U.S. 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 March 31, 1997
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
(Issuers 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 9,526,226 shares of the Registrant's common stock outstanding as of
May 9, 1997.
<PAGE>
Table of Contents
Page No.
--------
PART I. Financial Information
Item 1. Financial Statements ......................................... 3
Consolidated Balance Sheets ..................................... 3
Consolidated Statements of Operations ..................... 4
Consolidated Statements of Changes in
Shareholders Equity ....................................... 4
Consolidated Statements of Cash Flows ..................... 5
Notes to Financial Statements ............................. 6
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations ............... 8
PART II. Other Information ..................................................24
Item 1. Litigation Proceedings ......................................24
Item 6. Exhibits and Reports on Form 8-K ............................24
Signatures ............................................................26
2
<PAGE>
Blimpie International, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Consolidated Balance Sheets
- --------------------------------------------------------------------------------------
March 31 June 30
Assets 1997 1996
(Unaudited)
- --------------------------------------------------------------------------------------
<S> <C> <C>
Current
Cash and cash equivalent $ 3,229,735 $ 4,328,468
Investments 5,013,880 5,430,950
Accounts receivable, less allowance for doubtful accounts 2,425,643 1,455,986
Prepaid expenses and other current assets 624,410 674,203
Deferred income taxes 189,000 189,000
Current portion of notes receivable 521,728 535,163
------------ ------------
Total Current Assets 12,004,396 12,613,770
------------ ------------
Property, Plant and Equipment - at cost less accumulated
depreciation 1,300,561 972,251
------------ ------------
Other Assets
Notes receivable less allowance for doubtful accounts
and current portion 1,451,734 1,495,684
Investments 3,358,512 6,016,014
Trademarks - at cost, less accumulated amortization 5,234,718 445,556
Other 418,594 279,386
------------ ------------
Total Other Assets 10,463,558 8,236,640
------------ ------------
$ 23,768,515 $ 21,822,661
============ ============
- --------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
- --------------------------------------------------------------------------------------
Current
Accounts payable $ 3,382,831 $ 2,697,900
Current portion of long-term debt 7,745 7,536
Income taxes payable 61,226 563,912
Other current liabilities 331,166 851,687
------------ ------------
Total Current Liabilities 3,782,968 4,121,035
------------ ------------
Deferred Revenue 1,207,003 1,678,918
------------ ------------
Deferred Income Taxes 343,000 343,000
------------ ------------
Long-Term Debt, less current portion -- 5,202
------------ ------------
Commitments and Contingencies -- --
Shareholders' Equity
Common stock, par value $.01 - authorized
20,000,000 shares; issued and outstanding
9,526,226 and 9,480,876 shares, respectively 95,262 94,809
Additional paid-in capital 8,209,666 7,703,510
Retained earnings 10,346,898 8,132,082
Net unrealized loss on marketable securities (5,818) (3,590)
------------ ------------
18,646,008 15,926,811
Less: Subscriptions receivable 210,464 252,305
------------ ------------
Total Shareholders' Equity 18,435,544 15,674,506
------------ ------------
$ 23,768,515 $ 21,822,661
============ ============
</TABLE>
See Accompanying Notes to Financial Statements
3
<PAGE>
Blimpie International, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Consolidated Statements of Operations
(Unaudited)
- -----------------------------------------------------------------------------------------
Three months ended Nine months ended
March 31 March 31
1997 1996 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Continuing fees $ 3,906,671 $ 3,025,045 $11,127,420 $ 8,841,787
Subfranchisor fees, master license
fees, and sale of franchises 1,257,409 2,039,743 4,474,173 5,264,185
Store equipment sales 3,452,157 3,491,745 11,523,666 10,297,726
Management fees and other income 312,638 373,359 1,007,417 871,815
----------- ----------- ----------- -----------
8,928,875 8,929,892 28,132,676 25,275,513
----------- ----------- ----------- -----------
Expenses
Subfranchisors' share of franchise
and continuing fees 2,335,649 2,023,829 6,912,634 5,606,657
Store equipment cost of sales 3,139,934 2,969,053 10,289,439 9,005,610
Selling, general and administrative
expenses 2,433,931 2,260,336 7,511,081 6,468,631
Interest expense 372 654 3,857 2,280
----------- ----------- ----------- -----------
7,909,886 7,253,872 24,717,011 21,083,178
----------- ----------- ----------- -----------
Operating Income 1,018,989 1,676,020 3,415,665 4,192,335
Interest Income 213,759 340,359 721,520 769,353
----------- ----------- ----------- -----------
Income before income taxes 1,232,748 2,016,379 4,137,185 4,961,688
Income taxes 477,000 769,000 1,590,000 1,914,000
----------- ----------- ----------- -----------
Net Income $ 755,748 $ 1,247,379 $ 2,547,185 $ 3,047,688
=========== =========== =========== ===========
Earnings per share $ 0.08 $ 0.13 $ 0.26 $ 0.33
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Changes in Shareholders Equity
Nine Months Ended March 31, 1997
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------
Common Stock
------------ Additional Unrealized
Shares paid-in Retained holding
Outstanding Amount capital earnings gain (loss) Total
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance - June 30, 1996 9,480,876 $ 94,809 $ 7,703,510 $ 8,132,082 $ (3,590) $ 15,926,811
Incentive stock granted and
options exercised 20,350 203 267,343 -- -- 267,546
Purchase Canadian trademark 25,000 250 238,813 -- -- 239,063
Cash dividends paid -- -- -- (332,369) -- (332,369)
Net Income -- -- -- 2,547,185 -- 2,547,185
Net unrealized loss on
marketable securities -- -- -- -- (2,228) (2,228)
------------ ------------ ------------ ------------ ------------ ------------
Balance - March 31, 1997 9,526,226 $ 95,262 $ 8,209,666 $ 10,346,898 $ (5,818) $ 18,646,008
============ ============ ============ ============ ============ ============
</TABLE>
See Accompanying Notes to Financial Statements
4
<PAGE>
Blimpie International, Inc. and Subsidiaries
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
(Unaudited)
- --------------------------------------------------------------------------------------
Nine Months Ended March 31,
1997 1996
---- ----
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 2,547,185 $ 3,047,688
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 292,197 148,714
Incentive stock granted 255,196 136,059
Decrease (increase) in:
Accounts receivable (969,657) (673,315)
Prepaid expenses and other current assets 49,793 (195,747)
Trademarks (4,598,426) --
Other assets (163,267) (126,887)
Notes receivable 57,385 467,575
Increase (decrease) in:
Accounts payable 684,931 (881,264)
Income taxes payable (502,686) 120,037
Other current liabilities (520,521) 162,419
Deferred revenue (471,915) (732,747)
------------ ------------
Net cash (used in) provided by operating activities (3,339,785) 1,472,532
------------ ------------
Cash Flows From Investing Activities
Reinvested dividends of available-for-sale securities (4,331) (8,773)
Purchase of held-to-maturity securities (4,036,019) (6,782,929)
Proceeds from maturities of held-to-maturity securities 4,399,011 1,776,127
Proceeds from sale of held-to-maturity securities 2,695,562 --
Purchase of available-for-sale securities (7,504) (27,388)
Proceeds from sale of available-for-sale securities 25,625 --
Disposal of property, plant and equipment 10,232 --
Acquisition of property, plant and equipment (558,353) (400,902)
------------ ------------
Net cash provided by (used in) investing activities 2,524,223 (5,443,865)
------------ ------------
Cash Flows From Financing Activities
Proceeds from stock warrants/options exercised 12,350 4,000
Proceeds from stock offering -- 4,461,535
Collections on officer notes receivable for stock purchase 41,841 4,006
Cash dividends paid (332,369) (283,561)
Repayment of long-term debt (4,993) (4,568)
------------ ------------
Net cash (used in) provided by financing activities (283,171) 4,181,412
------------ ------------
Net (decrease) increase in Cash and Cash Equivalents (1,098,733) 210,079
Cash and Cash Equivalents, at beginning of year 4,328,468 3,922,173
------------ ------------
Cash and Cash Equivalents, at end of period $ 3,229,735 $ 4,132,252
============ ============
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for:
Interest $ 3,857 $ 2,280
Income taxes 2,092,686 1,793,963
Noncash investing and financing activities:
Net unrealized gain (loss) on marketable securities (2,228) 10,326
Canadian trademark stock issuance 239,063 271,875
</TABLE>
See Accompanying Notes to Financial Statements
5
<PAGE>
Blimpie International, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
For the Nine Months Ended March 31, 1997 (Unaudited)
The unaudited interim financial statements should be read in conjunction with
the consolidated financial statements of the Company and its Subsidiaries for
the fiscal year end June 30, 1996.
The unaudited financial statements include all adjustments consisting of only
normal recurring accruals which are, in the opinion of management, necessary to
present a fair statement of financial position as of March 31, 1997 and the
results of operations, changes in shareholders' equity, and cash flows for the
nine months 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 1996,
and no material contingencies exist which would require disclosure in this
interim report, except as follows:
Commitments and Contingencies
On September 26, 1996, an award was granted in an arbitration proceeding against
the Company in which a Blimpie franchise sought damages and injunctive relief
based on allegations that the Company authorized a nontraditional Blimpie
restaurant in a location approximately 1.5 miles from the franchises location.
The Company denied any liability asserting that it had made no agreements
granting a protected territory to the franchise. The arbitrator made an award to
the franchisee in the amount of $204,500 without interest. Pursuant to a
settlement, the Company paid $200,000 in full satisfaction of the award and is
entitled to receive one half of that amount from the Subfranchisor of the
claimant-franchisee. The Company is subject to various other legal actions
arising in the normal course of business. It is the Company's practice to
vigorously defend all actions. See Part II, Section 1 Litigation Proceedings.
Trademarks
In accordance with a written agreement which the Company executed with its
Chairman and Chief Executive Officer and its Vice Chairman and Chief Operating
Officer on February 18, 1997, the Company acquired, for $4.5 million plus
certain income-based fees which take effect after international revenues exceed
$5 million, ownership of the undivided 60% interest in the international rights
to the Blimpie trademarks and Blimpie marketing system owned by such
individuals. The agreement supersedes a licensing agreement pertaining to such
international trademark and marketing system rights which the Company had
previously entered into with such individuals. Metropolitan Blimpie, Inc. (MBI),
an unaffiliated company, continues to own the balance of such international
trademark and marketing system rights. Previously executed international
licensing agreements
6
<PAGE>
between MBI and the Company also remain in place.
Investments
On February 19, 1997, the Company sold held-to-maturity securities with an
aggregate cost of $2,723,328 and realized a gain of $27,766. The proceeds from
the sale of $2,695,562 were used in the purchase of the international trademarks
discussed above.
