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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1997 Commission File Number 0-21036
BLIMPIE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
New Jersey 13-2908793
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
740 Broadway, New York, NY 10003
(Address and Zip Code of Principal Executive Offices)
Issuer's Telephone Number: (212) 673-5900
Securities Registered Under Section 12(b) of the Exchange Act: None
Securities Registered Under Section 12(g) of the Exchange Act:
Common Stock, $.01 Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant as of September 23, 1997 was approximately
$19,572,000. Solely for purposes of the foregoing calculation all of the
registrant's directors and officers are deemed to be affiliates.
There were 9,541,926 shares of the registrant's common stock
outstanding as of September 15, 1997.
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Documents incorporated by reference. Part III of this Form 10-K incorporates
information by reference from the registrant's definitive proxy statement which
will be filed no later than 120 days after June 30, 1997.
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PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
Certain forward-looking statements are included in this report. They
use such words as "may," "will," "expect," "believe," "plan" "anticipate" and
other similar terminology. These statements reflect management's current
expectations and involve a number of risks and uncertainties. Actual results
could differ materially due to changes in: global and local business and
economic conditions; legislation and governmental regulation; competition;
success of operating initiatives and advertising and promotional efforts; food,
labor and other operating costs; availability and cost of land and construction;
adoption of new or changes in accounting policies and practices; consumer
preferences, spending patterns and demographic trends; political or economic
instability in local markets; and currency exchange rates.
GENERAL
The Company is a New Jersey corporation which was formerly known as
Astor Restaurant Group, Inc. (from October, 1986 - April, 1992) and
International Blimpie Corporation (from its formation in 1977 until October,
1986). The Company engages in franchising, subfranchising and master licensing
of the Blimpie trademarks, trade names, service marks, logos (the "Blimpie
Trademarks"), marketing concepts and marketing programs which are the basic
attributes of the chain of non-cooking, quick service sandwich outlets known as
"Blimpie" outlets. The main products sold in a Blimpie outlet are sub sandwiches
and salads. Blimpie(R) is a registered trademark of the Company. Unless
otherwise specified, the terms "Blimpie" and the "Company" include Blimpie(R).
The first Blimpie outlet commenced operations in 1964 in Hoboken, New
Jersey. The Company's rights regarding the Blimpie Trademarks and the
methodology and know-how which comprise the Blimpie outlet marketing concepts
and programs (the "Blimpie Marketing System") are, pursuant to written licensing
agreements between the Company and the owners of such rights, limited to
specific geographic regions throughout the World. See "Business - Trademarks,
Trade Names, Service Marks and Logos; Know-How and Methods of Operation." Since
the incorporation of the Company in 1977, the chain of franchised Blimpie
outlets has expanded to encompass 1684 outlets located in 46 states, Spain
Sweden, Argentina, the United Kingdom and Canada (as of June 30, 1997). See
"Business - Blimpie Outlet Locations." There are approximately 250 additional
Blimpie outlets which are controlled by an entity unaffiliated with the Company
that are located in
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areas of the country in which the Company does not possess rights to license the
Blimpie trademarks or sell franchises or subfranchises.
Commencing in 1977, the Company began selling individual outlet
franchises and territorial, i.e., area subfranchises. The Company distributes
the nationally registered Blimpie trademarks pursuant to a 99 year exclusive
trademark grant (expiring in the year 2076) from the trademark owners.
Commencing in 1995, the Company began selling master licenses for various
territories located outside of the United States. The Company distributes the
internationally registered Blimpie trademarks, as the owner of an undivided 60%
interest therein, and pursuant to an agreement with the holder of the remaining
40% undivided interest therein which provides for automatic annual renewals
until July, 2090. See "Business - Trademarks, Service Marks, Trade Names and
Logos; Know-How and Methods of Operation."
The Company derives its revenue primarily from four sources: (1) store
equipment sales, (2) continuing franchise fees based upon each franchisee's
gross sales, (3) fees from the grant of individual outlet franchises and (4)
fees from the grant of subfranchises to Subfranchisors and the grant of Master
licenses to Master Licensors worldwide. Individual outlet franchises are granted
for both "traditional" locations, i.e., Blimpie outlets located in free-standing
buildings, shopping malls, and in-line urban store clusters, and "new-concept"
locations, i.e., convenience stores, institutional food service entities,
colleges, schools, mass feeders (such as institutional food service providers
and in-facility commissaries) and hospitals that sell or otherwise make all or
part of the Blimpie line of food products available to their customers,
clientele or attendees through facilities that may or may not contain all of the
components normally associated with a traditional Blimpie outlet, such as
kitchen, food preparation and customer dining areas. The Company also has
commenced developing several new types of product distribution formats, some of
which it has begun to introduce and some of which it anticipates introducing in
the future. One such program involves the sale of a limited number of prepared
Blimpie sandwiches and salads maintained in "Grab'n Go" refrigeration cases at
Company-approved "distribution points" operated by franchisees and
non-franchisees. There are 28 of these Grab'n Go locations operating in Sweden
and 148 Grab'n Go locations operating in the United States. The Company
currently is developing new types of carts, kiosks, vending machines and other
mobile Blimpie branded product delivery systems. The Company further anticipates
the development of a format that would allow the sale of some Blimpie branded
products at supermarkets and other retail locations.
FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS
See note 14 to the Company's audited financial statements.
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THE BLIMPIE OUTLET FRANCHISE, SUBFRANCHISE AND MASTER LICENSE
A Blimpie outlet is a non-cooking, sandwich outlet characterized by
portion-controlled meat and cheese combinations generally sold on six inch or
twelve inch French/Italian white or wheat bread garnished with special Blimpie
spices and dressings along with salads and other food items. The sandwich
products sold in these outlets are known as Blimpie sandwiches and the outlets
themselves are known as Blimpie outlets.
The Company requires each franchisee to offer food products from a list
of products authorized by the Company. Such products include hot and cold
sandwiches, including hot items such as Italian meatball sandwiches and chicken
breast sandwiches, and cold items such as roast beef and club sandwiches. The
Company's "signature" item is the "Blimpie Best" sandwich, which consists of
ham, salami, cappacola, prosciuttini and provolone. In addition, all Blimpie
sandwiches are dressed at no additional charge with tomatoes, lettuce, onions,
oil and vinegar and oregano. The Company establishes recommended prices for food
products which franchisees may or may not adopt. Accordingly, such prices differ
depending upon geographic location. For example, in New York City a "Blimpie
Best" may sell for $3.89, while in Atlanta, Georgia, the same sandwich may be
purchased for $2.89.
In addition to the authorized Blimpie sandwich line, Blimpie outlets
also offer a variety of salads including chef, tuna, seafood and tossed green
salads and a variety of baked products including bagels, rolls, muffins,
cookies, cinnamon buns, donuts and a variety of other products produced mostly
from raw frozen dough products and baked in the approved Blimpie deck oven
installed in each Blimpie outlet. Prices for all authorized products vary
depending upon geographic location.
Each franchisee is obligated to purchase its raw materials, both food
and non-food, from authorized and designated distributors who may only sell
authorized and approved raw materials purchased from approved manufacturers and
suppliers. The Company negotiates approved product relationships with
manufacturers and suppliers on a national level with respect to all products
except produce, whether or not they bear the Blimpie logo. The Company
negotiates and enters into recognition agreements authorizing approved
distributors to deliver to Blimpie outlets the raw products purchased by such
distributors from approved manufacturers and suppliers. Franchisees have
traditionally purchased produce on a local level subject to the quality control
standards of the Company, but the Company is in the process of establishing
national produce relationships with various produce purveyors throughout the
United States of America ("U.S.") and overseas. The Company is in the process of
implementing a pre-sliced lettuce program throughout the U.S. that is
anticipated to reflect significant cost and labor savings for its franchisees.
All products purchased by franchisees on a local level must meet the Company's
quality standards. Franchisees may request approval of
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additional manufacturers, suppliers or distributors subject to the Company's
approval, which approval is based upon a number of conditions including price,
quality, ability to service the system on a national basis and such other
reasonable standards as may be promulgated by the Company from time to time.
Currently, there are no other manufacturers, suppliers or distributors approved
by the Company other than those designated by the Company.
The Company believes that it could easily obtain alternate
manufacturers, suppliers and distributors should any of its current
manufacturers, suppliers or distributors become unwilling or unable to provide
the Company's franchisees with the authorized required raw materials.
A franchisee pays a non-refundable initial franchise fee (currently
$18,000) in connection with his execution of a franchise agreement which grants
to the franchisee the right to use the various Blimpie trademarks, trade names,
service marks, logos, marketing concepts and marketing programs, and to operate
a Blimpie outlet at a location to be agreed upon by the Company and the
franchisee in accordance with the operations manual issued by the Company to its
franchisees (the "Operations Manual"). The non-refundable initial franchise fee
payable by the holder of a new-concept franchise can range between $1.00 and
$18,000 depending on the number of new-concept transactions executed, the
location of the new-concept franchisee, the marketing area in question and other
subjective factors. After a location has been found and the lease or purchase
thereof has been negotiated by the franchisee and approved by the Company, the
franchisee then constructs and installs its Blimpie outlet in accordance with
design and layout specifications provided by the Company. Franchisees are
required, pursuant to the franchise agreement and the Operations Manual, to
maintain specified standards as to food quality, menu items, uniforms,
appearance, sanitation and all other aspects of outlet operations.
In addition to the initial franchise fee, a Blimpie franchisee also
pays all other costs and expenses related to the installation of his Blimpie
outlet at an approved location. An equipment package, including but not limited
to slicing machines, refrigeration cases, food preparation counters and signs
bearing the registered "Blimpie" logos, costs approximately $25,000 to $40,000.
Construction of a Blimpie outlet, which generally includes walls, floor,
ceiling, plumbing and electrical work required to modify an existing premises to
an approved Blimpie design costs between $10,000 to $80,000 to complete. These
costs, plus the initial lease security payable to the owner of the leased
premises and utility deposits to the various utility companies and recommended
minimum opening inventory and working capital aggregating approximately $5,000
to $15,000, comprise the approximate cash investment of an average Blimpie
franchise.
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Blimpie franchisees are required to pay continuing franchise fees of 6%
of the franchisee's weekly gross sales. Franchisees are also required to pay
mandatory advertising contributions of 4% of the franchisees' weekly gross sales
except that persons or entities acquiring franchises before the fall of 1994 are
required to pay mandatory advertising contributions of 3%. Two percent of the
advertising contributions made by franchisees in the same general marketing area
are used for the payment of advertising which benefits all of such franchisees,
while the remainder is used for national advertising. Canadian franchisees pay
continuing franchise fees of 8% and advertising contributions of 2%.
Each Subfranchisor pays a subfranchise fee that is based upon the
population of the subfranchise. At present, the fee, which can typically range
between $10,000 and $350,000, is based upon a charge of $.10 per person located
within the area that is the subject of the subfranchise. In addition to the
subfranchise fee, each Subfranchisor must join a Subfranchisor advertising
cooperative association sponsored by the Company which purchases franchise
advertisements in national periodicals for the benefit of all Subfranchisors. A
Subfranchisor's annual contribution to the advertising cooperative typically
ranges between $1,200 and $4,800. The Company makes voluntary contributions to
the cooperative association that match the contributions made by the
Subfranchisors.
Each subfranchise consists of a specifically defined territory within
which the Subfranchisor has the exclusive right for a period of 50 to 60 years
to solicit potential purchasers of Blimpie franchises who sublicense directly
from the Company the right to use the Blimpie trademarks, trade names, service
marks, logos, marketing concepts and marketing programs.
The Company's standard form of subfranchise agreement grants to the
Subfranchisor the exclusive license to purchase the territory for a one year
period, followed by four to six renewal terms, all but the last of which are
annual in duration. The license is subject to the Company's continuing right to
market and sell the Blimpie trademarks, trade names, service marks, logos,
marketing concepts and marketing programs within specified territories. If all
terms and conditions of the subfranchise agreement have been met during the
initial one year term and each of the subsequent one year renewal terms, a 50 to
60 year right is granted during the final renewal term upon payment of the fee
set forth in the agreement. Each subfranchise agreement obligates the
Subfranchisor to satisfy all of the operational obligations owed by the Company
to each franchisee within the Subfranchisor's territory at the sole expense of
the Subfranchisor; to use his best efforts to promote the sale of franchises
within his territory; and to meet certain sales quotas. Each such agreement is
terminable by the Company upon thirty days' notice in the event of the
Subfranchisor's default under certain provisions of the agreement. The
Subfranchisor may terminate the agreement upon certain defaults by the Company
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and where such defaults remain uncured, depending on the nature of the default,
for more than 30 days to more than 75 days.
Subfranchisors who are in full compliance with the obligations imposed
upon them pursuant to the subfranchise agreement, including, among other things,
the obligation to open defined quantities of franchised Blimpie outlets within
specified periods of time, are entitled to receive one half of each initial
franchise fee (after deductions for sales commissions, design, training and real
estate fees) paid by new franchisees establishing Blimpie outlets within the
Subfranchisor's territory, and one half of the 6% of gross sales continuing
franchise fee paid by such franchisees pursuant to their respective franchise
agreements with the Company.
Each Master Licensor pays a master license fee that is based upon the
population of the master license territory. The fee, which typically ranges
between $10,000 and $1,000,000, is presently based upon a charge that ranges
from $.01 per person to $.10 per person located within the area that is the
subject of the master license.
Each master license consists of a specifically defined territory within
which the Master Licensor has the exclusive right for a period of 50 years to
solicit potential purchasers of Blimpie franchises who sublicense either
directly from the Master Licensor or from a wholly-owned subsidiary of the
Company the right to use the Blimpie trademarks, trade names, service marks,
logos, marketing concepts and marketing programs.
The Company's standard form of master license agreement grants to the
Master Licensor the exclusive license, subject to the Company's continuing right
to market and sell the Blimpie trademarks, trade names, service marks, logos,
marketing concepts and marketing programs, within specified territories for a
term of 50 years. Each such agreement obligates the Master Licensor to satisfy
all of the operational obligations to each franchisee within the Master
Licensor's territory at the sole expense of the Master Licensor and to meet
certain sales quotas. Each Master Licensor is required to organize a regional
advertising program. Each such agreement is terminable by the Company upon
notice in the event of the Master Licensor's default under certain provisions of
the agreement. The Master Licensor may terminate the agreement upon certain
defaults by the Company where such defaults remain uncured for periods ranging
from 30 to 75 days, depending upon the nature of the default.
Master Licensors who are in full compliance with the obligations
imposed upon them pursuant to the master license agreement including, among
other things, the obligation to open defined quantities of franchised Blimpie
outlets within specified periods of time, are entitled to receive 5/8 of the
initial franchise
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fees paid by new franchisees establishing Blimpie outlets within the Master
Licensor's territory, and 5/8 of the 8% of gross sales continuing franchise fees
paid by such franchisees pursuant to their respective franchise agreements with
the master licensor, the Company or the Company's subsidiary.
