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, 2001
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 September 18, 2001 was approximately
$6,281,000. Solely for purposes of the foregoing calculation all of the
registrant's directors and officers are deemed to be affiliates.
There were 9,163,659 shares of the registrant's common stock outstanding as of
October 8, 2001.
Table of Contents
Item
Number Page
----------- ------------
PART I
1. Business 3
Forward-looking Statements 3
Recent Developments - Anticipated Sale of the Company 3
General 4
Financial Information About Business Segments 6
The BLIMPIE Outlet Franchise 6
The PASTA CENTRAL Outlet Franchise 6
The MAUI TACOS Outlet Franchise 6
Our Subfranchises and Master Licenses 6
Services to Franchisees 8
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 14
Employees 15
2. Properties 15
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
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
8. Financial Statements 26
9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 26
PART III
10. Directors, Executive Officers 27
11. Executive Compensation 28
12. Security Ownership of Certain Beneficial Owners and
Management 30
13. Certain Relationships and Related Transactions 31
PART IV
14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K 32
14(a)(1) Financial Statements 32
14(a)(2) Financial Statement Schedule 32
14(a)(3) Exhibits 32
14(b) Reports on Form 8-K 36
SIGNATURES 37
2
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.
Recent Developments - Anticipated Sale of the Company
On October 5, 2001, we entered into an agreement and plan of merger with an
investor group headed by Jeffrey Endervelt (the "Endervelt Group"), one of our
subfranchisors. Pursuant to the merger agreement, Mr. Endervelt's company,
Sandwich Acquisition Corporation ("SAC"), will merge with and into us, and we
will be the surviving corporation.
In the merger, the Endervelt Group will acquire all of our outstanding
common stock at a price of $2.80 per share, or approximately $25,800,000. The
transaction, which is expected to close during the first quarter of calendar
2002, is subject to the approval of our shareholders.
In connection with the merger agreement, the following members of our
senior management, who currently own approximately 58% of our outstanding
shares, entered into a voting agreement with SAC:
. Anthony P. Conza, Chairman of the Board and Chief Executive Officer
. David L. Siegel, Vice Chairman of the Board and Chief Operating Officer
. Charles G. Leaness, a director and Executive Vice President
. Patrick Pompeo, a director and Executive Vice President and
. Joseph Conza, a Senior Vice President
In accordance with the voting agreement, those officers have agreed to vote
their shares in favor of the merger agreement, and have granted to SAC a proxy
to vote their shares in favor of the transaction. Those officers may terminate
the voting agreement and revoke their proxies if our Board of Directors
withdraws its recommendation of the merger in favor of a superior proposal (a
term which is defined in the merger agreement). Additionally, the merger
agreement provides that we will have the ability to conduct a market check for a
30-day period. The merger agreement allows us to terminate the merger if the
Board determines that it has received a superior proposal, which would require
the payment by us of a break-up fee of $1.3 million plus up to $200,000 of
expenses.
The foregoing statements have been included in this Report for the sole
purpose of disclosing material information that we believe anyone reading this
Report should know about us. Such statements should not be considered by anyone
---
to be a solicitation of any shareholder's proxy. We will file a proxy statement
and other relevant documents concerning the proposed merger transaction with the
SEC. We urge all of our shareholders to read the proxy statement when it
becomes available and any other relevant documents filed with the SEC because
they will contain important information about the proposed transaction.
Shareholders will be able to obtain the documents that we file with the SEC free
of charge at
3
the Web site maintained by the SEC at www.sec.gov. In addition, interested
investors may obtain copies of the documents we file with the SEC free of charge
by requesting them in writing from us at the following address: Blimpie
International, Inc., 1775 The Exchange, Atlanta, GA, 30339 Attention: Investor
Relations, or by telephoning our Investor Relations Department at (800) 447-6256
Ext. 165.
General
We engage in franchising, subfranchising and master licensing of the
trademarks, trade names, service marks, logos, know-how, marketing concepts and
marketing programs for each of our brands. We franchise our BLIMPIE Subs &
Salads and PASTA CENTRAL brands directly through our Company, and we franchise
the MAUI TACOS and SMOOTHIE ISLAND brands through our majority owned subsidiary,
Maui Tacos International, Inc. ("MTII"). Our menu of BLIMPIE Subs & Salads,
consisting of quick-service, healthy, sub sandwiches, is offered by
approximately 2,000 franchise outlets operating throughout the United States,
Puerto Rico and in 14 other countries. BLIMPIE is our registered trademark.
Unless otherwise specified, the term "BLIMPIE" includes BLIMPIE. As of June 30,
2001, there were eight PASTA CENTRAL restaurants operating in the United States
and Puerto Rico, 15 MAUI TACOS restaurants operating in the United States,
including two that are owned by us, and 80 SMOOTHIE ISLAND locations located
throughout the United States, Puerto Rico and in four other countries. 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 operate the subfranchise territory in
Puerto Rico, but do not operate any other 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.
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 franchisees with the
authorized required raw materials.
Our rights regarding the various BLIMPIE trademarks employed by all of our
BLIMPIE outlets located throughout the world, and the methodology and know-how
which comprise our BLIMPIE marketing concepts and programs, are limited to
specific geographic regions throughout the world, pursuant to written licensing
agreements between us and Metropolitan Blimpie, Inc. ("MBI"), a company with
which we have no affiliation. See "Business - Trademarks, Trade Names, Service
Marks and Logos; Know-How and Methods of Operation." Since our incorporation in
1977, the chain of franchised BLIMPIE outlets has expanded to encompass 1,955
outlets located in 47 states, Argentina, Aruba, Canada, Cyprus, Dominican
4
Republic, Great Britain, Guam, Lebanon, Mexico, Panama, Poland, Puerto Rico,
Saudi Arabia, South Africa and Venezuela (as of June 30, 2001). See "Business -
Outlet Locations." There are approximately 250 additional BLIMPIE outlets which
are controlled by MBI that are located in areas of the country in which we do
not possess rights to license the BLIMPIE trademarks or sell franchises or
subfranchises.
Commencing in 1977, we began selling individual outlet franchises and area
subfranchises. In 1995, we began selling master licenses for various territories
located outside of the United States. We and MBI own, respectively, undivided
60% and 40% interests in the BLIMPIE Trademarks. We distribute the
internationally registered BLIMPIE Trademarks pursuant to an agreement with MBI
which provides for automatic annual renewals until July, 2090. See "Business -
Trademarks, Trade Names, Service Marks and Logos; Know-How and Methods of
Operation."
We derive our revenue primarily from four sources: (1) store equipment
sales, (2) continuing franchise fees based upon each franchisee's gross sales,
(3) fees from the grant of individual outlet franchises and (4) fees from the
grant of subfranchises to Subfranchisors and the grant of master licenses to
Master Licensors worldwide. Individual outlet franchises are granted for both
"traditional" locations such as free-standing buildings, shopping malls, and in-
line urban store clusters, and "nontraditional" locations, i.e., convenience
stores, institutional food service entities, colleges, schools, mass feeders
(such as institutional food service providers and in-facility commissaries) and
hospitals. These locations may sell or otherwise make all or part of our various
food product brands available to their customers, clientele or attendees through
facilities that may or may not contain all of the components normally associated
with a traditional outlet, such as kitchen, food preparation and customer dining
areas. We also have commenced developing several new types of product
distribution formats, some of which we have begun to introduce and some of which
we anticipate introducing in the future.
The initial franchise fee currently is $18,000 for a traditional BLIMPIE
location, $28,000 for a co-branded BLIMPIE / PASTA CENTRAL location, $20,000 for
a co-branded MAUI TACOS / SMOOTHIE ISLAND location and $2,500 for a SMOOTHIE
ISLAND location. The initial franchise fee for a nontraditional franchise can
range between $1.00 and $15,000 depending on the number of nontraditional
transactions executed, the location of the nontraditional franchisee, the
marketing area in question and other subjective factors. After a location has
been found and the lease or purchase thereof has been negotiated by the
franchisee and approved by us, the franchisee then constructs and installs the
outlet in accordance with design and layout specifications provided by us.
Franchisees are required to maintain specified standards as to food quality,
menu items, uniforms, appearance, sanitation and all other aspects of outlet
operations.
In addition to the initial franchise fee, a franchisee also pays all other
costs and expenses related to the installation of the outlet at an approved
location. An equipment package, which typically includes slicing machines,
refrigeration cases, food preparation counters and signs bearing the registered
logos, costs approximately $25,000 to $40,000 for a BLIMPIE outlet, and may cost
in excess of $100,000 for a co-branded BLIMPIE / PASTA CENTRAL or MAUI TACOS /
SMOOTHIE ISLAND outlet. Construction of an outlet, which generally includes
walls, floor, ceiling, plumbing and electrical work required to modify an
existing premises to an approved design costs between $10,000 to $80,000 to
complete. These costs, plus the initial lease security payable to the owner of
the leased premises and utility deposits to the various 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%. Three 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.
5
Financial Information About Business Segments
See Note 13 to our audited consolidated financial statements.
The BLIMPIE Outlet Franchise
A BLIMPIE outlet is a non-cooking sandwich outlet characterized by portion-
controlled meat and cheese combinations generally sold on six inch or twelve
inch French/Italian white or wheat bread garnished with special BLIMPIE spices
and dressings along with salads and other food items. The sandwich products sold
in these outlets are known as BLIMPIE sandwiches and the outlets themselves are
known as BLIMPIE outlets.
We require each of our franchisees to offer food products from a list of
products authorized by us. Such products for a BLIMPIE outlet include hot
sandwiches, including items such as Italian meatball sandwiches and chicken
breast sandwiches, and cold sandwiches, including items such as roast beef and
club sandwiches. Our "signature" item is the "BLIMPIE Best" sandwich, which
consists of ham, salami, cappacola, prosciuttini and provolone. In addition, all
BLIMPIE sandwiches are dressed at no additional charge with tomatoes, lettuce,
onions, oil and vinegar and oregano. We establish recommended prices for food
products that franchisees may or may not adopt. Accordingly, such prices differ
depending upon geographic location. For example, in New York City a "BLIMPIE
Best" may sell for $4.19, while in Atlanta, Georgia, the same sandwich may be
purchased for $3.19.
In addition to the authorized BLIMPIE sandwich line, BLIMPIE outlets also
offer a variety of salads, baked products, and a variety of other products
produced mostly from raw frozen dough products and baked in the approved BLIMPIE
deck oven installed in each BLIMPIE outlet. Prices for all authorized products
vary depending upon geographic location.
The PASTA CENTRAL Outlet Franchise
A PASTA CENTRAL outlet offers Italian-style baked pasta dishes, gourmet
pizzas, and salads for in-store dining, take-away, or for final preparation and
consumption at home. The concept currently is 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 that has been marinated in Hawaiian
spices. The outlets are known as MAUI TACOS outlets.
The MAUI TACOS product line consists of traditional Mexican items such as
tacos, quesadillas, and burritos filled with charbroiled steak, chicken, and
seafood entrees marinated in pineapple and lime juices with Hawaiian spices. As
an accompaniment, tortilla chips, guacamole, and a variety of salsas are
available.
Our Subfranchises and Master Licenses
Each Subfranchisor of one of our brands pays a subfranchise fee that is
based upon the population of the subfranchise territory. At present, the fee,
which can typically range from $10,000 to over
6
$1,000,000, is based upon a calculation of $.10 per person located within the
area that is the subject of the subfranchise for BLIMPIE and MAUI TACOS
subfranchise territories. Domestic PASTA CENTRAL territories are managed by
BLIMPIE subfranchisors, and SMOOTHIE ISLAND territories are managed by either
the BLIMPIE or MAUI TACOS subfranchisor in the area. We do not charge a separate
fee for the right to subfranchise our PASTA CENTRAL or SMOOTHIE ISLAND brands
for existing BLIMPIE or MAUI TACOS subfranchisors located in the United States.
In addition to paying our subfranchise fees, each Subfranchisor must join and
make contributions to a Subfranchisor advertising cooperative association
sponsored by us, which purchases franchise advertisements in national
periodicals for the benefit of all Subfranchisors. A Subfranchisor's annual
contribution to the advertising cooperative typically ranges between $1,200 and
$6,000. We make voluntary contributions to the cooperative association that
match the contributions made by the Subfranchisors.
We award subfranchises consisting of a specifically defined territory
within which the Subfranchisor has the exclusive right to solicit potential
purchasers of our franchises for a period of 50 to 60 years. Such individual
purchasers of our franchises then purchase, or sublicense, the right to use our
trademarks, trade names, service marks, logos, marketing concepts and marketing
programs directly from us.
Our standard form of subfranchise agreement grants to the Subfranchisor the
exclusive license to purchase the territory for a one year period, followed by
four to ten renewal terms, all but the last of which are annual in duration. The
license is subject to our continuing right to market and sell the trademarks,
trade names, service marks, logos, marketing concepts and marketing programs
within specified territories. If all terms and conditions of the subfranchise
agreement have been met during the initial one-year term and each of the
subsequent one year renewal terms, a 50 to 60 year right is granted during the
final renewal term upon payment of the fee set forth in the agreement. Each
subfranchise agreement obligates the Subfranchisor to satisfy all of the
operational obligations owed by us to each franchisee within the Subfranchisor's
territory at the sole expense of the Subfranchisor; to use his best efforts to
promote the sale of franchises within his territory; and to meet certain sales
quotas. In the event of the Subfranchisor's default, each such agreement is
terminable by us upon giving thirty days' notice under certain provisions of the
agreement. The Subfranchisor may terminate the agreement upon certain defaults
by us, if such defaults remain uncured for more than 30 days to more than 75
days, depending on the nature of the default.
Subfranchisors who are in full compliance with the obligations imposed upon
them pursuant to the subfranchise agreement are entitled to receive one half of
each initial franchise fee (after deductions for sales commissions, design, and
training fees) paid by new franchisees establishing outlets within the
Subfranchisor's territory, and one half of the 6% of gross sales continuing
franchise fees paid by such franchisees pursuant to their respective franchise
agreements.
For territories outside of the United States, Canada and Puerto Rico, we
grant master license agreements that are generally equivalent to a domestic
subfranchise agreement. The significant 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, 2001 there were 84 existing domestic BLIMPIE subfranchisors, at
least one of which is located in each of the 47 states in which the 1,894
domestic BLIMPIE outlets are located; six Canadian BLIMPIE subfranchisors, which
are located in the Provinces of Alberta, British Columbia, Manitoba, Ontario and
Saskatchewan, in which 13 BLIMPIE outlets are located; 12 Master Licensors for
the
7
countries of Argentina, Aruba, Cyprus, Dominican Republic, Great Britain, Guam,
Lebanon / Saudi Arabia, Mexico, Panama, Poland, South Africa, and Venezuela in
which collectively there are 41 outlets located, and one Company-operated
territory in Puerto Rico in which seven BLIMPIE outlets are located. Included in
these BLIMPIE outlets were eight BLIMPIE / PASTA CENTRAL co-branded outlets, one
each in Georgia, South Carolina, Texas and Wyoming and four in Puerto Rico.
Also as of June 30, 2001, there were 13 domestic MAUI TACOS subfranchisors
and 15 domestic locations in operation. There were five MAUI TACOS outlets in
operation in Georgia, two in Hawaii, and one each in Alabama, Florida, Illinois,
Minnesota, New Jersey, New York, Texas and Washington, D.C. We own two of these
locations, but intend to sell or close the location in New York City early in
fiscal 2002.