At March 31, 1997, United States Treasury notes previously categorized as being
held-to-maturity were recategorized as available-for-sale. Accordingly, this
group of securities has been marked to market with the resulting adjustment
reported with other shareholders equity.
7
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Three and Nine Month Periods Ended March 31, 1997 Compared with Three and Nine
Month Periods Ended March 31,1996
Results of Operations
The Company's net income decreased 39% to $755,748 for the three months ended
March 31, 1997 from $1,247,379 for the three months ended March 31, 1996. The
Company's earnings per share decreased 38% to $.08 per share for the three
months ended March 31, 1997 from $.13 per share for the three months ended March
31, 1996. The Company's net income decreased 16% to $2,547,185 for the nine
months ended March 31, 1997 from $3,047,688 for the nine months ended March 31,
1996. The Company's earnings per share decreased 21% to $.26 per share for the
nine months ended March 31, 1997 from $.33 per share for the nine months ended
March 31, 1996. Such decreases are attributable to the decreases in subfranchise
and franchise fees, and the increase in selling, general and administrative
expenses, all of which are discussed below.
The Company's continuing fees derived from domestic franchises increased 28% to
$3,876,160 for the three months ended March 31, 1997 from $3,018,543 for the
three months ended March 31, 1996. During these same periods, continuing fees
derived from international franchises increased to $30,511 from $6,502. The
Company's continuing fees derived from domestic franchises increased 25% to
$11,047,582 for the nine months ended March 31, 1997 from $8,833,829 for the
nine months ended March 31, 1996. During these same periods, continuing fees
derived from international franchises increased to $79,838 from $7,958. These
increases are directly attributable to the greater number of total open outlets
as compared to the same periods ended in fiscal 1996.
During the three month and nine month periods ended March 31, 1997, the Company
experienced decreases in revenue from total subfranchise fees and franchise fees
recognized, and it experienced increases in international master license fees as
compared to the corresponding periods ended March 31, 1996. The Company believes
that such decreases are the result of the saturation of the domestic market with
subfranchisors and the maturing of the convenience store segment of the
new-concept marketplace. With that in mind the Company has refocused on
traditional outlet development by increasing franchise advertising, and hiring
more sales staff. The Company believes its refocusing on traditional outlet
development will increase both franchise grants and outlet openings in the
future. In addition, the Company will continue to place greater emphasis on
8
<PAGE>
developing the international market to mirror the success it has achieved in the
United States. 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
above-mentioned refocusing by the Company 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. The Company and its franchisees
compete in the quick-service restaurant (QSR) 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 influencing consumer spending habits, population trends and traffic
patterns. In awarding franchises, the Company competes with a number of QSR
franchisors and other business concepts, as well as for attractive commercial
real estate sites suitable for outlets. The Company and its 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 the Company's chain of franchised outlets and its franchisees,
respectively. In addition to these constant obstacles to growth, unforeseen
problems could arise which would keep the Company from reaching its goals, e.g.,
a strike by an equipment vendor or a material increase in borrowing rates, could
temporarily slow down projected openings. After taking such factors into
consideration, the Company has revised to 400 its estimation of the number of
new outlets which will open during the fiscal year ending June 30, 1997.
Revenue from subfranchise, master license and franchise fees for the three
months ended March 31, 1997 decreased 38% to $1,257,409 from $2,039,743 for the
same period ended 1996. The following table sets forth an analysis of the
components of such fees.
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
---- ----
<S> <C> <C>
SUBFRANCHISE FEES - DOMESTIC:
New Subfranchise Grants $ -0- $ -0-
Existing Subfranchise Expansions 55,619 49,232
Principal Payments Recognized on Deferred
Subfranchise Notes 29,636 52,472
Annual Renewal Term Payments Recognized 137,865 160,724
Deferred Subfranchise Fees Recognized -0- 484,454
------------ ------------
TOTAL SUBFRANCHISE FEES $ 223,120 $ 746,882
</TABLE>
9
<PAGE>
<TABLE>
<S> <C> <C>
MASTER LICENSE FEES - INTERNATIONAL:
New Master License Grants 132,293 -0-
Lump Sum Payments Recognized in Current
------------ ------------
Fiscal Year 111,500 175,150
TOTAL MASTER LICENSE FEES $ 243,793 175,150
FRANCHISE FEES RECOGNIZED:
Domestic $ 791,815 $ 1,117,710
International (1,319) -0-
------------ ------------
TOTAL FRANCHISE FEES $ 790,496 $ 1,117,710
------------ ------------
TOTAL SUBFRANCHISE, MASTER
LICENSE & FRANCHISE FEES $ 1,257,409 $ 2,039,742
------------ ------------
</TABLE>
Revenue from subfranchise, master license and franchise fees for the nine months
ended March 31, 1997 decreased 15% to $4,474,173 from $5,264,185 for the same
period ended 1996. The following table sets forth an analysis of the components
of such fees.
<TABLE>
<CAPTION>
Nine Months Ended March 31, 1997 1996
---------------------------- ---- ----
<S> <C> <C>
SUBFRANCHISE FEES - DOMESTIC:
New Subfranchise Grants $-0- $ 410,939
Existing Subfranchise Expansions 290,911 106,238
Principal Payments Recognized on Deferred
Subfranchise Notes 54,284 194,346
Annual Renewal Term Payments Recognized 228,664 231,281
Deferred Subfranchise Fees Recognized 258,749 955,449
------------ ------------
TOTAL SUBFRANCHISE FEES $ 832,608 $ 1,898,253
MASTER LICENSE FEES - INTERNATIONAL:
New Master License Grants $ 829,243 $ 78,120
Lump Sum Payments Recognized in Current
Fiscal Year 429,000 175,150
------------ ------------
TOTAL MASTER LICENSE FEES $ 1,258,243 $ 253,270
FRANCHISE FEES RECOGNIZED:
</TABLE>
10
<PAGE>
<TABLE>
<S> <C> <C>
Domestic $ 2,371,706 $ 3,112,662
International 11,617 -0-
------------ ------------
TOTAL FRANCHISE FEES $ 2,383,323 $ 3,112,662
------------ ------------
TOTAL SUBFRANCHISE, MASTER
LICENSE & FRANCHISE FEES $ 4,474,174 $ 5,264,185
</TABLE>
Total revenue from subfranchise fees decreased 70% to $223,120 for the three
months ended March 31, 1997 from $746,882 for the three months ended March 31,
1996. Total revenue from subfranchise fees decreased 56% to $832,608 for the
nine months ended March 31, 1997 from $1,898,253 for the nine months ended March
31, 1996.
During the three months ended March 31, 1997 and March 31, 1996 the Company
neither granted nor derived any revenue from any new domestic subfranchises.
During the nine month period ended March 31, 1997, the Company neither granted
nor derived any revenue from any new domestic subfranchises, compared to the
same period ended March 31, 1996 in which the Company granted seven domestic
subfranchises and received $410,939 in initial subfranchise fees. Two of the
seven domestic subfranchises provide for five annual renewal term options, and
if all of such options were to be exercised, the Company would receive
additional subfranchise fee revenues aggregating $129,534. Such decreases
resulted from the substantial achievement of the Company's goal of saturating
the domestic market with subfranchises. During the three months ended March 31,
1997, four domestic subfranchisors expanded and the Company received $55,619 in
fees in connection therewith. There were no renewal term options on any of these
four domestic subfranchise expansions. By comparison during the three months
ended March 31, 1996, one domestic subfranchisor expanded and the Company
received $49,232 in fees. During the nine months ended March 31, 1997, 13
domestic subfranchisors expanded and the Company received $290,911 in fees in
connection therewith. If all renewal term options on these domestic expansions
were to be exercised, the Company would receive additional subfranchise fee
revenues aggregating $378,925. By comparison during the nine months ended March
31, 1996, eight domestic subfranchisors expanded and the Company received
$106,238 in fees. Such increases resulted from the Company's efforts to expand
beyond the major population centers located in existing subfranchise territories
by the expansion of existing subfranchisors.
In addition, during the three months ended March 31, 1997, the Company
recognized $29,636 in principal payments received on deferred subfranchise notes
due from existing subfranchisors and recognized $137,865 in annual renewal term
11
<PAGE>
options exercised by nine subfranchisors, as compared to $52,472 recognized in
principal payments received on deferred subfranchise notes and $160,724
recognized in annual renewal term options exercised by nine subfranchisors
during the three months ended March 31, 1996. During the nine months ended March
31, 1997, the Company recognized $54,284 in principal payments received on
deferred subfranchise notes due from existing subfranchisors and recognized
$228,664 in annual renewal term options exercised by 19 subfranchisors, as
compared to $194,346 recognized in principal payments received on deferred
subfranchise notes and $231,281 recognized in annual renewal term options
exercised by 15 subfranchisors during the nine months ended March 31, 1996. The
above-described decreases in recognition of principal payments received on
deferred subfranchise notes are directly related to the change, more fully
discussed below with respect to current accounts receivable, of issuing annual
renewable subfranchise agreements as opposed to issuing 50 to 60 year
subfranchise agreements. The new agreements have been executed in connection
with all subfranchise sales since November 1994, and some subfranchisors
operating under the prior agreement are replacing them with the new agreement,
thereby eliminating principal and interest payments on the notes connected with
the old agreements. During the three months ended March 31, 1997, the Company
did not recognize any deferred subfranchise fees with respect to subfranchises
operating under the prior agreements discussed above, while during the same
period in 1996, the Company was able to recognize $484,454 in deferred
subfranchise fees with respect to six subfranchises. During the nine months
ended March 31, 1997, the Company recognized $258,749 of deferred subfranchise
fees with respect to four subfranchises operating under the prior agreements
discussed above, that had sufficiently matured, while during the same period in
1996, the Company was able to recognize $955,449 in deferred subfranchise fees
with respect to 21 subfranchises.
As in the previous fiscal year, the Company is continuing to place substantial
emphasis on its prospects in the international market. During the three months
ended March 31, 1997, the Company granted development rights for Ontario and
Poland, and received master license fees with respect to these agreements
totaling $132,293. In addition to the above-mentioned master licenses, during
the first six months ended December 31, 1996, the Company also granted
development rights for Argentina, Uruguay, Saudi Arabia, United Arab Emirates,
Bahrain, Oman, Qatar, Kuwait, Greece, Cyprus, Venezuela, Peru and South Africa
and received master license fees with respect to all of such agreements
consummated during such six month period totaling $696,950. One of these master
license agreements provides for three annual renewal term options with lump sums
totaling $216,520 due in fiscal 1998, 1999 and 2000. During the period ended
March 31, 1997, $429,000 in lump sum payments due in fiscal 1997, was recognized
in accordance with six master license agreements. During the three month period
ended March 31, 1996, the Company
12
<PAGE>
granted one master license and received $175,150 in master license fees in
connection therewith. During the nine month period ended March 31, 1996, the
Company granted three master licenses and received $253,270 in master license
fees in connection therewith. As of March 31, 1997 there were five Blimpie
outlets and 27 Grab 'n Go locations operating in Sweden, three outlets in Spain,
three in the United Kingdom, one in Argentina and one in Canada.