The Company markets and sells franchises, subfranchises and master
licenses through advertisements placed in local and national periodicals,
through presentations at trade shows and franchise conventions, through
referrals from existing franchisees, Subfranchisors and Master Licensors and
through informational materials placed in Blimpie outlets.
As of June 30, 1997 there were (1) 105 existing domestic
subfranchisors, at least one of which is located in each of the 46 states in
which the 1,667 domestic Blimpie outlets are located; (2) three Canadian
subfranchisors, one of which is located in each of the Provinces of Alberta,
British Columbia and Ontario in which four Blimpie outlets are located; (3) five
Blimpie outlets and 28 Grab `n Go distribution points located in Sweden; and (4)
13 Master Licensors for the countries of Spain, United Kingdom, Egypt, Lebanon,
Dominican Republic, Jordan, Australia, Argentina, Uruguay, Saudi Arabia, Oman,
Qatar, Bahrain, United Arab Emirates, Greece, Cyprus, Venezuela, South Africa,
Peru, Poland, Northern Ireland and the Republic of Ireland, in which
collectively there are eight outlets located. Such subfranchises and Master
licenses range in size, depending upon the specific geographical area involved,
from entire states to a specific county or counties. See "Business - Blimpie
Outlet Locations"; "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Results of Operations."
SERVICES TO FRANCHISEES
On a continuing basis, franchisees in the U.S. and Canada are furnished
with advisory assistance from the Company regarding outlet operations, new menu
items and new marketing aids developed by the Company. No additional fees are
charged to franchisees for these services or for the training program described
below. The Company, in its sole discretion, also provides services to
franchisees by visiting their outlets and inspecting them for quality,
cleanliness and service. A written operation inspection analysis is provided
after each inspection. Outside of the U.S. and Canada, Master Licensors provide
all such services, with the assistance of the Company.
The Company provides training for new franchisees in the U.S. and
Canada consisting of (i) forty hours of pre-training classes at an existing
Blimpie outlet approved by the Company, (ii) one week of classroom training at
its Georgia training center, and (iii) an additional 80 hours of operational
post-training at an existing Blimpie outlet approved by the Company. The Company
provides training for new Subfranchisors and Master Licensors consisting of two
weeks of classroom training
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at its Georgia training center, plus 80 hours of operational training at an
existing Blimpie outlet approved by the Company. The training program addresses
all phases of outlet operations from service training to financial management,
including the various controls of the Blimpie marketing system specified in the
Operations Manual. Inventories, ordering procedures, hiring and firing,
equipment maintenance, product controls, bookkeeping and accounting are all
covered by the training program. The training provided to Subfranchisors and
Master Licensors also encompasses franchisor-related activities including, but
not limited to, franchise sales, communication, analysis of franchisee
construction needs and the fulfillment thereof.
After a Blimpie outlet is constructed or renovated and the equipment
installed, a Company representative, Subfranchisor or Master Licensor is on hand
for one week after an outlet opens for the purpose of providing additional
operational assistance and supervisory functions. Each Subfranchisor or Master
Licensor is responsible for providing each franchisee within his territory with
operational assistance throughout the term of his subfranchise or master license
agreement. Generally, a Company representative is only on hand as described
above with respect to the first three franchisees which open outlets within a
territory. However, representatives of the Company remain available on a
continuing basis to provide additional support to franchisees, Subfranchisors
and Master Licensors. In connection therewith, the Company maintains a toll-free
hotline by which franchisees and Subfranchisors may contact representatives of
the Company for advice and assistance regarding operational matters.
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BLIMPIE OUTLET PROPERTIES
Each traditional franchisee in the U.S. and Canada generally is
required to lease his outlet premises from a designated leasing subsidiary of
the Company. Each franchisee outside of the U.S. and Canada generally is
required to lease his outlet premises from a corporation in which the Master
Licensor owns 50% and the Company or its designee owns 50%, or such franchisee
is required to provide a collateral assignment of the lease to the jointly owned
corporation. In all such cases, it is the franchisee's sole obligation to find
the premises to be leased and to obtain the Company's approval of such location
as the situs of his franchised outlet. Once the location is approved, the
Company (or its leasing subsidiary) will negotiate and enter into a lease of the
premises, subject to the franchisee's approval, and will then enter into a
sublease thereof with the franchisee for the entire term and renewal term, if
any, of the lease of the premises less one day (generally 10 to 20 years). The
percentage royalty and advertising payments due pursuant to the franchise
agreement constitute additional rent under the sublease. Payment of the
percentage royalties and advertising fees under the franchise agreement
satisfies the above-mentioned corresponding additional rental payment obligation
under the sublease. All rents specified pursuant to the lease of the premises
are paid directly by the franchisee to the landlord specified in the lease
pursuant to the cancelable authorization by the Blimpie subsidiary leasing
corporation set forth in the sublease. Accordingly, except in a rare case in
which the Company or one of its subsidiaries may be the owner and landlord of a
franchisee's outlet, no funds which constitute the rent and additional rent due
under the lease of the premises are ever commingled or otherwise used by the
Company or any of its affiliates or subsidiaries. The Company has no payment or
performance obligations with respect to any of the existing outlet location
leases, except for less than one percent thereof.
The leasing/subleasing mechanism described above enables the Company to
maintain control of each Blimpie outlet premises and to enforce franchisee
compliance with the Company's authorized product line and quality standards. In
addition, since percentage royalties and advertising fees constitute additional
rent under the subleases, the leasing/subleasing mechanism gives the Company an
additional vehicle through which to enforce its rights regarding receipt of such
payments and payments to the landlord of the Blimpie outlet premises. Typically,
upon a franchisee's failure to timely make rental payments, the Company's
leasing subsidiary will receive notice from the landlord of such fact. The
franchisee is then notified of its default and is given the opportunity to cure
the default. Upon failure to cure the default, eviction proceedings usually will
be instituted by either the unaffiliated landlord or the Company's leasing
subsidiary. Following eviction of the franchisee, the Company, if the landlord
so permits, will attempt to sell the existing franchised outlet to a new
franchisee who will take possession of the premises subject to the terms of the
prior lease and sublease, or pursuant to a new lease negotiated by the Company
with the landlord, and a new sublease. In cases
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where a lease has been terminated and/or a franchisee has been evicted, if a
replacement franchisee cannot be obtained by the Company to cure all defaults
and operate or re-open the Blimpie outlet in question, it is the general policy
of the Company either to abandon the location and the leasing subsidiary, or to
dispose of ownership of the leasing subsidiary to unaffiliated parties for
nominal consideration.
Substantially all leases executed by the Company's various leasing
subsidiaries during the past five years have provided (and it is the Company's
intention that all future leases for outlet premises shall provide) that the
respective landlords thereunder will not directly or indirectly claim or
institute legal proceedings against the Company.
All of the 1,684 existing Blimpie outlets (as of June 30, 1997) are
operating in premises located in free-standing buildings, shopping malls,
shopping centers, in-line urban store clusters, convenience stores,
institutional food service facilities, colleges, schools, mass feeders,
hospitals, bowling alleys, golf courses and subway stations. The size of a
Blimpie outlet varies from 400 square feet to approximately 3,500 square feet.
Since the cost of renovating pre-existing premises into an approved Blimpie
outlet is dependent upon the condition and prior use of the premises, an exact
estimation is impossible. Historically, the cost of Blimpie outlet
construction/renovation, which must be completed in accordance with design and
layout specifications provided by the Company, and at the franchisee's sole
expense, has ranged from as low as $10,000 to as high as $80,000. The franchisee
must also equip his Blimpie outlet at his sole cost and expense. Such equipment
costs, in the aggregate, approximately $25,000 to $40,000.
BLIMPIE OUTLET LOCATIONS
The following table sets forth the number of Blimpie franchised outlets
in operation as of June 30, 1997:
<TABLE>
<CAPTION>
Location Number of Outlets
-------- -----------------
<S> <C>
Alabama 20
Alaska 7
Arizona 65
Arkansas 18
California 42
Colorado 35
Connecticut 24
Florida 144
Georgia 162
</TABLE>
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<TABLE>
<S> <C>
Hawaii 9
Idaho 15
Illinois 35
Indiana 55
Iowa 52
Kansas 16
Kentucky 24
Louisiana 37
Maine 2
Massachusetts 5
Michigan 65
Minnesota 26
Mississippi 14
Missouri 49
Montana 5
Nebraska 23
Nevada 34
New Hampshire 1
New Jersey 49
New Mexico 11
New York 60
North Carolina 54
North Dakota 4
Ohio 67
Oklahoma 7
Oregon 13
Pennsylvania 38
Rhode Island 7
South Carolina 55
South Dakota 4
Tennessee 62
Texas 143
Utah 33
Washington 28
West Virginia 20
Wisconsin 21
Wyoming 7
--------
U.S. Total: 1,667
International
Argentina 2
Canada 4
Spain 2
Sweden 5
</TABLE>
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<TABLE>
<S> <C>
United Kingdom 4
--------
International Total: 17
Total 1,684
========
</TABLE>
GOVERNMENT REGULATION
The Federal Trade Commission and various state governmental authorities
have adopted laws regulating franchise operations and the franchisor-franchisee
relationship. Such laws vary from merely requiring the filing of disclosure
documents concerning the offer and sale of franchises to the application of
statutory standards regulating established franchise relationships. The most
common provisions of those laws regulate the substance of franchisor-franchisee
relationships and establish restrictions on the ability of franchisors to
terminate or to refuse to renew franchise agreements. Other states' laws contain
provisions designed to ensure the fairness of the franchise agreements to
franchisees by, among other means, including limitations, prohibitions and/or
restrictions pertaining to the assignability of the rights of franchisees; a
franchisee's right to own or be involved in other businesses; franchisee
membership in trade associations; and franchisor interference with franchisee
employment practices.
In addition to the foregoing state regulations, the Federal Trade
Commission has adopted rules and guidelines which require franchisors to make
certain disclosures to prospective franchisees prior to the offer or sale of
franchises. In addition to requiring the disclosure of information necessary for
a franchisee to make an informed decision on whether to enter into a franchise
relationship, the guidelines delineate the circumstances in which franchisors
may make predictions on future sales, income and profits. The Company does not
furnish or authorize its salespersons to furnish any oral or written information
on the actual or projected sales, costs, income or profits of a franchise.
Failure to comply with such rules constitutes an unfair trade practice under
Section 5 of the Federal Trade Commission Act.
Several state and federal courts have revealed a tendency to be
sympathetic to and desirous of protecting the rights and interests of
franchisees in litigation with their franchisors. Although such tendency may
result in some modification of the Company's licensing activities and some
delays or failures in enforcing certain of its rights and remedies under certain
franchising and lease agreements, the Company does not believe that such
modifications, delays or failures will have a materially adverse effect on its
operations or business. However, the law applicable to franchise operations and
relationships is rapidly developing, and the Company is unable to predict the
effect on its operations of additional requirements or restrictions which may be
enacted or promulgated or of court decisions which may generally be adverse to
the franchise industry. The Company believes that it has
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conducted and is conducting its business in substantial compliance with all
applicable laws and regulations governing its operations.
The franchisees' outlets are also subject to regulatory provisions
relating to the wholesomeness of food, sanitation, health, safety, fire, land
use and environmental standards. Suspension of certain licenses or approvals,
due to failure to comply with applicable regulations or otherwise, could
interrupt the operations of the affected outlet or otherwise adversely affect
the outlet. The franchisees are also subject to federal and state laws
establishing minimum wages and regulating overtime and working conditions.
Changes in such laws could result in an increase in labor costs that could
adversely affect the outlet.
The Company believes that it is conducting its business in substantial
compliance with all applicable laws and regulations governing its operations.
TRADEMARKS, TRADE NAMES, SERVICE MARKS AND LOGOS; KNOW-HOW AND METHODS OF
OPERATION
The Company regards the Blimpie Trademarks and the Blimpie Marketing
System as having significant value and as being important to its marketing
efforts. Each Blimpie franchisee and Subfranchisor is authorized pursuant to his
franchise agreement to use the Blimpie Trademarks and Blimpie Marketing System,
along with all other future trademark filings.
The Blimpie Trademarks and Blimpie Marketing System may only be used by
traditional and new-concept Blimpie outlets which sell Blimpie sandwiches and
Blimpie-related products, and by Blimpie distribution points. There are specific
product limitations as to each Blimpie outlet so that each Blimpie franchisee
may sell only those products authorized by his particular franchise agreement
and the Operations Manual or otherwise approved in writing by the Company. Any
variation from the authorized product line is actionable by the trademark owners
or the Company.
Prior to 1976, all rights under the laws of the United States
pertaining to the Blimpie Trademarks and the Blimpie Marketing System were owned
by Anthony P. Conza and David L. Siegel, Esq. (who are the Company's founders
and principal shareholders, directors and, respectively, the President and Chief
Operating Officer, of the Company) and by Peter DeCarlo, an individual who is
not affiliated with the Company. During that period of time, Messrs. Conza,
Siegel and DeCarlo conferred the right to distribute the Blimpie Trademarks and
to license the use of the Blimpie Marketing System upon a number of corporations
which they owned and controlled. In 1976, they ceased their joint association
and divided, by written
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agreement, the right to issue Blimpie franchise and subfranchise agreements. In
1984, Mr. DeCarlo assigned his interests in the Blimpie Trademarks to
Metropolitan Blimpie, Inc. ("MBI"), a corporation which is not affiliated with
the Company.
Prior to 1991, MBI, and Messrs. Conza and Siegel had reserved to
themselves and jointly owned undivided 40%, 40% and 20% interests, respectively,
in and with respect to all international, i.e. non-U.S., rights pertaining to
the Blimpie Trademarks and the Blimpie Marketing System.
The Company, pursuant to 99 year grants made to it by Messrs. Conza and
Siegel in 1976, has the exclusive right to distribute the Blimpie Trademarks and
license the use of the Blimpie Marketing System in the following territories
located within the U.S.: Alabama, Arizona, Connecticut, Florida, Georgia, Idaho,
Illinois, Indiana, Kentucky, Louisiana, Maine, Massachusetts, Michigan,
Minnesota, Mississippi, Montana, New Hampshire, the Counties of Morris, Warren,
Sussex, Bergen, Passaic and Essex in New Jersey except for the Cities of Alpine,
Belville, Cliffside Park, Cloister, Cresskill, Demarest, Dumont, East
Rutherford, Edgewater, Englewood, Englewood Cliffs, Fairview, Fort Lee,
Hackensack, Harrington Park, Haworth, Old Tappan, Northvale, Nutley, Norwood,
Palisades Park, Paterson, Ridgefield, Ridgefield Park, Rock Leigh, Rutherford,
South Hackensack and Tenafly; New York (except for the following counties: New
York, Bronx, Kings and Queens, Westchester and Rockland), Ohio, Oregon, Rhode
Island, North Carolina, South Carolina, Tennessee, Texas, Utah, Vermont,
Washington, West Virginia, Wisconsin and Wyoming. In 1993, the Company acquired
from Messrs, Conza, Siegel and MBI the exclusive right to license the Blimpie
Trademarks and the Blimpie Marketing System in New Mexico, in consideration for
the transfer to MBI of the exclusive right to license the Blimpie Trademarks and
Blimpie Marketing System in Richmond County, New York.
