SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1998
OR
[ ] Transition report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _______ to _______
Commission File Number 0-21036
BLIMPIE INTERNATIONAL, INC.
(Exact name of issuer as specified in its charter)
New Jersey
(State or Other Jurisdiction of Incorporation or Organization)
13-2908793
(IRS Employer Identification No.)
740 Broadway, New York, NY 10003
(Address and Zip Code of Principal Executive Offices)
(212) 673-5900
(Issuer's Telephone Number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
---
There were 9,577,226 shares of the registrant's common stock outstanding as
of November 10, 1998.
Blimpie International, Inc.
Quarterly Report on Form 10-Q
For the Quarter Ended September 30, 1998
Table of contents
Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets - September 30, 1998
and June 30, 1998 3
Condensed Consolidated Statements of Income - Three
Months Ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows - Three
Months Ended September 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
2
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
BLIMPIE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands) September 30 June 30
1998 1998
------------ ----------
(Unaudited) (Note)
Assets
Current assets:
Cash and cash equivalents $ 4,824 $ 4,021
Investments 3,435 4,495
Accounts receivable, net 3,330 3,007
Prepaid expenses and other current assets 484 498
Deferred income taxes 211 211
Current portion of notes receivable 666 569
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Total current assets 12,950 12,801
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Property and equipment, net 1,679 1,584
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Other assets:
Notes receivable less current portion, net 1,215 1,324
Investments 4,781 3,686
Trademarks, net 8,594 8,568
Other 360 360
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Total other assets 14,950 13,938
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$29,579 $28,323
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------------ ----------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and other current liabilities $ 3,743 $ 3,060
Income taxes payable 479 276
------------ ----------
Total current liabilities 4,222 3,336
Deferred revenue 643 736
Deferred income taxes 218 218
Trademark obligations 3,408 3,408
Shareholders' equity:
Common stock, $.01 par value 96 96
Additional paid-in capital 8,430 8,420
Retained earnings 12,985 12,519
Net unrealized gain on marketable securities 142 51
------------ ----------
21,653 21,086
Treasury stock (355) (251)
Subscriptions receivable (210) (210)
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Total shareholders' equity 21,088 20,625
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$29,579 $28,323
------------ ----------
------------ ----------
Note: The condensed consolidated balance sheet at June 30, 1998 has been
derived from the audited consolidated financial statements of the Company at
that date but does not include all of the information required by generally
accepted accounting principles for complete financial statements.
See notes to condensed consolidated financial statements.
3
BLIMPIE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended
(in thousands, except for per share amounts) September 30
1998 1997
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Revenues
Continuing fees $ 4,800 $ 4,231
Subfranchisor fees, master license fees
and sale of franchises 1,086 1,234
Store equipment sales 2,592 4,274
Management fees and other income 296 294
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8,774 10,033
Expenses
Subfranchisors' share of franchise
and continuing fees 2,971 2,757
Store equipment cost of sales 2,384 3,563
Selling, general and administrative expenses 2,877 2,594
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8,232 8,914
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Operating income 542 1,119
Interest income 185 183
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Income before income taxes 727 1,302
Income taxes 261 499
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Net income $ 466 $ 803
---------- ---------
---------- ---------
Basic earnings per share $0.05 $0.08
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---------- ---------
Diluted earnings per share $0.05 $0.08
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---------- ---------
Weighted average basic shares outstanding 9,498 9,542
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---------- ---------
Weighted average diluted shares outstanding 9,498 9,577
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See notes to condensed consolidated financial statements.