Total domestic franchise fees recognized decreased 29% to $791,815 for the three
months ended March 31, 1997 from $1,117,710 for the three months ended March 31,
1996. This decrease is attributable to the 30% decrease in the number of outlets
opened during the three months ended March 31, 1997 to 85 (39 traditional
outlets and 46 new-concept outlets) from 122 (40 traditional outlets and 82
new-concept outlets) during the three months ended March 31, 1996. Total
domestic franchise fees recognized decreased 24% to $2,371,706 for the nine
months ended March 31, 1997 from $3,112,662 for the nine months ended March 31,
1996. This decrease is attributable to the decrease to 305 outlets (130
traditional and 175 new-concept) opened during the nine months ended March 31,
1997, from 360 outlets (135 traditional and 225 new-concept) opened during the
comparable period ended 1996. The foregoing decreases in franchise fees
recognized are attributable to the fact that many of the new-concept outlet
openings were the second, third, or fourth outlet opened in the same chain and
these franchises were granted at a reduced rate, versus a traditional outlet, to
entice the new-concept chain to open multiple outlets. The Company derived
$11,617 in franchise fees from the opening of seven international outlets during
the nine month period ended March 31, 1997, while for the same period ended
1996, the Company did not derive any revenue from the opening of four
international outlets.
Store equipment sales to domestic franchises increased 10% to $11,315,964 during
the nine month period ended March 31, 1997 from $10,281,876 for same period
ended 1996. During these same periods, store equipment sales to international
franchises increased $207,702 from $15,850. These increases were attributable to
the 37% increase in orders processed by the Company's equipment sales department
to 1547 orders processed during the nine month period ended March 31, 1997 from
1132 orders processed during the same period ended 1996.
Management fees and other income for the three months ended March 31, 1997
decreased 16% to $312,638 from $373,359 for the same period ended 1996. This
decrease resulted from the January 1997 relocation of one of the Company's
subfranchisors who had previously been sharing office space in the Atlanta
office. Although the Company experienced a decrease for the three month period,
management fees and other income for the nine month period ended March 31, 1997
increased by 16% to $1,007,417 from $871,815 for the same period ended 1996.
13
<PAGE>
These increases are due to the increased compensation received for providing
operational, marketing and staff support to various subfranchisors, master
licensors and franchisees.
The subfranchisors' shares of continuing and franchise fees increased 15% to
$2,335,649 for the three months ended March 31, 1997 from $2,023,829 for the
same period ended 1996. The following table sets forth an analysis of the
components of such fees.
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1996
---- ----
<S> <C> <C>
SUBFRANCHISORS'/MASTER LICENSORS'
SHARE OF CONTINUING FEES:
Domestic $ 1,880,203 $ 1,517,992
International 14,424 3,250
------------ ------------
TOTAL SUBFRANCHISORS' / MASTER
LICENSORS' SHARE OF CONTINUING
FEES $ 1,894,627 $ 1,521,242
SUBFRANCHISORS'/ MASTER LICENSORS'
SHARE OF FRANCHISE FEES:
Domestic $ 216,774 $ 303,699
International (1,096) -0-
------------ ------------
TOTAL SUBFRANCHISORS' SHARE OF
FRANCHISE FEES $ 215,678 $ 303,699
TRADEMARK LICENSE FEES ON CONTIN-
UING, FRANCHISE, MASTER LICENSE &
SUBFRANCHISE FEES:
Domestic $ 180,440 $ 118,756
International 44,904 80,132
------------ ------------
TOTAL TRADEMARK LICENSE FEES ON
CONTINUING, FRANCHISE, MASTER
LICENSE & SUBFRANCHISE FEES $ 225,344 $ 198,888
------------ ------------
</TABLE>
14
<PAGE>
<TABLE>
<S> <C> <C>
TOTAL SUBFRANCHISORS' / MASTER
LICENSORS' SHARE OF CONTINUING &
FRANCHISE FEES AND TRADEMARK
LICENSE FEES ON CONTINUING,
FRANCHISE, MASTER LICENSE &
SUBFRANCHISE FEES $ 2,335,649 $ 2,023,829
------------ ------------
</TABLE>
The Subfranchisors' shares of continuing and franchise fees increased 23% to
$6,912,634 for the nine months ended March 31, 1997 from $5,606,657 for the same
period ended 1996. The following table sets forth an analysis of the components
of such fees.
<TABLE>
<CAPTION>
Nine Months Ended March 31,
1997 1996
---- ----
<S> <C> <C>
SUBFRANCHISORS' / MASTER LICENSORS'
SHARE OF CONTINUING FEES:
Domestic $ 5,402,833 $ 4,297,238
International 36,482 3,979
------------ ------------
TOTAL SUBFRANCHISORS'/MASTER
LICENSORS' SHARE OF CONTINU-
ING FEES $ 5,439,315 $ 4,301,217
SUBFRANCHISORS'/ MASTER LICENSORS'
SHARES OF FRANCHISE FEES:
Domestic $ 631,934 $ 804,530
International 1,447 -0-
------------ ------------
TOTAL SUBFRANCHISORS' SHARE OF
FRANCHISE FEES $ 633,381 $ 804,530
TRADEMARK LICENSE FEES ON CONTIN-
UING, FRANCHISE, MASTER LICENSE &
SUBFRANCHISE FEES:
Domestic $ 444,734 $ 390,538
International 395,204 110,372
------------ ------------
TOTAL TRADEMARK LICENSE FEES ON
CONTINUING, FRANCHISE, MASTER
LICENSE & SUBFRANCHISE FEES $ 839,938 $ 500,910
------------ ------------
</TABLE>
15
<PAGE>
<TABLE>
<S> <C> <C>
TOTAL SUBFRANCHISORS' / MASTER
LICENSORS' SHARE OF CONTINUING &
FRANCHISE FEES AND TRADEMARK
LICENSE FEES ON CONTINUING,
FRANCHISE, MASTER LICENSE &
SUBFRANCHISE FEES $ 6,912,634 $ 5,606,657
</TABLE>
The subfranchisors' total share of domestic continuing fees increased 24% to
$1,880,203 for the three months ended March 31, 1997 from $1,517,992 for the
same period ended 1996, and it increased 26% to $5,402,833 for the nine months
ended March 31, 1997 from $4,297,238 for the same period ended 1996. The master
licensors' share of international continuing fees increased to $14,424 and
$36,482, respectively, during the three and nine month periods ended March 31,
1997 from $3,250 and $3,979 respectively, during each of the comparable periods
in 1996. These increases are directly related to the increase in the revenue
derived from continuing fees.
By reason of the above-mentioned decrease in domestic franchise fees, the
subfranchisors share thereof decreased 29%, i.e., by $86,925, to $216,774 for
the three month period ended March 31, 1997 from $303,699 for the same period
ended 1996, and the subfranchisors' share thereof also decreased 21%, i.e., by
$172,596, to $631,934 for the nine month period ended March 31, 1997 from
$804,530 for the same period ended 1996. The Company believes that such
decreases will not adversely affect its subfranchisors as their share of the
continuing fees, as discussed above, has continued to increase at a much greater
rate, e.g., by $362,211 (a 24% increase) from $1,517,992 for the three months
ended March 31, 1996 to $1,880,203 for the same period ended 1997, and by
$1,105,595 (a 26% increase) to $5,402,833 for the nine months ended March 31,
1997 from $4,297,238 for the same period ended 1996.
Trademark license fee obligations owed to Metropolitan Blimpie, Inc. (MBI), an
unaffiliated corporation, on certain domestic continuing, franchise, and
subfranchise fees increased 52% to $180,440 for the three months ended March 31,
1997 from $118,756 for the same period ended 1996. Such obligations increased
14% to $444,734 for the nine months ended March 31, 1997 from $390,538 for the
same period ended 1996. Such increases are directly related to the increase in
domestic continuing fees as discussed above. Trademark license fee obligations
owed to MBI, and Anthony P. Conza and David L. Siegel, the Chairman and Chief
Executive, and Vice Chairman and Chief Operating Officer, respectively, of the
Company, with respect to international continuing, franchise, subfranchise and
master license fees decreased to $44,904 during the three months ended March 31,
1997 from $80,132 during the comparable period of 1996. This decrease is the
result of the Company's purchase on February 18, 1997 of the portion of the
Blimpie international trademarks and service marks held by such officers. See
Footnotes to Financial
16
<PAGE>
Statements. Therefore, there was a significant reduction in international
trademark license fee payments made during the three months ended March 31,
1997. However, these same trademark license fee obligations increased to
$395,204 during the nine months ended March 31, 1997 from $110,372 during the
comparable period of 1996 due to the overall increase in international revenue.
Store equipment cost of sales to domestic franchisees increased 12% to
$10,083,763 for the nine month period ended March 31, 1997 from $9,005,610 for
the same period ended 1996. During this same nine month period, store equipment
cost of sales to international franchisees increased to $205,676 from $0. These
increases are directly attributable to the increase in store equipment sales to
domestic and international franchisees.
Selling, general and administrative expense rose 8% to $2,433,931 for the three
month period ended March 31, 1997 from $2,260,336 for the same period ended
1996, and by 16% to $7,511,081 for the nine month period ended March 31, 1997
from $6,468,632 for the same period ended 1996. These increases are directly
related to the continuing expansion of the Company's work force to strengthen
its infrastructure, create an international department, expand the domestic
franchise development department, and increases in office and travel expenses
incurred in order to provide support services to the increasing number of
subfranchisors, franchisees, and master licensors. In addition, the increase
reflects a one time contingency charge taken by the Company during the first
quarter of fiscal 1997 in the amount of $100,000 which represents the Company's
share of an arbitrator's award. See Part II, Section 1 Litigation Proceedings.
Interest income for the three months ended March 31, 1997 decreased 37% to
$213,759 from $340,359 for the comparable period ended 1996. Such income also
decreased 6% for the nine months ended March 31, 1997 to $721,519 from $769,353
for the comparable period ended 1996. These decreases were the result of the
selling of a portion of the U.S. Treasury notes owned by the Company to purchase
a portion of the international trademarks and service marks on February 18,
1997. See Footnotes to Financial Statements.
The effective income tax rate (income taxes expressed as a percentage of pre-tax
income) was 38.7% and 38.1% for the three months ended March 31, 1997 and 1996,
respectively, and 38.4% and 38.6% for the nine months ended March 31, 1997 and
1996, respectively.