MBI presently has the right to distribute the Blimpie Trademarks and
license the Blimpie Marketing System in the following territories located within
the U.S. (collectively, the "MBI Territories"): Arkansas, Colorado, Delaware,
Iowa, Kansas, Maryland, Missouri, Nebraska, New Jersey (except for the counties
and cities referred to above), Nevada, the counties of New York, Queens, Kings,
Richmond, Rockland, Bronx and Westchester in New York, North Dakota, Oklahoma,
Pennsylvania (from the eastern border westward to and including Harrisburg),
South Dakota and Virginia. From time to time, the Company has been authorized by
MBI to issue, and has issued, franchises or subfranchises in the MBI
Territories. From each franchise sale, subfranchise sale or other sale, the net
receipts after the deduction of the specific expenses have been divided
unequally between the Company and MBI. The Company also is authorized to issue
replacement or substitute franchise agreements for any franchised locations
granted under MBI's authorization.
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The Company possesses the exclusive right to license the Blimpie
Trademarks and Blimpie Marketing System in the area of Northern California
between the southern border of Monterrey and the northern border of the state,
including the counties of Monterrey, San Benito, Santa Cruz, Santa Clara, San
Mateo, Alameda, Mariposa, San Francisco, Contra Costa, Marin Novato, Mono,
Tudumne, Calaveras, Napa, Solano, Sonoma, Amedor, Alpine, Sacramento, Yolo,
Sutter, El Dorado, Placer, Colusa, Nevada, Lake, Yuba, Mendocino, Glenn, Sierra,
Butte, Tehama, Plumas, Humboldt, Trinity, Shasta, Lassen, Del Norte, Siskiyou
and Modoc. Blimpie of California, Inc. ("BOC"), a corporation which is not
affiliated with the Company, possesses the exclusive right to license the
Blimpie Trademarks and Blimpie Marketing System throughout the balance of the
state of California pursuant to a joint trademark distribution agreement which
the Company and MBI entered into in 1984 with ISM, Inc. (a corporation which is
not affiliated with the Company), which agreement was subsequently assigned to
BOC, and thereafter amended. A number of franchised Blimpie outlets located in
Southern California have been established pursuant to trademark licenses granted
by BOC. The Company receives 2.5% of the gross sales by such franchisees, and
shares half of such receipts with MBI.
By agreement dated July 19, 1991 (the "1991 Agreement"), MBI granted to
the Company the exclusive right to license the Blimpie Trademarks and Blimpie
Marketing System throughout the MBI Territories, except for those portions
thereof located in, or consisting of, Delaware, Maryland, New Jersey, New York,
Pennsylvania, Virginia and Washington DC. The Company also acquired, pursuant to
the 1991 Agreement, the exclusive right to license the Blimpie Trademarks and
Blimpie Marketing System in Alaska, Hawaii, Puerto Rico and all other U.S.
territories located outside of the continental U.S.
In accordance with the 1991 Agreement, the Company acquired all rights
which MBI possessed regarding the licensing of the Blimpie Trademarks and
Blimpie Marketing System in all non-U.S. territories, subject to completion of
appropriate trademark filings in each territory at the expense of the Company.
In consideration for the grants made to the Company by the 1991
Agreement, the Company agreed to pay specified percentages of all revenues
derived by the Company within the MBI Territories and outside of the U.S.,
subject to a minimum annual payment requirement of $100,000. The 1991 Agreement
provided for an initial term of 42 months, and further provides for automatic
annual renewals until July 2090, provided that the Company continues to pay said
minimum annual payments. If the Company fails to satisfy its payment obligations
under the 1991 Agreement, the Company would lose the right to license the
Blimpie Trademarks and Blimpie Marketing System outside of the U.S. and
throughout the MBI Territories. From July 1991 through June 30, 1997, the
Company paid approximately $2,750,000 to MBI pursuant to the 1991 Agreement.
Management has no reason to
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believe that MBI would ever seek to cancel or terminate the 1991 Agreement.
Furthermore, management believes that the Company will continue to pay not less
than $100,000 per year to MBI pursuant to the 1991 Agreement, and that such
agreement shall remain in full force and effect throughout the entire period of
permissible automatic renewals thereof. However, no assurance can be given that
the 1991 Agreement will remain in full force and effect until July 2090.
In accordance with a written agreement which the Company executed with
Anthony P. Conza and David L. Siegel, the Company's Chairman and Chief Executive
Officer and its Vice Chairman and Chief Operating Officer, respectively, on
February 18, 1997, the Company acquired ownership of the undivided 60% interest
in the international rights to the Blimpie trademarks and Blimpie marketing
system owned by such individuals. In accordance with such agreement, the terms
of which were negotiated by a Committee of the Board consisting solely of
outside directors, the Company agreed to pay $4.5 million ($3 million to Mr.
Conza and $1.5 million to Mr. Siegel), plus certain contingent fees which take
effect after cumulative international revenues exceed $5 million, in
consideration for their sale of such rights to the Company. Commencing on
January 1, 2002, or such later year in which aggregate international revenues
exceed $5 million, and continuing through the year 2052, the Company will be
obligated to pay the first $150,000 of the revenues it derives from its
international operations to Messrs. Conza ($100,000) and Siegel ($50,000). The
agreement further provides that each of Messrs. Conza and Siegel may elect, at
any time prior to January 1, 2001, to receive a lump sum distribution of $3
million ($2 million payable to Mr. Conza and the balance payable to Mr. Siegel)
in lieu of such annual fee payments. If either or both of Messrs. Conza or
Siegel do not exercise such option, the agreement grants to them a further
option, exercisable at any time prior to January 1, 2006, to receive smaller
lump sum payments based upon the foregoing amounts, but reduced pursuant to a
formula to account for any annual contingent fee payments made to them prior to
exercise of the second option. In determining the fairness of the consideration
paid to Messrs. Conza and Siegel, the Committee of outside directors relied upon
a report regarding the valuation of the international trademarks and the
international rights to the Blimpie marketing system which had been prepared for
the Committee by a firm of trademark valuation experts which had been retained
for such purpose. 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 between MBI and the Company also remain in place.
On October 1, 1995, the Company entered into an agreement to settle a
trademark infringement proceeding which it commenced in Canada against an
unaffiliated party (the "claimant") who had filed trademark registration
documents
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seeking trademark protection for the word "Blimpie" prior to the time that the
Company made such filings in Canada. Pursuant to the settlement agreement, the
Company acquired all rights held by the claimant in such Canadian trademark
registration in consideration for the payment of $40,000 and an agreement to
issue 125,000 unregistered shares of the Company's Common Stock at the rate of
25,000 shares per year. The issuance of each installment after the initial
25,000 shares (which were issued upon the closing of such settlement) is subject
to the claimant's compliance with various conditions specified in the settlement
agreement.
To the knowledge of the Company, there are no infringing uses of the
Blimpie Trademarks in any territory where any of the Company's franchisees has
established or attempted to establish operations which would in any way
materially affect the use of such trademarks by the Company or a franchisee.
RESEARCH AND DEVELOPMENT
The Company conducts ongoing development of new menu items and test
markets such products, as well as new Company-developed food marketing aids, in
selected Blimpie outlets. Although such research and development activities are
important to the Company's business, its expenditures for these activities
heretofore have not been material.
BUSINESS EXPANSION
Equipment Leasing. The Company provides financing to new and existing
franchisees through direct equipment leasing and by entering into participation
arrangements with unaffiliated third party finance/leasing entities. During the
year ended June 30, 1996, the Company entered into two participation
arrangements with unaffiliated third party financing/leasing entities in order
to provide financing to new and existing franchisees through direct equipment
leasing. During the year ended June 30, 1997, the Company participated in the
financing of 34 of such equipment leases, and at June 30, 1997, the balance of
those participations totalled $366,311. The Company believes that such programs
will result in an increase in financing profits and an increase in franchise
sales due to the greater availability of equipment to new and existing
franchisees. However, no assurances can be given in that regard.
Domestic Expansion. The Company plans to grow through continued
development of traditional and new-concept Blimpie outlets throughout the U.S.
The Company also plans to continue to hire and train additional staff to develop
new types of Blimpie distribution points throughout the U.S.
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International Expansion. The Company continues to grow internationally
through the sale of master license agreements. The agreements are analogous to
subfranchise agreements, except that the master licensor or a wholly-owned
subsidiary of the Company enters into franchise agreements directly with the
franchisees in each international market. The master licensor, in effect, is the
Company's representative in that specific country and is obligated to provide
all of the support services and selling activities required to develop the
franchised market. Initially, however, the Company will provide administrative
support to assist the master licensors. The Company has entered into master
license agreements for the following countries: Spain, United Kingdom, Dominican
Republic, Egypt, Lebanon, Jordan, Australia, Argentina, Uruguay, Saudi Arabia,
Oman, Qatar, Bahrain, United Arab Emirates, Kuwait, Greece, Cyprus, Venezuela,
South Africa, Peru, Poland, Northern Ireland and the Republic of Ireland. In
addition, the master licensor for Egypt, Lebanon and Jordan has purchased a two
year option to buy the master license rights for Syria. As a result of the
recent sale and change of control of AB Svenska Pressbyran, the Company has
curtailed the development of Blimpie outlets in Pressbryan's stores in Sweden,
and is evaluating various alternative means for continuing the growth of its
brand in this territory. After the close of the fiscal year, the Company entered
into master license agreements for the country of Panama and the Canadian
Province of Manitoba.
In the United Kingdom, pursuant to an amendment of the master license
agreement, the Company formed a 50% owned subsidiary, Blimpie International of
Great Britain, Ltd., which will issue franchise agreements for use in the United
Kingdom.
The Company anticipates that it will execute master license agreements
for various other countries in the near future. The Company also plans to
develop joint venture agreements with various entities such as petroleum
marketers or convenience store chains for the installation of Blimpie outlets in
such entities' locations. The Company is in the midst of negotiations for
several such arrangements in the United Kingdom and elsewhere. There can be no
assurance, however, that the Company will consummate any such transactions.
Development of Blimpie Branded Products. As part of the Company's long
term strategic plan of developing products for sale at distribution points such
as Blimpie restaurants, supermarkets and convenience stores, the Company began a
market test of Blimpie branded peppers during the year ended June 30, 1997. The
Company intends to begin market testing Blimpie branded potato chips during the
first half of fiscal 1998, and it plans to roll out both branded products in
fiscal 1998. No assurances can be given, however, that the introduction of
Blimpie branded products will generate increased revenue for the Company.
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Expansion of Equipment Sales Department. Due to the success achieved by
the Company from the sale of equipment to Blimpie franchisees, the Company has
decided to expand its equipment sales department in Houston, and to undertake
the sale of equipment to franchisees of other chains commencing in fiscal 1998.
In connection with such expansion, the equipment sales department will be
reorganized as a wholly owned subsidiary to be known as BI Concept Systems, Inc.
The Company believes that this expansion will increase revenue, and result in an
increase in net income. However, no assurances can be given in such regard.
Acquisition of Existing Franchise Concept. In May 1997, the Company
announced that it had begun to search for potential acquisition candidates. The
Company is actively seeking an existing franchise system or entity that can be
converted into a franchise system which will provide a beneficial association to
the Company and its existing franchisees. The Company believes that its mature
infrastructure is capable of supporting additional franchise systems, and that
an acquisition of this nature will open up additional market segments for
development by the Company. However, no assurances can be given that an
acquisition will be consummated, and if one is consummated, that the Company
will generate increased revenues or net income therefrom.
Development of New Franchise Concepts. The Company is actively engaged
in the development of new franchised food concepts involving product offerings
which will not be directly competitive with the products offered by the chain of
Blimpie outlets. No assurances can be given that the Company will be able to
successfully develop one or more new franchise food concepts. In the event that
the Company does attempt to launch a new franchise food concept, it will, in all
likelihood, incur substantial initial costs which will exceed the initial
revenues to be derived therefrom. Furthermore, no assurances can be given that
the Company will be able to develop sufficient market acceptance and market
penetration with respect to any such new franchise concept, or that it will be
able to derive any revenues or net income from such an undertaking.
COMPETITION
The Company and its franchisees compete in the quick-service outlet
industry, which is highly competitive with respect to price, service, outlet
location and food quality, and is often affected by changes in consumer tastes,
local and national economic conditions affecting consumer spending habits,
population trends and traffic patterns. The Company and its franchisees compete
with an increasing number of national chains of quick-service outlets, a number
of which have dominant market positions, and possess substantially greater
financial resources and longer operating histories than the Company.
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The Company's most significant competitor is the Subway(R) chain of
sandwich outlets, whose outlets offer food products substantially similar to
those offered by Blimpie outlets, at comparable prices. 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.
Blimpie outlets compete principally on the basis of price, nature of
product, food quality and quality of service. In selling franchises, the Company
competes with a number of franchisors of outlets and other business concepts. In
general, there is also active competition for management personnel, as well as
for attractive commercial real estate sites suitable for outlets.
The Company is also required to respond to various consumer
preferences, tastes and eating habits; demographic trends and traffic patterns;
increases in food and labor costs; and national, regional and local economic
conditions. In the past, several quick-service restaurant companies have
experienced flat growth rates and declines in average sales per outlet, in
response to which certain of such companies have adopted "value pricing"
strategies. Such strategies could have the effect of drawing customers away from
companies that do not engage in discount pricing and could also negatively
impact the operating margins of competitors that do attempt to match
competitors' price reductions. Continuing or sustained price discounting in the
fast food industry could have an adverse effect on the Company.
The Company believes that it can differentiate itself from its
competitors in that Blimpie outlets offer freshly sliced-to-order sandwich
products, freshly made salads, freshly baked bread and bakery products which are
distinguished by use of high quality ingredients, as compared to pre-made or
pre-sliced sandwich products made with lesser quality ingredients.
EMPLOYEES
As of June 30, 1997, the Company employed 84 full-time employees
(including twelve officers). Nineteen employees (including five officers) attend
to the Company's operations/franchisee support, executive management and legal
staffing needs at the Company's New York City office; 14 employees (including
one officer) provide construction and design and operations/franchisee support
services at the Company's Houston, Texas office; and 51 employees (including six
officers) are engaged in accounting, operations/franchisee and training support,
marketing and franchise development activities at the Company's Atlanta, Georgia
office. None of the employees is covered by collective bargaining agreements.
All of the
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Company's full-time employees, including executive officers, are covered by a
health plan and the 401(k) profit sharing plan.