Such subfranchises and master licenses range in size, depending upon the
specific geographical area involved, from entire countries or states to a
specific county or counties. See "Business - Outlet Locations"; "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Results of Operations."
Services to Franchisees
On a continuing basis, franchisees in the U.S., Canada and Puerto Rico are
furnished with advisory assistance from us regarding outlet operations, new menu
items and new marketing aids developed by us. No additional fees are charged to
franchisees for these services or for the training program described below. We
also provide, when we, in our sole discretion deem it appropriate to do so,
services to franchisees by visiting their outlets and inspecting them for
quality, cleanliness and service. A written operation inspection analysis is
provided after each inspection. Outside of the U.S., Canada and Puerto Rico,
Master Licensors provide all such services, with our assistance.
We provide training for new franchisees in the U.S., Canada and Puerto Rico
consisting of (i) 40 hours of pre-training classes at an existing outlet
approved by us, (ii) 80 hours of classroom training at our Georgia training
center, and (iii) an additional 80 hours of operational post-training at an
existing outlet approved by us. We provide training for new Subfranchisors and
Master Licensors consisting of two weeks of classroom training at our Georgia
training center, plus 80 hours of operational training at an existing outlet
approved by us. The training program addresses all phases of outlet operations
from service training to financial management, including the various controls of
the marketing system specified in the Operations Manual. The training program
covers inventories, ordering procedures, hiring and firing, equipment
maintenance, product controls, bookkeeping and accounting. The training provided
to Subfranchisors and Master Licensors also encompasses franchisor-related
activities including, but not limited to, franchise sales, communication,
analysis of franchisee construction needs and the fulfillment thereof.
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 its territory with operational assistance throughout the
term of its 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
8
collateral assignment of the lease to the jointly owned corporation. In all such
cases, it is the franchisee's sole obligation to find the premises to be leased
and to obtain our approval of the site of his franchised outlet. Once the
location is approved, we (or our leasing subsidiary) will negotiate and enter
into a lease of the premises, subject to the franchisee's approval.
Subsequently, we (or our leasing subsidiary) will enter into a sublease with the
franchisee for the entire term and renewal term, if any, of the lease of the
premises less one day (generally 10 to 20 years). The percentage royalty and
advertising payments due under the franchise agreement constitute additional
rent under the sublease. Payment of the percentage royalties and advertising
fees under the franchise agreement satisfies the additional rental payment
obligation under the sublease. All rents specified in the lease are paid
directly by the franchisee to the landlord specified in the lease pursuant to
the cancelable authorization by the subsidiary leasing corporation set forth in
the sublease. Accordingly, except in a rare case in which we or one of our
subsidiaries may be the owner and landlord of a franchisee's outlet, no funds
that constitute rental payments are ever collected for use by us. We have no
payment or performance obligations with respect to any of the existing outlet
location leases, except for less than one percent of those leases.
The leasing/subleasing mechanism described above enables us to maintain
control of each outlet premises and to enforce franchisee compliance with our
authorized product line and quality standards. Additionally, since percentage
royalties and advertising fees constitute additional rent under the subleases,
the leasing/subleasing mechanism gives us an additional vehicle through which to
enforce our rights regarding receipt of such payments and payments to the
landlord of the outlet premises. Typically, upon a franchisee's failure to make
timely rental payments, our leasing subsidiary will receive notice from the
landlord. The franchisee is then notified of its default and is given the
opportunity to cure the default. If the franchisee fails to cure the default,
eviction proceedings usually will be instituted by either the unaffiliated
landlord or our leasing subsidiary. Following eviction of the franchisee, we,
with the landlord's approval, will attempt to sell the existing franchised
outlet to a new franchisee who will take possession of the premises subject to
the terms of the prior lease and sublease, or under a new lease negotiated by us
with the landlord, and a new sublease. In cases where a lease has been
terminated and/or a franchisee has been evicted and a replacement franchisee
cannot be obtained by us to cure all defaults and operate or re-open the outlet
in question, it is our general policy either to abandon the location and the
leasing subsidiary, or to dispose of ownership of the leasing subsidiary to
unaffiliated parties for nominal consideration.
Substantially all leases executed by our various leasing subsidiaries
during the past five years include provisions (and it is our intention that all
future leases will include provisions) that the respective landlords thereunder
will not directly or indirectly claim or institute legal proceedings against us.
All of the 1,955 existing BLIMPIE and BLIMPIE / PASTA CENTRAL outlets and
the 15 MAUI TACOS outlets (as of June 30, 2001) 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 $95,000. 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.
9
Outlet Locations
As of June 30, 2001, we operated one MAUI TACOS outlet in Atlanta, Georgia,
and one in New York City, and had four franchised MAUI TACOS locations in
Georgia, two in Hawaii, and one in each of Alabama, Florida, Illinois,
Minnesota, New Jersey, Texas and Washington, D.C. The following table sets forth
the number of BLIMPIE franchised outlets in operation as of June 30, 2001, and
includes eight co-branded BLIMPIE / PASTA CENTRAL locations, four of which were
located in Puerto Rico and one in each of Georgia, South Carolina, Texas and
Wyoming:
Number of Number of
Location Outlets Location Outlets
United States outlets: United States outlets (cont'd):
Alabama 16 Pennsylvania 34
Alaska 7 Rhode Island 3
Arizona 82 South Carolina 57
Arkansas 23 South Dakota 2
California 71 Tennessee 61
Colorado 36 Texas 121
Connecticut 43 Utah 34
Florida 203 Vermont 1
Georgia 205 Washington 33
Hawaii 12 West Virginia 15
Idaho 18 Wisconsin 26
Illinois 32 Wyoming 11
-----
Indiana 63
Iowa 61 United States total 1,894
-----
Kansas 14
Kentucky 28 International outlets:
Louisiana 40 Argentina 5
Maine 2 Aruba 1
Massachusetts 6 Canada 13
Michigan 92 Cyprus 4
Minnesota 29 Dominican Republic 1
Mississippi 8 Great Britain 4
Missouri 63 Guam 1
Montana 8 Lebanon 1
Nebraska 27 Mexico 1
Nevada 20 Panama 1
New Hampshire 4 Poland 8
New Jersey 47 Puerto Rico 7
New Mexico 11 Saudi Arabia 7
New York 72 South Africa 1
North Carolina 48 Venezuela 6
-----
North Dakota 6
Ohio 71 International total 61
-----
Oklahoma 10
Oregon 18 Total 1,955
=====
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
10
provisions designed to ensure the fairness of the franchise agreements to
franchisees by, among other means, including limitations, prohibitions and/or
restrictions pertaining to the assignability of the rights of franchisees; a
franchisee's right to own or be involved in other businesses; franchisee
membership in trade associations; and franchisor interference with franchisee
employment practices.
In addition to the foregoing state regulations, the Federal Trade
Commission has adopted rules and guidelines that require franchisors to make
certain disclosures to prospective franchisees prior to the offer or sale of
franchises. In addition to requiring the disclosure of information necessary for
a franchisee to make an informed decision on whether to enter into a franchise
relationship, the guidelines delineate the circumstances in which franchisors
may make predictions on future sales, income and profits. We do not furnish or
authorize our salespersons to furnish any oral or written information on the
actual or projected sales, costs, income or profits of a franchise. Failure to
comply with such rules constitutes an unfair trade practice under Section 5 of
the Federal Trade Commission Act.
Several state and federal courts have revealed a tendency to be sympathetic
to and desirous of protecting the rights and interests of franchisees in
litigation with their franchisors. Taking such tendencies into consideration, we
may modify our licensing activities, or we may choose not to enforce certain of
our rights and remedies under certain franchise and lease agreements. However,
we do not believe that such modifications, delays, or failures will have a
materially adverse effect on our operations. The law applicable to franchise
operations and relationships is rapidly developing, and we are unable to predict
the effect on our operations of additional requirements or restrictions, which
may be enacted or promulgated, or of court decisions which may generally be
adverse to the franchise industry. We believe that we have conducted and are
conducting our business in substantial compliance with all applicable laws and
regulations governing our operations.
The franchisees' outlets also are subject to regulatory provisions relating
to the wholesomeness of food, sanitation, health, safety, fire, land use and
environmental standards. Suspension of certain licenses or approvals, due to
failure to comply with applicable regulations or otherwise, could interrupt the
operations of the affected outlet or otherwise adversely affect the outlet. The
franchisees are also subject to federal and state laws establishing minimum
wages and regulating overtime and working conditions. Changes in such laws could
result in an increase in labor costs that could adversely affect the outlet.
We believe that we are conducting our business in substantial compliance
with all applicable laws and regulations governing our operations.
Trademarks, Trade Names, Service Marks and Logos; Know-How and Methods of
Operation
We regard our trademarks and the methodologies and know-how which comprise
each of the marketing concepts and programs employed by our various brands
(each, a "Marketing System") as having significant value and as being important
to our marketing efforts. Each of our franchise and subfranchise agreements
authorizes our franchisees and subfranchisors, respectively, to use the
trademarks and Marketing System pertaining to the brand that is the subject of
such agreements, along with all other future trademarks pertaining thereto.
Our trademarks and Marketing Systems may only be used by traditional and
nontraditional outlets that sell our products, and by our licensed distribution
points. There are specific product limitations regulating each outlet so that
franchisees may sell only those products authorized by their particular
franchise agreement and Operations Manual, or that we otherwise approve. Any
variation from the authorized product line is actionable by us.
We currently own an undivided 60% interest in the domestic and
international BLIMPIE trademarks. The remaining 40% interest in those trademark
rights is owned by MBI. Through various agreements that we have entered into
with MBI, the trademark rights are shared by both MBI and us. Both companies
have the exclusive rights to the trademarks in certain domestic territories, and
for the remaining territories, we have licensed the rights to the trademarks
from MBI in exchange for a licensing
11
fee generally equal to 30% of the revenues, after deducting direct expenses
incurred by us in the territories.
The territories for which we have licensed the right to distribute the
BLIMPIE trademarks and license the BLIMPIE Marketing System from MBI include:
Alaska, Arkansas, Northern California, Colorado, Hawaii, Iowa, Kansas, Missouri,
Nebraska, Nevada, North Dakota, Oklahoma, South Dakota, and all territories
outside of the United States.
The territories in which MBI has retained the right to distribute the
BLIMPIE trademarks and license the BLIMPIE Marketing System (the "MBI
Territories") include Delaware, Maryland, New Jersey (except for portions of the
northeastern section of the State), the counties of New York, Queens, Kings,
Richmond, Rockland, Bronx and Westchester in New York, Pennsylvania (from the
eastern border westward to and including Harrisburg), Virginia and Washington,
D.C.
We possess the exclusive right to license the BLIMPIE trademarks and
BLIMPIE Marketing System in the area of Northern California between the southern
border of Monterrey and the northern border of the state. Blimpie of California,
Inc. ("BOC"), a corporation which is not affiliated with us, possesses the
exclusive right to license the BLIMPIE trademarks and BLIMPIE Marketing System
throughout the balance of the state of California. A number of franchised
BLIMPIE outlets located in Southern California have been established pursuant to
trademark licenses granted by BOC. We receive 2.5% of the gross sales by such
franchisees, and share half of such receipts with MBI.
The agreement we entered into with MBI in 1991 with respect to the
licensing of the BLIMPIE trademarks and the BLIMPIE marketing system outside of
the United States (the "1991 Agreement") provides for automatic annual renewals
until July 2090, provided that we make all payments due to MBI, subject to a
minimum annual payment of $100,000. If we ever failed to satisfy our payment
obligations under that agreement, we would lose the right to license the BLIMPIE
trademarks and BLIMPIE Marketing System outside of the U.S. and throughout the
MBI Territories. From July 1991 through June 30, 2001, we paid approximately
$4,718,000 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
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.
12
Also, we are the sole owners of the trademark rights relating to PASTA
CENTRAL.
To our knowledge, there are no infringing uses of any of our trademarks in
any territory where any of our franchisees has established or attempted to
establish operations that would in any way materially affect the use of such
trademarks by us or by any of our franchisees.
Research and Development
We conduct ongoing development of new menu items and test markets such
items, as well as new company-developed food marketing aids, in selected
outlets. Although such research and development activities are important to our
business, the amounts that we have previously expended for these activities have
not been material.
Business Expansion
Domestic Expansion. We plan to grow through continued development of
------------------
traditional and nontraditional BLIMPIE outlets, co-branded BLIMPIE / PASTA
CENTRAL outlets, MAUI TACOS outlets and SMOOTHIE ISLAND outlets co-branded with
the other outlets throughout the U.S. We also plan to continue to develop new
types of BLIMPIE distribution points throughout the U.S., including expanding
the vending machine program, the school lunch program, and other initiatives.
International Expansion. We continue to grow internationally through the
-----------------------
sale of master license agreements. The agreements are analogous to subfranchise
agreements, except that the master licensor or one of our wholly-owned
subsidiaries enters into franchise agreements directly with the franchisees in
each international market. The master licensor, in effect, is our representative
in that specific country and is obligated to provide all of the support services
and selling activities required to develop the franchised market. Initially,
however, we will provide administrative support to assist the master licensors.
As of June 30, 2001, we had entered into BLIMPIE master license agreements for
the following countries: Argentina, Bahrain, Canada, Cyprus, Dominican Republic,
Great Britain, Greece, Guam, Kuwait, Mexico (primarily states in the
northeastern and northwestern parts of the country), Northern Ireland, Oman,
Panama, Poland, Portugal, Qatar, The Republic of Ireland, Romania, Saipan, Saudi
Arabia, South Africa, United Arab Emirates, Uruguay, and Venezuela. The master
licensors for Mexico have purchased the master license for PASTA CENTRAL as
well. Currently, we operate the master license territory in Puerto Rico.
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. We began selling BLIMPIE
branded peppers, potato chips and potato sticks during the year ended June 30,
1998 in a limited number of BLIMPIE outlets. We have expanded this initiative by
increasing the number of BLIMPIE branded products and the number of locations in
which they are sold. No assurances can be given, however, that the sale of
BLIMPIE branded products will continue to generate increased revenue for us.
Acquisition of Existing Franchise Concept. On October 29, 1997 we entered
-----------------------------------------
into an agreement with Maui Tacos International, Inc. (MTII) which resulted in
our acquisition of a majority interest in MTII. See "Business - Business
Expansion - Development of New Franchise Concepts" below. We believe that our
mature infrastructure is capable of supporting additional franchise systems, and
that additional acquisitions of this nature will open up additional market
segments for our development. However, no
13
assurances can be given that additional acquisitions will be consummated, and if
consummated, that they will generate increased revenues or net income for us.
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, 2001, we had 13 subfranchise territories
operating in the United States, and had 15 locations operating, including two
Company-owned locations.
PASTA CENTRAL(TM) - This Company-created concept features baked pasta and
pizza offerings in the HMR (Home Meal Replacement) category that address current
eating trends for eat-in or take home meals. Our strategy for this concept is to
co-brand PASTA CENTRAL with BLIMPIE outlets to create natural synergies and cost
efficiencies. In the typical BLIMPIE location, the majority of sales take place
at lunchtime. We anticipate that PASTA CENTRAL will generate significant evening
traffic, since it includes meals for in-store dining, take-away, or for final
preparation and consumption at home. We expect that the two concepts can co-
exist in the same location and generate greater returns to the franchisee and us
based on higher revenues and lower costs as a percentage of these revenues. The
concept may eventually be developed as a stand-alone location. As of June 30,
2001, we had seven franchised locations and one Company-owned location operating
within BLIMPIE outlets in the United States and Puerto Rico.
