basic and diluted
income before cumulative effect of change in accounting principle per share
decreased 40.0% to $0.03 per share in the three months ended September 30, 1999
from $0.05 per share in the three months ended September 30, 1998. Such
decreases are attributable primarily to decreases in 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 2.9% to $4,937,000
in the three months ended September 30, 1999 from $4,800,000 in the three months
ended September 30, 1998. This increase was due primarily to the 5.4% increase
in the number of open outlets from 2,009 at September 30, 1998 to 2,117 at
September 30, 1999. Continuing fees increased at a slower rate than the rate of
outlet openings primarily because of a decrease in average unit volumes for
existing outlets.
Subfranchisor fees, master license fees and fees from the sales and
resales of franchises decreased 1.0% to $1,108,000 in the three months ended
September 30, 1999 from $1,119,000 in the three months ended September 30, 1998.
The following table summarizes the components of these fees for the three months
ended September 30, 1999 and 1998:
Three Months Ended
September 30,
(amounts in 000's) 1999 1998 Change
------ ------ ------
Amortization of deferred subfranchise
and master license fees $ 387 $ 362 6.9%
Franchise fees 588 659 -10.8%
Resale and other fees 133 98 35.7%
====== ====== ======
Total $1,108 $1,119 -1.0%
====== ====== ======
The amortization of deferred subfranchise and master license fees for the
three months ended September 30, 1999 was 6.9% higher than the amortization for
the same three months of the prior fiscal year, due primarily to amortization of
deferred revenues related to the sales of new Maui Tacos subfranchise
territories between the two periods. Revenues from sales of franchises decreased
10.8% in the three months ended September 30, 1999 due primarily to a 31.7%
decrease in new outlets opened, from 120 new outlets in the three months ended
September 30, 1998 to 82 new outlets in the three months ended September 30,
1999. This decrease was partially offset by an increase in the revenue per
outlet, as well as the recognition of franchise fees for franchises sold but not
opened after two years. Resale and other fees increased 35.7% in the three
months ended September 30, 1999 due primarily to more outlets and subfranchise
territories being transferred to new owners.
Store equipment sales decreased 19.1% to $2,098,000 in the three months
ended September 30, 1999 from $2,592,000 in the three months ended September 30,
1998. This decrease was consistent with the 31.7% decrease in new outlets opened
during the three months ended September 30, 1999 when compared to the same
period of the prior fiscal year. The decrease in sales to Blimpie franchises was
partially offset by higher sales per location due to Maui Tacos and co-branded
Blimpie / Pasta Central sales, as well as an increase in sales to
non-affiliates.
9
License fees and other income for the three months ended September 30,
1999 increased 30.1% to $134,000 from $103,000 in the three months ended
September 30, 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 majority-owned
subsidiary of ours, and currently is the only outlet operated by us. Company
restaurant sales were $125,000 for the three months ended September 30, 1999.
There were no such sales in the three months ended September 30, 1998. 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 1.9%
to $3,037,000 in the three months ended September 30, 1999 from $2,980,000 in
the three months ended September 30, 1998. This increase is due primarily to the
2.9% increase in continuing fees, and was partially offset by the decrease in
franchise fees.
Store equipment cost of sales decreased 20.8% to $1,889,000 in the three
months ended September 30, 1999 from $2,384,000 in the three months ended
September 30, 1998. This decrease was due to the 19.1% decrease in store
equipment sales, and by an increase in the gross profit on those sales. The
gross margin on store equipment sales increased to 10.0% in the three months
ended September 30, 1999 from 8.0% in the three months ended September 30, 1998
due to a favorable product mix during the current year.
Selling, general and administrative expense rose 10.9% to $2,991,000 in
the three months ended September 30, 1999 from $2,697,000 in the three months
ended September 30, 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. 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. Therefore, we expect selling, general and administrative
expenses will continue to increase for at least the next year.
Company restaurant operations were $121,000 in the three months ended
September 30, 1999, with no comparable expense in the three months ended
September 30, 1998. The first Company-owned outlet was opened in October 1998.
Interest income in the three months ended September 30, 1999 decreased by
1.6% to $182,000 from $185,000 in the three months ended September 30, 1998.
This decrease resulted from our sale of a portion of our U.S. Treasury notes in
February 1999 in order to satisfy our remaining obligation for the purchase of
the various international trademarks and service marks of the Blimpie brand in
February 1997.
The effective income tax rates (income taxes expressed as a percentage of
pre-tax income) were 48.2% in the three months ended September 30, 1999 and
35.9% excluding the impact of the change in accounting principle in the three
months ended September 30, 1998. The increase in the effective rate was due to
certain losses of our majority-owned subsidiary, Maui Tacos International, Inc.,
which may not be deductible for tax purposes in fiscal 2000.
10
Liquidity and Capital Resources
Our cash used in operating activities was $657,000 in the three months
ended September 30, 1999. We generated $1,153,000 in cash flows from operating
activities in the three months ended September 30, 1998. The change between the
two periods is due primarily to a decrease in accounts payable and other current
liabilities and lower income before cumulative effect of change in accounting
principle.
Net cash provided by investing activities during the three months ended
September 30, 1999 was $1,925,000. Net cash used in investing activities during
the three months ended September 30, 1998 was $246,000. The change between the
two periods is due primarily to proceeds from the sale of securities with no
offsetting purchases in the current year. The proceeds in the current period
were used to purchase investments with maturities of less than three months, so
the investments have been included in cash and cash equivalents as of September
30, 1999.
There were no cash flows from financing activities in the three months
ended September 30, 1999. Net cash used in financing activities was $104,000 in
the three months ended September 30, 1998. The decrease in the cash used in
financing activities was due to the absence of any purchases of treasury stock
in the current year period.
The Company's primary liquidity needs arise from expansion, capital
expenditures and trademark obligations. These needs are primarily met by the
cash flows from operations and from the Company's cash and investments. The
Company believes that the cash flows from operations and the Company's cash and
investments will be sufficient to fund its future liquidity needs for the
foreseeable future.
11
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following exhibits are filed as part of this
report:
Exhibit no. Description
27 Financial Data Schedule
(b) No Current Reports on Form 8-K were filed by the Company
during the quarter for which this report has been filed.
12
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Blimpie International, Inc.
(Registrant)
Dated: December 16, 1999 By: /s/ Brian D. Lane
-------------------------------------
Brian D. Lane
Vice President and Chief Financial
Officer (Principal Financial Officer)
13