The Company considers its employee relations to be good. The Company
believes that it provides working conditions and pays salaries and bonuses that
compare favorably with those of its competitors.
The Company has adopted a stock incentive plan for its employees and
officers. See "Executive Compensation - Omnibus Stock Incentive Plan."
ITEM 2. PROPERTIES
The Company has its principal offices at 740 Broadway, New York, New
York, where it leases, through a wholly-owned subsidiary, 740 Broadway Top Floor
Corp., approximately 6,000 square feet of office space from an unaffiliated
landlord. The Company is guarantor with respect to the obligations of said
subsidiary under such lease. Such subsidiary pays a monthly rent of $9,800 which
is subject to escalations, plus certain utilities and other fees. The term of
such lease expires in February, 2003. The Company also leases 16,554 square feet
of office space in Atlanta, Georgia from an unaffiliated landlord, through its
wholly owned subsidiary Blimpie Capital Corporation. The monthly payments under
such lease currently approximate $17,630 and escalate to $20,389 per month
during the last year of the lease term in 2001.
The Company also subleases 3,585 square feet of office space in
Houston, Texas, on a month-to-month basis pursuant to an oral agreement with Vet
Con Management Company, Inc. ("Vet Con"), a company wholly owned by Joseph
Conza. Vet Con holds the lease relating to such office space with a landlord
unaffiliated with the Company. The Company makes monthly payments under such
sublease directly to the landlord. The monthly payments under such sublease made
by the Company are currently $3,200 and, if the Company continues to occupy the
premises pursuant to its oral sublease, may escalate to include annual common
area maintenance payments during the final three years of the lease term, which
may require moderate increased payments to the landlord for expenses incurred by
the landlord in maintaining common areas.
The Company is also the owner of a building and is the lessee of a
ground lease relating to property in Marietta, Georgia. Such building was
purchased by the Company in 1984 for $80,855 and is currently subleased to a
Blimpie franchisee for use as a Blimpie outlet. There is no mortgage on such
building.
Each franchisee is required to lease his outlet premises from a
designated wholly owned leasing subsidiary of the Company. Each leasing
subsidiary leases
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such premises from a landlord unaffiliated with the Company. See "Business -
Blimpie Outlet Properties."
ITEM 3. LEGAL PROCEEDINGS
An action was commenced against the Company in the United States
District Court for the Middle District of Florida entitled Mike Arodak v.
Blimpie International, Inc. (Civil Action No. 95-143-Civ-T-24). The plaintiff is
the holder of a license to own and operate a traditional Blimpie outlet within a
15 square mile protected area wherein no other Blimpie outlet may be located. In
1994, the Company authorized the installation of a new-concept Blimpie outlet in
a convenience store located outside of said protected area. The plaintiff has
claimed that such new-concept outlet violates his protected area rights
notwithstanding the fact that it is located more than one mile beyond the limits
of such area at a point which is inside of the protected area of another Blimpie
franchisee who has given his permission to the establishment of the new-concept
outlet at such location.
The complaint seeks damages in excess of $13 million and alleges breach
of agreement, negligent or reckless withholding of or omission to provide
material information, breach of an implied covenant and duty of good faith and
fair dealing, violations of Florida's franchise and business opportunities laws,
promissory and equitable estoppel and violations of the Federal RICO, mail fraud
and wire fraud statutes.
The Company's motion to stay the action pending arbitration in
accordance with the terms of the franchise agreement between the parties was
granted. In September 1995, the claimant filed an arbitration demand with the
American Arbitration Association in New York, New York. The Company has filed an
answer denying all of plaintiff's claims, and has interposed counterclaims
seeking money damages and termination of plaintiff's franchise agreement based
upon his breach of the terms thereof. A hearing in the matter has been scheduled
for mid-November 1997.
An arbitration proceeding has also been commenced against the Company
entitled Blimpie Food Services, Inc. v. Blimpie International, Inc. F/K/A Astor
Restaurant Group (case no. 511140041495). The claimant filed the demand for
arbitration with the Chicago, Illinois regional office of the American
Arbitration Association on November 30, 1995 and indicated that it was seeking
unspecified relief. The claimant formerly was a subfranchisor whose subfranchise
was terminated by the Company. On or about February 27, 1996, the Company sought
leave to file a counterclaim against claimant and its principal shareholder
alleging that claimant breached its subfranchise agreement and seeking a
declaration that it
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properly terminated claimant's subfranchise agreement, and indemnification for
any damages and attorneys' fees arising out of claimant's conduct in connection
with the sale of Blimpie franchises to third parties. On April 9, 1996, claimant
filed a motion for leave to amend the original arbitration demand to seek
compensatory damages in excess of $100,000, treble and punitive damages, and
attorneys' fees and costs, as well as cancellation of a promissory note executed
by claimant in connection with the purchase of the subfranchise. The Claimant's
application for leave to amend its claims, and the Company's application for
leave to interpose its counterclaim were granted by the arbitrator. Thereafter,
pre-hearing discovery and evidentiary hearings were completed. During such
hearings, the claimant quantified its claims for damages as $710,000 for lost
profits, approximately $165,000 in additional compensatory damages and
approximately $100,000 in attorney's fees and expenses. The parties are
presently engaged in the preparation of post-hearing briefs, and a decision is
expected from the arbitrator during the quarter ending December 31, 1997. The
Company believes, based upon the evidence adduced at the hearings, that
claimant's claims will be dismissed in their entirety.
In the arbitration proceeding entitled Linda and Louis Seufert v.
Blimpie International, Inc. (case no. 57-114-0072-95), the claimants were the
holders of a Blimpie franchise seeking unspecified damages in excess of $50,000
and injunctive relief based upon allegations that the Company authorized a
new-concept Blimpie outlet in a location in a Texaco station approximately 1.5
miles from claimant's location. The Company denied any liability asserting that
the new-concept Blimpie outlet was located in an entirely separate and
independent marketing area and that the franchisee was not injured as its sales
had not decreased or otherwise been affected by the new-concept Blimpie outlet.
In connection with the $204,500 award made by the arbitrator after conducting
evidentiary hearings, the Company paid $200,000 in full settlement and
satisfaction thereof, and is entitled to receive one half of the amount paid
from the subfranchisor of the claimant-franchisee.
An arbitration proceeding was commenced against the Company which is
entitled Michael J. Moran, Randall M. Besch, and Alkeny, Inc. v. Blimpie
International, Inc. (case no. 131140081696, American Arbitration Association -
New York, New York). The claimant, a Blimpie franchisee, filed a demand for
arbitration against the Company seeking damages in the amount of $290,000 for
its alleged financial harm based upon a claim that the Company breached the
franchise agreement when it allowed another Blimpie restaurant to open within 2
miles from the franchisee's restaurant. At the arbitration hearing which was
held in May 1997, the Company adduced testimony that the allegedly infringing
restaurant is located at a truck stop on an interstate highway and caters almost
exclusively to truckers who never venture into the town in which the claimant's
Blimpie restaurant is located. The arbitrator recently requested the parties to
submit post-hearing briefs. A decision is expected from the arbitrator during
the quarter ending December 31, 1997.
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The Company believes, based upon the evidence adduced at the hearings, that
claimant's claims will be dismissed in their entirety.
Ocean Shore Group, Inc. ("OSG") filed a demand for arbitration with the
New York City regional office of the American Arbitration Association entitled
Ocean Shore Group, Inc. v. Blimpie International, Inc., Foodservice, Inc. and
Jane B. Davis, (case no. 131140030996) seeking specific performance of an
alleged contract, or in lieu thereof, damages in excess of $2,000,000. In
January, 1996, the Company and OSG entered into a letter of intent with respect
to a proposed subfranchise program in which OSG sought to purchase subfranchise
rights in five counties in the Daytona Beach area in the State of Florida.
However, another subfranchisor owned the rights in one of the counties and
refused to sell those rights to OSG. Prior to entering into an agreement with
the Company, OSG filed its demand for arbitration. The Company initially
objected to the arbitration demand because there was no arbitration agreement
between the parties. However, on June 5, 1996, the Company and OSG entered into
a written subfranchise agreement for four of the five counties. The subfranchise
agreement specifically provides for all disputes to be submitted to arbitration.
On June 17, 1996, OSG filed an action against the Company in Volusia County,
Florida, raising the same claims it raised in the arbitration demand (Case No.
96-31335-CICI, Circuit Court, Seventh Judicial Circuit in and for Volusia
County, Florida). The Court granted the Company's motion to stay the proceedings
in state court pending arbitration. The Company has denied all liability and has
vigorously defended itself in the arbitration proceedings. The arbitrator has
scheduled six days of evidentiary hearings, two of which were held in September
1997. A decision in the matter is expected during the quarter ending December
31, 1997.
Two arbitration proceedings were commenced against the Company which are
entitled Jac J. Howard and Bonnie Howard - and - Blimpie International, Inc.
(case no. 511140014095 American Arbitration Association, Chicago, Illinois) and
Timothy J. Markham and Sophie Radlowski - and - Blimpie International, Inc.
(case no. 51114004797 American Arbitration Association, Chicago, Illinois). Both
proceedings involve claimants who are franchisees who formerly operated a
Blimpie franchise in Bloomington, Illinois and Carol Stream, Illinois,
respectively. Both claims allege that the Company has violated (i) the Illinois
Consumer Fraud and Deceptive Business Practices Act, (ii) the Illinois Franchise
Disclosure Act and (iii) the Racketeer Influenced and Corrupt Organizations Act.
Claims of common law fraud in connection with the purchase of the franchises, as
well as claims for breach of written and oral contract based on the Company's
alleged failure to provide operational and other support and assistance to the
claimants are also alleged. Both arbitration demands seek compensatory damages
in an unspecified amount and treble damages for alleged violations of the RICO
statute. However, the claimants in each proceeding have disclosed that they have
suffered damages of approximately $100,000. The Company has denied all
liability, and is vigorously defending itself. It
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anticipates that evidentiary hearings will be held in both proceedings during
the quarter ending March 31, 1998 or thereafter.
It is the opinion of management that the liability, if any, arising
from all pending claims and lawsuits will not have a material adverse impact
upon the Company's consolidated earnings or financial position.
ITEM 3A. EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information concerning all
executive officers of the Company. Executive officers are elected by the Board
of Directors to serve at the pleasure of the Board.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Anthony P. Conza 57 President and Chief Executive Officer
David L. Siegel 53 Chief Operating Officer and General Counsel
Patrick J. Pompeo 58 Executive Vice President, Research and
Development
Charles G. Leaness 47 Executive Vice President - Senior Corporate
Counsel and Secretary
Dennis G. Fuller 50 Senior Vice President-Global Development
Joseph A. Conza 43 Senior Vice President - Equipment and Design
Services
Robert S. Sitkoff 44 Senior Vice President, CFO and Treasurer
Joseph Morgan 35 Senior Vice President - Strategic Planning
Bruce A. Kolbinsky 36 Vice President - Operations
Arthur Mancino 48 Vice President - New Business
Rebecca Killarney 40 Vice President - Marketing
Sharon Henderson 33 Vice President - Finance
</TABLE>
27
<PAGE> 28
Mr. Anthony P. Conza, together with two individuals who are not
affiliated with the Company, originally created the Blimpie concept in 1964. He
is one of the original founders of the Blimpie outlet chain, and is a co-founder
of the Company. He has been Chairman of the Board of Directors, President and
Chief Executive Officer of the Company since the Company commenced business
operations in 1977. In 1992, "the Entrepreneur of the Year" for New York, an
award sponsored by Ernst & Young, Merrill Lynch and Inc. Magazine, was presented
to Mr. Conza. In the same year, he was also named Chain Operator of the Year by
the New York State Restaurant Association. He is a member of the Board of the
Jose Limon Dance Company, a member of the Board of Governors of The Boys & Girls
Clubs of America and he serves on the Dean's Council at Harvard University's JFK
School of Government. Mr. Conza is the brother of Joseph A. Conza, the
brother-in-law of Patrick Pompeo and the father-in-law of Joseph Morgan.
Mr. Siegel, one of the co-founders of the Company, served as the
Company's Executive Vice President and General Counsel and as a member of its
Board of Directors since its formation in 1977. In September 1995, he was
appointed as the Company's Vice Chairman of the Board, Chief Operating Officer
and General Counsel. He also served as the Company's Treasurer from 1977 until
January, 1991. He is also a practicing attorney in the City of New York. Mr.
Siegel received a Bachelor of Arts degree in 1965 from Marietta College, a Juris
Doctor Degree in 1968 from New York University School of Law and a Master of
Laws Degree in 1970 from New York University School of Law. During the past five
years, Mr. Siegel has also served as an officer of each of the Company's leasing
subsidiaries.
Mr. Pompeo has served as a director and Senior Vice President in charge
of operations since the time of commencement of the Company's business
operations in 1977. In September 1995, he became Executive Vice President of
Research Development and Procurement. Mr. Pompeo was employed for 16 years as a
floor supervisor by E.F. Hutton & Co., the former New York Stock Exchange member
firm. Mr. Pompeo is also a principal shareholder, officer and director of
Georgia Enterprises, Inc., the Company's Subfranchisor for the State of Georgia.
Mr. Pompeo is the brother-in-law of Anthony Conza.
Mr. Leaness has been a member of the Company's Board of Directors since
the Company commenced business operations, and served as the Company's Senior
Vice President-Corporate Counsel for more than the past five years. In
September, 1995, he became an Executive Vice President. Mr. Leaness is also a
principal shareholder, officer and director of Llewellyn Distributors, Inc., the
Company's Subfranchisor for a part of New Jersey. Mr. Leaness received a
Bachelor of Arts degree from Tulane University in 1972 and a Juris Doctor degree
from New York Law School in 1982. Mr. Leaness is a practicing attorney in New
York State. He currently serves as Director of the New York State Restaurant
Association and is
28
<PAGE> 29
President of the New York City Chapter. Mr. Leaness also serves on the Board of
Directors of the International Franchise Association (IFA).
Mr. Fuller was appointed Senior Vice President of Global Development in
September 1995 after serving as our Vice President of Franchise Development
since October 1991 and Director of Franchise Sales since January 1990. Mr.
Fuller is located in our Atlanta office.
Mr. Joseph A. Conza held the position of Vice President-Construction
and Design from February 1, 1991 through August 1995. In September 1995, he was
appointed Senior Vice President - Equipment and Design Services. From 1986
through his appointment as one of the Company's Vice Presidents, Mr. Conza was
employed as President of Lone Star Blimpie, Inc. He has also served as President
of International Southwest Blimpie, Inc. since 1990. Mr. Conza is also a
principal shareholder, officer and director of International Southwest Blimpie,
Inc., the Company's Subfranchisor for the Harris County (Houston), Texas market.
Mr. Conza also owns 45% of Georgia Enterprises, Inc., the Company's
Subfranchisor for the State of Georgia. Mr. Conza is the brother of Anthony P.