SMOOTHIE ISLAND(TM) - This MTII-created concept features offerings of
blended beverages of frozen yogurt, fruit and nutritional supplements. SMOOTHIE
ISLAND will be co-branded with BLIMPIE and MAUI TACOS locations, and may also
stand alone in other venues such as airports, sporting arenas, and fitness
centers. As of June 30, 2001, there were 80 locations open and operating in 21
states and in Aruba, Canada, Guam, Mexico and Puerto Rico.
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 may
continue to incur substantial costs that will exceed the initial revenues
derived. Furthermore, no assurances can be given that we will be able to develop
sufficient market acceptance and market penetration with respect to any of the
new franchise concepts, or that we will be able to derive any revenues or net
income from such undertakings.
COMPETITION
We and our franchisees compete in the quick-service restaurant industry,
which is highly competitive with respect to price, service, outlet location and
food quality, and is often affected by changes in consumer tastes, local and
national economic conditions affecting consumer spending habits, population
trends and traffic patterns. We and our franchisees compete with an increasing
number of national chains of quick-service outlets, a number of which have
dominant market positions, and possess substantially greater financial resources
and longer operating histories than we possess.
Our most significant competitor is the Subway(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.
14
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 also could 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, 2001, we employed 109 full-time employees (including 12
officers) in our corporate offices. Twenty-two employees (including six
officers) attend to our franchisee operations support, executive management and
legal staffing needs at our New York City office; 12 employees (including one
officer) provide construction and design and franchisee operations support
services at our Houston, Texas office; and 75 employees (including five
officers) are engaged in accounting, franchisee operations support and training,
marketing and franchise development activities at our Atlanta, Georgia office.
None of our employees are covered by collective bargaining agreements. All of
our full-time employees, including executive officers, are covered by a health
plan and our 401(k) profit sharing plan.
As of June 30, 2001, we employed 49 full- and part-time employees in our
Company-owned store operations that are located in Atlanta, Georgia, Athens,
Georgia and New York, New York.
We consider our employee relations to be good. We believe that we provide
working conditions and pay salaries and bonuses that compare favorably with
those of our competitors.
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 $9,546, which is subject to escalations, plus
certain utilities and other fees. The term of the lease expires in February
2003. We also lease 16,554 square feet of office space in Atlanta, Georgia from
an unaffiliated landlord, through our wholly owned subsidiary Blimpie Capital
Corporation. The monthly payments under this lease currently approximate $22,834
and escalate to approximately $23,500 per month during the last year of the
lease term in 2003.
We also sublease 3,585 square feet of office space in Houston, Texas, on a
month-to-month basis pursuant to an oral agreement with Vet Con Management
Company, Inc. ("Vet Con"), a company wholly owned by Joseph Conza. Vet Con holds
the lease relating to such office space with a landlord unaffiliated with us. We
make monthly payments under such sublease directly to the landlord. The monthly
payments under such sublease made by us are currently $3,954 and, if we continue
to occupy the premises pursuant to our oral sublease, may escalate to include
annual common area maintenance payments during the final three years of the
lease term, which may require moderate increased payments to the landlord for
expenses incurred by the landlord in maintaining common areas.
We also own a building and are the lessee of a ground lease relating to
property in Marietta, Georgia. We purchased the building in 1984 for $80,855 and
currently sublease it to a BLIMPIE franchisee for use as a BLIMPIE outlet. There
is no mortgage on that building.
15
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 February 1998 in the San
Francisco, California office of the AAA entitled Peacox Ventures LLC v Blimpie
International, Inc. (case no. 74-114-0209-98). The claim alleges violations of
the California Franchise Investment Law, the California Unfair Practices Act,
fraud and negligent misrepresentation based on alleged misrepresentations and
omissions in the sale of franchises by our subfranchisor, who is alleged to be
our agent, as well as a claim for breach of contract based on our alleged
failure to provide operational support and assistance to the claimant. A
decision in favor of the claimant in the amount of approximately $215,000 was
rendered in October, 2000. We deposited the entire amount of the award in court,
commenced proceedings to recover approximately $50,000 owed to us by the
claimants and accrued a charge for the payment we made pursuant to the
arbitrator's decision in our audited financial statements for the year ended
June 30, 2000. We settled these proceedings during fiscal 2001 by agreeing to
relinquish our rights to the deposited amount, and to pay an additional $7,500
to resolve Peacox's claim for post-judgment interest.
An arbitration proceeding was commenced in March 2000 in the New York, New
York office of the AAA entitled Upchurch v Blimpie International, Inc. (case no.
13 114 00425 00). The claimant, one of our franchisees who formerly operated a
Blimpie outlet in California, is seeking compensatory damages of $248,000,
rescission damages of $49,000 and punitive damages in an unspecified amount
based upon allegations that a representative of one of our Subfranchisors in
California, who is alleged to be our agent, made representations regarding sales
volumes of our restaurants which amounted to earnings claims in violation of the
California Franchise Investment Law, as well as statutory and common law fraud
and an unfair trade practice. Claimant also alleged that we breached the
franchise agreement as well as an implied covenant of good faith and fair
dealing. We denied all liability, and have vigorously defended all of these
claims. A hearing was held in April, 2001, and a decision in favor of the
claimant in the amount of approximately $232,000 was rendered in August, 2001.
We believe this award will be paid under our Franchisor Errors & Omissions
insurance policy, and are in the process of submitting a request for payment
from our insurer.
An arbitration proceeding was commenced in June 2000 in the New York, New
York office of the AAA entitled Pile v Blimpie International, Inc. and Maui
Tacos International, Inc. (case no. 13 114 00585 00). The Claimant, who formerly
operated a combined Blimpie/Pasta Central/Smoothie Island restaurant in Missouri
pursuant to three separate franchise agreements, alleges that various
representatives of our company misrepresented the nature of the Pasta Central
concept and the expected revenue of Claimant's business. Claimant also alleges
that such misrepresentations constituted common law fraud and violations of the
New York franchise statute. Claimant further alleges that we violated Missouri's
franchise law by utilizing franchise agreements that contained provisions not
sanctioned under such law. Additionally, the Claimant alleges that his franchise
agreements were breached by reason of our failure to provide inadequate training
and operational assistance, and by our failure to designate a competent food
supplier. We interposed a number of defenses to and vigorously defended against
all of such claims. A hearing was held in March and May, 2001. In his post-
hearing brief, the Claimant requested damages of $404,700 plus costs and counsel
fees in an unspecified amount. No decision in the proceedings was rendered
prior to the date of this Report.
An arbitration proceeding was commenced in February 2000 in the New York,
New York office of the AAA entitled Sheskier, et al v Blimpie International,
Inc. (case no. 13 114 00309 00). Claimants are franchisees who formerly owned a
Blimpie outlet in Montgomery, NY. They claim that we violated New York's
franchise law by failing to disclose the litigation history of one of our
franchise development managers in our franchise disclosure document. They also
allege, that the franchise development manager, who is alleged to have been our
agent, made various misrepresentations in connection with the purchase of their
franchises, and that we failed to provide operational assistance that we were
16
contractually obligated furnish to them. We interposed a number of defenses to
and vigorously defended against all of such claims. A hearing was held in
January and April 2001. In his post-hearing brief, the Claimants requested
compensatory damages of $287,000 and pre-judgment interest in the amount of
$120,539, as well as an unspecified amount for attorney's fees, costs and
punitive damages. No decision was rendered prior to the date of this Report.
An action entitled OTR Associates v IBC Services, Inc. a/k/a International
Blimpie Corporation a/k/a Blimpie International, Inc. and Garden State Blimpie,
Inc. was commenced in the Superior Court of the State of New Jersey, Law
Division, Middlesex County under Case No. L-4650-98. Plaintiff, a landlord of
premises where a former franchisee operated its business, sued two of the
Company's leasing subsidiaries for failure to pay rent under the lease. A non-
jury trial took place in December 2000. At the close of the evidence, the
Company was added as a defendant and the Court entered judgment against all
defendants, including the Company, jointly and severally, in the amount of
$208,602 inclusive of interest through the date of the judgment's entry. The
Company and its two subsidiaries have appealed the judgment to the Appellate
Division of the Superior Court of New Jersey (Docket No. A-2826-00T2) where it
is currently pending.
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 61 Chairman and Chief Executive Officer
David L. Siegel 57 Vice Chairman, Chief Operating Officer and General Counsel
Patrick J. Pompeo 62 Executive Vice President, Research and Development / Procurement
Charles G. Leaness 51 Executive Vice President - Senior Corporate Counsel
and Secretary, Chief Executive Officer, Maui Tacos
International, Inc.
Joseph A. Conza 47 Senior Vice President, President - B I Concept Systems, Inc.
Robert S. Sitkoff 48 Senior Vice President, Corporate Services
Joseph W. Morgan 39 Senior Vice President, President - BLIMPIE Subs & Salads
Brian D. Lane 39 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 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
17
Harvard University's JFK School of Government. Mr. Conza is the brother of
Joseph A. Conza, the brother-in-law of Patrick Pompeo and the father-in-law of
Joseph Morgan.
Mr. Siegel, one of our co-founders, served as our Executive Vice President
and General Counsel and as a member of our Board of Directors since our
formation in 1977. In September 1995, he was appointed as our Vice Chairman of
the Board, Chief Operating Officer and General Counsel. He also served as our
Treasurer from 1977 until January 1991. He is also a practicing attorney in the
City of New York. Mr. Siegel received a Bachelor of Arts degree in 1965 from
Marietta College, a Juris Doctor Degree in 1968 from New York University School
of Law and a Master of Laws Degree in 1970 from New York University School of
Law. During the past five years, Mr. Siegel has also served as an officer of
each of our leasing subsidiaries.
Mr. Pompeo has served as a director and Senior Vice President in charge of
operations since the time of commencement of our business operations in 1977. In
September 1995, he became Executive Vice President of Research Development and
Procurement. Mr. Pompeo was employed for 16 years as a floor supervisor by E.F.
Hutton & Co., the former New York Stock Exchange member firm. Mr. Pompeo is also
a principal shareholder, officer and director of Georgia Enterprises, Inc., our
Subfranchisor for the State of Georgia. Mr. Pompeo is the brother-in-law of
Anthony Conza.
Mr. Leaness has been a member of our Board of Directors since we commenced
business operations, and served as our Senior Vice President-Corporate Counsel
for more than the past five years. He was appointed Chief Executive Officer of
Maui Tacos International, Inc. in February 1999. In September 1995, he was
appointed as one of our Executive Vice Presidents. Mr. Leaness is also a
principal shareholder, officer and director of Llewellyn Distributors, Inc., our
BLIMPIE Subfranchisor for a part of New Jersey, of Manhattan Maui, Inc., our
subfranchisor for MAUI TACOS for the County of New York in New York State, and
of New Jersey Maui, Inc., our subfranchisor for parts of New Jersey, including
Bergen, Essex, Hudson, Morris, and Middlesex counties. Mr. Leaness received a
Bachelor of Arts degree from Tulane University in 1972 and a Juris Doctor degree
from New York Law School in 1982. Mr. Leaness is a practicing attorney in New
York State. He currently serves as Director of the New York State Restaurant
Association and serves as its Treasurer. Mr. Leaness also serves on the Board of
Directors of the International Franchise Association (IFA) and the National
Restaurant Association (NRA).
Mr. Joseph A. Conza held the position of Vice President - Construction and
Design from February 1991 through August 1995. In September 1995, he was
appointed Senior Vice President - Equipment and Design Services. In November
1997, he was appointed President of BI Concept Systems, Inc., our wholly-owned
equipment and design subsidiary. From 1986 through his appointment as one of our
Vice Presidents, Mr. Conza was employed as President of Lone Star Blimpie, Inc.
He has also served as President of International Southwest Blimpie, Inc. since
1990. Mr. Conza is also a principal shareholder, officer and was director of
International Southwest Blimpie, Inc., our Subfranchisor for the Harris County
(Houston), Texas market through the sale of this market to an unrelated party in
November 1998. Mr. Conza also is a principal shareholder of Georgia Enterprises,
Inc., our Subfranchisor for the State of Georgia. Mr. Conza is the brother of
Anthony P. Conza.
Mr. Sitkoff served as our Vice President, Treasurer and Chief Financial
Officer from January 1991 through August 1995. In September 1995, he was
appointed Senior Vice President, Treasurer and Chief Financial Officer. In
September 1997, he was appointed President of Maui Tacos International, Inc. In
April 2000, he was appointed Senior Vice President, Corporate Services. Between
1980 and 1985, he was self-employed as a distributor for Pepperidge Farms'
Biscuit Division. Between 1986 and 1988, he was a principal shareholder and
President of Blimpie of Central Florida, Inc., our Subfranchisor for the
Orlando, Florida market. From 1989 through 1990 he was employed as our
Controller. Mr. Sitkoff received a B.S. degree in Industrial Management from
Georgia Institute of Technology in 1974.
Mr. Morgan joined us in 1992 in the capacity as a corporate counsel. From
1994 through August 1995, he served as our director of strategic planning. In
September 1995, he was appointed as Vice President of Strategic Planning and in
December 1996 he was appointed to Senior Vice President of Strategic Planning.
In September 1997 he was appointed President of our BLIMPIE Subs & Salads
18
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. Morgan is the son-in-law of Anthony P. Conza.
Mr. Lane joined us in May 1998 in the capacity of Vice President, Chief
Financial Officer. After graduating from the University of Georgia in 1984 with
a Bachelor of Business Administration in Accounting, Mr. Lane joined Ernst &
Young LLP as a staff accountant. He progressed to the position of Audit Senior
Manager before leaving the firm in 1995. Mr. Lane then joined Checkmate
Electronics, Inc., an electronics manufacturer in Roswell, Georgia, as Director
of Finance. He was promoted to Vice President of Finance before leaving that
company to join us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
fourth quarter of our fiscal year ended June 30, 2001.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is 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 that Exchange during the fiscal years ended June 30, 2000 and
2001 were as follows:
Quarter-End High Low Close
----------------- -------- --------- ---------
9/99 3.319 2.000 2.000
12/99 2.063 1.250 1.875
3/00 1.907 1.292 1.846
6/00 2.215 1.563 1.813
9/00 1.960 1.531 1.625
12/00 1.813 1.188 1.250
3/01 1.953 1.240 1.510
6/01 1.750 1.350 1.720
As of September 18, 2001, there were 537 holders of record of our Common
Stock.
We paid our first cash dividends on our Common Stock in the amount of $.025
per share during the fiscal year ended June 30, 1993 ($.017 per share as
adjusted for a 3:2 stock split effected during the fiscal year ended June 30,
1994. During the fiscal year ended June 30, 1996, we paid cash dividends
aggregating $.06. During the fiscal years ended June 30, 1997, 1998, 1999, 2000
and 2001, we paid cash dividends aggregating $.07 per share in each fiscal year.
It is our present intention to pay dividends in or about October and April of
each year, subject to such factors as earnings levels, anticipated capital
requirements, our operating and financial condition and other factors deemed
relevant by the Board of Directors.
During the fiscal years ended June 30, 1999, 2000 and 2001, we did not sell
any securities which were not registered under the Securities Act of 1933.