For the nine months ended March 31, 1997, cash and cash equivalents decreased by
25% to $3,229,735 from $4,328,468 at June 30, 1996. Investments under other
assets decreased 44% to $3,358,512 from $6,016,014 at June 30, 1996. Trademarks
less
17
<PAGE>
accumulated amortization increased to $5,234,718 from $445,556 at June 30, 1996.
These decreases and increases are the direct result of the purchase of a portion
of international Blimpie trademarks and service marks. (See Footnotes to
Financial Statements.)
Current accounts receivable, less allowance for doubtful accounts, increased 67%
to $2,425,643 at March 31, 1997 from $1,455,986 at June 30, 1996. Deferred
revenue decreased 28% as at the same dates, respectively, to $1,207,003 from
$1,678,918. Said increase and decrease were the direct result of a policy
implemented by the Company during fiscal 1995 of issuing annual renewable
subfranchise agreements, instead of subfranchise agreements having terms of 50
to 60 years. Under the previous agreements, if the subfranchise fees were
collectible over an extended period of time and no reasonable basis existed for
estimating collectibility, the fees were deferred and not recognized until they
were collected or the uncertainty regarding collectibility was resolved. Under
the new agreements, the subfranchisor purchases a territory for a one year
period, followed by four to six renewal terms, all but the last being annual in
duration. If all terms and conditions of the agreement have been met during the
initial one year term and each of the subsequent one year terms, a 50 to 60 year
right is granted during the final renewal term upon payment of the fee set forth
in the agreement. The first year annual fee is recognized when all material
services and conditions related to the sale are satisfied by the Company.
Subsequent years are recognized annually upon renewal. The Company still
maintains numerous subfranchise agreements under the prior policy and continues
to recognize revenue under these agreements consistent with prior years.
However, the amount of such revenue will continue to decline in the future as
some of the prior subfranchise agreements are replaced with the new agreement,
upon the subfranchisors request. The new agreements have been used on all
subfranchise sales since November 1994.
The Company's property, plant and equipment less accumulated depreciation,
increased 34% to $1,300,561 at March 31, 1997 from $972,251 at June 30, 1996.
This increase resulted from the Company's continued modernization and
computerization of its offices.
Other non-current assets increased 50% to $418,594 at March 31, 1997 from
$279,386 at June 30, 1996. This increase is the result of the Company's purchase
of a new accounting software package.
The Company's accounts payable increased 25% to $3,382,831 at March 31, 1997
from $2,697,900 at June 30, 1996. This increase resulted from the greater number
of deferred payment, as opposed to cash on delivery transactions, effected by
the Company's equipment sales department, coupled with the longer periods that
the
18
<PAGE>
Company takes to pay equipment vendors with respect to purchase transactions
financed by the Company's franchisees. In such cases, the Company defers payment
until (1) the franchisee has given notice to the lender that the equipment has
been installed and accepted; and (2) the lender has delivered payment of the
financed amount to the Company. Accounts payable also increased as a result of
the fees payable to the increasing number of subfranchisors.
Income taxes payable at March 31, 1997 decreased 89% to $61,226 from $563,912 at
June 30, 1996. This decrease was the result of the payment of income taxes on
September 15, 1996 and October 15, 1996, for fiscal year ended June 30, 1996
income taxes that had been accrued.
The payment of fiscal year end 1996 bonuses to employees that had been accrued
at June 30, 1996, resulted in the 61% decrease in other current liabilities to
$331,166 at March 31, 1997 from $851,687 at June 30, 1996.
During the three months ended March 31, 1997, 85 domestic Blimpie franchise
outlets opened (39 traditional outlets and 46 new-concept outlets) in the
following states: Arizona (2); California (8); Florida (10); Georgia (6);
Illinois (5); Indiana (2); Iowa (1); Kansas (1); Kentucky (2); Louisiana (3);
Maine (1), Massachusetts (1), Michigan (1); Minnesota (5); Missouri (1); Nevada
(5); New Hampshire (1); New York (4); North Carolina (6); Ohio (3); Oklahoma
(1); Oregon (2); South Carolina (1); South Dakota (1); Tennessee (2); Texas (6);
Utah (1); Washington (1); West Virginia (1); and Wyoming (1). During the same
period, 1 international new-concept Blimpie franchise outlet opened in the
United Kingdom. By comparison, during the three months ended March 31, 1996, 122
domestic and 2 international Blimpie franchise outlets opened (41 traditional
outlets and 83 new-concept outlets). During the three months ended March 31,
1997, 46 domestic Blimpie franchise outlets closed (24 traditional outlets and
22 new-concept outlets) in the following states: Arizona (1); California (1);
Colorado (1); Florida (7); Illinois (5); Iowa (2); Kansas (3); Michigan (1);
Minnesota (1); Missouri (1); New Jersey (3); New York (4); North Carolina (2);
South Dakota (1); Texas (9); Utah (2); and Washington (2). By comparison, during
the same period ended 1996, 22 domestic Blimpie franchise outlets closed (17
traditional outlets and 5 new-concept outlets). During the three months ended
March 31, 1997, no closed domestic Blimpie franchise outlets reopened. By
comparison, during the same period ended 1996, 1 closed domestic Blimpie
franchise outlet reopened.
During the three months ended March 31, 1997, the Company received $740,631 from
the granting of 144 domestic individual outlet franchises (38 traditional
franchises and 106 new-concept franchises) in the following states: Alabama (5);
Arizona (5); California (10); Colorado (3); Florida (14); Georgia (9); Idaho
(1); Illinois (3); Indiana (4); Iowa (1); Kentucky (2); Louisiana (5); Maine
(2); Michigan (5);
19
<PAGE>
Minnesota (6); Missouri (2); Nebraska (2); Nevada (2); New Mexico (1); New York
(7); Ohio (4); Oklahoma (1); Oregon (1); Pennsylvania (22); Rhode Island (1);
South Carolina (6); Tennessee (3); Texas (3); Utah (1); Washington (5);
Wisconsin (7); and Wyoming (1). During the same period ended, the Company
received $125,524 from the granting of 7 international individual outlet
franchises (6 traditional franchises and 1 new-concept franchise) in the United
Kingdom. By comparison, during the three months ended March 31, 1996, the
Company received $995,514 from the granting of 161 domestic individual outlet
franchises(63 traditional franchises and 98 new-concept franchises), and did not
derive any revenue from the granting of 2 international individual franchises.
The decrease in the funds received from the granting of domestic franchises, was
the result of a decrease in the actual number of franchises granted.
During the nine months ended March 31, 1997, 305 domestic Blimpie franchise
outlets opened (130 traditional outlets and 175 new-concept outlets) in the
following states: Alabama (5); Alaska (2); Arizona (13); Arkansas (1);
California (14); Colorado (2); Connecticut (1); Florida (33); Georgia (17);
Hawaii (1); Illinois (7); Indiana (10); Iowa (5); Kansas (2); Kentucky (7);
Louisiana (6); Maine (1); Massachusetts (1); Michigan (9); Minnesota (11);
Mississippi (2); Missouri (10); Montana (2); Nebraska (6); Nevada (8); New
Hampshire (1); New Jersey (3); New Mexico (4); New York (14); North Carolina
(13); North Dakota (2); Ohio (17); Oklahoma (1); Oregon (3); Pennsylvania (7);
Rhode Island (2); South Carolina (9); South Dakota (2); Tennessee (10); Texas
(18); Utah (3); Washington (3); West Virginia (7); Wisconsin (7); and Wyoming
(3). During the same period, 7 international Blimpie franchise outlets opened (4
traditional outlets and 3 new-concept outlets) in the following areas: Argentina
(1); Canada (1); Spain (2); Sweden (1); and United Kingdom (2). By comparison,
during the nine months ended March 31, 1996, 360 domestic and 4 international
Blimpie franchise outlets opened (136 traditional outlets and 228 new-concept
outlets). During the nine months ended March 31, 1997, 115 domestic Blimpie
franchise outlets closed (63 traditional outlets and 52 new-concept outlets) in
the following states: Arizona (2); California (2); Colorado (5); Connecticut
(1); Florida (15); Georgia (6); Hawaii (2); Idaho (2); Illinois (5); Indiana
(1); Iowa (5); Kansas (4); Kentucky (1); Massachusetts (3); Michigan (5);
Minnesota (2); Missouri (1); New Jersey (6); New York (6); North Carolina (4);
South Carolina (2); South Dakota (1); Texas (27); Utah (2); Washington (2); and
West Virginia (3). By comparison, during the same period ended 1996, 52 domestic
Blimpie franchise outlets closed (42 traditional outlets and 10 new-concept
outlets). During the nine months ended March 31, 1997, two closed domestic
Blimpie franchise outlets reopened in: Michigan (1); and Texas (1). By
comparison, during the same period ended 1996, 4 closed domestic Blimpie
franchise outlets reopened.
During the nine months ended March 31, 1997, the Company received $2,199,004
20
<PAGE>
from the granting of 394 domestic individual outlet franchises (155 traditional
franchises and 239 new-concept franchises) in the following states: Alabama (7);
Alaska (1); Arizona (14); California (22); Colorado (3); Connecticut (2);
Florida (35); Georgia (26); Hawaii (1); Idaho (4); Illinois(5); Indiana (10);
Iowa (8); Kentucky (5); Louisiana (10); Maine (2); Massachusetts (1); Michigan
(17); Minnesota (19); Mississippi (1); Missouri (11); Montana (2); Nebraska (5);
Nevada (6); New Hampshire (1); New Mexico (1); New York (21); North Carolina
(13); North Dakota (1); Ohio (27); Oklahoma (1); Oregon (7); Pennsylvania (25);
Rhode Island (6); South Carolina (13); South Dakota (2); Tennessee (11); Texas
(20); Utah (4); Washington (5); Wisconsin (17); and Wyoming (2). During the same
period ended, the Company received $172,150 from the granting of 19
international individual outlet franchises (18 traditional franchises and 1 new
concept franchise) in the following territories: Argentina (1); Canada (6);
Spain (2); Sweden (1); and United Kingdom (9). By comparison, during the nine
months ended March 31, 1996, the Company received $2,771,745 from the granting
of 499 domestic individual outlet franchises (153 traditional franchises and 346
new-concept franchises), and did not derive any revenue from the granting of 4
international individual outlet franchises. The decrease in the funds received
from the granting of domestic franchises, was the result of a decrease in the
actual number of franchises granted, and the reduction of the franchise fee to
$1,000, for a limited time only to current Blimpie franchisees only, to
encourage multiple outlet ownership. Of the 394 domestic individual outlet
franchises granted during the nine months ended March 31, 1997, 41 were at this
reduced price.