Conza.
Mr. Sitkoff served as a Vice President, Treasurer and Chief Financial
Officer of the Company from January 1991 through August 1995. In September 1995,
he was appointed Senior Vice President, Treasurer and Chief Financial Officer.
Between 1980 and 1985, he was self-employed as a distributor for Pepperidge
Farms' Biscuit Division. Between 1986 and 1988, he was a principal shareholder
and President of Blimpie of Central Florida, Inc., the Company's Subfranchisor
for the Orlando, Florida market. From 1989 through 1990 he was employed as
Controller of the Company. Mr. Sitkoff received a B.S. degree in Industrial
Management from Georgia Institute of Technology in 1974.
Mr. Morgan joined the Company in 1992 in the capacity as a corporate
counsel. From 1994 through August 1995, he served as the Company's director of
strategic planning. In September 1995, he was appointed as Vice President of
Strategic Planning and in December 1996 he was appointed to Senior Vice
President of Strategic Planning. During the three year period prior to joining
the Company, Mr. Morgan attended the University of Miami School of Law, and
received a J.D. degree from said institution in June 1992.
Mr. Kolbinsky has been Vice President-Operations since July 1994. Since
joining the Company in October, 1990, Mr. Kolbinsky has held the positions of
National Training Director and National Director of Operations. After graduating
from The University of North Carolina Chapel Hill in 1983 with a Bachelor of
Arts in Business Administration, Mr. Kolbinsky became a supervisor for Domino's
Pizza. Over the next six years he rose through the corporate ranks to the
position of South Eastern Operations Director in 1988, a position he held until
1989. During
29
<PAGE> 30
1989 and 1990, Mr. Kolbinsky operated several Subway(R) submarine sandwich
franchise outlets.
Mr. Mancino was elected Vice President of New Business in August 1995
after serving as Blimpie's Director of New Concepts since August 1993. In this
capacity he oversees development of new business opportunities in the various
new-concept areas such as petroleum, education, healthcare, and the like. Mr.
Mancino joined Blimpie as a salesperson in April 1992. From April 1990 to March
1992, Mr. Mancino was the Director of Franchising for EBC Franchise Group, Inc.
and from July 1988 to May 1990, Mr. Mancino was Vice President of Integrated
Concepts Corporation, a Burger King Franchisee.
Ms. Killarney was appointed Vice President of Marketing in December of
1995. Upon joining the Company in June of 1991 she served as Director of
Marketing. Prior to joining Blimpie Ms. Killarney worked for Hardee's Food
Systems, Inc. in a Field Marketing capacity. Ms. Killarney works with the Boys &
Girls Clubs of America on their National Marketing Committee.
Ms. Henderson was appointed Vice President of Finance in December 1996.
Since joining the Company in April 1992, Ms. Henderson has held the positions of
accountant and Controller, and most recently, Assistant Vice President and
Assistant Treasurer. Ms. Henderson worked for Futren Corp. as a staff accountant
from 1988 to 1992. She received a B.B.A. (Accounting) from Kennesaw State
University in 1987.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of its fiscal year ended June 30, 1997.
30
<PAGE> 31
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The quarter by quarter ranges of the high, low and closing prices of
the Company's Common Stock on the Nasdaq National Stock Market during the fiscal
years ended June 30, 1996 and 1997 were, as follows:
<TABLE>
<CAPTION>
Quarter-End High Low Close
----------- ---- --- -----
<S> <C> <C> <C>
9/95 $12.125 $ 6.125 $10.875
12/95 13.125 9.125 11.125
3/96 12.750 10.625 11.250
6/96 16.000 10.750 14.625
9/96 15.625 10.625 12.750
12/96 13.250 10.000 10.375
3/97 10.875 6.625 7.000
6/97 7.750 5.375 5.500
</TABLE>
As of September 22, 1997, there were 524 holders of record of the
Company's Common Stock.
The Company paid its first cash dividends on its Common Stock in the
amount of $.025 per share during its fiscal year ended June 30, 1993 ($.017 per
share as adjusted for a 3:2 stock split effected during the fiscal year ended
June 30, 1994 (the "1994 Stock Split"). During the fiscal years ended June 30,
1994, 1995, 1996, and 1997 the Company paid cash dividends aggregating $.03
($.02 as adjusted for the 1994 Stock Split), $.05, $.06 and $.07 per share,
respectively. The Company presently intends to pay dividends in or about October
of each year, subject to such factors as earnings levels, anticipated capital
requirements, the operating and financial condition of the Company and other
factors deemed relevant by the Board of Directors.
During the fiscal years ended June 30, 1995, 1996 and 1997, the Company
did not sell any securities which were not registered under the Securities Act
of 1933.
31
<PAGE> 32
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
--------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in 000's, Except Per Share and Outlets Open Data)
<S> <C> <C> <C> <C> <C>
Revenues $38,127 $34,991 $26,374 $16,090 $11,800
Continuing Fees 15,391 12,465 8,734 6,017 4,310
Net Income 3,278 4,040 2,340 1,383 1,049
Primary Earnings Per Share $ 0.34 $ 0.43 $ 0.27 $ 0.16 $ 0.14
Fully Diluted Earnings Per Share $ 0.34 $ 0.41 $ 0.27 $ 0.16 $ 0.14
Total Assets $27,704 $21,823 $15,252 $11,170 $ 7,876
Long Term Debt -0- 5 13 19 24
Long Term Trademark Obligations 3,509 -0- -0- -0- -0-
Total Shareholders' Equity 18,865 15,675 7,308 5,311 3,376
Cash Dividends Declared Per Common Share $ 0.07 $ 0.06 $ 0.05 $ 0.02* $ 0.17*
Outlets Open 1,684 1,407 986 674 499
</TABLE>
- ----------
* Adjusted to account for three for two stock split implemented in March 1994.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FISCAL YEAR ENDED JUNE 30, 1997 COMPARED WITH FISCAL YEAR ENDED JUNE 30, 1996.
RESULTS OF OPERATIONS
The Company's net income decreased 19% to $3,277,994 for the twelve
months ended June 30, 1997 from $4,040,275 for the twelve months ended June 30,
1996. The Company's primary earnings per share decreased 21% to $.34 per share
for the twelve months ended June 30, 1997 from $.43 per share for the twelve
months ended June 30, 1996, while during the same periods, the Company`s fully
diluted earnings per share decreased 17% to $.34 per share from $.41 per share.
Such
32
<PAGE> 33
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 23% to $15,287,457 for the twelve months ended June 30, 1997 from
$12,441,768 for the twelve months ended June 30, 1996. Continuing fees derived
from international franchises increased during the twelve months ended June 30,
1997 to $103,342 from $22,734 during comparable period of fiscal 1996. 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 twelve month period ended June 30, 1997, the Company
experienced decreases in revenue from total subfranchise fees and franchise fees
recognized. 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 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.
33
<PAGE> 34
Revenue from subfranchise, master license and franchise fees for the
twelve months ended June 30, 1997 decreased 14% to $6,515,699 from $7,604,787
for the same period ended 1996. The following table sets forth an analysis of
the components of such fees.
<TABLE>
<CAPTION>
Twelve Months Ended June 30,
1997 1996
---------- ----------
<S> <C> <C>
SUBFRANCHISE FEES - DOMESTIC:
New Subfranchise Grants $ -0- $ 488,580
Existing Subfranchise Expansions 323,570 167,738
Principal Payments Recognized on Deferred
Subfranchise Notes 76,070 220,664
Annual Renewal Term Payments Recognized 310,665 334,372
Deferred Subfranchise Fees Recognized 258,749 955,449
---------- ----------
TOTAL SUBFRANCHISE FEES $ 969,054 $2,166,803
========== ==========
MASTER LICENSE FEES - INTERNATIONAL:
New Master License Grants $ 864,093 $ 472,157
Lump Sum Payments Recognized in Current
Fiscal Year 504,200 497,150
---------- ----------
TOTAL MASTER LICENSE FEES $1,368,293 $ 969,307
========== ==========
FRANCHISE FEES RECOGNIZED:
Domestic $4,135,544 $4,468,677
International 42,808 -0-
---------- ----------
TOTAL FRANCHISE FEES $4,178,352 $4,468,677
========== ==========
TOTAL SUBFRANCHISE, MASTER
LICENSE & FRANCHISE FEES $6,515,699 $7,604,787
========== ==========
</TABLE>
Total revenue from subfranchise fees decreased 55% to $969,054 for the
twelve months ended June 30, 1997 from $2,166,803 for the twelve months ended
June 30, 1996.
During the twelve month period ended June 30, 1997, the Company neither
granted nor derived any revenue from any new domestic subfranchises, compared to
the same period ended June 30, 1996 in which the Company granted nine domestic
subfranchises and received $488,580 in initial subfranchise fees. Three of the
nine domestic subfranchises provide for five or seven annual renewal term
options, and if all of such options were to be exercised, the Company would
receive additional subfranchise fee revenues aggregating $338,709. This decrease
resulted
34
<PAGE> 35
from the substantial achievement of the Company's goal of saturating the
domestic market with subfranchises. During the twelve months ended June 30,
1997, 16 domestic subfranchisors expanded and the Company received $323,570 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 twelve
months ended June 30, 1996, nine domestic subfranchisors expanded and the
Company received $167,738 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 twelve months ended June 30, 1997, the Company
recognized $76,070 in principal payments received on deferred subfranchise notes
due from existing subfranchisors and recognized $310,665 in annual renewal term
options exercised by 25 subfranchisors, as compared to $220,664 recognized in
principal payments received on deferred subfranchise notes and $334,372
recognized in annual renewal term options exercised by 20 subfranchisors during
the twelve months ended June 30, 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 twelve months ended
June 30, 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
twelve months ended June 30, 1997, the Company granted development rights for
Argentina, Uruguay, Saudi Arabia, United Arab Emirates, Bahrain, Oman, Qatar,
Kuwait, Greece, Cyprus, Venezuela, Peru, South Africa, Ontario, Poland, Northern
Ireland and the Republic of Ireland, and received master license fees with
respect to such agreements totaling $864,093. Three of these master license
agreements provide for various lump sums totaling $603,106 due in fiscal 1997,
1998, 1999 and 2000. During the twelve month period ended June 30, 1996, the
Company granted seven master licenses and received $472,157 in master license
fees in connection therewith. During the twelve months ended June 30, 1997,
$504,200 in lump sum payments due in fiscal 1997, was recognized in accordance
with nine master license agreements, as compared to the twelve months ended June
30, 1996 in which
35
<PAGE> 36
$497,150 in lump sum payments due, was recognized in accordance with two master
license agreements. As of June 30, 1997 there were five Blimpie outlets and 28
Grab 'n Go locations operating in Sweden, two outlets in Spain, four in the
United Kingdom, two in Argentina and four in Canada.
Total domestic franchise fees recognized decreased 7% to $4,135,544 for
the twelve months ended June 30, 1997 from $4,468,677 for the twelve months
ended June 30, 1996. This decrease is attributable to the decrease to 413
outlets (169 traditional and 244 new-concept) opened during the twelve months
ended June 30, 1997, from 468 outlets (171 traditional and 297 new-concept)
opened during the comparable period ended 1996. This decrease in franchise fees
recognized is 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
$42,808 in franchise fees from the opening of thirteen international outlets
during the twelve month period ended June 30, 1997, while for the same period
ended 1996, the Company did not derive any revenue from the opening of five
international outlets.
Store equipment sales to domestic franchises increased 7% to
$14,425,107 during the twelve month period ended June 30, 1997 from $13,424,298
for same period ended 1996. During these same periods, store equipment sales to
international franchises increased $509,737 from $78,824. These increases were
attributable to the 32% increase in orders processed by the Company's equipment
sales department to 2014 orders processed during the twelve month period ended
June 30, 1997 from 1527 orders processed during the same period ended 1996. Due
to the success and experience obtained from selling equipment to Blimpie
franchisees, the Company has decided to expand the equipment sales department in
Houston in order to sell equipment to franchisees of other chains. The Company
believes this expansion will increase revenue and in turn the net income,
however no assurances can be given that this expansion will generate increased
revenue or net income.
Management fees and other income for the twelve months ended June 30,
1997 decreased 9% to $1,285,657 from $1,418,971 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, therefore the fees the Company was receiving for reimbursement of a
portion of office expenses decreased.
The Subfranchisors' shares of continuing and franchise fees increased
22% to $9,777,740 for the twelve months ended June 30, 1997 from $7,994,170 for
the same period ended 1996. The following table sets forth an analysis of the
components of such fees.
36
<PAGE> 37
<TABLE>
<CAPTION>
Twelve Months Ended June 30,
1997 1996
---------- ----------
<S> <C> <C>
SUBFRANCHISORS / MASTER LICENSORS
SHARE OF CONTINUING FEES:
Domestic $7,497,208 $6,017,314
International 47,731 10,216
---------- ----------
TOTAL SUBFRANCHISORS/MASTER
LICENSORS SHARE OF CONTINU-
ING FEES $7,544,939 $6,027,530
========== ==========
SUBFRANCHISORS/ MASTER LICENSORS
SHARES OF FRANCHISE FEES:
Domestic $1,120,586 $1,191,903
International 9,826 -0-
---------- ----------
TOTAL SUBFRANCHISORS SHARE OF
FRANCHISE FEES $1,130,412 $1,191,903
========== ==========
TRADEMARK LICENSE FEES ON CONTINUING,
FRANCHISE, MASTER LICENSE &
SUBFRANCHISE FEES:
Domestic $ 630,683 $ 582,045
International 471,706 192,692
---------- ----------
TOTAL TRADEMARK LICENSE FEES ON
CONTINUING, FRANCHISE, MASTER
LICENSE & SUBFRANCHISE FEES $1,102,389 $ 774,737
========== ==========
TOTAL SUBFRANCHISORS / MASTER
LICENSORS SHARE OF CONTINUING &
FRANCHISE FEES AND TRADEMARK
LICENSE FEES ON CONTINUING,
FRANCHISE, MASTER LICENSE &
SUBFRANCHISE FEES $9,777,740 $7,994,170
========== ==========
</TABLE>
The subfranchisors' total share of domestic continuing fees increased
25% to $7,497,208 for the twelve months ended June 30, 1997 from $6,017,314 for
the same period ended 1996. The master licensors' share of international
continuing fees increased to $47,731 during the twelve month period ended June
30, 1997 from
37
<PAGE> 38
$10,216 during the comparable period in 1996. This increase is directly related
to the increase in the revenue derived from continuing fees.
By reason of the above-mentioned decrease in domestic franchise fees
for the twelve months ended June 30, 1997, the subfranchisors share thereof
decreased 6% to $1,120,586 for the twelve months ended June 30, 1997 from
$1,191,903 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 8% to $630,683 for the twelve months ended June
30, 1997 from $582,045 for the same period ended 1996. Such increase is 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 increased to $471,706 during the
twelve months ended June 30, 1997 from $192,692 during the comparable period of
1996 due to the overall increase in international revenue.