4
BLIMPIE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended
(in thousands) September 30
1998 1997
---------- ---------
Cash Flows From Operating Activities
Net income $ 466 $ 803
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 181 135
Incentive stock granted 10 86
Decrease (increase) in:
Accounts receivable (323) (383)
Prepaid expenses and other current assets 14 (138)
Other assets 0 (115)
Deferred income taxes 0 (39)
Notes receivable 12 (24)
Increase (decrease) in:
Accounts payable and other current liabilities 683 (335)
Income taxes payable 203 427
Deferred revenue (93) (139)
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Net cash provided by operating activities 1,153 278
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Cash Flows From Investing Activities
Purchase of available-for-sale securities (1,384) (1,633)
Proceeds from sale of available-for-sale securities 1,440 1,554
Reinvested dividends of available-for-sale securities 0 (2)
Purchase of trademarks (98) 0
Acquisition of property and equipment (204) (88)
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Net cash used in investing activities (246) (169)
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Cash Flows From Financing Activities
Purchase of treasury stock (104) 0
Repayment of long-term debt 0 (1)
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Net cash used in financing activities (104) (1)
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Net increase in cash and cash equivalents 803 108
Cash and cash equivalents at beginning of period 4,021 3,532
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Cash and cash equivalents at end of period $ 4,824 $ 3,640
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See notes to condensed consolidated financial statements.
5
Notes To Condensed Consolidated Financial Statements
For the Three Months Ended September 30, 1998 (Unaudited)
The unaudited interim financial statements have been prepared on a basis
substantially similar with the Company's audited financial statements as of
June 30, 1998 and should be read in conjunction with the Company's June 30,
1998 Annual Report on Form 10-K.
The unaudited financial statements include all adjustments consisting only
normal recurring accruals which are, in the opinion of management, necessary
to present a fair statement of financial position as of September 30, 1998
and the results of operations and cash flows for the periods then ended.
Results of operations for the period are not necessarily indicative of the
results to be expected for the full year.
No significant events have occurred subsequent to the end of fiscal year 1998,
and no material contingencies exist which would require disclosure in this
interim report.
Earnings per Share
Earnings per share on a basic and diluted basis as required by Statement No.
128 is calculated as follows:
Three months ended
September 30,
(in thousands, except per share amounts) 1998 1997
---------- ------
Net income $ 466 $ 603
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Calculation of weighted average shares
outstanding plus assumed conversions:
Weighted average basic shares outstanding 9,498 9,542
Effect of dilutive employee stock options 0 35
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Weighted average diluted shares outstanding 9,498 9,577
---------- ------
---------- ------
Basic earnings per share $ 0.05 $ 0.08
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Diluted earnings per share $ 0.05 $ 0.08
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6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion contains forward-looking statements subject to
the safe harbor created by the Private Securities Litigation Reform Act of
1995. The words "may," "would," "could," "will," "expect," "estimate,"
"believe," "intends," "plans" and similar expressions and variations thereof
are intended to identify forward-looking statements. Management cautions that
these statements represent projections and estimates of future performance
and involve certain risks and uncertainties. The Company's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors including, without limitation, the
Company's ability to successfully implement the new concepts currently being
formulated; changes in global and local business and economic conditions;
consumer preferences, spending patterns and demographic trends; food, labor
and other operating costs; availability and cost of land and construction;
currency exchange rates; and other risks outside the control of the Company
referred to in the Company's registration statement and periodic reports
filed with the Securities and Exchange Commission.
Three Months Ended September 30, 1998 Compared with Three Months Ended
September 30, 1997
Results of Operations
The Company's net income decreased 42.0% to $466,000 in the three months
ended September 30, 1998 from $803,000 in the three months ended September
30, 1997. The Company's basic and diluted earnings per share decreased 37.5%
to $0.05 per share in the three months ended September 30, 1998 from $0.08
per share in the three months ended September 30, 1997. Such decreases are
attributable primarily to decreases in store equipment sales and an increase
in selling, general and administrative expenses, all of which are discussed
below.
The Company's continuing fees derived from franchises increased 13.4% to
$4,800,000 in the three months ended September 30, 1998 from $4,231,000 in the
three months ended September 30, 1997. This increase was due to the 14.0%
increase in the number of open outlets from 1,763 at September 30, 1997 to
2,009 at September 30, 1998.