Liquidity and Capital Resources
During the nine months ended March 31, 1997, the Company did not incur any
material capital commitments, and it does not anticipate that it will incur a
commitment of that nature during the remainder of the fiscal year ending June
30, 1997. The Company's current ratio (aggregate current assets compared to
aggregate current liabilities) at March 31, 1997 was in excess of 3.1:1, and the
aggregate amount of cash and cash equivalents available to the company at that
date was, and it continues to be, sufficient, in the opinion of the Company's
management, to fund all of the Company's operations for the next 12 months
through its internally generated funds. The current ratio at June 30, 1996 was
in excess of 3:1.
Blimpie Outlet Locations
The following table sets forth the number of Blimpie franchised outlets in
operation as of March 31, 1997:
21
<PAGE>
Location Number of Outlets
-------- -----------------
United States:
Alabama 20
Alaska 07
Arizona 61
Arkansas 18
California 41
Colorado 33
Connecticut 23
Florida 138
Georgia 155
Hawaii 11
Idaho 12
Illinois 32
Indiana 53
Iowa 50
Kansas 15
Kentucky 27
Louisiana 31
Maine 01
Massachusetts 05
Michigan 66
Minnesota 25
Mississippi 14
Missouri 45
Montana 04
Nebraska 23
Nevada 34
New Hampshire 01
New Jersey 49
New Mexico 09
New York 54
North Carolina 52
North Dakota 05
Ohio 60
Oklahoma 06
Oregon 11
Pennsylvania 34
Rhode Island 07
South Carolina 55
South Dakota 04
Tennessee 59
22
<PAGE>
Texas 141
Utah 34
Washington 26
West Virginia 20
Wisconsin 17
Wyoming 06
-----
Total - United States 1,594
International:
Argentina 01
Canada 01
Spain 03
Sweden 05
United Kingdom 03
-----
Total - International 13
-----
Total Outlets Open 1,607
=====
23
<PAGE>
Part II Other Information
Item 1. Litigation Proceedings
In connection with the $204,500 award made in the arbitration proceeding
commenced against the Company entitled Linda and Louis Seufert v. Blimpie
International, Inc. (case no. 57-114-0072-95), the Company paid $200,000 in full
selltement and satisfaction thereof,and is entitled to receive one half of the
amount paid from the subfranchisor of the claimant-franchisee.
The Company commenced an action in the Supreme Court of the State of New York,
County of New York which is entitled Blimpie International, Inc. against Vincent
J. D'Elia, Joseph Piserchia, Thomas Piserchia, Jay Manfro, Route 9 Development
Corporation, Robert Sandow, Iris Sandow, Diana Dinardo, Edward Sheskier, Edward
Sheskier, Jr., Carmine Longano, Charles George, Pamela George, Stanley Bednarz
and Maria Trovato (Index No. 604761/96). Said action arises from a series of
joint venture transactions, management transactions and development transactions
by some of the defendants who were principal shareholders of corporations who
became franchisees within the subfranchise territory held by Triad Restaurant
Venture Group, Ltd. ("Triad"), a partial subfranchisor of the Company. In said
action, the Company seeks judgment declaring, among other things, that the
Company did not violate any of th defendant's rights, and is not liable for any
losses which any of the defendants suffered as a result of the failure of their
franchises. During February 1997, the defendants interposed counterclaims
alleging, among other things that Triad, its offidcers and its shareholders
(collectively, the "Triad Parties") were agents of the Company, and that the
fraudulent activity alleged against the Triad Parties constituted acts of fraud
by the Company in violation of Sections 683, 349 and 350 of the New York General
Business Law. Accordingly, the defendants are seeking judgment against the
Company in an amount which is not less than $500,000 on each of eight aleged
causes of action. The Company has denied any knowledge, information, involvement
or participation in the any of the agreements, transactions or understandings
between the defendants and the Triad Parties which form the basis of the
counterclaims, and the Company intends to vigorously defend aginst such
counterclaims.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit no. Description
10.43 Agreement made as of the 18th day of February, 1997 by and between
24
<PAGE>
Anthony P. Conza, David L. Siegel and Blimpie International, Inc.
The following document has been filed as an exhibit solely with the Securities
and Exchange Commission:
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
for which this report has been filed.
25
<PAGE>
Signature
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.
Date: May 12, 1997 By: /s/ Robert S. Sitkoff
----------------------------
Robert S. Sitkoff
Senior Vice President and
Chief Financial Officer
26
CONTRACT OF SALE
AGREEMENT made as of the 18th day of February, 1997 by and between Anthony
P. Conza located at 35 Hill 99, Woodstock, New York 12498 and David L. Siegel
located at 160 East 65th Street, New York, New York 10021 (hereinafter jointly
referred to as "Sellers" and individually by their last names) and Blimpie
International, Inc. located at 740 Broadway, 12th Floor, New York, New York
10003 (hereinafter referred to as "Purchaser").
PREAMBLE
WHEREAS, pursuant to the terms of a certain agreement dated August 1,
1976, including all amendments thereto (said agreement and amendments shall
hereinafter be called the "Agreement") made among the then owners of the Blimpie
trademarks which included Blimpie Trademark #188686 and #188080 and such other
new additional trademarks that were filed for or obtained at anytime prior to
the date hereof or hereafter in the U.S.A. (hereinafter collectively referred to
as the "Trademarks" or "Service Marks") originally filed in the name of Conza,
Siegel and Peter DeCarlo (Conza, Siegel and Peter DeCarlo and their assigns
described herein are hereinafter called the "Trademark Owners""), the then
Trademark Owners, among other things, divided among them, the right to use, and
to license and sublicense others to use the Service Marks within the continental
United States of America; and
WHEREAS, Metropolitan Blimpie, Inc. is by assignment the successor in
interest to the ownership of forty (40%) percent of the Service Marks by
assignment from Peter DeCarlo; and
WHEREAS, Sellers and Metropolitan Blimpie, Inc. have been executing
applications or filing and obtaining throughout the world service
marks/trademarks for the name Blimpie and/or Blimpie Subs and Salads in
individual countries in expectation that each respective service mark/trademark
will be used to develop the System in the respective country of filing. Such
filings are in the individual names of Sellers and Metropolitan Blimpie, Inc. or
in partnerships formed for the purpose of ownership of each respective foreign
trademark; and
WHEREAS, on July 19, 1991 Metropolitan Blimpie, Inc. and Purchaser entered
into a written agreement (the "Metropolitan Agreement") whereby Purchaser
obtained Metropolitan Blimpie, Inc.'s forty (40%) percent right to use or
license and/or to sublicense (by franchise agreements, master license agreements
and other authorizations and agreements) of all of the international Blimpie
trademarks/service marks as obtained in each country which include all of the
countries in the world except continental U.S.A. (the "International Blimpie
Trademarks") for all international areas of the world as hereinafter defined;
and
<PAGE>
WHEREAS, Purchaser and Sellers executed on June 1, 1995 a Licensing
Agreement (the "1995 Agreement") whereby Purchaser obtained from Sellers the
sole and exclusive right to use or license and/or to sub-sublicense others to
use the International Blimpie Trademarks and the System for all international
areas of the world (for the purpose of this agreement, international areas of
the world shall be defined to include all countries of the world except
continental U.S.A. but including all areas of non-continental U.S.A. and shall
be hereinafter referred to as the "Territory"); and
WHEREAS, Purchaser desires to purchase all of the right, title and
interest of the Sellers in and to the International Blimpie Trademarks for use
in the Territory as may be appropriate.
NOW, THEREFORE, in consideration of the foregoing and the mutual terms,
covenants and conditions hereinbelow set forth, it is agreed as follows:
1. Definitions. Sellers and Purchaser have defined for the purpose of this
agreement the following terms:
1.1 "Currency" means United States Dollars.
1.2 "Income" as used herein shall mean all payments, direct or indirect,
received by Purchaser from the Territory without any exception or exclusion
except as specifically provided herein, including but not limited to all
payments received up to the date hereof pursuant to the 1995 Agreement or
otherwise received from the Territory, payments received from initial or
continuing franchise/royalty fees or sublicense/master license/subfranchise fees
or promissory note collections from franchisees, subfranchisors or licensees or
master licensees, or entities authorized to operate Blimpie distribution points
or any other entity selling Blimpie branded products under agreements made
directly (by Purchaser) or indirectly (by authorized sublicensees or others),
equipment sales profits or any other funds arising from the Territory and
Imputed Income as hereinafter defined. Income does not include unpaid
obligations, notes or future obligations until paid or any value added tax,
withholding tax or any similar tax deducted from Purchaser's share of such fees
unless Purchaser is entitled to a tax deduction under U.S.A. law and in such
event said tax shall be included as Income.
1.2.1 In the event the Purchaser waives, modifies, reduces, sells,
transfers, assigns, or awards the right to license or sublicense the right to
use any of the International Blimpie Trademarks or to develop Blimpie
Restaurants or to operate Blimpie distribution points or in any way authorizes
the sale of Blimpie branded products under agreements made directly (by
Purchaser) or indirectly (by authorized sublicensees or others) in any part of
the Territory whereby less than 3% of gross sales is received by the Purchaser
arising from the sale of any product or service or other use whereby any of the
International Blimpie Trademarks are used, from any Blimpie Restaurant, Blimpie
distribution point or by the sale of Blimpie branded products in the Territory,
the sum of 3% of gross sales from said Blimpie Restaurant(s) and Blimpie
distribution points or any other entity selling Blimpie branded products shall
be deemed
2
<PAGE>
for the purpose of this agreement to be received by the Purchaser in the year of
the sale and included in the definition of Income.
1.2.2 In the event the Purchaser licenses, sublicenses, or otherwise
awards the right to license, sublicense, franchise, or otherwise authorize
Blimpie Restaurants, Blimpie distribution points or Blimpie branded products in
any part of the Territory for less than $.01 per person for that portion of the
Territory, the Purchaser shall be deemed to have received Income in the year of
the transaction of $.01 per person which sum shall be deemed to be included in
the definition of Income even if the Purchaser receives compensation which is
less than $.01 per person. In the event the Purchaser directly or indirectly
transfers the rights to license or sublicense the International Blimpie
Trademarks in whole or in part to any entity including subsidiaries, affiliates,
independent third parties or others, such license or sublicense shall be
expressly subject to the provisions of this agreement and any compensation
received by the Purchaser shall be deemed Income under this agreement in the
year of the transaction. All of the Income received under 1.2.2 and 1.2.3 of
this article shall be hereinafter referred to as "Imputed Income".