Store equipment cost of sales to domestic franchisees increased 3% to
$12,575,514 for the twelve month period ended June 30, 1997 from $12,200,024 for
the same period ended 1996. During this same twelve month period, store
equipment cost of sales to international franchisees increased to $448,569 from
$70,841. These increases are directly attributable to the increase in store
equipment sales to domestic and international franchisees.
Selling, general and administrative expense rose 19% to $10,917,566 for
the twelve month period ended June 30, 1997 from $9,203,507 for the same period
ended 1996. This increase is directly related to the continuing expansion of the
Company's workforce 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 franchisees and master licensors, and the increasing
size of subfranchisors. In addition, the increase reflects a 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 I
Litigation Proceedings.
Interest income for the twelve months ended June 30, 1997 decreased by
12% to $889,535 from $1,015,112 for the comparable period ended 1996. This
decrease was 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
38
<PAGE> 39
in February 1997. See "Business - Trademarks, Trade Names, Service Marks and
Logos; Know-How and Methods of Operation."
The effective income tax rates (income taxes expressed as a percentage
of pre-tax income) were 38.1% and 38.2% for the twelve months ended June 30,
1997 and 1996, respectively.
For the twelve months ended June 30, 1997, cash and cash equivalents
decreased by 18% to $3,532,339 from $4,328,468 at June 30, 1996. Investments
under current assets decreased 18% to $4,462,253 from $5,430,950 at June 30,
1996. Investments under other assets decreased 36% to $3,877,827 from $6,016,014
at June 30, 1996. Trademarks less accumulated amortization increased to
$8,704,472 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 43% to $2,084,825 at June 30, 1997 from $1,455,986 at June 30, 1996.
Deferred revenue decreased 21% as at the same dates, respectively, to $1,325,146
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.
Deferred income taxes in current assets and deferred income taxes
payable in other liabilities decreased to $0 at June 30, 1997 from $189,000 and
$343,000, respectively, at June 30, 1996. Deferred income taxes in other assets
and deferred income taxes payable in current liabilities both increased to
$76,000 and $115,000,
39
<PAGE> 40
respectively, from $0 at June 30, 1996. These decreases and increases resulted
from the decreases in deferred revenue and the difference in amortization
periods for financial accounting purposes, as opposed to tax purposes,
applicable to the international trademark purchase consummated in February 1997.
The Company's current portion of notes receivable increased 84% to
$985,772 at June 30, 1997 from $535,163 at June 30, 1996. This was the result of
the fact that several master licensors have lump sum payments due in fiscal
1998, therefore these amounts were moved from notes receivable under other
assets to current portion of notes receivable.
The Company's property, plant and equipment less accumulated
depreciation, increased 29% to $1,253,003 at June 30, 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 82% to $507,633 at June 30, 1997
from $279,386 at June 30, 1996. This increase primarily resulted from the
Company's purchase of a new accounting software package.
The Company's accounts payable increased 30% to $3,518,657 at June 30,
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 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 June 30, 1997 decreased to $7,676 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, and the decrease in net income.
The payment of fiscal year end 1996 bonuses to employees that had been
accrued at June 30, 1996, resulted in the 58% decrease in other current
liabilities to $358,951 at June 30, 1997 from $851,687 at June 30, 1996.
Trademark obligations increased to $3,508,594 at June 30, 1997 from $0
at June 30, 1996. Such increase resulted from the recordation of the aggregate
value of the remaining shares of Common Stock issuable by the Company in
connection with its acquisition of the Canadian rights to the Blimpie trademarks
in October 1995 from
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<PAGE> 41
an unaffiliated party. Such increases also resulted from the recordation of the
additional fees payable to Anthony P. Conza and David L. Siegel in connection
with the February 1997 acquisition of the undivided 60% interest in the
international rights to the Blimpie trademarks and Blimpie marketing system
which they respectively owned. See "Business -- Trademarks, Trade Names, Service
Marks and Logos; Know-How and Methods of Operation" and the Footnotes to the
Company's audited financial statements appearing elsewhere herein.
During the twelve months ended June 30, 1997, 413 domestic Blimpie
franchise outlets opened (169 traditional outlets and 244 new-concept outlets)
in the following states: Alabama (7); Alaska (2); Arizona (17); Arkansas (1);
California (16); Colorado (5); Connecticut (2); Florida (41); Georgia (24);
Hawaii (1); Idaho (2); Illinois (10); Indiana (13); Iowa (8); Kansas (3);
Kentucky (7); Louisiana (12); Maine (2); Massachusetts (2); Michigan (11);
Minnesota (13); Mississippi (2); Missouri (17); Montana (3); Nebraska (7);
Nevada (9); New Hampshire (1); New Jersey (3); New Mexico (6); New York (20);
North Carolina (19); North Dakota (2); Ohio (25); Oklahoma (2); Oregon (5);
Pennsylvania (11); Rhode Island (2); South Carolina (12); South Dakota (2);
Tennessee (15); Texas (21); Utah (3); Washington (5); West Virginia (7);
Wisconsin (11); and Wyoming (4). During the same period, 13 international
Blimpie franchise outlets opened (10 traditional outlets and 3 new-concept
outlets) in the following areas: Argentina (2); Canada (4); Spain (2); Sweden
(1); and United Kingdom (4). By comparison, during the twelve months ended June
30, 1996, 468 domestic and 5 international Blimpie franchise outlets opened (173
traditional outlets and 300 new-concept outlets). During the twelve months ended
June 30, 1997, 151 domestic Blimpie franchise outlets closed (75 traditional
outlets and 76 new-concept outlets) in the following states: Alabama (2);
Arizona (2); California (3); Colorado (6); Connecticut (1); Florida (17);
Georgia (6); Hawaii (4); Idaho (2); Illinois (5); Indiana (2); Iowa (6); Kansas
(4); Kentucky (4); Massachusetts (4); Michigan (8); Minnesota (3); Missouri (4);
Nebraska (1); Nevada (1); New Jersey (6); New York (6); North Carolina (8);
North Dakota (1); Ohio (1); South Carolina (5); South Dakota (1); Tennessee (2);
Texas (28); Utah (3); Washington (2); and West Virginia (3). By comparison,
during the same period ended 1996, 62 domestic Blimpie franchise outlets closed
(48 traditional outlets and 14 new-concept outlets). During the twelve months
ended June 30, 1997, three closed domestic Blimpie franchise outlets reopened
in: Idaho (1); Michigan (1); and Texas (1). By comparison, during the same
period ended 1996, 10 closed domestic Blimpie franchise outlets reopened.
During the twelve months ended June 30, 1997, the Company received
$3,193,006 from the granting of 602 domestic individual outlet franchises (239
traditional franchises and 363 new-concept franchises) in the following states:
Alabama (11); Alaska (3); Arizona (21); Arkansas (1); California (30); Colorado
(7); Connecticut (4); Florida (53); Georgia (51); Hawaii (2); Idaho (5);
Illinois (8); Indiana (13); Iowa (14); Kansas (1); Kentucky (5); Louisiana (16);
Maine (3); Massachusetts (5);
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<PAGE> 42
Michigan (21); Minnesota (20); Mississippi (4); Missouri (22); Montana (4);
Nebraska (5); Nevada (6); New Hampshire (1); New Jersey (3); New Mexico (1); New
York (37); North Carolina (37); North Dakota (1); Ohio (39); Oklahoma (1);
Oregon (7); Pennsylvania (31); Rhode Island (6); South Carolina (18); South
Dakota (2); Tennessee (19); Texas (32); Utah (5); Washington (5); Wisconsin
(20); and Wyoming (2). During the same period ended, the Company received
$284,559 from the granting of 30 international individual outlet franchises (29
traditional franchises and 1 new-concept franchise) in the following
territories: Argentina (2); Canada (12); Cyprus (1); Spain (3); Sweden (1); and
United Kingdom (11). By comparison, during the twelve months ended June 30,
1996, the Company received $3,881,419 from the granting of 769 domestic
individual outlet franchises (291 traditional franchises and 478 new-concept
franchises), and did not derive any revenue from the granting of 5 international
individual outlet franchises (2 traditional franchises and 3 new-concept
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 602 domestic individual outlet franchises granted during the
twelve months ended June 30, 1997, 41 were at this reduced price.
FISCAL YEAR ENDED JUNE 30, 1996 COMPARED WITH FISCAL YEAR ENDED JUNE 30, 1995.
The Company's net income increased 73% to $4,040,275 for the Fiscal
Year ended June 30, 1996 from $2,339,916 for the Fiscal Year ended June 30,
1995. The Company's primary earnings per share increased 59% to $.43 per share
for the Fiscal Year ended June 30, 1996 from $.27 per share for the prior year.
During these same periods, the Company's fully diluted earnings per share
increased 52% to $.41 per share from $.27 per share. Such increases are
attributable to the increases discussed below in continuing fees, store
equipment sales, interest income and master license fees.
The Company's continuing fees derived from domestic franchises
increased 43% to $12,441,768 for the Fiscal Year ended June 30, 1996 from
$8,733,568 for the prior year. During those respective periods, revenues from
the granting of domestic franchises and subfranchises increased 21% to
$6,573,405 from $5,409,176 and the subfranchisors' share of such franchise and
continuing fees increased 48% to $7,983,954 from $5,394,692. These increases are
directly attributable to the greater number of franchised outlets that were
opened, and the increase in matured subfranchise territories, resulting in the
recognition of deferred subfranchise fees. While the recognition of deferred
subfranchise fees caused an increase in subfranchise fee revenue, the number of
new subfranchises granted and the revenue received from those grants, decreased.
This decrease is a direct result of the fact that the Company has almost reached
its goal of saturating the major markets of the Untied States with
subfranchises, inasmuch as 90% of the major U.S. markets
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<PAGE> 43
have been awarded. During the Fiscal Year ended June 30, 1996, the Company
granted 9 domestic subfranchises covering the territories of Northeast
Tennessee, Central California, Southern Florida, Northern Wyoming, Northern
Florida, Milwaukee, Southwest Florida, Northern Alabama and Central Florida and
received in connection therewith initial subfranchise fees aggregating $528,580.
Such subfranchises provide for five or seven annual renewal term options, and if
all of such options were to be exercised, the Company would receive additional
subfranchise fee revenues aggregating $338,709. By comparison, during the Fiscal
Year ended June 30, 1995, the Company granted 20 domestic subfranchises and
received initial subfranchise fees aggregating $829,935 in cash and $259,014 in
principal amount of long term notes. In addition, during fiscal 1996, the
Company received $185,681 in principal payments on long term notes due from
existing subfranchisors as compared to $407,595 received in fiscal 1995. In
connection with a goal set by the Company at the beginning of fiscal 1996 to
expand the introduction of individual Blimpie franchised outlets beyond the
major population centers located in existing subfranchise territories, many of
the Company's subfranchisors have expanded their territories. The Company
believes that such expansion will generate additional subfranchise fees and
individual Blimpie outlet growth, which would in turn generate increases in
franchise fees and continuing fees, as subfranchisors continue to renew their
subfranchise agreements with the Company. However, no assurances can be given
that such subfranchisor expansion activity will continue, or if it does, that it
will result in material increments in revenue. During the Fiscal Year ended June
30, 1996, 9 domestic subfranchisors expanded and the Company received $148,314
in initial subfranchise fees in connection therewith. If all renewal term
options on such expansions were to be exercised, the Company would receive
additional subfranchise fee revenues aggregating $145,673. By comparison during
fiscal 1995, 11 domestic subfranchisors expanded and the Company received
$202,221 in initial subfranchise fees and $5,000 in principal amount of long
term notes.
Having substantially achieved its goal of saturating the domestic
market with subfranchises, as discussed above, the Company placed greater
emphasis on its prospects in the international market during fiscal 1995, and
consummated the first agreement for the establishment of Blimpie outlets in
Sweden in June 1995. Currently there are 3 Blimpie outlets and 23 Grab `n Go
locations operating in Sweden. During the Fiscal Year ended June 30, 1996, the
Company granted rights for the development of Spain which led to the opening of
the first Blimpie outlet in Spain on March 25, 1996. During the Fiscal Year
ended June 30, 1996, the Company also granted development rights for the United
Kingdom, Egypt, Lebanon, Jordan, Dominican Republic, Australia and the Canadian
provinces of Alberta, and British Columbia. These grants generated $534,232 in
initial fees. One of the international grants provides for 7 annual renewal term
options, and if all of such options were to be exercised, the Company would
receive additional fees aggregating $157,637. The other international grants
provide for annual renewal term options with various lump sums due on various
dates. During the fiscal year ended June 30, 1996, there
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<PAGE> 44
were $497,150 of lump sum payments due, all of which have been received. There
are $262,500 and $87,000 due in lump sum payments during fiscal 1997 and 1998
respectively. The Company will continue to aggressively pursue the international
market to mirror the success it has achieved in the United States. The Company's
continuing fees derived from its outlets in Sweden and Spain increased to
$22,734 for the Fiscal Year ended June 30, 1996 from $0 for the prior year, and
the international developers' share of these continuing fees increased to
$10,216 from $0 for the same periods.
Store equipment sales to domestic franchises increased 19% to
$13,424,298 for the Fiscal Year ended June 30, 1996 from $11,286,096 for the
prior year. During such respective periods, the cost of acquisition of store
equipment for domestic franchises increased 21% to $12,200,024 from $10,084,525.
In addition, during these same periods, store equipment sales to international
franchises increased to $78,824 from $0, and the cost of acquisition of said
equipment increased to $70,841 from $0. These increases were attributable to the
10% increase in orders processed by the Company's equipment sales department
(due to the greater number of Blimpie franchised outlets under construction) to
1,150 orders processed during the Fiscal Year ended June 30, 1996 from 1,046
orders processed during the prior year.
Increases in the compensation received for providing operational,
marketing and staff support to various subfranchisors resulted in the Company's
management fees and other income increasing 50% to $1,418,971 for the Fiscal
Year ended June 30, 1996 from $945,174 during the prior year.
Selling, general and administrative expenses rose 22% to $9,203,507 for
the Fiscal Year ended June 30, 1996 from $7,545,041 for the prior year. These
increases are attributed to the continued expansion of the Company's workforce,
which increased to 92 employees from 67, and increases in office and travel
expenses incurred in order to provide support services to the increasing number
of subfranchisors, franchisees, and master licensors.
As a result of the availability of greater amounts of funds for
investment and the interest collected on notes receivable, the Company's
interest income increased 76% to $1,015,112 during the Fiscal Year ended June
30, 1996 from $578,010 during the prior year.
The effective income tax rate (income taxes expressed as a percentage
of pre-tax income) was 38.2% and 40.4% for the Fiscal Year ended June 30, 1996
and 1995, respectively.