19
ITEM 6. SELECTED FINANCIAL DATA
Fiscal Year Ended June 30,
-----------------------------------------------------------------------------------
2001 2000 1999 1998 1997
-------------- -------------- -------------- -------------- --------------
(Dollars in 000's, Except Per Share and Outlets Open Data)
Revenues (a) $30,734 $31,017 $33,550 $37,107 $37,337
Continuing fees 19,200 19,129 18,956 17,343 15,391
Income before cumulative effect of
change in accounting principle 74 1,095 1,156 2,444 3,278
Cumulative effect adjustment - - (3,373) - -
Net income (loss) 74 1,095 (2,217) 2,444 3,278
Basic earnings per share before
cumulative effect adjustment $ 0.01 $ 0.12 $ 0.12 $ 0.26 $ 0.34
Diluted earnings per share before
cumulative effect adjustment $ 0.01 $ 0.12 $ 0.12 $ 0.26 $ 0.34
Basic earnings (loss) per share $ 0.01 $ 0.12 $ (0.23) $ 0.26 $ 0.34
Diluted earnings (loss) per share $ 0.01 $ 0.12 $ (0.23) $ 0.26 $ 0.34
Pro forma amounts assuming the new
revenue recognition method is
applied retroactively (b):
Net income $ 74 $ 1,095 $ 1,156 $ 2,428 $ 2,816
Basic earnings per share $ 0.01 $ 0.12 $ 0.12 $ 0.25 $ 0.30
Diluted earnings per share $ 0.01 $ 0.12 $ 0.12 $ 0.25 $ 0.29
Total assets $26,523 $27,060 $28,258 $28,323 $27,704
Trademark obligations - - 204 3,408 3,509
Total shareholders' equity 17,639 18,486 18,107 20,625 18,865
Cash dividends declared per
common share $ 0.07 $ 0.07 $ 0.07 $ 0.07 $ 0.07
Outlets open at end of year (c) 1,955 1,990 2,097 1,972 1,684
___________________
(a) Results for fiscal 1998 and 1997 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 and 1997.
(c) Outlets includes only BLIMPIE Subs & Salads outlets.
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
Fiscal 2001 was a year of many changes for Blimpie International, Inc. When
the year began, we continued to invest in store operations, opening three
SMOOTHIE ISLAND JUICE BAR locations in the first four months, and a tri-branded
BLIMPIE / PASTA CENTRAL / SMOOTHIE ISLAND location in April 2001. While the
Blimpie division was performing up to our expectations in the first half of the
year, our other operations were well below plan.
At the midpoint of the year, we decided to scale back our Maui Tacos
operations, reducing discretionary expenses, cutting the corporate staff from
five to one and merging the corporate office into the existing Blimpie
International office in Atlanta. Since the losses from the Maui Tacos division
currently cannot be offset against Blimpie International's profits for income
tax purposes, these savings also should result in the Company recognizing a
lower effective income tax rate in fiscal 2002 than in recent fiscal years.
Next, we evaluated the SMOOTHIE ISLAND JUICE BAR operations and determined
that we would be best served to sell or close all of the six locations in
operation. Similarly, we decided to sell or close the MAUI TACOS location in New
York City. We had already closed the first location in that city in October
2000, and sold the second location in September 2001. The operating losses,
which include losses on the sales and / or closings of these eight locations,
totaled $2,075,000 in fiscal 2001. These changes resulted in our operating only
two Company-owned restaurants at the beginning of fiscal 2002, including a MAUI
TACOS location in Atlanta, GA and a tri-branded BLIMPIE / PASTA CENTRAL /
SMOOTHIE ISLAND location in Athens, GA.
The changes described above negatively impacted operating results in fiscal
2001. Our net income was $74,000, or $0.01 per share, compared to $1,095,000, or
$0.12 per share in the prior year. We believe that the changes made in fiscal
2001 have enabled us to enter fiscal 2002 with the ability to dramatically
improve our operating results from the levels achieved in fiscal 2001.
Results Of Operations
Fiscal Year Ended June 30, 2001 Compared With Fiscal Year Ended June 30, 2000.
Our continuing fees derived from franchises increased 0.4% to $19,200,000
in fiscal 2001 from $19,129,000 in fiscal 2000. This increase resulted from an
increase in the sales in stores open during both fiscal 2001 and fiscal 2000,
partially offset by a decrease in the number of locations open. BLIMPIE Subs &
Salads' traditional location same store sales increased 1.3% in fiscal 2001. For
the year, BLIMPIE Subs & Salads opened 188 locations and closed 223 locations, a
net decrease of 35 locations. There were 1,955 BLIMPIE Subs & Salads locations
open at June 30, 2001 as compared to 1,990 locations open at June 30, 2000.
21
Subfranchisor fees, master license fees and fees from the sales and resales
of franchises increased 1.7% to $4,093,000 in fiscal 2001 from $4,026,000 in
fiscal 2000. The following table summarizes the components of these fees for
fiscal 2001 and 2000:
Year Ended June 30,
(amounts in 000's) 2001 2000 Change
---------------------------------------------
Amortization of deferred subfranchise
and master license fees $1,472 $1,565 -5.9%
Franchise fees 2,035 1,993 2.1%
Resale fees 586 468 25.2%
---------------------------------------------
Total $4,093 $4,026 1.7%
=============================================
During fiscal 2001, we granted development rights for one MAUI TACOS
subfranchise territory, three international BLIMPIE territories, three
international PASTA CENTRAL territories, and one domestic BLIMPIE territory. In
fiscal 2001, the amortization of these fees was 5.9% lower than in fiscal 2000
due primarily to decreased amortization of BLIMPIE subfranchise fees caused by
deferred amounts becoming fully amortized. Revenues from sales of franchises
increased 2.1% in fiscal 2001. New outlets opened, including BLIMPIE, MAUI TACOS
and PASTA CENTRAL outlets, decreased 6.4% from 220 in fiscal 2000 to 206 in
fiscal 2001. The increase in revenues despite a decrease in 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, 2001. Resale fees increased 25.2% in fiscal 2001 due primarily to a higher
average resale fee per store.
Store equipment sales decreased 21.6% to $4,978,000 in fiscal 2001 from
$6,351,000 in fiscal 2000. New outlets opened decreased 6.4% from 220 in fiscal
2000 to 206 in fiscal 2001, resulting in a portion of this decrease. The
remaining decrease is due primarily to certain new locations purchasing used
equipment, either from a closed BLIMPIE location or another source.
License fees and other income for the year ended June 30, 2001 increased
21.1% to $791,000 from $653,000 in fiscal 2000. This increase was due primarily
to greater license fees from the Canteen Vending Service Program and from
Blimpie branded product sales.
Company restaurant sales increased 94.9% to $1,672,000 in fiscal 2001 from
$858,000 in fiscal 2000. In fiscal 2000, we operated one MAUI TACOS location.
This increase was due to an increase in the number of outlets open for the
majority of each fiscal year. Late in fiscal 2001, we sold or closed seven of
the nine Company-owned restaurants operating at April 30, 2001. We do not expect
to open additional Company-owned outlets in the upcoming fiscal year, and
therefore expect the related sales to decline in fiscal 2002.
The Subfranchisors' shares of franchise and continuing fees increased 1.9%
to $11,714,000 in fiscal 2001 from $11,499,000 in fiscal 2000. The most
significant portion of this expense is the subfranchisor's share of continuing
fees, which generally is 50% of the fees we collect. Continuing fees increased
0.4%, and franchise fees and resale fees together increased 6.5% in fiscal 2001,
resulting in the increase in this expense.
Store equipment cost of sales decreased 19.4% to $4,261,000 in fiscal 2001
from $5,285,000 in fiscal 2000. This decrease was due to the 21.6% decrease in
store equipment sales, combined with a decrease in the profit margin on the
sales. The gross margin on store equipment sales decreased to 14.4% in fiscal
2001 from 16.8% in fiscal 2000 due to normal fluctuations in the product mix.
Selling, general and administrative expense declined 0.8% to $11,207,000 in
fiscal 2001 from $11,294,000 in fiscal 2000. This decrease was due primarily to
lower payroll and travel expenses due to fewer employees, which was partially
offset by higher legal fees and the cost of assigning the cash surrender value
of key man life insurance policies to the executives for whom we purchased the
policies. We continue to try to reduce selling, general and administrative
expenses, but no assurances can be
22
given that we will be successful in that regard in fiscal 2002.
Company restaurant operations increased 165.6% to $3,747,000 in fiscal 2001
from $1,411,000 in fiscal 2000. We opened most of our Company-owned locations in
late in fiscal 2000 or early in fiscal 2001. Company restaurant sales increased
94.9% in fiscal 2001 as a result of these openings. We incurred losses from
these restaurant operations of $2,075,000 in fiscal 2001, up from losses of
$553,000 in fiscal 2000. The increase in the losses is due to more locations in
operation and to the losses incurred in the sale, closing or impairment of most
of these locations. We anticipate that Company restaurant operations will
decrease in fiscal 2002 due to there being only two Company-owned restaurants
expected to be operating during the year.
Interest income in fiscal 2001 increased by 1.6% to $636,000 from $626,000
in fiscal 2000.
The effective income tax rates (income taxes expressed as a percentage of
pre-tax income) were 83.2% in fiscal 2001, as compared to 49.2% in fiscal 2000.
The increase in fiscal 2001 was due to an increase in non-deductible losses as a
percentage of our overall taxable income. Certain losses of our subsidiary, Maui
Tacos International, Inc., currently are not deductible for income tax purposes
because we cannot consolidate this subsidiary in our income tax returns.
Although the Maui Tacos losses were lower in fiscal 2001 than in fiscal 2000,
the income from the remainder of the Company decreased a greater amount, causing
the increase in the percentage of non-deductible losses to income before income
taxes.
Fiscal Year Ended June 30, 2000 Compared With Fiscal Year Ended June 30, 1999.
Our income before income taxes and cumulative effect of change in
accounting principle increased 10.1% to $2,154,000 in fiscal 2000 from
$1,956,000 in fiscal 1999. Our basic and diluted earnings per share before
cumulative effect of change in accounting principle was $0.12 per share in both
years. The improvement in income before income taxes and cumulative effect of
change in accounting principle was due primarily to lower S,G&A expenses,
partially offset by losses from Company restaurant operations. Due to a higher
effective tax rate, income before cumulative effect of change in accounting
principle decreased 5.3% to $1,095,000 in fiscal 2000 from $1,156,000 in fiscal
1999. These changes and others are discussed further below.
Our continuing fees derived from franchises increased 0.9% to $19,129,000
in fiscal 2000 from $18,956,000 in fiscal 1999. This increase resulted from an
increase in the sales in stores open during both fiscal 2000 and fiscal 1999,
but partially offset by a decrease in the number of locations open. BLIMPIE Subs
& Salads' traditional location same store sales increased 2.7% in fiscal 2000.
For the year, BLIMPIE Subs & Salads opened 206 locations and closed 313
locations, a net decrease of 107 locations. There were 1,990 BLIMPIE Subs &
Salads locations open at June 30, 2000 as compared to 2,097 locations open at
June 30, 1999.
During fiscal 2000, we experienced a shift in demand for our traditional
and nontraditional locations. From fiscal 1995 to 1999, nontraditional
development outpaced the growth in traditional locations. Nontraditional
locations include convenience stores, hospitals, universities, and other
locations within another structure. In fiscal 2000, which included the opening
of 122 new traditional locations and 84 nontraditional locations, this trend
reversed. Historically, traditional locations have had significantly higher
sales volumes than nontraditional locations.
In fiscal 2000, we and several of the convenience store chains who operate
nontraditional locations reviewed the growth and performance of their BLIMPIE
Subs & Salads operations. After these reviews, locations with poor performance
were closed. In addition, a greater number of traditional locations closed
during the past year than in prior years due to a variety of factors. Certain
international stores and domestic stores in areas in which we do not have a
strong presence were closed as a result of poor sales. Many older locations were
closed as either rents escalated too much, which made operations too costly, or
demographics shifted, which lowered sales below acceptable levels. Accordingly,
during fiscal 2000, 143 traditional locations and 170 nontraditional locations
were closed. We believe that certain
23
convenience store operators will continue to close weaker locations, while
others will continue to expand their BLIMPIE Subs & Salads operations. Similar
fluctuations will continue to occur with traditional locations as well. Our
current focus is on helping our franchised locations improve their operating
performance, which we believe will diminish the number of store closings.
However, we can give no assurances that our efforts in this area will be
successful, or that store closings will not increase from the levels experienced
in fiscal 2000.
Subfranchisor fees, master license fees and fees from the sales and resales
of franchises decreased 9.5% to $4,026,000 in fiscal 2000 from $4,451,000 in
fiscal 1999. The following table summarizes the components of these fees for
fiscal 2000 and 1999:
Year Ended June 30,
(amounts in 000's) 2000 1999 Change
-------------------------------------------
Amortization of deferred subfranchise
and master license fees $1,565 $1,437 8.9%
Franchise fees 1,993 2,446 -18.5%
Resale fees 468 568 -17.6%
-------------------------------------------
Total $4,026 $4,451 -9.5%
===========================================
During fiscal 2000, we granted development rights for nine MAUI TACOS
subfranchise territories, one international BLIMPIE territory, one international
PASTA CENTRAL territory, and one domestic BLIMPIE territory. During fiscal 1999,
we granted development rights for five MAUI TACOS subfranchise territories and
two international BLIMPIE territories. In fiscal 2000, the amortization of these
fees was 8.9% higher than in fiscal 1999 due primarily to increased amortization
of MAUI TACOS subfranchise fees. Revenues from sales of franchises decreased
18.5% in fiscal 2000 due primarily to a 28.7% decrease in new outlets opened,
from 289 new outlets in fiscal 1999 to 206 new outlets in fiscal 2000. The lower
decrease in revenues as compared to outlets opened is due to a higher average
franchise fee for locations opened, as well as revenues recognized for outlets
sold more than two years ago, but not opened as of June 30, 2000. Resale fees
decreased 17.6% in fiscal 2000 due primarily to fewer outlets and subfranchise
territories being transferred to new owners.
As of June 30, 2000, we had Master Licensors operating in 25 countries, and
57 BLIMPIE outlets operating in 13 of these countries. Our focus in 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 increases in
revenue.
Store equipment sales decreased 31.9% to $6,351,000 in fiscal 2000 from
$9,328,000 in fiscal 1999. This decrease was consistent with the 28.7% decrease
in new outlets opened in the two years. In addition, we stopped soliciting new
business from sales to customers other than our franchisees, and stopped selling
the point-of-sale systems to the franchisees. In most of fiscal 2000, the point-
of-sale vendor sold systems directly to the franchisees.
License fees and other income for the year ended June 30, 2000 increased
36.9% to $653,000 from $477,000 in fiscal 1999. This increase was due primarily
to greater license fees from the Canteen Vending Service Program.
Company restaurant sales increased 153.8% to $858,000 in fiscal 2000 from
$338,000 in fiscal 1999. In fiscal 1999, we operated one MAUI TACOS location. In
fiscal 2000, we opened a MAUI TACOS location with two other investors, opened a
second Company-owned MAUI TACOS location, and opened three Company-owned
SMOOTHIE ISLAND JUICE BAR locations. We opened a fourth SMOOTHIE ISLAND JUICE
BAR location in July 2000.
24
The Subfranchisors' shares of franchise and continuing fees decreased 2.4%
to $11,499,000 in fiscal 2000 from $11,782,000 in fiscal 1999. The most
significant portion of this expense is the subfranchisor's share of continuing
fees, which generally is 50% of the fees we collect. Continuing fees increased
0.9%, but franchise fees and resale fees both decreased in fiscal 2000,
resulting in the decrease in this expense.
Store equipment cost of sales decreased 35.0% to $5,285,000 in fiscal 2000
from $8,137,000 in fiscal 1999. This decrease was due to the 31.9% decrease in
store equipment sales, combined with an increase in the profit margin on the
sales. The gross margin on store equipment sales increased to 16.8% in fiscal
2000 from 12.8% in fiscal 1999 due to lower sales in two segments with low gross
profit margins, including sales to customers other than our franchisees and of
point-of-sale systems.