Subfranchisor fees, master license fees and fees from the sales and
resales of franchises decreased 12.0% to $1,086,000 in the three months ended
September 30, 1998 from $1,234,000 in the three months ended September 30,
1997. The following table summarizes the components of these fees for three
months ended September 30, 1998 and 1997:
Three Months Ended
September 30,
1998 1997 Change
-------------------------------
Subfranchisor fees $ 278,000 $ 194,000 43.3%
Master license fees 100,000 202,000 -50.5%
Franchise and resale fees 708,000 838,000 -15.5%
---------- -------- ------
Total $1,086,000 $1,234,000 -12.0%
---------- -------- ------
---------- -------- ------
Subfranchise fees increased 43.3% due primarily to the sale of a Maui
Tacos International, Inc. subfrancise territory in three months ended
September 30, 1998. Master license fees decreased 50.5% due to the
recognition of deferred fees from previously sold territories in the 1997
period, with no corresponding revenues in the current period. Revenues
7
from sales of franchises and resale fees decreased 15.5% in the three months
ended September 30, 1998 due primarily to a decrease in the number of new
outlets opened in the period. The number of new outlets opened decreased
31.7% to 82 new outlets in the three months ended September 30, 1998 from 120
in the three months ended September 30, 1997.
As of September 30, 1998, the Company had Master Licensors operating in
26 countries, and 43 Blimpie outlets operating in 12 of these countries. The
Company's focus through the remainder of fiscal 1999 will be to continue to
sell new international territories while assisting our Master Licensors with
the aggressive development of the existing areas. Although the Company has
strengthened its 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 the Company's investment in the
international marketplace will increase either franchise grants, master
license fees or outlet openings, or if such increases do occur, that they
will result in material increments in revenue.
Store equipment sales decreased 39.4% to $2,592,000 in the three months
ended September 30, 1998 from $4,274,000 in the three months ended September
30, 1997. This decrease was due to fewer store openings in the current
period, as well as a greater percentage of the new franchises being "new
concept" franchises, which typically purchase less equipment than traditional
locations due to their smaller size.
Management fees and other income for the three months ended September
30, 1998 increased 0.7% to $296,000 from $294,000 in the three months ended
September 30, 1997.
The Subfranchisors' shares of continuing and franchise fees increased
7.8% to $2,971,000 in the three months ended September 30, 1998 from
$2,757,000 in the three months ended September 30, 1997. This increase was
due to the 13.4% increase in continuing fees, partially offset by the
decrease in master license, franchise and resale fees.
Store equipment cost of sales decreased 33.1% to $2,384,000 in the three
months ended September 30, 1998 from $3,563,000 in the three months ended
September 30, 1997. This decrease was due to the 39.4% decrease in store
equipment sales, combined with a decline in the profit margin on the sales.
The gross margin on store equipment sales decreased to 8.0% in the three
months ended September 30, 1998 from 16.6% in the three months ended
September 30, 1997 due to an unfavorable change in the product mix.
Selling, general and administrative expense rose 10.9% to $2,877,000 in
the three months ended September 30, 1998 from $2,594,000 in the three months
ended September 30, 1997. This increase was due primarily to additional
personnel and related costs associated with the 13.4% growth in number of
Blimpie outlets, as well as personnel, legal and other costs incurred in the
development of the Maui Tacos, Smoothie Island and Pasta Central brands.
Interest income in the three months ended September 30, 1998 increased
by 1.1% to $185,000 from $183,000 in the three months ended September 30,
1997.
The effective income tax rates (income taxes expressed as a percentage
of pre-tax income) were 36.0% in the three months ended September 30, 1998
and 38.3% in the three months ended September 30, 1997. The decrease was due
to a lower effective state income tax rate.
8
Liquidity and Capital Resources
During the three months ended September 30, years 1998 and 1997 the
Company did not incur any material capital commitments. As of September 30,
1998, the Company's working capital was $8,728,000 and total cash and
investments were $13,040,000.