1.2.2 Purchaser agrees that in order to avoid any conflict of interest
with respect to any transaction that results in Imputed Income, Purchaser shall
submit for approval or rejection of said transaction to the Purchaser's
non-employee directors and said transaction must be approved by a majority of
the Purchaser's non-employee directors as such term is defined in Purchaser's
Omnibus Stock Incentive Plan.
1.3 "Service Marks" means the "BLIMPIE" and "BLIMPIE SUBS AND SALADS"
Trademarks and Service Marks and applications for same and any other trademarks
and service marks filed and recorded in the Territory prior to and after the
date hereof for use by Purchaser including all other trademarks, including logos
and designs, which may in the future be licensed, registered or filed. Purchaser
acknowledges that the initial filing in each country for a Service Mark in the
Territory generally will first be for "BLIMPIE" and thereafter if sought to be
used by Purchaser, a subsequent application for "BLIMPIE SUBS AND SALADS" shall
be made pursuant to the terms hereof.
1.4 "Services" means the consultative, advisory, policing, educational,
support and other services to be rendered to the franchisees and sublicensees
and other authorized entities to ensure that development and implementation of
the System and use of the Service Marks in each respective portion of the
Territory is functioning in a proper and appropriate manner in accordance with
reasonable standards of development which may be more particularly described in
the Blimpie Advisory Manual and/or Manuals or other written instrument now
existing or hereinafter developed.
1.5 "System" as used herein is the method of operation for merchandising
authorized products, including distinctive signs, food recipes, uniforms and
various trade secrets and other confidential information, architectural designs,
equipment specifications, layout plans, inventory
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and recordkeeping techniques and marketing techniques which are materially
reflected in the Blimpie Franchisee Operations Manual and Construction Manual
described herein.
1.6 "Term" means fifty years commencing on January 17, 2002.
1.7 "Term Year" means each of the one year periods commencing on January
17, 2002 and each anniversary date thereafter.
1.8 "Territory" means all of the countries in the entire world except the
continental U.S.A. but including non-continental U.S.A.
1.9 In this agreement unless the context otherwise requires:
1.9.1. A reference in this agreement to any legislation or regulations or
any section of them shall be read to include any replacement legislation or
regulations enacted in substitution for them.
1.9.2 The headings in this agreement are included for convenience only and
shall not affect the construction of this agreement.
2. Sale. The Sellers agrees to sell to the Purchaser and the Purchaser
agree to buy from the Sellers, all of Sellers' right, title and interest in the
International Blimpie Trademarks and the System, whether owned in the individual
names of the Sellers or via ownership partnerships by Sellers with Metropolitan
Blimpie, Inc., free and clear of any debts, mortgages, security interests or
other liens or encumbrances except for the remaining ownership rights of
Metropolitan Blimpie, Inc. and subject to any other applicable state or federal
franchise law or foreign law for franchises or subfranchises or master licenses
for any part of the Territory. The closing shall occur on the date hereof .
3. Purchase Price. The purchase price to be paid by the Purchaser to
Anthony P. Conza is Three Million Dollars ($3,000,000.00) in currency plus the
contingent compensation set forth in Article 3 herein. The purchase price to be
paid by the Purchaser to David L. Siegel is One Million Five Hundred Thousand
Dollars ($1,500,000.00) in currency plus the contingent compensation set forth
in Article 3 herein. The purchase price shall be paid on January 18, 1997.
4. Contingent Compensation. Subject to the prior receipt by the Purchaser
of the aggregate collections of Five Million Dollars ($5,000,000.00) of Income
(the "Income Condition") as defined herein received by Purchaser from the
Territory, Purchaser agrees to pay to Conza and Siegel the first One Hundred
Fifty Thousand Dollars ($150,000.00) per year (the "Annual Fee") collected from
the Territory commencing on January 1, 2002 and continuing for each Term Year of
the Term without any deductions whatsoever. Said sum shall be payable in
proportions of 66.66% to Conza and 33.34% to Siegel. In the event the Purchaser
receives Imputed Income, said Imputed Income shall be included in the
determination and calculation of the Income received
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from the Territory. Purchaser's general receipts in an amount equal to the
Imputed Income shall be deemed to be received by Purchaser (as if actually
received from the Territory) in the year of the transaction or receipt by the
user of any of the International Blimpie Trademarks from or in the Territory and
shall be payable to the Sellers in accordance with this Article. The amount of
Imputed Income received by Purchaser necessary to achieve the Annual Fee in any
Term Year, shall be payable to the Sellers by the Purchaser from its gross
receipts derived from markets outside of the Territory (the U.S.A.), as if
actually received by Purchaser from the Territory.
4.1 The Annual Fee for the Term Year beginning in the year 2002, and for
each Term Year succeeding thereafter shall be adjusted annually and, as so
adjusted, shall be payable during the Term Year for which such adjustment has
been made, as follows: the Annual Fee for the immediately preceding Term Year
shall be multiplied by a fraction, the numerator of which shall be the Consumer
Price Index published for the last month of 1997 and the denominator of which
shall be the Consumer Price Index published for the last month of the Term Year
prior to the immediately preceding Term Year. The "Consumer Price Index" shall
mean the Consumer Price Index for All Urban Consumers published by the Bureau of
Labor Statistics of the United States Department of Labor, New York, New
York-Northeast New Jersey area, All items (1982-84=100), or any successor index
thereto, appropriately adjusted. If the Consumer Price Index ceases to be
published, and there is no successor thereto, then such other index as Sellers
reasonably determines shall be substituted for the Consumer Price Index.
Purchaser shall have the right to pay such funds as it may desire to Sellers to
aggregate the Annual Fee payments set forth above, even if the Income and
Imputed Income, if any, from the Territory does not provide sufficient funds.
4.2 In any Term Year, all Income including Imputed Income, in excess of
the sum of $150,000.00 for each Term Year shall be deemed included in the next
Term Year and subsequent Term Years (if the amount exceeds the minimum for the
next Term Year ) in order to establish whether or not Purchaser received the sum
of $150,000.00 for each year of the Term. In any Term Year(s), if all or part of
the Annual Fee is not paid due to insufficient Income received by Purchaser in
the respective Term Year, then the unpaid amount shall be payable the following
Term Year along with the Annual Fee due for that Term Year. A similar procedure
shall be used for future Term Years until the Annual Fee is paid in full. This
procedure shall be applicable for any Term Year wherein insufficient Income is
received to make the Annual Fee payment. In the event of the nonpayment of said
Annual Fee on the due date of any such payment, the amount not paid shall bear
interest at the rate of 20 % per annum until actual receipt of good funds by
each respective Sellers is received.
5. Closing Documents. On the closing the parties shall execute,
acknowledge where necessary and deliver the following documents:
5.1 A bill of sale/assignment for the International Blimpie Trademarks and
any and all rights and privileges thereto including partnership rights (owning
same with Metropolitan Blimpie, Inc. owned by Sellers from Sellers to
Purchaser), if any, free and clear of all claims, liens
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and encumbrances except for the rights of Metropolitan Blimpie, Inc. but subject
to this agreement including but not limited to the continuing obligations of the
Sellers set forth in Article 3 herein.
5.2 Secretary's certificates of directors' resolutions of Purchaser
consenting to the execution and delivery of this agreement and all other
documents executed in compliance therewith.
5.3 Sellers agree to execute any and all necessary documents including,
but not limited to, additional bills of sale or other instruments needed to
effectuate the transfer and recording of record of each of the respective
International Blimpie Trademarks as required by Purchaser's trademark counsel
and in accordance with each country in the Territory.
5.4 Within thirty days from the closing date, Sellers and Purchaser shall
execute and deliver a first and primary accounts receivable security interest
and UCC-1s against all of Purchaser's accounts and franchise fees receivable to
secure the payment of the obligations of the Purchaser set forth in this
agreement including, but not limited to, payment of the Annual Fee to Sellers.
Purchaser shall file at Purchaser's expense and continue to file at its own
expense appropriate Uniform Commercial Code filing receipts in all required
jurisdictions necessary to perfect and maintain the validity and enforceability
of said security interest during the Term and extension/renewal filing receipts
as needed to extend/renew the lien of Sellers for the Term. Such instruments
filed of record shall clearly denote the interest of Sellers. Purchaser
represents and agrees that as of the date hereof there are no outstanding
security interests against Purchaser that will be prior to the lien of Sellers
nor will Purchaser ever allow any prior lien on such collateral during the Term.
The parties herein agree to execute any and all documents that may be reasonably
required to effect the intent of this paragraph. This entire article shall
survive closing.
5.5 Sellers and Purchaser shall execute any and all documents reasonably
requested by the other in order to effectuate, enforce or otherwise comply with
the terms of this agreement.
5.6 The Purchaser hereby grants the following options to the Sellers which
may be exercised by either or both of them, jointly and/or severally:
5.6.1 On or before January 1, 2001, either or both of the Sellers or their
respective heirs, successors or assigns may elect the option to effect a
cancellation of the Contingent Compensation Annual fee payable to the electing
Seller or Sellers pursuant to Article 4 hereof (the "First Cancellation
Option"). Notice of exercise of the First Cancellation Option may be given by an
electing Seller at any time on or before, but not after, January 1, 2001,
whether or not the Income Condition shall have been satisfied on or before
January 1, 2001.
5.6.2 If Conza timely exercises the First Cancellation Option, Purchaser
shall pay the sum of $2,000,000 to him on January 2, 2001; and/or
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5.6.3 If Siegel timely exercises the First Cancellation Option, Purchaser
shall pay the sum of $1,000,000 to him on January 2, 2001.
5.6.4 If the First Cancellation Option shall not be timely exercised by
either or both of the Sellers, then the non-exercising Seller or Sellers shall
have a second option to effect a cancellation of the contingent compensation
Annual Fee payable to the non-electing Seller or Sellers pursuant to Article 4
hereof (the "Second Cancellation Option"). Notice of exercise of the Second
Cancellation Option may be given by an electing Seller at any time after January
1, 2001, and on or before, but not after, January 1, 2006, whether or not the
Income Condition shall have been satisfied:
5.6.4.1 If Conza timely exercises the Second Cancellation Option,
Purchaser shall pay the sum of $2,000,000, reduced in the manner set forth in
paragraph 5.6.5, to him on January 2, 2006; and/or
5.6.4.2 If Siegel timely exercises the Second Cancellation Option,
Purchaser shall pay the sum of $1,000,000, reduced in the manner set forth in
paragraph 5.6.5, to him on January 2, 2006.