Selling, general and administrative expense declined 7.1% to $11,294,000 in
fiscal 2000 from $12,156,000 in fiscal 1999. This decrease was due primarily to
abnormally high expenses in fiscal 1999, when we incurred higher professional
fees related to changing to a different subfranchisor and master license fee
revenue recognition method, increased our allowance for doubtful accounts and
wrote off certain deferred franchise fees and start-up costs.
Company restaurant operations increased 312.6% to $1,411,000 in fiscal 2000
from $342,000 in fiscal 1999. As noted above, we opened several Company-owned
MAUI TACOS and SMOOTHIE ISLAND JUICE BAR locations in fiscal 2000. Company
restaurant sales increased 153.8% in fiscal 2000 as a result of these openings.
We incurred losses of $553,000 from these restaurant operations, due primarily
to high pre-opening costs and low sales as the new concepts develop a customer
base.
Interest income in fiscal 2000 decreased by 23.9% to $626,000 from $823,000
in fiscal 1999. This decrease was the result of the selling of a portion of the
U.S. Treasury notes we owned in February 1999 in order to satisfy the remaining
$3,000,000 trademark obligation, as well as lower average notes receivable in
fiscal 2000.
The effective income tax rates (income taxes expressed as a percentage of
pre-tax income) were 49.2% in fiscal 2000, as compared to 40.9% in fiscal 1999,
excluding the impact of the change in accounting principle. The increase in
fiscal 2000 was due to an increase in non-deductible losses as a percentage of
our overall taxable income.
Liquidity And Capital Resources
During fiscal years 2001, 2000 and 1999 we did not incur any material
capital commitments. As of June 30, 2001, our working capital was $9,624,000 and
total cash and investments were $11,197,000.
We generated cash flows from operating activities of $3,190,000, $1,224,000
and $3,217,000 in the fiscal years ended June 30, 2001, 2000 and 1999,
respectively. The increase in fiscal 2001 was due primarily to increases in
accounts payable and accrued expenses, an increase in customer equipment
deposits and decreases in other assets, income taxes receivable and deferred tax
assets, partially offset by an increase in accounts receivable and a decrease in
deferred revenues. The decrease in fiscal 2000 was due primarily to decreases in
accounts payable and accrued expenses, and customer equipment deposits and an
increase in income taxes receivable, partially offset by a decrease in accounts
receivable.
Net cash used in investing activities during fiscal 2001 and 1999 totaled
$992,000 and $1,868,000, respectively. Net cash provided by investing activities
was $3,293,000 in fiscal 2000. The cash provided in fiscal 2000 was due to the
proceeds from U.S. Treasury bills, which were reinvested in money market funds
and therefore classified as cash and cash equivalents as of June 30, 2001. This
increase was partially offset by higher purchases of property and equipment due
to opening several Company-owned restaurants during the year. The absence of
proceeds from sales of available-for-sale securities in fiscal 2001 resulted in
the use of cash in that year, primarily for the purchases of property and
equipment associated with opening Company-owned restaurants during the year.
Fiscal 1999 included
25
$3,077,000 in payments made for international trademark rights, partially offset
by net proceeds from the sale of investments.
Net cash used in financing activities during fiscal 2001, 2000 and 1999
totaled $978,000, $927,000 and $688,000, respectively. The increase in the use
of cash in fiscal 2001 was due to higher purchases of treasury stock. The lower
use of cash in fiscal 1999 was due to collections on subscriptions receivable in
that year.
Our primary liquidity needs arise from opening Company-owned outlets,
expansion and capital expenditures. These needs are primarily met by the cash
flows from operations and from our cash and investments. We believe that our
cash flows from operations and our cash and investments will be sufficient to
fund our liquidity needs for the foreseeable future.
ITEM 8. FINANCIAL STATEMENTS
Our financial statements described below and the reports of independent
auditors thereon are set forth following the Index to Financial Statements on
page F-1 of this report:
Report of independent auditors
Consolidated balance sheets at June 30, 2001 and 2000
Consolidated statements of operations and comprehensive income (loss)
for each of the three years in the period ended June 30, 2001
Consolidated statements of shareholders' equity for
each of the three years in the period ended June 30, 2001
Consolidated statements of cash flows for each of the
three years in the period ended June 30, 2001
Notes to consolidated financial statements
Consolidated schedule of valuation and qualifying accounts
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
26
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 72
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. 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 55
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.
Jim L. Peterson, Age 65
Mr. Peterson was appointed to our Board of Directors on May 1, 2001. For 23
years, Mr. Peterson was the CEO of Whataburger, Inc. Since 1994, Mr. Peterson
has been Chairman of the Board and Chief Executive Officer of Bojangles
Restaurants, Inc., a private company engaged in the operation and franchising of
fast food restaurants. Mr. Peterson serves on the Board of Directors of Back
Yard Burgers, Inc., which owns, operates and franchises quick-service and fast-
casual restaurants. Mr. Peterson also serves on the Board of Directors of Earful
of Books, Inc., a leading audiobook-only retailer in the United States.
27
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, 2001 and whose annual compensation and bonus was
$100,000 or more (collectively, the "Named Executive Officers"). Information
with respect to salary, bonus, other annual compensation, restricted stock and
options is included for the fiscal years ended June 30, 2001, 2000 and 1999. We
have not paid any compensation that would qualify as "Restricted Stock Awards,"
payouts pursuant to long-term incentive plans ("LTIP Payouts"), or "All Other
Compensation" in any of the three years in the period ended June 30, 2001.
Long Term
Compen-
Annual Compensation sation
--------------------------------- -----------
Fiscal Other Securities All
Year Annual Underlying Other
Name and Ended Compen- Options/ Compen-
Principal Position June 30 Salary($) Bonus ($) sation SARs(#) sation
------------------ ------- --------- --------- ------ ------- ------
Anthony P. Conza,
Chairman & CEO 2001 $256,850 $244,673(2) $ 411(1) 20,000 $2,100(3)
2000 242,320 10,804 498(1) -- 2,385(3)
1999 235,330 30,736 919(1) 25,000 2,715(3)
David L. Siegel,
Vice Chairman & COO 2001 191,303 178,181(2) 2,802(1) 20,000 2,200(3)
2000 180,474 5,527 498(1) -- 2,100(3)
1999 174,297 15,498 919(1) 25,000 1,914(3)
Charles G. Leaness,
Exec. V.P. 2001 175,859 66,133(2) 1,541(1) 20,000 2,050(3)
2000 172,182 3,768 1,618(1) -- 2,050(3)
1999 141,250 8,391 3,399(1) 25,000 1,922(3)
Patrick J. Pompeo,
Exec. V.P. 2001 165,000 54,365 411(1) 20,000 2,050(3)
2000 148,084 3,768 498(1) -- 2,050(3)
1999 138,971 9,891 919(1) 25,000 2,000(3)
Joseph W. Morgan,
Sr. V.P., President - 2001 185,201 1,789 4,716(1) -- 2,050(3)
Blimpie Subs & Salads 2000 175,940 2,886 498(1) 125,000 2,050(3)
and Pasta Central 1999 136,437 6,856 919(1) 35,000 1,828(3)
(1) Represents commissions paid with respect to master license sales
consummated. Also includes personal expenses paid by the Company of $2,391
for Mr. Siegel in 2001 and $4,305 for Mr. Morgan in 2001.
(2) Includes the cash surrender value of life insurance distributed to the
officer of $238,047 for Mr. Conza, $174,742 for Mr. Siegel, and $64,299 for
Mr. Leaness.
(3) Represents matching contributions which we made to our 401(k) Plan on
behalf of each of the Named Executive Officers.
28
Options/SAR Grants In Last Fiscal Year
Individual Grants
Number of % of Total Potential Realizable Value at
Securities Options Assumed Annual Rates of Stock
Underlying Granted to Exercise or Price Appreciation
Options Employees in Base Price Expiration for Option Term
---------------
Name Granted Fiscal Year ($/Sh) Date 5 ($) 10 ($)
---- ----------- ------ ---- ----- ------
(#)
---
Anthony P. Conza 20,000 12.5% $1.38 12/11/11 $35,218 $44,464
David L. Siegel 20,000 12.5% 1.38 12/11/11 35,218 44,464
Charles G. Leaness 20,000 12.5% 1.38 12/11/11 35,218 44,464
Patrick J. Pompeo 20,000 12.5% 1.38 12/11/11 35,218 44,464
Joseph W. Morgan -- -- -- -- -- --
Fiscal Year End Option Values
The following table sets forth the number of unexercised options held by
our Named Executive Officers during the fiscal year ended June 30, 2001. No
options were exercised during such period.
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End(#) at FY-End($)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise(#) Realized($) Unexercisable Unexercisable
---- -------------- ----------- ------------- -------------
Anthony P. Conza -- -- 70,000/15,000 $3,400/ 3,400
David L. Siegel -- -- 70,000/15,000 3,400/ 3,400
Charles G. Leaness -- -- 50,000/15,000 3,400/ 3,400
Patrick J. Pompeo -- -- 50,000/15,000 3,400/ 3,400
Joseph W. Morgan -- -- 128,000/57,000 --/--
29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the holdings of our Common Stock as of
October 8, 2001 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...................................... 3,017,742 (4) 32.7%
David L. Siegel....................................... 1,555,117 (5) 16.8%
Charles G. Leaness.................................... 489,459 (6) 5.3%
Patrick Pompeo........................................ 451,368 (7) 4.9%
Alvin L. Katz (8)..................................... 43,600 (9) *
Harry G. Chernoff (10)................................ 35,868 (11) *
Jim L. Peterson (12).................................. 2,000 (13) *
Joseph W. Morgan...................................... 262,767 (14) 2.8%
Joseph A. Conza....................................... 88,601 (15) *
Robert S. Sitkoff..................................... 84,525 (16) *
Brian D. Lane......................................... 29,043 (17) *
All Directors and Executive Officers
As a Group (10 Persons)............................... 6,060,090 (18) 62.4%
_________________________
* 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 9,163,659 shares outstanding on October 8, 2001 (not including
470,267 treasury shares), increased by the number of shares under options
which the holder(s) thereof have the right to acquire within 60 days from
October 8, 2001.
(4) Includes 70,000 shares which Mr. Conza may acquire pursuant to options
exercisable within 60 days of October 8, 2001. 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, 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 70,000 shares which Mr. Siegel may acquire pursuant to options
exercisable within 60 days of October 8, 2001. Does not include 13,046
shares held by Mr. Siegel's daughter, as to which Mr. Siegel disclaims
beneficial ownership.
(6) Includes 50,000 shares which Mr. Leaness may acquire pursuant to options
exercisable within 60 days of October 8, 2001.
(7) Includes 50,000 shares which Mr. Pompeo may acquire pursuant to options
exercisable within 60 days of October 8, 2001. Does not include 6,300
shares held by Mr. Pompeo's sister and brother-in-law, as to which Mr.
Pompeo disclaims beneficial ownership.
30
(8) The address of Mr. Katz is 301 N. Birch Road, Ft. Lauderdale, Florida
33304.
(9) Includes 23,600 shares which Mr. Katz may acquire pursuant to options
exercisable within 60 days of October 8, 2001.
(10) The address of Dr. Chernoff is 286 Spring Street, Suite 401, New York, New
York 10013.
(11) Includes 23,600 shares which Dr. Chernoff may acquire pursuant to options
exercisable within 60 days of October 8, 2001.
(12) The address of Mr. Peterson is 218 Fannin Street, Gilead, Texas 77963.
(13) Includes 2,000 shares which Mr. Peterson may acquire pursuant to options
exercisable within 60 days of October 8, 2001.
(14) Includes 128,000 shares which Mr. Morgan may acquire pursuant to options
exercisable within 60 days of October 8, 2001. 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.
(15) Includes 41,000 shares which Mr. Conza may acquire pursuant to options
exercisable within 60 days of October 8, 2001.
(16) Includes 70,000 shares which Mr. Sitkoff may acquire pursuant to options
exercisable within 60 days of October 8, 2001.
(17) Includes 20,000 shares which Mr. Lane may acquire pursuant to options
exercisable within 60 days of October 8, 2001.
(18) Includes 548,200 shares which all of such persons may acquire pursuant to
options exercisable within 60 days of October 8, 2001. 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 14 above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal years ended June 30, 2001, 2000 and 1999, we paid
$1,155,000, $1,162,000, and $1,155,000, 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 $273,000, $280,000, and
$305,000, 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 in fiscal
1999 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. In fiscal
2000, we paid $8,000 to Manhattan Maui, Inc., a corporation partially owned by
Charles G. Leaness, in payment of fees that Manhattan Maui, Inc. earned as
subfranchisor for the New York County, NY market for Maui Tacos.
Each of the aforementioned transactions was effected pursuant to written
agreements between us
31
and the parties thereto. Such agreements are substantially identical to the
standard form of subfranchise 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 years ended June 30, 2001, 2000 and 1999, we paid $17,000,
$13,000 and $11,000, 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, 2001, 2000 and 1999, we received
$108,000, $111,000 and $110,000, 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.
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 through April 15, 2015. 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 approximately $46,000.
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 *
32
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*
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*
33
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*
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*
34
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****
10.50 Blimpie International, Inc. 2000 Omnibus Stock Incentive Plan (a copy
of which was filed with the Commission on February 14, 2001 as Exhibit
4.2 to the Company's Registration Statement on Form S-8, and is hereby
incorporated herein by this reference)
10.51 Agreement and Plan of Merger dated as of the 5th day of October 2001
between Blimpie International, Inc. and Sandwich Acquisition
Corporation (a copy of which was filed as an exhibit of corresponding
number to the Company's Report on Form 8-K dated October 8, 2001, and
is hereby incorporated herein by this reference).
10.52 Voting Agreement dated as of the 5th day of October 2001 among certain
shareholders of Blimpie International, Inc. and Sandwich Acquisition
Corporation (a copy of which was filed as an exhibit of corresponding
number to the Company's Report on Form 8-K dated October 8, 2001, and
is hereby incorporated herein by this reference).
18 Letter dated December 13, 1999 from Ernst & Young LLP regarding change
in accounting principle related to subfranchise and master license fee
revenues (a copy of which was filed with the Commission on September
28, 2000 as an Exhibit of corresponding number to the Company's Annual
Report on Form 10-K for the year ended June 30, 2000, and is hereby
incorporated herein by this reference)
21 Subsidiaries of the Company*
23 Consent of Independent Auditors
99.1 Press Release dated October 8, 2001 of Blimpie International, Inc. (a
copy of which was filed as an exhibit of corresponding number to the
Company's Report on Form 8-K dated October 8, 2001, and is hereby
incorporated herein by this reference).
__________________________
35
* (a copy of which was filed with the Commission on June 30, 1995 as an
Exhibit of corresponding number to the Company's Registration Statement on Form
SB-2 (Reg. No. 33-93738), and is hereby incorporated herein by this reference).
** (a copy of which was filed with the Commission on May 12, 1997 as an
Exhibit of corresponding number to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1997, and is hereby incorporated herein by this
reference).
*** (a copy of which was filed with the Commission on February 12, 1999 as an
Exhibit of corresponding number to the Company's Current Report on Form 8-K
dated February 10, 1999, and is hereby incorporated herein by this reference).
**** (a copy of which was filed with the Commission on December 15, 1999 as an
Exhibit of corresponding number to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1999, and is hereby incorporated herein by this
reference).