The Company generated cash flows from operating activities of $1,153,000
and $278,000 in the three months ended September 30, 1998 and 1997,
respectively. The increase in the three months ended September 30, 1998 was
primarily the result of an increase in accounts payable, partially offset by
lower net income and a smaller increase in income taxes payable.
Net cash used in investing activities during the three months ended
September 30, 1998 and 1997 totaled $246,000 and $169,000, respectively. The
1996 period included greater purchases of trademarks and property and
equipment, partially offset by net proceeds from the sale of
available-for-sale securities.
Net cash used in financing activities was $104,000 in the three months
ended September 30, 1998 and $1,000 in the three months ended September 30,
1997. The increase in the use of cash from the three months ended September
30, 1997 to three months ended September 30, 1998 was due to the
implementation of a plan announced by the Company in fiscal 1998 to
repurchase up to 250,000 shares of its Common Stock. As of November 10, 1998
the Company had repurchased 120,000 shares pursuant to this plan.
The Company's primary liquidity needs arise from expansion, research and
development, capital expenditures and trademark obligations. These needs are
primarily met by the cash flows from operations and from the Company's cash
and investments. The Company believes that the cash flows from operations and
the Company's cash and investments will be sufficient to fund its future
liquidity needs for the foreseeable future.
Impact of Year 2000
The Company's business and relationships with its business partners and
customers depend significantly on a number of computer software programs,
internal operating systems and connections to other networks, and the failure
of any of these programs, systems or networks to successfully address the
Year 2000 data rollover problem could have a material adverse effect on the
Company's business, financial condition and results of operations. Many
installed computer software and network processing systems currently accept
only two-digit entries in the date code field and many need to be upgraded or
replaced in order to accurately record and process information and
transactions on and after January 1, 2000.
The Company utilizes personal computers that are connected to a network
for all of its employee workstations. These personal computers all utilize
Microsoft Windows NT as their operating system. The Company believes that the
Windows NT operating system is Year 2000 compliant. Additionally, the Company
recently installed new software to operate all of its accounting operations.
The Company believes this new software, and the computer hardware on which
it runs, is Year 2000 compliant. Management anticipates that all accounting
operations will be performed using the Year 2000 compliant systems by March
1999. The majority of the costs of installing and implementing the
aforementioned software and hardware was incurred prior to September 30,
1998. The Company anticipates that any additional expenditures to complete
the implementation will be funded from cash flow generated by operations.
The Company primarily does business with its subfranchisors and its
franchisees who in turn deal with retail customers and food distribution
companies. The Company has considered the transactions it conducts with its
subfranchisors and franchisees in its analyses of the Year 2000
9
issue, and believes that it has completed substantially all modifications to
the computer systems used in these transactions to ensure the systems are Year
2000 compliant. The Company is not certain as to whether the computer software
and business systems of its franchisees' suppliers are Year 2000 compliant.
The failure or delay of these distributors to successfully address the Year
2000 issue may result in delays in placing or receiving orders for goods and
services at the store level. Such delays may result in lost revenues for the
franchisees, and in turn, lower continuing fee revenue for the Company. The
Company anticipates that such delays and lost revenues, if any, would be
minimal.
The Company intends to continue to monitor its Year 2000 compliance and to
correct any noncompliance as it is discovered. Management anticipates funding
such efforts out of operating cash flow. The Company believes that the
effects of any noncompliance on its part, or by its customers and suppliers,
will not have a material adverse effect on the Company's business, financial
condition, results of operations or cash flows.
10
Part II. Other information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following exhibits are filed as part of this report
Exhibit no. Description
27 Financial Data Schedule
(b) No Current Reports on Form 8-K were filed by the
Company during the quarter for which this report
has been filed.
11
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
BLIMPIE International, Inc.
(Registrant)
Dated: November 11, 1998 By: /s/ Brian D. Lane
-------------------------------------
Brian D. Lane
Vice President and Chief Financial
Officer (Principal Financial Officer)
12