5.6.5 The aggregate amount of the reduction to be applied to the payment
to be made to an electing Seller pursuant to paragraph 5.6.4.1 and 5.6.4.2
hereof shall be determined by multiplying the sum of $2,000,000 in Conza's case,
or $1,000,000 in Siegel's case, by a fraction, the numerator of which shall be
the aggregate amount of all payments made to the electing Seller excluding CPI
increases under Article 4 hereof prior to January 1, 2006, and the denominator
of which shall be $5,000,000 in Conza's case of $2,500,000 in Siegel's case and
deducting the resulting sum from the Second Cancellation Option payment amount.
For example: if Conza received the sum of $100,000 for each year commencing on
2001 through 2005, Conza would have received $500,000. Conza's aggregate fees
payable under Article 4 is $5,000,000. $500,000 is 10% of $5,000,000.
Accordingly, in the event Conza elects the Second Cancellation Option then the
sum of $2,000,000 payable to Conza shall be reduced by 10%, i.e. $200,000. Using
the same facts, the formula would be $2,000,000 times a fraction, the numerator
of which is 500,000 and the denominator is 5,000,000, equaling 200,000. That sum
shall be deducted from $2,000,000.
5.6.6 Upon the election of the option set forth in Article 5.6.1 or 5.6.2
and the payment of the sums owed to each of the electing Seller, and/or to his
respective heirs, successors and assigns, the security interest conferred by the
Purchaser to the Sellers pursuant to this Article shall thereupon be terminated.
Sellers, for themselves, and their respective heirs, Successors and assigns1
hereby covenant and agree that, not later than 30 days after the date of full
payment of the sums due under the First or Second Cancellation Option due to
them, Purchaser shall deliver and Sellers shall execute termination statements
regarding such security interest on the then applicable form, and deliver same
to Purchaser for recordation in each jurisdiction in which notice of the
existence of such security interest shall have been recorded.
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6. Consent and Modification. Purchaser agrees to comply with the terms of
the Metropolitan Agreement and of the Agreement. Purchaser agrees to not
unreasonably withhold or delay its consent to any necessary modifications or
changes to the Metropolitan Agreement or the Agreement as may be appropriate.
Sellers agree to not unreasonably withhold or delay their consent to any
necessary modifications or changes to the Metropolitan Agreement or the
Agreement as may be appropriate.
7. Broker. The parties agree that there is no broker involved in this
transaction. Each party hereby indemnifies and holds the other harmless from and
against any demand for commission or other compensation by any broker, finder or
similar agent claiming to have been employed by or on behalf of any party.
8. Representations. No representations have been made except as set forth
in this agreement. Sellers represent and warrants to Purchaser as of the closing
as follows:
8.1 To the best of Sellers' knowledge, Sellers and Metropolitan Blimpie,
Inc. are the sole owners of the International Blimpie Trademarks free and clear
of all debts, mortgages, security interests or other liens or encumbrances as
set forth on the annexed schedules of International Blimpie Trademarks and where
indicated on the annexed schedule(s) exist a conflict with a previously filed
trademark in the respective country. There are no representations or warranties
with respect to the ability to obtain trademarks for the name "Blimpie" or
"Blimpie Subs and Salads" in any country in the Territory as Purchaser
acknowledges receipt of information from the trademark firm of Steinberg and
Raskin, Esq. with respect to the worldwide searches regarding the International
Blimpie Trademarks as well as all problems with respect to such filings that may
exist. For example, there is a prior trademark filing in the country of Chile.
The International Blimpie Trademarks are accepted "as is".
8.2 All obligations in connection with the filing, registration,
processing and completion of such International Blimpie Trademarks filings are
the obligation of Purchaser pursuant to the Metropolitan Agreement and 1995
Agreement and will remain so after the date hereof.
8.3 Except for those agreements entered into by Purchaser as of the date
hereof or with Metropolitan Blimpie, Inc. or pursuant to the Agreement, Sellers
have made no agreement with any third party to license or sell the International
Blimpie Trademarks.
8.4 No petition in bankruptcy or other insolvency proceeding has been
filed by or against the Sellers, nor have the Sellers made an assignment for the
benefit of creditors. There is no litigation or administrative proceedings of
any nature pending against the Sellers which would affect Sellers ownership of
the International Blimpie Trademarks. There are no judgments entered against
Sellers which affect Sellers ownership of the International Blimpie Trademarks.
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8.5 If any representation hereunder is not correct, the Sellers shall have
the opportunity to cure such misrepresentation within a reasonable time after
notice thereof.
8.6 By execution hereof the Purchaser acknowledges and represents that
there have been no representations, warranties, forecasts, estimates,
inducements or projections of any type or nature with respect to projected sales
volume, net profits, gross profits, or with respect to any other matter unless
specifically set forth herein.
9. Risk of Loss. Risk of loss or damage arising from the trademarks laws
of any country or governmental authority in the Territory or the inability to
develop any country in the Territory or the inability to obtain a Service Mark
in any country in the Territory or any other problem, dispute, difficulty, legal
issue or other concern arising about or from any of the International Blimpie
Trademarks subsequent to the closing shall be solely borne by the Purchaser and
under no circumstances will Purchaser be entitled to the return of any moneys
paid hereunder or for a cancellation or modification or decrease of the Annual
Fee or of a cancellation or modification or reformation of this agreement and
Purchaser shall have no claim against the Sellers with respect thereto.
10. Notices. Any notice or other communication hereunder shall be in
writing sent by certified mail, postage prepaid, return receipt requested or by
one day carrier such as Federal Express or Airborne, addressed to the parties as
follows:
If to Sellers:
Anthony P. Conza
740 Broadway, 12th Floor
New York, New York 10003
AND
Anthony P. Conza
35 Hill 99
Woodstock, NY 12498
AND
David L. Siegel, Esq.
740 Broadway, 12th Floor
New York, New York 10003
AND
David L. Siegel, Esq.
160 East 65th Street
New York, New York 10021
AND
David L. Siegel and Francinelee Hand
6229 North West 21st Court
Boca Raton, Florida 33496
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If to Purchaser:
Blimpie International, Inc.
740 Broadway, 12th Floor
New York, New York 10003
Notices shall be deemed given seven (7) business days after receipt when sent in
accordance with the foregoing.
11. Miscellaneous Provisions. This agreement may not be changed or
modified nor may any provision hereof be waived, except by a written instrument
signed by the Sellers and Purchaser or their assignees.
11.1 This agreement shall be construed in accordance with the laws of the
State of New York.
11.2 This agreement shall bind and benefit the heirs, executors,
administrators, successors and assigns of the parties hereto.
11.3 This entire agreement shall survive closing.
12. Appropriate Development. Purchaser acknowledges that the Sellers will
not be entitled to receive the Annual Fee unless the Territory is appropriately
developed. Appropriate development means that the following occurs: (i)
development of the Blimpie System in the Territory, (ii) compliance,
implementation and enforcement of System quality controls in order to maintain
the (a) positioning of the Blimpie System and (b) validity of the International
Blimpie Trademarks and (iii) the provision of the Services in each part of the
Territory. Accordingly the Purchaser hereby agrees to exercise its best efforts
during the Term to (i) develop the System in the Territory; (ii) ensure
compliance, implementation and enforcement of the quality controls of the
System; and (iii) provide the Services in each part of the Territory to the
franchisees, master licensees and others distributing Blimpie branded products (
hereinafter referred to as the "Obligations").
12.1 Purchaser acknowledges that each of the Sellers is extremely
knowledgeable and sophisticated in the development of the System, quality
controls, and the Services and any communications, suggestions, advice and
assistance will be helpful to the Purchaser and their master licensees and
franchisees throughout the world. In order to determine if Purchaser is
providing or performing the Obligations in the primary countries in the
Territory and in order to receive the assistance needed by the Purchaser or its
assigns, transferees and associates from the Sellers, Purchaser hereby agrees
that each of the Sellers during their lifetimes at the sole expense of Purchaser
shall have the right at their sole discretion upon at least 30 days prior
written notice to Purchaser to inspect the primary countries in the Territory,
in whole or in part, for the purpose of ascertaining compliance with the
Obligations and to provide observations, suggestions, advice and assistance as
set forth herein. Primary countries for the purpose of this
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agreement shall be deemed to be the U.K., Germany, Netherlands, France, Italy,
Russia, Spain, Sweden, Norway, Czech Republic, Hungary, Argentina, Canada,
Mexico, Brazil, Turkey, Japan and China. Each Seller may at his sole discretion
undertake inspection(s) to determine if Purchaser is providing or performing the
Obligations in the primary countries in the Territory or selected Primary
countries or parts or areas therein as well as to provide suggestions, advice
and assistance as set forth herein. Purchaser shall pay all expenses in advance
of Sellers or their agent(s) arising from all such inspections in the Territory
(which shall be for a minimum of 1-2 weeks for each country or for such greater
time as solely determined by each Sellers in each of their sole discretion),
including, but not limited to, air travel (business or first class for each
Sellers and one assistant for each), first class hotel accommodations/lodging
(room with two beds or queen or king size bed), reasonably acceptable breakfast,
lunch and dinner expenses, in-Territory transportation, translation expenses,
and any other expenses arising from such inspections. Purchaser agrees that
third parties may freely utilize the lodging of Sellers or otherwise use
facilities provided to them so long as such facilities do not represent
additional charges to Purchaser.
12.2 Sellers shall be entitled to review (i) samples of the raw materials
used in connection with the sale of Blimpie authorized products, (ii) specimens
of representative advertising, promotional materials, office placards,
packaging, promotional inserts, labels, and the completed authorized Blimpie
products which will be sold to customers of Blimpie Restaurants or in Blimpie
distribution points at the expense of Purchaser (iii) individual Blimpie
Restaurant locations, salesman and executives in each market as well as any
other relevant information that may be needed. At such time or reasonably after
the completion of each inspection each Sellers shall without any further
compensation prepare a written or oral summary of their observations which will
be communicated first to each Master Licensee in each respective portion of the
Territory inspected by each Seller and upon the Sellers return to the U.S.A. to
the Purchaser, its successors or assigns. The written or oral summary shall also
include advice, recommendations, observations and suggestions as to how to
improvement of franchise sales, improvements of operation, quality control
deficiencies observed and any other constructive suggestion that may be made by
each Sellers. At such time that the Sellers are no longer employed by the
Purchaser, then in no event shall Purchaser be obligated to expend more than
$35,000 per annum to each of the Sellers for inspections.