(b) Reports on Form 8-K:
The Company did not file any Current Reports on Form 8-K during the fourth
quarter of its fiscal year ended June 30, 2001.
36
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: October 10, 2001 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: October 10, 2001 /s/ Anthony P. Conza
--------------------------------------------
Anthony P. Conza, Chairman and Chief
Executive Officer
Principal Financial And Accounting Officer
Date: October 10, 2001 /s/ Brian D. Lane
--------------------------------------------
Brian D. Lane, Vice President, Chief
Financial Officer
Date: October 10, 2001 /s/ David L. Siegel
--------------------------------------------
David L. Siegel, Vice Chairman, Chief
Operating Officer and General Counsel
Date: October 10, 2001 /s/ Patrick J. Pompeo
--------------------------------------------
Patrick J. Pompeo, Executive Vice
President and Director
Date: October 10, 2001 /s/ Charles G. Leaness
--------------------------------------------
Charles G. Leaness, Executive Vice
President, Secretary and Director
Date: October 10, 2001 /s/ Alvin Katz
--------------------------------------------
Alvin Katz, Director
Date: October 10, 2001 /s/ Harry G. Chernoff
--------------------------------------------
Harry G. Chernoff, Director
Date: October 10, 2001 /s/ Jim L. Peterson
--------------------------------------------
Jim L. Peterson, Director
37
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors F-2
Consolidated Balance Sheets at June 30, 2001 and 2000 F-3
Consolidated Statements of Operations and Comprehensive Income
(Loss) for each of the three years in the period ended June 30, 2001 F-4
Consolidated Statements of Shareholders' Equity for each of the
three years in the period ended June 30, 2001 F-5
Consolidated Statements of Cash Flows for each of the three years
in the period ended June 30, 2001 F-6
Notes to Consolidated Financial Statements F-7
Consolidated Schedule of Valuation and Qualifying Accounts for each
of the three years in the period ended June 30, 2001 F-22
F-1
Report of Independent Auditors
Board of Directors and Shareholders
Blimpie International, Inc.
We have audited the accompanying consolidated balance sheets of Blimpie
International, Inc. and subsidiaries as of June 30, 2001 and 2000, and the
related consolidated statements of operations and comprehensive income (loss),
shareholders' equity, and cash flows for each of the three years in the period
ended June 30, 2001. Our audits also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Blimpie
International, Inc. and subsidiaries at June 30, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 2001, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, in 1999 the
Company changed its method of accounting for subfranchisor and master license
fee revenues.
/s/ Ernst & Young LLP
Atlanta, Georgia
September 14, 2001, except for Note 17, as to which the date is October 9, 2001
F-2
Blimpie International, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(dollars in thousands except share amounts)
--------------------------------------------------------------------------------------------------------------------------
June 30
Assets 2001 2000
--------------------------------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 9,492 $ 8,272
Investments 687 618
Accounts receivable, less allowance of $391 in 2001
and $252 in 2000 2,596 2,125
Prepaid expenses and other current assets 195 277
Income taxes receivable 537 812
Deferred income taxes 328 155
Current portion of notes receivable 586 540
------------ ------------
Total current assets 14,421 12,799
Property and equipment - at cost less accumulated
depreciation of $2,954 in 2001 and $2,412 in 2000 1,441 2,390
Other assets:
Notes receivable, less allowance of $172 in 2001
and $82 in 2000 and less current portion 646 666
Investments 1,018 970
Trademarks - at cost, less accumulated amortization
of $1,354 in 2001 and $1,044 in 2000 8,018 8,249
Deferred income taxes 879 1,313
Other 100 673
------------ -------------
Total other assets 10,661 11,871
------------ -------------
$ 26,523 $ 27,060
============ =============
---------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
---------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 4,434 $ 3,285
Customer equipment deposits 363 238
------------ -------------
Total current liabilities 4,797 3,523
Deferred revenue, net 4,087 5,051
Shareholders' equity:
Common stock, $.01 par value:
Authorized shares - 20,000,000
Issued and outstanding shares - 9,633,000 in 2001
and 9,632,000 in 2000 96 96
Additional paid-in capital 9,031 9,028
Retained earnings 9,499 10,075
Net unrealized gain on marketable securities 95 41
------------ ------------
18,721 19,240
Treasury stock at cost - 470,000 shares in 2001 and
281,000 shares in 2000 (1,025) (694)
Subscriptions receivable (57) (60)
------------ ------------
Total shareholders' equity 17,639 18,486
------------ ------------
$ 26,523 $ 27,060
============ ============
See accompanying notes to consolidated financial statements.
F-3
Blimpie International, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands except for per share amounts)
--------------------------------------------------------------------------------------------------------------------------
Years Ended June 30
2001 2000 1999
------------ ------------ ------------
Revenues:
Continuing fees $ 19,200 $ 19,129 $ 18,956
Subfranchisor fees, master license fees
and sale of franchises 4,093 4,026 4,451
Store equipment sales 4,978 6,351 9,328
License fees and other income 791 653 477
Company restaurant sales 1,672 858 338
------------ ------------ ------------
30,734 31,017 33,550
Expenses:
Subfranchisors' share of franchise and continuing fees 11,714 11,499 11,782
Store equipment cost of sales 4,261 5,285 8,137
Selling, general and administrative expenses 11,207 11,294 12,156
Company restaurant operations 3,747 1,411 342
------------ ------------ ------------
30,929 29,489 32,417
------------ ------------ ------------
Operating (loss) income (195) 1,528 1,133
Interest income 636 626 823
------------ ------------ ------------
Income before income taxes and cumulative effect
of change in accounting principle 441 2,154 1,956
Income taxes on income before cumulative effect
of change in accounting principle 367 1,059 800
------------ ------------ ------------
Income before cumulative effect of change in accounting principle 74 1,095 1,156
Cumulative effect on prior years (to June 30, 1998) of changing to
a different subfranchisor and master license fee revenue
recognition method (less tax benefit of $1,815) - Note 2 - - (3,373)
------------ ------------ ------------
Net income (loss) $ 74 $ 1,095 $ (2,217)
============ ============ ============
Basic and diluted earnings (loss) per share:
Income before cumulative effect of change in accounting principle $ 0.01 $ 0.12 $ 0.12
Cumulative effect of change in accounting principle - - (0.35)
------------ ------------ ------------
Net income (loss) $ 0.01 $ 0.12 $ (0.23)
============ ============ ============
Weighted average basic shares outstanding 9,269 9,446 9,467
============ ============ ============
Weighted average diluted shares outstanding 9,280 9,453 9,472
============ ============ ============
Comprehensive income (loss):
Net income (loss) $ 74 $ 1,095 $ (2,217)
Other comprehensive income (loss):
Unrealized gains (losses) on marketable securities:
Unrealized gains and (losses), net of tax 54 1 (12)
Less: reclassification adjustment for losses
included in net loss, net of tax - - 1
------------ ------------ ------------
Other comprehensive income (loss) 54 1 (11)
------------ ------------ ------------
Comprehensive income (loss) $ 128 $ 1,096 $ (2,228)
============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
Blimpie International, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended June 30, 2001, 2000, and 1999
(in thousands except for per share amounts)
----------------------------------------------------------------------------------------------------------------------------------
Common Stock Additional
------------------------------
Shares Paid-In Retained
Outstanding Amount Capital Earnings
------------- ---------- -------- -----------
Balance - July 1, 1998 9,574 $ 96 $ 8,420 $ 12,519
Incentive stock granted 5 14
Stock issued under Canadian trademark agreement 25 204
Warrants and options issued for services and trademark 180
Dividends paid ($ .07 per share) (662)
Net loss (2,217)
Net unrealized loss on marketable securities
------------- -------------- ------------- ----------------
Balance - June 30, 1999 9,604 96 8,818 9,640
Incentive stock granted 3 6
Stock issued under Canadian trademark agreement 25 204
Dividends paid ($ .07 per share) (660)
Net income 1,095
Net unrealized gain on marketable securities
------------- -------------- ------------- ---------------
Balance - June 30, 2000 9,632 96 9,028 10,075
Incentive stock granted 1 3
Dividends paid ($ .07 per share) (650)
Net income 74
Net unrealized gain on marketable securities
------------- -------------- ------------- ----------------
Balance - June 30, 2001 9,633 $ 96 $ 9,031 $ 9,499
============= ============== ============= ================
Unrealized
Holding
Gain (Loss) Total
-------------- ------------
Balance - July 1, 1998 $ 51 $ 21,086
Incentive stock granted 14
Stock issued under Canadian trademark agreement 204
Warrants and options issued for services and trademark 180
Dividends paid ($ .07 per share) (662)
Net loss (2,217)
Net unrealized loss on marketable securities (11) (11)
-------------- --------------
Balance - June 30, 1999 40 18,594
Incentive stock granted 6
Stock issued under Canadian trademark agreement 204
Dividends paid ($ .07 per share) (660)
Net income 1,095
Net unrealized gain on marketable securities 1 1
-------------- --------------
Balance - June 30, 2000 41 19,240
Incentive stock granted 3
Dividends paid ($ .07 per share) (650)
Net income 74
Net unrealized gain on marketable securities 54 54
-------------- -------------
Balance - June 30, 2001 $ 95 $ 18,721
============== =============
See accompanying notes to consolidated financial statements.
F-5
Blimpie International, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
----------------------------------------------------------------------------------------------------------------------------
Years Ended June 30
2001 2000 1999
----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Income before cumulative effect of change in accounting principle $ 74 $ 1,095 $ 1,156
Adjustments to reconcile income before accounting change
to net cash provided by operating activities:
Depreciation and amortization 993 941 846
Loss on disposals and sales of property and equipment 904 - -
Incentive stock granted 3 6 104
Changes in operating assets and liabilities:
Accounts receivable (471) 981 (48)
Prepaid expenses and other current assets 82 (71) 292
Other assets 573 (240) (99)
Income taxes receivable 275 (790) (22)
Deferred income taxes 261 445 (105)
Notes receivable 186 230 406
Accounts payable and accrued expenses 1,149 (406) 973
Customer equipment deposits 125 (308) 204
Income taxes payable - - (276)
Deferred revenue, net (964) (659) (214)
------------ -------- --------
Net cash provided by operating activities 3,190 1,224 3,217
Cash Flows from Investing Activities
Purchases of available-for-sale securities - (89) (2,646)
Proceeds from sales of available-for-sale securities - 4,786 4,605
Reinvested dividends of available-for-sale securities (63) (7) (66)
Purchases of international trademarks (79) (120) (3,077)
Purchases of property and equipment (901) (1,277) (684)
Proceeds from sales of property and equipment 51 - -
------------ -------- --------
Net cash (used in) provided by investing activities (992) 3,293 (1,868)
Cash Flows from Financing Activities
Purchases of treasury stock (331) (267) (176)
Collections on subscriptions receivable 3 - 150
Cash dividends paid (650) (660) (662)
------------ -------- --------
Net cash used in financing activities (978) (927) (688)
------------ -------- --------
Net increase in cash and cash equivalents 1,220 3,590 661
Cash and cash equivalents at beginning of year 8,272 4,682 4,021
------------ -------- --------
Cash and cash equivalents at end of year $ 9,492 $ 8,272 $ 4,682
============ ======== ========
See accompanying notes to consolidated financial statements.
F-6
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 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 2,000 franchise stores operating throughout the United
States, Puerto Rico and in 14 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, 2001, the Company operates two MAUI TACOS restaurants and one tri-
branded BLIMPIE, PASTA CENTRAL, SMOOTHIE ISLAND restaurant. The Company operates
the subfranchise in Puerto Rico, but does not operate any other 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 liquid investments with a maturity of three months
or less when purchased to be cash equivalents.
F-7
Note 2: Summary of Significant Accounting Policies (continued)
Cash and Cash Equivalents (continued)
The Company has cash deposits with financial institutions, which fluctuate in
excess of federally insured limits. If these financial institutions were not to
honor their contractual liability, the Company could incur losses. Management
believes that there is no significant risk of loss because of the financial
strength of the financial institutions.
Investments
Pursuant to Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," debt securities that may
be sold prior to maturity and all marketable equity securities are classified as
available-for-sale and carried at fair value. Fair value is estimated based on
quoted market prices for those or similar investments. Net unrealized gains and
losses, determined on the specific identification method, on securities
classified as available-for-sale are recorded as a separate component of
shareholders' equity.
Fair Market Value Disclosure
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments" ("SFAS 107"), requires disclosure of the fair
value of certain items, including receivables, payables and investments. The
Company believes that the carrying amounts included in the consolidated balance
sheets for such items do not differ significantly from their fair values as
defined in SFAS 107.
Accounts and Notes Receivable
The Company provides an allowance for doubtful receivables equal to the
estimated collection losses that will be incurred in the collection of such
receivables. The estimated losses are based on historical collection experience
coupled with a review of all outstanding receivables.
Property, Equipment and Depreciation
Property and equipment are carried at cost. Depreciation is computed over the
estimated useful lives of the assets using straight-line methods. Significant
expenditures for additions and improvements are capitalized and expenditures for
routine repairs and maintenance are charged to expense as incurred.
Trademarks
Trademarks are carried at cost less accumulated amortization, which is
calculated on a straight-line basis over the estimated useful lives of 15-40
years. Amortization expense was $310,000 in 2001, $305,000 in 2000, and $337,000
in 1999.
Advertising
The Company follows the policy of charging the costs of advertising to expense
as incurred. Advertising expense was $327,000 in 2001, $374,000 in 2000, and
$404,000 in 1999.
The Company administers several advertising and promotional funds on behalf of
the franchisees. The franchisees contribute 4% of their gross sales to The
National Media Advertising Account. A portion of the 4% contribution is
transferred to Regional Advertising Associations. Franchisees form voluntary
regional advertising associations intended to coordinate advertising and
marketing efforts and programs for local advertising. Blimpie Brand Building
Fund, Inc. is a not-for-profit entity that is authorized to receive marketing
allowances and payments from purveyors, distributors and manufacturers. Its
activities are
F-8
Note 2: Summary of Significant Accounting Policies (continued)
Advertising (continued)
controlled by franchisees elected to the National Blimpie Franchisee Advisory
Council, subfranchisors elected to the National Blimipie Subfranchisor Advisory
Council and Company representatives. The National Media Advertising Account and
the Blimpie Brand Building Fund monies are spent for advertising and marketing
uses, including marketing and advertising personnel, advertising agencies,
operating expenses of all types, matching fund programs, research and
development, production of educational or training materials, production of
commercials, focus groups and other studies, television or radio media time,
print advertising and other marketing and advertising uses.
The Company also administers a grand opening fund and the local restaurant
marketing fund. New franchisees generally pay $3,000 to the grand opening fund
and $2,000 to the local restaurant marketing fund during their first year of
operation. The franchisee, together with the Company, develops the marketing
plan that will include the grand opening marketing, coupon events and monthly
promotions. As the franchisee implements the marketing plan, the Company pays
vendors or reimburses the franchisee for expenditures related to that plan up to
the amount contributed.
Aggregate receipts and expenditures for these funds were approximately
$20,000,000 each for fiscal 2001. Total assets were approximately $6,000,000 and
total liabilities were approximately $3,000,000 as of June 30, 2001. The net
assets of these funds are held in a manner analogous to escrow accounts by the
Company and are not consolidated.
Income Taxes
The provision for income taxes and corresponding balance sheet accounts are
determined in accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109, deferred tax
liabilities and assets are determined based on temporary differences between the
basis of certain assets and liabilities for income tax and financial reporting
purposes. A valuation allowance is provided for deferred tax assets for which
realization is uncertain.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect certain amounts
reported in the consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.