As a result of the increase in revenues, the Company's cash and cash
equivalents increased 10% to $4,328,468 at June 30, 1996 from $3,922,173 at the
prior year end.
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<PAGE> 45
The Company's investments under current assets increased 147% to
$5,430,950 at June 30, 1996 from $2,197,793 at the prior year end. During these
same periods, investments under other assets increased 44% to $6,016,014 from
$4,193,499. The overall increase in investments was a direct result of the cash
available from the common stock offering hereinbelow discussed, and the
Company's profitability.
Current accounts receivable, less allowance for doubtful accounts,
increased 110% to $1,455,986 at June 30, 1996 from $692,846 at the prior year
end. During these same periods, the current portion of notes receivable
decreased 8% to $535,163 from $583,205, the non-current portion of notes
receivable, less allowance for doubtful accounts, decreased 25% to $1,495,684
from $1,983,594, and deferred revenue decreased 36% to $1,678,918 from
$2,638,019. Said increase and decreases were the direct result of a policy the
Company implemented during fiscal 1995, of issuing annual renewable subfranchise
agreements. Prior to implementation of such policy, the Company issued a 50 to
60 year subfranchise in exchange for a one time fee or note receivable, and the
revenue was recognized when all material services and conditions related to the
sale were satisfied by the Company. However, if the 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. The new
agreements require the subfranchisor to purchase the territory for a one year
period, followed by four to six renewal terms, all but the last of which are
annual in duration. If all terms and conditions of the agreement have been met
during the initial one year term and each of the subsequent one year renewal
terms, a 50 to 60 year right is granted during the final renewal term upon
payment of the fee set forth in the agreement. 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, this number will continue to decline in the future as some
old subfranchise agreements are replaced with the new agreement, upon the
subfranchisor's request, and the new agreements have been used on all
subfranchise sales since November 1994.
The increase in deferred income taxes in current assets to $189,000,
the increase in deferred income taxes in other liabilities to $343,000, and the
decrease in both deferred income taxes in other assets and deferred income taxes
payable in current liabilities to $0 were the direct result of a change in
accounting method authorized by the Internal Revenue Service during fiscal 1995,
related to the recognition, for tax purposes, of subfranchisor and franchise
revenue and related expenses. The total revenue less related expenses of
$3,516,000 is being recognized, for tax purposes, over a six year period in
equal annual installments of $586,000, beginning with Fiscal Year 1995. During
the Fiscal Year ended June 30, 1996, $925,000 in deferred subfranchise revenue
and $205,000 in principal payments on long term
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<PAGE> 46
notes due from existing subfranchisors was recognized for financial accounting
purposes, while $586,000 was recognized for tax purposes. At June 30, 1996, the
remaining balance of the revenue to be recognized for tax purposes was
$2,344,000.
The Company's property, plant and equipment increased 40% to $972,251
at June 30, 1996 from $692,579 at the prior year end. This increase resulted
from the modernization and computerization of the Company's offices.
Trademarks increased to $445,556 at June 30, 1996 from $0 at the prior
year end. This increase was the result of the issuance, at fair market value, of
a block of the Company's unregistered common stock in connection with the
purchase of rights claimed by a third party to certain Blimpie trademarks in
Canada, and the increase in costs associated with acquiring foreign trademarks.
The increase in the number of cash on delivery transactions, as opposed
to extended payment terms, and the Company's utilization of cash received to pay
equipment vendors on a current basis resulted in the decrease in accounts
payable of 26% to $2,697,900 at June 30, 1996 from $3,667,481 at the prior year
end.
Other current liabilities increased 16% to $851,687 at June 30, 1996
from $734,962 at the prior year end resulting from the Company's accrual of
funds for the Company's franchisee convention and for the fiscal year end 1996
bonuses to employees.
During the Fiscal Year ended June 30, 1996, 468 domestic Blimpie
franchise outlets opened (171 traditional outlets and 297 new-concept outlets)
in the following states: Alabama (6); Alaska (2); Arizona (10); Arkansas (5);
California (16); Colorado (8); Connecticut (3); Florida (41); Georgia (17);
Hawaii (3); Idaho (7); Illinois (12); Indiana (19); Iowa (15); Kansas (7);
Kentucky (13); Louisiana (8); Massachusetts (2); Michigan (15); Minnesota (6);
Mississippi (3); Missouri (20); Montana (2); Nebraska (12); Nevada (15); New
Jersey (6); New Mexico (2); New York (12); North Carolina (21); North Dakota
(1); Ohio (17); Oklahoma (2); Oregon (3); Pennsylvania (9); Rhode Island (4);
South Carolina (16); South Dakota (2); Tennessee (22); Texas (55); Utah (3);
Washington (13); West Virginia (10); and Wisconsin (3). During the same fiscal
year, 5 international Blimpie franchise outlets opened (2 traditional outlets
and 3 new-concept outlets) in the following areas: Spain (1); and Sweden (4). By
comparison, during the Fiscal Year ended June 30, 1995, 390 domestic and 0
international Blimpie franchise outlets opened (156 traditional outlets and 234
new-concept outlets). During the Fiscal Year ended June 30, 1996, 62 domestic
Blimpie franchise outlets closed (48 traditional outlets and 14 new-concept
outlets) in the following states: Arizona (2); California (3); Colorado (1);
Connecticut (2); Florida (3); Georgia (3); Hawaii (1); Idaho (1); Illinois (4);
Indiana (4); Iowa (2); Kansas (2); Louisiana (1); Massachusetts (1); Michigan
(3); Missouri (1); Nevada (2); New York (7); Ohio (2); Oregon (1); Pennsylvania
(1); South Carolina (4); South Dakota (1); and
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<PAGE> 47
Texas (10). By comparison, during the Fiscal Year ended June 30, 1995, 82
domestic Blimpie franchise outlets closed (55 traditional outlets and 27
new-concept outlets). During the Fiscal Year ended June 30, 1996, ten closed
Blimpie franchise outlets reopened in: Connecticut (1); Idaho (1); Indiana (1);
Michigan (1); New York (1); Ohio (1); Pennsylvania (1); South Dakota (1); Texas
(1); and Washington (1). By comparison, during the Fiscal Year ended June 30,
1995, 4 closed Blimpie outlets reopened.
During the Fiscal Year ended June 30, 1996, the Company received
$3,881,419 from the granting of 769 domestic individual outlet franchises (291
traditional franchisees and 478 new-concept franchisees) in the following
states: Alabama (11); Alaska (7); Arizona (15); Arkansas (3); California (67);
Colorado (4); Connecticut (3); Florida (60); Georgia (39); Hawaii (2); Idaho
(3); Illinois (13); Indiana (26); Iowa (15); Kansas (12); Kentucky (23);
Louisiana (13); Massachusetts (4); Michigan (27); Minnesota (13); Mississippi
(4); Missouri (24); Montana (2); Nebraska (14); Nevada (9); New Jersey (7); New
Mexico (18); New York (24); North Carolina (41); North Dakota (2); Ohio (25);
Oklahoma (6); Oregon (6); Pennsylvania (20); Rhode Island (7); South Carolina
(23); South Dakota (2); Tennessee (26); Texas (87); Utah (7); Washington (13);
West Virginia (20); Wisconsin (16); and Wyoming (6). During the same fiscal
year, the Company did not derive any revenue from the granting of 5
international individual outlet franchises (2 traditional franchisees and 3
new-concept franchisees) in the following territories: Spain (1); and Sweden
(4). By comparison, during Fiscal Year ended June 30, 1995, the Company received
$4,775,377 from the granting of 792 domestic individual outlet franchises (262
traditional franchisees and 530 new-concept franchisees), and neither granted
nor derived any revenue from any 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 769
domestic individual outlet franchises granted during fiscal year 1996, 67 were
at this reduced price.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal years 1997, 1996 and 1995 the Company did not incur any
material capital commitments. The Company's current ratio (aggregate current
assets compared to aggregate current liabilities) at June 30, 1997, 1996, and
1995 was 2.9:1, 3:1 and 1.5:1, respectively.
The Company generated cash flows from operating activities of
$1,918,904, $2,041,526 and $5,316,495 in the fiscal years ended June 30, 1997,
1996 and 1995, respectively. The decrease of $122,622 in fiscal 1997 was
primarily the result of the increase in notes receivable due to the fact that
several of the Company's Master Licensors have lump sum payments due in fiscal
1998, and was partially offset by an
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<PAGE> 48
increase in accounts payable resulting from the greater number of deferred
payment, as opposed to cash on delivery transactions.
Net cash flows used in investing activities during fiscal 1997, 1996
and 1995 totaled $2,096,366, $5,533,547 and $4,196,352, respectively. The
decrease of $3,437,181 in fiscal 1997 was primarily the result of the selling of
U.S. Treasury notes in order to purchase a portion of the international Blimpie
trademarks and service marks and the reclassification of the remaining U.S.
Treasury notes from held-to-maturity securities to available-for-sale
securities. (See Footnotes to Financial Statements.)
During fiscal 1997, the Company used $618,667 in net cash flows from
financing activities, while during fiscal 1996, $3,898,316 in net cash flows was
generated from financing activities and during fiscal 1995, $423,547 was used in
net cash flows from financing activities. The decrease of $4,516,983 from 1996
to 1997 and the increase of $4,321,863 from 1995 to 1996 was primarily the
result of the stock offering which occurred in fiscal 1996.
The Company's primary liquidity needs arise from expansion, research
and development, capital expenditures and trademark obligations. These needs are
primarily met by the cash flows from operations and from the Company's cash and
investments. The Company believes that the cash flows from operations and the
Company's cash and investments will be sufficient to fund its future liquidity
needs for the foreseeable future.
With the modernization of the Company's computer systems in fiscal year
1997 and 1996, the Company does not expect the Impact of Year 2000 to have any
effect on existing systems.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February, 1997 the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 128, Earnings per Share
(SFAS 128), which the Company is required to adopt effective for fiscal year
ending June 30, 1998. SFAS 128 establishes standards for computing and
presenting earnings per share (EPS) in order to make them comparable to
international EPS standards. The Company does not believe the adoption will have
a material effect on the financial statements.
In June, 1997 the FASB issued Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information (SFAS 131), which the Company is required to adopt effective for
fiscal year ending June 30, 1998. SFAS 131 requires that a public business
enterprise report financial
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<PAGE> 49
and descriptive information about its reportable operating segments. Management
is currently reviewing the provisions of SFAS 131 and does not believe that the
Company's financial statements will be significantly impacted by the adoption.
ITEM 8. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
Page
Report of independent accountants 50
Consolidated balance sheets at June 30, 1997 and 1996 51
Consolidated statements of income for each of the
three years in the period ended June 30, 1997 52
Consolidated statements of shareholders' equity for
each of the three years in the period ended June 30, 1997 52
Consolidated statements of cash flows for each of the
three years in the period ended June 30, 1997 53
Notes to consolidated financial statements 54
Report of independent accountants 65
Consolidated schedule of valuation and qualifying accounts 66
49
<PAGE> 50
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Blimpie International, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Blimpie
International, Inc. and Subsidiaries as of June 30, 1997 and 1996, and the
related consolidated statements of operations, changes in shareholders' equity,
and cash flows for the three years ended June 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Blimpie
International, Inc. and Subsidiaries as of June 30, 1997 and 1996 and the
consolidated results of their operations and cash flows for the three years
ended June 30, 1997 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
September 12, 1997
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<PAGE> 51
BLIMPIE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30 JUNE 30
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current
- - Cash and cash equivalents $ 3,532,339 $ 4,328,468
- - Investments 4,462,253 5,430,950
- - Accounts receivable, less allowance for doubtful accounts of
$82,750 in 1997 and $46,400 in 1996 2,084,825 1,455,986
- - Prepaid expenses and other current assets 701,504 674,203
- - Deferred income taxes 189,000
- - Current portion of notes receivable 985,772 535,163
------------ ------------
Total Current Assets 11,766,693 12,613,770
------------ ------------
Property, Plant and Equipment - at cost less accumulated
depreciation of $868,619 in 1997 and $575,879 in 1996 1,253,003 972,251
Other Assets
- - Notes receivable, less allowance for doubtful accounts of
$60,300 in 1997, $46,656 in 1996 and less current portion 1,518,721 1,495,684
- - Investments 3,877,827 6,016,014
- - Deferred income taxes 76,000
- - Trademarks - at cost, less accumulated amortization of
$154,136 in 1997 and $19,132 in 1996 8,704,472 445,556
- - Other 507,633 279,386
------------ ------------
Total Other Assets 14,684,653 8,236,640
------------ ------------
$ 27,704,349 $ 21,822,661
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
- - Accounts payable $ 3,518,657 $ 2,697,900
- - Current portion of long-term debt 5,202 7,536
- - Income taxes payable 7,676 563,912
- - Deferred income taxes payable 115,000
- - Other current liabilities 358,951 851,687
------------ ------------
Total Current Liabilities 4,005,486 4,121,035
------------ ------------
Deferred Revenue 1,325,146 1,678,918
Deferred Income Taxes 343,000
Long-Term Debt 5,202
Trademark Obligations 3,508,594
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, respectively 95,262 94,809
- - Additional paid-in capital 8,209,666 7,703,510
- - Retained earnings 10,744,290 8,132,082
- - Net unrealized gain (loss) on marketable securities 25,905 (3,590)
------------ ------------
19,075,123 15,926,811
Less: Subscriptions receivable 210,000 252,305
------------ ------------
Total Shareholders' Equity 18,865,123 15,674,506
------------ ------------
$ 27,704,349 $ 21,822,661
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
51
<PAGE> 52
BLIMPIE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues
- - Continuing fees $15,390,799 $12,464,502 $ 8,733,568
- - Subfranchisor fees, master license fees and sale of franchises 6,515,699 7,604,787 5,409,176
- - Store equipment sales 14,934,844 13,503,122 11,286,096
- - Management fees and other income 1,285,657 1,418,971 945,174
----------- ----------- -----------
38,126,999 34,991,382 26,374,014
----------- ----------- -----------
Expenses
- - Subfranchisors' share of franchise and continuing fees 9,777,740 7,994,170 5,394,692
- - Store equipment cost of sales 13,024,083 12,270,865 10,084,525
- - Selling, general and administrative expenses 10,917,566 9,203,507 7,545,041
- - Interest expense 4,151 2,677 3,850
----------- ----------- -----------
33,723,540 29,471,219 23,028,108
----------- ----------- -----------
Operating Income 4,403,459 5,520,163 3,345,906
Interest Income 889,535 1,015,112 578,010
----------- ----------- -----------
Income before income taxes 5,292,994 6,535,275 3,923,916
Income taxes 2,015,000 2,495,000 1,584,000
----------- ----------- -----------
Net Income $ 3,277,994 $ 4,040,275 $ 2,339,916
=========== =========== ===========
Primary earnings per share $ 0.34 $ 0.43 $ 0.27
=========== =========== ===========
Fully diluted earnings per share $ 0.34 $ 0.41 $ 0.27
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
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, 1994 8,560,626 $ 85,606 $ 2,739,858 $ 2,748,570 $ $ 5,574,034
- Stock incentive granted/stock
options exercised 15,500 155 97,782 97,937
- Dividends paid (428,698) (428,698)
- Net income 2,339,916 2,339,916
- Net unrealized loss on
marketable securities (17,532) (17,532)
------------ ------------ ------------ ------------ ---------- ------------
Balance - June 30, 1995 8,576,126 85,761 2,837,640 4,659,788 (17,532) 7,565,657
- Stock incentive granted/stock
options exercised 17,250 173 141,335 141,508
- Purchase Canadian Trademark 25,000 250 271,625 271,875
- Stock offering 862,500 8,625 4,452,910 4,461,535
- Dividends paid (567,981) (567,981)
- Net income 4,040,275 4,040,275
- Net unrealized gain on
marketable securities 13,942 13,942
------------ ------------ ------------ ------------ ---------- ------------
Balance - June 30, 1996 9,480,876 94,809 7,703,510 8,132,082 (3,590) 15,926,811
- Stock incentive granted/stock
options exercised 20,350 203 267,343 267,546
- Purchase Canadian Trademark 25,000 250 238,813 239,063
- Dividends paid (665,786) (665,786)
- Net income 3,277,994 3,277,994
- Net unrealized gain on
marketable securities 29,495 29,495
------------ ------------ ------------ ------------ ---------- ------------
Balance - June 30, 1997 9,526,226 $ 95,262 $ 8,209,666 $ 10,744,290 $ 25,905 $ 19,075,123
============ ============ ============ ============ ========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
52
<PAGE> 53
BLIMPIE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,277,994 $ 4,040,275 $ 2,339,916
Adjustments to reconcile net income to net
cash provided by operating activities:
- Depreciation and amortization 440,733 237,497 139,521
- Incentive stock granted 255,197 136,058 93,062
- Decrease (increase) in:
Accounts receivable (628,839) (763,140) 133,193
Prepaid expenses and other current assets (27,301) (43,901) (478,168)
Other assets (228,247) (211,454) (130,113)
Deferred income taxes (115,000) 190,000 (36,000)
Notes receivable (473,646) 535,952 1,218,398
- Increase (decrease) in:
Accounts payable 820,757 (969,581) 1,797,239
Income taxes payable (556,236) (267,804) 534,801
Other current liabilities (492,736) 116,725 472,968
Deferred revenue (353,772) (959,101) (768,322)
----------- ----------- -----------
- Net cash provided by operating activities 1,918,904 2,041,526 5,316,495
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of available-for-sale securities (5,322,077) (101,763)
Proceeds from sale of available-for-sale securities 8,463,716 74,398
Reinvested dividends of available-for-sale securities (5,260) (10,099) (10,680)
Purchase of held-to-maturity securities (7,562,621) (5,356,501)
Proceeds from maturities of held-to-maturity securities 2,558,354 1,576,838
Purchase of international trademarks (4,646,264) -- --
Disposal of property, plant and equipment 13,603 17,337
Acquisition of property, plant and equipment (600,084) (509,153) (406,009)
----------- ----------- -----------
- Net cash used in investing activities (2,096,366) (5,533,547) (4,196,352)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock warrants/options exercised 12,350 5,450 4,875
Proceeds from stock offering 4,461,535 --
Collections on officer notes receivable for stock purchase 42,305 5,375 5,528
Cash dividends paid (665,786) (567,981) (428,698)
Repayment of long-term debt (7,536) (6,063) (5,252)
----------- ----------- -----------
- Net cash (used in) provided by financing activities (618,667) 3,898,316 (423,547)
----------- ----------- -----------
Net (decrease) increase in Cash and Cash Equivalents (796,129) 406,295 696,596
Cash and Cash Equivalents, at beginning of year 4,328,468 3,922,173 3,225,577
----------- ----------- -----------
Cash and Cash Equivalents, at end of year $ 3,532,339 $ 4,328,468 $ 3,922,173
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
- Interest $ 2,514 $ 2,677 $ 3,850
- Income taxes 2,571,236 3,508,798 1,049,199
Noncash investing and financing activities:
- Canadian trademark stock issuance 239,063 271,875
- Purchase of international trademarks 3,508,594
- Net unrealized gain (loss) on marketable securities 29,495 13,942 (17,532)
</TABLE>
See accompanying notes to consolidated financial statements.