12.3 At such time that the Sellers are no longer employed by the Purchaser
and the Annual Fee is no longer owed to the Sellers, then the right of the
Sellers to perform inspections as set forth in this entire Article 12 shall be
deemed cancelled and of no further force and effect.
13. Refusal To Approve. In the event that Purchaser contends that either
Sellers has unreasonably withheld or delayed his respective approval on any
matter provided herein requiring their consent or approval, then Purchaser's
sole remedy shall be to commence an arbitration with the American Arbitration
Association in the City of New York, State of New York and if the American
Arbitration Association determines that Sellers has been unreasonable, then
Sellers shall promptly provide the appropriate approval or consent. Neither
Conza nor
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Siegel shall be responsible for such consequential damages resulting from a
failure to comply with an Arbitrator's decision if either or both exercise its
rights and/or remedies to set aside the Arbitrator's decision until fifteen (15)
days after a final nonappealable decision of a court of competent jurisdiction.
13.1 Notwithstanding any dispute with either of the Sellers, the Annual
Fee must be paid the Sellers with no set-off, adjustment or modification. In the
event that either Seller contends that Purchaser has unreasonably withheld or
delayed its approval on any matter provided herein requiring Purchasers' consent
or approval, then Sellers' respective sole remedy shall be to commence an
arbitration with the American Arbitration Association in the City of New York,
State of New York and if the American Arbitration Association determines that
Purchaser has been unreasonable, then Purchaser shall promptly provide the
appropriate approval or consent and in no event shall Purchaser be directly or
indirectly obligated for any consequential damages arising from its original
refusal to consent or approve, unless he or they fail to comply with the
Arbitrator's decision. Purchaser shall not be responsible for such consequential
damages resulting from a failure to comply with an Arbitrator's decision if
either or both exercise its rights and/or remedies to set aside the Arbitrator's
decision until fifteen (15) days after a final nonappealable decision of a court
of competent jurisdiction. The powers of the Arbitrator shall be limited in that
the Arbitrator shall not be empowered or entitled or authorized to modify this
agreement or in any way change and of its terms. Under no circumstances shall
the Sellers be directly or indirectly obligated to modify by decrease or
repayment change any portion of the Annual Fee and such request shall be deemed
to be an unreasonable one nor shall the arbitrator be deemed to be authorized to
do so..
13.2 In the alternative either Purchaser or either Seller may make an ex
parte application for a hearing on notice to the other party with the right of
the other to respond to an appropriate part of the Supreme Court of the State of
New York in and for the County of New York for an order on an expedited basis
determining the reasonableness or unreasonableness of the actions taken by the
other, such order to be final and nonappealable.
14. Assignment, Etc. This agreement and the rights to the International
Blimpie Trademarks may not be assigned, conveyed or otherwise transferred by
Purchaser without the prior written consent of Sellers which consent shall not
be unreasonably withheld or delayed. Each of the Sellers may assign this
Agreement or any of the rights and privileges granted hereunder including the
right to receive the Annual Fee in whole or in part without the consent of the
Purchaser.
15. Defaults. Notwithstanding any claim of default by Purchaser against
either or both Sellers, the Annual Fee must continue to be paid the Sellers with
no set-off, adjustment or modification. In the event, either Sellers or
Purchaser claims a default of this agreement, the party claiming such default
shall notify the other and the other party shall not be in default of this
agreement until the expiration of twenty (20) business days after receipt of
such notice during which period the defaulting party may cure such default. If a
default, except for any monetary
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obligations of Purchaser to Sellers, shall be of a nature that said default
cannot be completely cured or remedied within such twenty (20) day period and if
the defaulting party is reasonably and expeditiously in good faith with
reasonable diligence attempting to cure, the other shall reasonably extend the
cure period as may be necessary. If after the receipt of written notice from
Sellers stating the specific default within the time period set forth herein,
Sellers may then serve a five (5) day written notice of cancellation of this
agreement and upon the expiration of said five (5) days, this agreement and the
terms hereunder shall end and expire as fully and completely as if the
expiration of such five (5) day period were the day herein definitely fixed for
the end and expiration of the term of this agreement and Sellers shall be
entitled to any and all rights and remedies as may be authorized and allowable
under applicable law. All payments made by Purchaser to Sellers prior to any
default shall be deemed to be nonrefundable but shall not be deemed to modify or
in any way limit any of the rights and remedies or privileges of the Sellers
under applicable law which shall include but not be limited to the right of
rescission without the obligation of Sellers to refund any part of the purchase
price or Annual Fee received, specific performance, damages, liquidated damages,
redemption of the Annual Fee or such other right or remedy as may be authorized
by a court of competent jurisdiction. Purchaser shall pay all of Sellers legal
fees and expenses as incurred which arise from any default of Purchaser of this
agreement.
15.1 Nothing contained herein shall limit or prevent Purchaser or Sellers
from seeking from any court of competent jurisdiction for judicial assistance in
restraining and enjoining violations of this agreement. Sellers shall not be
deemed to have waived any of its rights to enforce compliance by Purchaser of
any default of this agreement despite any prior nonenforcement by Sellers' of
any violation of the terms of this agreement unless such default waiver is
reflected by a written waiver of default agreement executed by Sellers.
16. Subsequent Agreements. Inasmuch as each country in the Territory
generally requires a separate trademark filing, Conza, Siegel and Purchaser
shall execute any and all other documents necessary to effectuate the intent of
this agreement including individual country by country licensing agreements,
registered user agreements and such other instruments as may reasonably be
required.
17. Inspection. Sellers or its designated agents shall each have the
right to reasonably inspect Purchaser's agreements, books and records relating
to this agreement or the Territory or the receipt of Income pertaining to the
Territory. With respect to all Blimpie sublicenses, Blimpie distribution point
agreements, Blimpie Restaurant franchise agreements and any other document or
instrument pertaining to the Territory or with respect to the receipt of any
Income, Purchaser shall make copies thereof at Purchaser's expense within
fifteen (15) days after receipt of completed instruments or checks or drafts or
other record of payment of Income and send copies of same to Sellers. Failure to
strictly comply with these obligations shall be deemed a material default of
this agreement. In the event an inspection of the books and records of Purchaser
indicates that there is an error of two (2%) percent or more in paying to either
Sellers any portion of the Annual Fee obligations under this agreement,
Purchaser shall be liable and
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responsible for all auditing, legal and other expenses reasonably incurred by
Sellers Conza and/or Sellers Siegel in their inspection of Purchaser's books and
records or collection or enforcement thereof.
18. Completed Transactions. Sellers and Purchaser acknowledge the
execution of a number of master license agreements and franchise agreements for
Blimpie Restaurants for parts of the Territory prior to the date hereof, for
which a portion of the Master license and franchise fees are payable to Sellers.
Except for master license fees arising from master licensing transactions prior
to July 1, 1996, all future receipts from master license agreements shall be
payable to Purchaser except for any receipts paid to Sellers prior to the date
of this agreement which shall be retained by Sellers. Master license fees due
from transactions prior to July 1, 1996 and payable after the date hereof, shall
be payable to the Sellers in the proportions established in the 1995 Agreement.
19. 1995 Agreement. Subject to and conditional upon the Purchaser's
complying with all of the obligations of Purchaser set forth herein, and
excepting the provisions of Article 18 herein, the 1995 Agreement shall be
deemed cancelled and null and void.
20. Attorneys. The Purchaser has been represented by Steven Dreyer, Esq.
of Hall Dickler Kent Friedman & Wood LLP. David L. Siegel, Esq. has negotiated
and drafted this
14
<PAGE>
agreement on behalf of Sellers, however, Anthony P. Conza has been represented
by independent counsel selected by Anthony P. Conza who has reviewed this
agreement and approved same on his behalf.
IN WITNESS WHEREOF, the parties have executed this agreement as of the
date first above written.
SELLER:
By:
---------------------------
Anthony P. Conza
By:
---------------------------
David L. Siegel
PURCHASER:
Blimpie International, Inc.
By:
---------------------------
Name:
Title:
15
<PAGE>
ASSIGNMENT
ASSIGNMENT made as of the 18th day of February, 1997 by Anthony P. Conza
and David L. Siegel, Esq. (hereinafter jointly referred to as the "Assignor") to
Blimpie International, Inc. (hereinafter referred to as the "Assignee").
1. Assignment. Assignor hereby assigns to Assignee all of Assignor's
right, title and interest in and with respect to all of the international
Blimpie trademarks/service marks, applications for the obtaining of
international Blimpie trademarks/service marks and partnership rights with
Metropolitan Blimpie, Inc. pertaining to the ownership of international Blimpie
trademarks owned by the Assignor for all areas outside of the U.S.A. Annexed
hereto are a list of all currently filed applications and approved trademarks
and service marks for Blimpie and Blimpie Subs and Salads. This assignment is
subject to and conditional upon full compliance by the Assignee of the
obligations of the Assignee as contained in the Contract of Sale dated January
18, 1997 by and between Assignor and Assignee which is hereby incorporated by
reference. Excluded from this assignment are all Blimpie and Blimpie Subs and
Salads trademarks/service marks owned by the Assignor for the U.S.A.
2. Benefit. This assignment is binding upon and shall inure to the benefit
of the parties and their respective successors and assigns.
3. Future Documents. Assignee hereby agrees to execute any and all
documents necessary to effectuate the intent of this agreement.
IN WITNESS WHEREOF, the parties have executed this Assignment as of the
date first above written.
ASSIGNOR:
By:
---------------------------
Anthony P. Conza
By:
---------------------------
David L. Siegel
ASSIGNEE:
Blimpie International, Inc.
By:
---------------------------
Charles G. Leaness
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated Balance Sheet at March 31, 1997 (Unaudited) and the Consolidated
Statement of Operations for the nine months ended March 31, 1997 (Unaudited) and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 3,229,735
<SECURITIES> 5,013,880
<RECEIVABLES> 2,487,143
<ALLOWANCES> 61,500
<INVENTORY> 169,538
<CURRENT-ASSETS> 12,004,396
<PP&E> 2,086,020
<DEPRECIATION> 785,458
<TOTAL-ASSETS> 23,768,515
<CURRENT-LIABILITIES> 3,782,968
<BONDS> 0
0
0
<COMMON> 95,262
<OTHER-SE> 18,340,282
<TOTAL-LIABILITY-AND-EQUITY> 23,768,515
<SALES> 27,125,259
<TOTAL-REVENUES> 28,132,676
<CGS> 17,202,073
<TOTAL-COSTS> 17,202,073
<OTHER-EXPENSES> 7,511,081
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,857
<INCOME-PRETAX> 4,137,185
<INCOME-TAX> 1,590,000
<INCOME-CONTINUING> 2,547,185
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,547,185
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.26
</TABLE>