Supplemental Disclosure of Cash Flow Information
Years Ended June 30
------------------------------------
2001 2000 1999
---------- ---------- ----------
Cash paid during the year for:
Interest $ 2,000 $ - $ -
Income taxes 76,000 1,049,000 1,232,000
Noncash investing and financing activities:
Stock issued under Canadian trademark agreement - 204,000 204,000
Warrants and options issued for services
and trademark - - 180,000
Net unrealized gain (loss) on marketable securities 54,000 1,000 (11,000)
Notes receivable from sales of Company-owned
restaurants 211,000 - -
F-9
Note 3: Investments
The following is a summary of available-for-sale securities included in
investments as of June 30:
Unrealized Fair
2001 Cost Gain (Loss) Value
------------ ---------- ------------
Available-for-Sale Securities:
Current:
Common stocks $ 88,000 $ 86,000 $ 174,000
Preferred stocks 362,000 5,000 367,000
Mutual funds 163,000 (17,000) 146,000
------------ ---------- ------------
613,000 74,000 687,000
Long-Term
U. S. Government securities 997,000 21,000 1,018,000
------------ ---------- ------------
$1,610,000 $ 95,000 $1,705,000
============ ========== ============
2000
Available-for-Sale Securities:
Current:
Common stocks $ 61,000 $108,000 $ 169,000
Preferred stocks 326,000 (24,000) 302,000
Mutual funds 163,000 (16,000) 147,000
------------ ---------- ------------
550,000 68,000 618,000
Long-Term
U. S. Government securities 997,000 (27,000) 970,000
------------ ---------- ------------
$1,547,000 $ 41,000 $1,588,000
============ ========== ============
The long-term U.S. Government securities held at June 30, 2001 mature in 2004.
Note 4: Notes Receivable
Notes receivable consist of the following as of June 30:
2001 2000
------------------ ------------------
Notes from subfranchisors, with interest ranging from 5% to 13% due
at various dates through December, 2008 $ 944,000 $ 814,000
Notes receivable from sale of Company-owned restaurants, with
interest ranging from 5% to 10% due at various dates through
May, 2009 211,000 -
Notes receivable from sale of discontinued segment - 56,000
Notes receivable from an officer of the Company due in semi-monthly
installments including interest of 8% per annum
through April, 2015 46,000 48,000
Receivable from leasing companies arising from participation in
franchisee equipment leases, with interest ranging from 7% to 17%,
due at various dates through August, 2003 203,000 370,000
------------------ ------------------
1,404,000 1,288,000
Allowance for doubtful accounts (172,000) (82,000)
------------------ ------------------
1,232,000 1,206,000
Current maturities 586,000 540,000
------------------ ------------------
$ 646,000 $ 666,000
================== ==================
F-10
Note 5: Property and Equipment
The major components of property and equipment and related depreciation
periods as of June 30 are:
Cost
--------------------------- Depreciation
Item 2001 2000 Period
---------------------------------- ------------ ------------ ---------------
Building and other $ 296,000 $ 739,000 7-14 years
Office furniture and fixtures 3,007,000 3,087,000 5-10 years
Automobiles 247,000 223,000 5 years
Software 845,000 753,000 5 years
------------ ------------
4,395,000 4,802,000
Less accumulated depreciation 2,954,000 2,412,000
------------ ------------
$1,441,000 $2,390,000
============ ============
Depreciation expense totaled $683,000 in 2001, $636,000 in 2000, and $519,000
in 1999.
At June 30, 2001, the Company recorded an impairment loss on leasehold
improvements and restaurant equipment related to its Company-owned Maui Tacos
location in New York City. The impairment loss was recorded due to continued
operating losses incurred in this location and management's intention to sell or
close the location early in fiscal 2002. The Company recorded a net loss of
$338,000 to write down all assets of the location to their estimated net
realizable values of $25,000. The impairment loss has been included in Company
restaurant operations in the accompanying consolidated statement of operations
for the year ended June 30, 2001. The Company expects to dispose of all assets
of the store during fiscal 2002.
Note 6: Income Taxes
The provision for income taxes is comprised as follows for the years ended
June 30 :
2001 2000 1999
--------- ---------- ----------
Federal
Current $ 96,000 $ 564,000 $789,000
Deferred 241,000 409,000 (91,000)
--------- ---------- ----------
337,000 973,000 698,000
--------- ---------- ----------
State
Current 10,000 50,000 116,000
Deferred 20,000 36,000 (14,000)
--------- ---------- ----------
30,000 86,000 102,000
--------- ---------- ----------
$367,000 $1,059,000 $800,000
========= ========== ==========
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:
2001 2000 1999
--------- ---------- ----------
Federal statutory rate - 34% $150,000 $ 732,000 $665,000
State or local taxes, net of federal benefit 20,000 57,000 65,000
Non-deductible expenses 29,000 25,000 34,000
Valuation allowance 163,000 287,000 385,000
Other 5,000 (42,000) (349,000)
--------- ---------- ----------
$367,000 $1,059,000 $800,000
========= ========== ==========
F-11
Note 6: Income Taxes (continued)
The components of temporary differences and their tax effects which comprise
the Company's net deferred tax asset are as follows at June 30:
2001 2000
---------- ----------
Deferred tax assets:
Subfranchisor deferred revenues $1,233,000 $1,509,000
Franchisee deferred revenues 196,000 259,000
Allowance for doubtful accounts 176,000 117,000
Start-up costs for Maui Tacos 57,000 83,000
Net operating loss carryforward of Maui Tacos 607,000 395,000
Other 124,000 20,000
Valuation allowance (835,000) (672,000)
---------- ----------
1,558,000 1,711,000
---------- ----------
Deferred tax liabilities:
Trademark amortization (351,000) (243,000)
---------- ----------
(351,000) (243,000)
---------- ----------
$1,207,000 $1,468,000
========== ==========
The valuation allowance for deferred taxes relates to net deferred tax assets
of Maui Tacos, a majority-owned subsidiary that is not consolidated for tax
purposes. The valuation allowance was established due to the uncertainty of the
related deferred tax assets' ultimate realization. Maui Tacos has net operating
loss carryforwards totaling approximately $1,734,000 expiring beginning in 2020.
Note 7: Commitments and Contingencies
The Company leases its facilities under noncancelable operating leases,
expiring in various years through 2012. The minimum future annual rentals under
these noncancelable operating leases as of June 30, 2001 for each of the next
five years and in the aggregate, are as follows:
Year Amount
--------------------- --------------
2002 $ 538,000
2003 379,000
2004 77,000
2005 61,000
2006 28,000
2007 and thereafter 151,000
----------
$1,234,000
==========
The Company also is obligated for increases in real estate taxes and operating
costs. Rent expenses including real estate taxes and operating costs amounted to
$852,000 in 2001, $765,000 in 2000, and $520,000 in 1999. Certain of these
leases contain renewal provisions.
The Company's leasing subsidiaries execute leases for approved BLIMPIE
restaurant locations and then sublease the premises to franchisees. Under the
terms of the typical lease agreement, the Company's leasing subsidiary's
liability is limited to its net assets and the landlord agrees to not commence
any legal proceedings against Blimpie International, Inc. The franchisee assumes
the payment of rent and agrees to perform all terms, covenants and conditions of
the original lease. As a result, the Company has not recorded lease expense and
sublease income in the accompanying consolidated financial statements. As of
June 30, 2001, there were approximately 600 leasing subsidiaries with aggregate
net assets of $344,000, which are included in cash and other assets in the
F-12
Note 7: Commitments and Contingencies (continued)
accompanying consolidated balance sheet. The terms of these leases range from 3
to 30 years. As of June 30, 2001, there were approximately 923 leases held by
these leasing subsidiaries. The aggregate minimum annual lease payments for all
of these leases is estimated to be approximately $20,000,000 in fiscal 2002 and
approximately $90,000,000 for all fiscal years subsequent to June 30, 2001.
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, 2001 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 8: Trademarks
The Company currently owns an undivided 60% interest in the domestic and
international BLIMPIE trademarks. The remaining 40% interest in those trademark
rights is owned by Metropolitan Blimpie, Inc. ("MBI"), an unrelated company.
Through various agreements that the Company has entered into with MBI, the
trademark rights are shared by both MBI and the Company. Both companies have the
exclusive rights to the trademarks in certain domestic territories, and for the
remaining domestic territories, the Company has licensed the rights to the
trademarks from MBI in exchange for a licensing fee generally equal to 30% of
the revenues, after deducting direct expenses incurred by the Company in the
territories.
The territories for which the Company has licensed the right to distribute the
BLIMPIE trademarks and license the BLIMPIE Marketing System from MBI include:
Alaska, Arkansas, Northern California, Colorado, Hawaii, Iowa, Kansas, Missouri,
Nebraska, Nevada, North Dakota, Oklahoma, South Dakota, and all territories
outside of the United States.
The domestic territories in which MBI has retained the right to distribute the
BLIMPIE trademarks and license the BLIMPIE Marketing System (the "MBI
Territories") include Delaware, Maryland, New Jersey (except for portions of the
northeastern section of the State), the counties of New York, Queens, Kings,
Richmond, Rockland, Bronx and Westchester in New York, Pennsylvania (from the
eastern border westward to and including Harrisburg), Virginia and Washington,
D.C.
The agreement with MBI with respect to the licensing of the BLIMPIE trademarks
and the BLIMPIE marketing system outside of the United States provides for
automatic annual renewals until July 2090, provided that the Company makes all
payments due to MBI, subject to a minimum annual payment of $100,000. The
payments made to MBI under this arrangement were $627,000 in 2001, $700,000 in
2000, and $778,000 in 1999.
The Company acquired its 60% interest in the trademark rights noted above
through various transactions with Anthony P. Conza, Chairman and Chief Executive
Officer ("Conza") and David L. Siegel, Chief Operating Officer ("Siegel"). The
Company received a 99 year license in the domestic rights in the BLIMPIE
trademarks from Conza and Siegel in 1976. In 1997, the Company purchased its
share of the international rights to the BLIMPIE trademarks from Conza and
Siegel. The Company agreed to pay $4.5 million ($3 million to Conza and $1.5
million to Siegel), plus certain contingent fees which were to take effect after
cumulative international revenues exceeded $5 million, in consideration for
their sale of such rights to the Company. That agreement further provided that
Conza and Siegel could receive annual payments totaling $150,000 per year for 50
years, or could elect, at any time prior to January 1, 2001, to receive a lump
sum distribution of $3 million on January 1, 2001, with $2 million payable to
Conza and $1 million payable to Siegel.
F-13
Note 8: Trademarks (continued)
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, 2001, all 125,000 shares of common stock had been
issued to the claimant.
Note 9: Related Party Transactions
The Company had numerous transactions which result from written agreements
between the Company and subfranchisors who are related parties. The following is
a summary of the types of transactions and revenue or expense recognized related
to these transactions for the years ended June 30:
Revenue or Expense
Related Party Recognized 2001 2000 1999
---------------------------------- ---------------------------- --------------- ------------- -------------
Georgia Enterprises, Inc., a Revenue derived from area $2,490,000 $2,511,000 $2,514,000
corporation partially owned by Fees paid to subfranchisor 1,155,000 1,162,000 1,155,000
two officers of the Company
Llewellyn Distributors, Inc., Revenue derived from area 562,000 587,000 525,000
a corporation partially owned Fees paid to subfranchisor 273,000 280,000 305,000
by an officer of the Company
International Southwest Blimpie, Revenue derived from area - - 123,000
Inc., a corporation principally Fees paid to subfranchisor - - 53,000
owned and controlled by an
officer of the Company
Manhattan Maui, Inc. a Revenue derived from area 472,000 156,000 -
corporation partially owned Fees paid to subfranchisor - 8,000 -
by an officer of the Company
In November 1998, International Southwest Blimpie, Inc. was sold to a party
unrelated to the Company. No additional revenue or expenses are expected to be
earned or paid to this officer related to this territory subsequent to November
15, 1998.
F-14
Note 9: Related Party Transactions (continued)
The Company has subscriptions receivable from an officer of the Company
totaling $57,000 at June 30, 2001 and $60,000 at June 30, 2000 related to a
purchase of shares of the Company's common stock in fiscal 1992. Such receivable
bears interest at the rate of 5% per annum, payable quarterly. Interest income
of $4,000, $4,000, and $9,000 was recognized by the Company for the years ended
June 30, 2001, 2000, and 1999, respectively.
The Company has a note receivable from an officer of the Company due in semi-
monthly installments including interest of 8% per annum through April, 2015 (see
Note 4). Such note receivable was $46,000 and $48,000 at June 30, 2001 and 2000,
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 $17,000, $13,000,
and $11,000 was recognized for the years ended June 30, 2001, 2000, and 1999,
respectively.
In April 2001, the Company assigned certain key man insurance policies to
three officers of the Company. The aggregate cash surrender value of these
policies of approximately $477,000 was expensed as bonuses to the three officers
and was recorded in selling, general and administrative expenses in the year
ended June 30, 2001.
Note 10: Stock Options and Warrants
The Company has established an Omnibus Stock Incentive Plan ("the Plan") which
permits the Company to award various forms of incentive compensation. Through
June 30, 2001, the Company has issued incentive and nonstatutory stock options
and stock grants under the Plan. A maximum of 1,293,700 shares may be issued
under the Plan. The options are exercisable at the fair market value on the date
of grant. The options and stock grants generally provide for vesting at the rate
of 20% per annum and expire from five to ten years after issuance. In connection
with the issuance of the stock grants, the Company recognized compensation
expense of $3,000 in 2001, $6,000 in 2000, and $14,000 in 1999.
Option activity under the Plan is as follows:
Weighted
Average
Number of Exercise
Options Price
-------------- ---------------
Outstanding at July 1, 1998 380,400 $6.11
Granted 509,000 2.74
Exercised - -
Canceled (136,400) 5.91
-----------------
Outstanding at June 30, 1999 753,000 3.87
Granted 130,000 2.69
Exercised - -
Canceled (90,500) 3.51
-----------------
Outstanding at June 30, 2000 792,500 3.71
Granted 160,500 1.48
Exercised - -
Canceled (15,000) 4.40
-----------------
Outstanding at June 30, 2001 938,000 $3.32
=================
Options exercisable at June 30, 1999 249,300 $4.82
Options exercisable at June 30, 2000 378,800 $4.36
Options exercisable at June 30, 2001 639,600 $3.73
F-15
Note 10: Stock Options and Warrants (continued)
The following table summarizes information concerning options outstanding and
exercisable under the Plan at June 30, 2001:
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
----------------- ----------------- ------------------- ----------------- ----------------- -----------------
$1.380 - $ 2.690 427,500 8.35 $ 2.11 246,800 $ 2.13
$3.030 - $ 3.680 294,000 6.95 3.04 176,900 3.04
$5.500 - $ 14.750 216,500 0.76 6.11 215,900 6.12
-------------- --------------
938,000 6.16 3.32 639,600 3.73
============== ==============
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, 2001. The following table
summarizes information concerning common stock purchase warrants and options
held by non-employees as of June 30, 2001:
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
On July 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS 123). As
permitted by SFAS 123, the Company has chosen to apply APB Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its Plan and apply the disclosure-only provisions of SFAS 123.
Under APB 25, when the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required
by SFAS 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to June
30, 1995 under the fair value method of that Statement. The fair value of these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for fiscal 2001, 2000 and
1999: 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
$0.47, $1.13, and $1.17 for fiscal 2001, 2000, and 1999, 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-16
Note 10: 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:
2001 2000 1999
------------- ------------ ---------------
Income before cumulative effect of change in $ 74,000 $1,095,000 $1,156,000
accounting principle
Pro forma (loss) income before cumulative effect of (190,000) 811,000 827,000
change in accounting principle
Pro forma (loss) income per share before cumulative
effect of change in accounting principle:
Basic and diluted $ (0.02) $ 0.09 $ 0.09
Note 11: Convertible Shares of Subsidiary
The shareholders of the Company's majority-owned subsidiary, Maui Tacos, hold
common stock in Maui Tacos that is convertible into Blimpie common stock,
according to the terms stipulated in the Maui Tacos shareholder Agreement, as
amended. Such agreement states that during the period commencing with the first
day of Maui Tacos' third full fiscal year of operations (July 1, 2000) and
ending with the ninetieth day after the Company files its annual financial
statements, all Maui Tacos shareholders, except for the Company, have the right
to convert all or a portion of their respective shares of Maui Tacos common
stock into Company stock, pursuant to a formula calculated by dividing the lower
of Maui Tacos' current or prior year earnings per share value by the Company's
earnings per share value for the same period. The conversion privileges held by
the Maui Tacos shareholders are subject to limitations on the number of shares
of Company stock that are subject to such conversion rights, both for individual
Maui Tacos shareholders and for aggregate levels of conversions. Maui Tacos
incurred losses in both the current and prior year, and therefore no shares may
be converted pursuant to such formula.
Note 12: Employee Benefit Plan
The Company maintains a 401(k) Profit Sharing Plan (the "Plan") available to
substantially all employees. Under the Plan, the Company can elect to make
matching contributions of up to 100% of the elective deferral contributions.
During each of the three years in the period ended June 30, 2001, the Company
made matching contributions of 20% of the elective deferral contributions. The
matching contributions charged to earnings were $67,000, $76,000, and $66,000
for fiscal 2001, 2000 and 1999, respectively. At June 30, 2001 and 2000, the
Plan held approximately 101,000 and 47,000 shares, respectively, of the
Company's common stock with a fair value of approximately $174,000 and $85,000,
respectively. The Plan received approximately $4,800, $2,200 and $300 in
dividends on Company shares in fiscal 2001, 2000 and 1999, respectively.
Note 13: Business Segment Information
The Company's separately identifiable segments relate to: franchise
operations, store design services and equipment sales, and restaurant operations
of the Company-owned restaurants.
During 1996, the Company began operations outside of the United States. As of
June 30, 2001, the Company has master licenses operating in Argentina, Bahrain,
Canada, Cyprus, Dominican Republic, Great Britain, Greece, Guam, Kuwait, Mexico
(primarily states in the northeastern and northwestern parts of the country),
Northern Ireland, Oman, Panama, Poland, Portugal, Puerto Rico, Qatar, The
Republic of Ireland, Romania, Saipan, Saudi Arabia, South Africa, United Arab
Emirates, Uruguay, and Venezuela. Franchisees are operating in the following
countries: Argentina, Aruba, Canada, Cyprus, Dominican
F-17
Note 13: Business Segment Information (continued)
Republic, Great Britain, Guam, Lebanon, Mexico, Panama, Poland, Puerto Rico,
Saudi Arabia, South Africa, and Venezuela. There were no capital expenditures
outside of the United States in 2001, 2000, or 1999.
Financial information by identifiable segments is as follows for the years
ended June 30:
Depreciation
Operating Identifiable and
2001 Revenue (Loss) Income Assets Amortization
----------------- ------------------ ----------------- -----------------
Franchise operations:
United States $23,448,000 $ 2,318,000 $23,031,000 $729,000
International 596,000 (248,000) 1,569,000 107,000
Equipment and design 5,018,000 (190,000) 1,595,000 36,000
Company restaurants 1,672,000 (2,075,000) 328,000 121,000
----------------- ------------------ ----------------- -----------------
$30,734,000 $ (195,000) $26,523,000 $993,000
================= ================== ================= =================
2000
Franchise operations:
United States $23,337,000 $ 2,584,000 $21,815,000 $726,000
International 415,000 (547,000) 1,556,000 105,000
Equipment and design 6,407,000 44,000 2,531,000 50,000
Company restaurants 858,000 (553,000) 1,158,000 60,000
----------------- ------------------ ----------------- -----------------
$31,017,000 $ 1,528,000 $27,060,000 $941,000
================= ================== ================= =================
1999
Franchise operations:
United States $23,043,000 $ 1,577,000 $24,448,000 $674,000
International 760,000 (394,000) 1,454,000 101,000
Equipment and design 9,409,000 (46,000) 2,127,000 56,000
Company restaurant 338,000 (4,000) 229,000 15,000
----------------- ------------------ ----------------- -----------------
$33,550,000 $ 1,133,000 $28,258,000 $846,000
================= ================== ================= =================
Note 14: Subfranchisor Fees and Franchise Revenue
Franchise Fees and Costs
The initial non-refundable fee for franchisees that have previously never
owned a traditional BLIMPIE or MAUI TACOS restaurant is $18,000 and $20,000,
respectively. MAUI TACOS agreements include franchise rights to SMOOTHIE ISLAND.
BLIMPIE franchisees may purchase a SMOOTHIE ISLAND franchise for $1 to $2,500.
These fees generally are payable in cash at the time of execution of the
franchise agreement. Additional franchises are awarded at lesser amounts based
upon the number of units awarded. The initial non-refundable franchise fee for
nontraditional BLIMPIE restaurants, such as those in convenience stores,
institutional food service entities, colleges, schools, mass feeders, hospitals
and others range from $1.00 to $18,000 (depending upon the number of
nontraditional restaurant transactions executed, the location of the
nontraditional franchised restaurant, the marketing area and other subjective
matters). The Company reserves the right to issue franchises to its
subfranchisors or their designees for $1.00 to $5,000 each in order to
accelerate the development of the area of the subfranchisor. The Company defers
recognition of the revenues and costs related to these transactions until the
restaurant is opened.
The number of franchised BLIMPIE restaurants open as of June 30, 2001, 2000,
and 1999 were 1,955 (1,894 United States, 61 International), 1,990 (1,933 United
States, 57 International), and 2,097 (2,040 United States, 57 International),
respectively. There were eight PASTA CENTRAL locations co-branded with BLIMPIE
locations as of June 30, 2001, five as of June 30, 2000 and three as of June 30,
1999.
F-18
Note 14: Subfranchisor Fees and Franchise Revenue (continued)
Franchise Fees and Costs (continued)
There were 15 MAUI TACOS restaurants operating as of June 30, 2001, 13 of which
were franchised and two of which the Company had full or partial ownership.
There were eight MAUI TACOS restaurants operating as of June 30, 2000, five of
which were franchised and three of which the Company had full or partial
ownership. There was one Company-owned MAUI TACOS restaurant operating as of
June 30, 1999. There were 80 SMOOTHIE ISLAND locations co-branded with either a
BLIMPIE or MAUI TACOS restaurant as of June 30, 2001, 50 as of June 30, 2000,
and 30 as of June 30, 1999. There were three Company-owned SMOOTHIE ISLAND JUICE
BAR locations operating as of June 30, 2000, all of which were closed or sold in
fiscal 2001.
The following is a summary of the deferred franchise revenues and costs.
Number
Revenues Costs of Units
--------------- --------------- ------------
Balance June 30, 1998 $ 2,905,000 $ 2,224,000 515
Franchises awarded 2,209,000 1,221,000 311
Revenue recognized (2,592,000) (1,888,000) (470)
--------------- --------------- ------------
Balance June 30, 1999 2,522,000 1,557,000 356
Franchises awarded 1,319,000 758,000 236
Revenue recognized (1,939,000) (1,153,000) (316)
--------------- --------------- ------------
Balance June 30, 2000 1,902,000 1,162,000 276
Franchises awarded 1,333,000 702,000 257
Revenue recognized (1,863,000) (1,057,000) (313)
--------------- --------------- ------------
Balance June 30, 2001 $ 1,372,000 $ 807,000 220
=============== =============== ============
According to the terms of signed agreements between the Company and its
franchisees, the Company is obligated, among other things, to supply to the
franchisee logo types, dies, mats, etc., of its trademarks, along with sets of
materials, manuals and forms at a price equivalent to the Company's cost for
such materials, and certain training and continued support. The Company, in
conjunction with the subfranchisors and master licensors, assists in the
selection and purchase of equipment and helps the franchisee to obtain financing
of the initial cost of franchising. Subfranchisors and master licensors are
responsible for providing day-to-day operational support for BLIMPIE and MAUI
TACOS franchise restaurants in their territory, and in return receive
compensation approximating half of the fees collected from the individual
BLIMPIE and MAUI TACOS franchises. These services are performed under the
Company's supervision.
Subfranchisor and Master Licensor Fees
The subfranchisor and master licensor fee ranges from $10,000 to $575,000.
These fees typically are established by calculating the population of the area
of the subfranchisor or master licensor and multiplying the population by $0.10
for the United States and $0.01 to $0.10 for International. Subfranchisors and
master licensors in operation as of June 30, 2001, 2000 and 1999 were 102 (84
United States, 18 International), 107 (85 United States, 22 International) and
106 (85 United States, 21 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-19
Note 14: Subfranchisor Fees and Franchise Revenue (continued)
Subfranchisor and Master Licensor Fees (continued)
Effective July 1, 1999, the Company changed its accounting policy related to
the recognition of subfranchisor and master licensor fees (see Note 2). This
change was accounted for as a cumulative effect adjustment in fiscal 1999, as
reflected in the table below. The following is a summary of the remaining
deferred subfranchisor fees:
Revenues Costs
------------------ -----------------
Balance June 30, 1998 $ 55,000
Cumulative effect of accounting change 6,840,000 $1,652,000
Sales of subfranchises and
master licenses 805,000 133,000
Revenue recognized (1,437,000) (267,000)
------------------ -----------------
Balance June 30, 1999 6,263,000 1,518,000
Sales of subfranchises and
master licenses 891,000 62,000
Revenue recognized (1,565,000) (302,000)
------------------ -----------------
Balance June 30, 2000 5,589,000 1,278,000
Sales of subfranchises and
master licenses 452,000 34,000
Revenue recognized (1,472,000) (265,000)
------------------ -----------------
Balance June 30, 2001 $ 4,569,000 $1,047,000
================== =================
Note 15: Earnings Per Share
Earnings per share on a basic and diluted basis is calculated as follows:
2001 2000 1999
------------------ ----------------- -----------------
Income before cumulative effect of change
in accounting principle $ 74,000 $1,095,000 $1,156,000
================== ================= =================
Calculation of weighted average shares
outstanding plus assumed exercises:
Weighted average basic shares outstanding 9,269,000 9,446,000 9,467,000
Effect of dilutive employee stock options 11,000 7,000 5,000
------------------ ----------------- -----------------
Weighted average diluted shares outstanding 9,280,000 9,453,000 9,472,000
================== ================= =================
Basic earnings per share before cumulative effect
of change in accounting principle $ 0.01 $ 0.12 $ 0.12
================== ================= =================
Diluted earnings per share before cumulative effect
of change in accounting principle $ 0.01 $ 0.12 $ 0.12
================== ================= =================
Certain options outstanding during each of the following years and their
related exercise prices were not included in the computation of diluted earnings
per share before cumulative effect of change in accounting principle because
their exercise price was greater than the average market price of the shares
and, therefore, the effect would be antidilutive: fiscal 2001 - 798,000 shares
at prices ranging from $1.64 to $14.75, fiscal 2000 - 603,000 shares at prices
ranging from $2.69 to $14.75, and fiscal 1999 - 590,000 shares at prices ranging
from $3.03 to $14.75.
F-20
Note 16: Quarterly Information (Unaudited)
The following table sets forth a summary of the unaudited quarterly results of
operations for the twelve month periods ended June 30, 2001 and June 30, 2000.
Quarter
-----------------------------------------------------------------------------
2001 First Second Third Fourth Total
----------------- ----------------- ----------------- ----------------- -----------------
Total revenues $8,179,000 $7,537,000 $7,211,000 $7,807,000 $30,734,000
Gross profit 3,074,000 2,951,000 2,785,000 2,202,000 11,012,000
Net income (loss) 160,000 196,000 195,000 (477,000) 74,000
Earnings (loss) per share:
Basic and diluted $ 0.02 $ 0.02 $ 0.02 $ (0.05) $ 0.01
2000
Total revenues $8,402,000 $7,191,000 $7,249,000 $8,175,000 $31,017,000
Gross profit 3,355,000 3,286,000 3,047,000 3,134,000 12,822,000
Net income 283,000 466,000 263,000 83,000 1,095,000
Earnings per share:
Basic and diluted $ 0.03 $ 0.05 $ 0.03 $ 0.01 $ 0.12
The fourth quarter of fiscal 2001 included provisions, net of tax, of
approximately $305,000 related to the distribution of the cash surrender value
of life insurance to three of the Company's executives, $225,000 related to
additional trademark license fees due to MBI, and $592,000 for losses incurred
or accrued for the sales or closings of the six SMOOTHIE ISLAND JUICE BAR
locations in Houston, Texas and the MAUI TACOS location in New York City.
Note 17: Subsequent Event
On October 5, 2001, the Company entered into an agreement and plan of merger
(the "Agreement") with an investor group headed by Jeffrey Endervelt (the
"Endervelt Group"), one of its subfranchisors. Pursuant to the Agreement, Mr.
Endervelt's company, Sandwich Acquisition Corporation ("SAC"), will merge with
and into the Company, and the Company will be the surviving corporation.
In the merger, the Endervelt Group will acquire all of the outstanding common
stock of the Company at a price of $2.80 per share, or approximately
$25,800,000. The transaction, which is expected to close during the first
quarter of calendar 2002, is subject to the approval of the Company's
shareholders.
In connection with the merger agreement, five members of the Company's senior
management, who currently own approximately 58% of the Company's outstanding
shares, entered into a voting agreement with SAC. In accordance with the voting
agreement, those officers have agreed to vote their shares in favor of the
Agreement, and have granted to SAC a proxy to vote their shares in favor of the
transaction. Those officers may terminate the voting agreement and revoke their
proxies if the Company's Board of Directors withdraws its recommendation of the
merger in favor of a superior proposal, as defined in the merger agreement.
Additionally, the Agreement provides that the Company will have the ability to
conduct a market check for a 30-day period. The Agreement allows the Company to
terminate the merger if the Board determines that it has received a superior
proposal, which would require the payment by the Company of a break-up fee of
$1.3 million plus up to $200,000 of expenses.
F-21
Blimpie International, Inc. and Subsidiaries
SCHEDULE II
CONSOLIDATED SCHEDULE OF VALUATION AND QUALIFYIING ACCOUNTS
(in thousands)
--------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
----------------------------------------------------------------------
Balance at Charged to Charged to Balance at
Beginning Cost and Other End of
Description of Period Expenses Account Deductions Period
Year ended June 30, 2001
Accounts receivable $ 252 $ 170 $ 100 (1) $ 131 $ 391
Notes receivable 82 137 8 55 172
Year ended June 30, 2000
Accounts receivable 392 - 102 (1) 242 252
Notes receivable 81 6 21 26 82
Year ended June 30, 1999
Accounts receivable 207 306 - 121 392
Notes receivable 65 101 - 85 81
(1) Represents amounts recorded as receivables but fully reserved at inception
due to collectibility concerns.
F-22