53
<PAGE> 54
BLIMPIE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: DESCRIPTION OF COMPANY
Blimpie International, Inc. (the "Company") engages in franchising,
subfranchising and master licensing the Blimpie trademarks, trade names, service
marks, logos, marketing concepts and marketing programs, which are the basic
attributes of the chain of non-cooking, quick service sandwich restaurants known
as "Blimpie" restaurants. The main products sold in a Blimpie restaurant are
submarine sandwiches and salads. As of June 30, 1997 the Company operates in 46
states of the United States and 23 countries. The Company does not operate any
Blimpie restaurants, subfranchisor or master licensor areas.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
REVENUE RECOGNITION
Fees relating to subfranchisor and master licensor sales are recognized when
all material services or conditions relating to the sale are substantially
performed or satisfied by the Company. If fees are collectible over an extended
period and no reasonable basis exists for estimating collectibility, those fees
are recognized as they are collected or when the uncertainty regarding
collectibility of fees is resolved.
Initial fees from the awarding of individual franchises are deferred and
recorded as revenue when the franchisees restaurant is opened. Expenses
associated with site selection, real estate, training, commissions and design
are deferred and charged to expense when the initial fees are recognized.
Continuing fees from franchised restaurants are recorded as revenue when earned.
Revenue from equipment sales is recognized when the equipment is shipped.
CASH AND CASH EQUIVALENTS
For the purpose of the statement of cash flows, the company considers all
short-term debt securities purchased with a maturity of three months or less to
be cash equivalents.
The Company has cash deposits with financial institutions which fluctuate in
excess of federally insured limits. If these financial institutions were not to
honor their contractual liability, the Company could incur losses. Management is
of the opinion that there is no significant risk of loss because of the
financial strength of the financial institutions.
INVESTMENTS
Investment securities with maturities of three months or less at the time of
acquisition are considered cash equivalents. Pursuant to Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," debt securities included in the company's investment
portfolio for which there is a positive intent and ability to hold to maturity
are carried at amortized cost. Debt securities that may be sold prior to
maturity and all marketable equity securities are classified as
available-for-sale and carried at fair value. Fair value is estimated based on
quoted market prices for those or similar investments. Net unrealized gains and
losses, determined on the specific identification method, on securities
classified as available-for-sale are carried as a separate component of
Stockholders Equity.
FAIR MARKET VALUE DISCLOSURE
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments" (SFAS 107), requires disclosure of the fair
value of certain items, including receivables, payables, debt and investments.
The Company believes that the amounts disclosed within the consolidated balance
sheet do not differ significantly from fair value as defined in SFAS 107. The
carrying value of cash and cash equivalents and accounts receivable approximates
fair value because of the short maturity of those instruments. The carrying
value of notes receivable was deemed appropriate since recognition was deferred
until such time as collection can be assured. The carrying value of amounts due
from related parties was deemed to approximate fair value based on current
market conditions as well as the relationship of the parties.
ACCOUNTS AND NOTES RECEIVABLE
The Company provides an allowance for doubtful receivables equal to the
estimated collection losses that will be incurred in the collection of all
receivables. The estimated losses are based on historical collection experience
coupled with a review of all existing receivables.
54
<PAGE> 55
BLIMPIE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are carried at cost. Depreciation is computed over the
estimated useful lives of the assets using both accelerated and straight-line
methods. Significant expenditures for additions and improvements are capitalized
and expenditures for routine repairs and maintenance are charged to operations
as incurred. The costs of assets retired or otherwise disposed of and the
related accumulated depreciation are eliminated from the accounts in the year of
disposal. Gains or losses resulting from disposals are included in operations.
TRADEMARKS
Trademarks are carried at cost less accumulated amortization which is
calculated on a straight-line basis over the estimated useful lives of 15-40
years. Amortization expense was $135,004 in 1997 and $19,132 in 1996.
ADVERTISING
The Company follows the policy of charging the costs of advertising to
expense as incurred. Advertising expense was $477,026 in 1997, $427,256 in 1996
and $192,494 in 1995.
INCOME TAXES
The Company and its wholly-owned subsidiaries file a consolidated Federal
income tax return. The provision for income taxes and corresponding balance
sheet accounts are determined in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Under
SFAS 109, the deferred tax liabilities and assets are determined based on
temporary differences between the basis of certain assets and liabilities for
income tax and financial reporting purposes. These differences are primarily
attributable to differences in the recognition of depreciation and amortization
of property and revenues.
EARNINGS PER SHARE AND PER SHARE AMOUNTS
Primary and fully-diluted earnings per share amounts are computed on the
weighted average number of shares outstanding, 9,517,462 in 1997, 9,372,447 in
1996 and 8,573,797 in 1995, adjusted for the assumed conversion of dilutive
common stock equivalents, principally stock options.
COMMON STOCK
On January 10, 1995, the shareholders approved an increase in the authorized
common stock from 10,000,000 shares to 20,000,000. On August 11, 1995, the
Company issued 862,500 additional shares of common stock (see Note 15).
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amount of assets and liabilities
and disclosures of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Accordingly, actual results could differ from those
estimates.
ACCOUNTING PRONOUNCEMENTS
In February, 1997 the FASB issued Statement of Financial Accounting Standards
No. 128, "Earnings per Share" (SFAS 128), which the Company is required to adopt
effective for fiscal year ended June 30, 1998. SFAS 128 establishes standards
for computing and presenting earnings per share (EPS). SFAS 128 simplifies the
standards for computing earnings per share and makes them comparable to
international EPS standards. It replaces the presentation of primary EPS with a
presentation of basic EPS and requires dual presentation of basic and diluted
EPS on the face of the income statement. Basic EPS excludes dilution and is
computed by dividing income available to common stockholders by the
weighted-average number of common share outstanding for the period. The Company
does not believe the adoption will have a material effect on the financial
statements.
In June, 1997 the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS
131), which the Company is required to adopt effective for fiscal year ended
June 30, 1998. SFAS 131 requires that a public business enterprise report
financial and descriptive information about its reportable operating segments.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by management in
deciding how to allocate resources and in assessing performance. Management is
currently reviewing the provisions of SFAS 131 and does not believe that the
Company's financial statements will be significantly impacted by the adoption.
RECLASSIFICATIONS
Certain amounts have been reclassified to conform with current year
presentation.
55
<PAGE> 56
BLIMPIE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: INVESTMENTS
The following is a summary of available-for-sale securities included in
investments as of June 30:
<TABLE>
<CAPTION>
1997 Unrealized Fair
Cost Gain (Losses) Value
-----------------------------------
<S> <C> <C> <C>
Available-for-Sale Securities:
Current
Common stock $ 60,969 $19,508 $ 80,477
Preferred stock 178,765 4,968 183,733
Mutual funds 124,986 (1,401) 123,585
U. S. Government securities 4,071,628 3,952 4,075,580
---------- ------- ----------
$4,436,348 $27,027 $4,463,375
---------- ------- ----------
Long-Term
U. S. Government securities 3,877,827 (1,122) 3,876,705
---------- ------- ----------
$8,314,175 25,905 $8,340,080
---------- ------- ----------
<CAPTION>
1996 Unrealized Fair
Cost Gain (Losses) Value
-----------------------------------
<S> <C> <C> <C>
Available-for-Sale Securities:
Current
Common stock $ 88,362 $ (1,230) $ 85,132
Preferred stock 255,896 (2,818) 253,078
Mutual funds 86,829 458 87,287
----------- -------- -----------
$ 429,087 $ (3,590) $ 425,497
----------- -------- -----------
Held-to-Maturity Securities:
Current
U. S. Government securities $ 5,005,453 $(18,340) $ 4,987,113
Long-Term
U. S. Government securities 6,016,014 (7,114) 6,008,900
----------- -------- -----------
$11,021,467 $(25,454) $10,996,013
----------- -------- -----------
</TABLE>
The contractual maturities of long-term debt securities at June 30, 1997 are
as follows: $3,527,402 in 1999 and $350,425 in 2000.
On February 19, 1997, the Company sold held-to-maturity securities with an
aggregate cost of $2,646,039 and realized a gain of $27,766. The proceeds from
the sale were $2,673,805.
At June 30, 1997, United States Treasury notes previously categorized as
being held-to-maturity were recategorized as available-for-sale. Accordingly,
this group of securities has been marked to market with the resulting adjustment
reported in shareholders' equity.
56
<PAGE> 57
BLIMPIE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: NOTES RECEIVABLE
Notes receivable consisted of the following as of June 30:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Notes from subfranchisors, with interest ranging from 8% to
19% payable at various dates through June, 2008 $2,065,443 $1,900,608
Notes receivable from sale of discontinued segment due in
weekly installments of $599 including interest of 10% per annum
through March, 2000 80,312 102,007
Notes receivable from an officer due in semi-monthly
installments of $232 including interest of 8% per annum through
April, 2000 52,727 54,021
Participation receivable from leasing company arising from
participation in franchisee leasing arrangements with interest
ranging from 9% to 15.8% payable at various dates through June,
2002 366,311
Other -- 20,867
---------- ----------
2,564,793 2,077,503
Allowance for doubtful accounts 60,300 46,656
---------- ----------
2,504,493 2,030,847
Current maturities 985,772 535,163
---------- ----------
$1,518,721 $1,495,684
---------- ----------
</TABLE>
NOTE 5: PROPERTY, PLANT AND EQUIPMENT
The major components of property and equipment and depreciation periods as
of June 30 are:
<TABLE>
<CAPTION>
Cost
----------------------------- Depreciation
Item 1997 1996 Period
---- ------------ ------------ ------------
<S> <C> <C> <C>
Building $ 80,865 $ 80,865 14 years
Office furniture and fixtures 1,856,153 1,344,436 5-10 years
Automobiles 184,604 122,829 5 years
------------ ------------
2,121,622 1,548,130
Less accumulated depreciation 868,619 575,879
------------ ------------
$ 1,253,003 $ 972,251
------------ ------------
</TABLE>
Depreciation expense was $305,729 in 1997, $212,145 in 1996 and $129,523 in
1995.
NOTE 6: LONG-TERM DEBT
Long-term debt consists of the following as of June 30:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Note payable to individual in weekly installments of $229,
including interest at 17% per annum through January, 1998 $ 5,202 $12,738
Less: current portion 5,202 7,536
------- -------
$ -- $ 5,202
------- -------
</TABLE>
57
<PAGE> 58
BLIMPIE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7: TRADEMARK OBLIGATIONS
Trademark obligations consist of the following as of June 30:
<TABLE>
<CAPTION>
1997
----------
<S> <C>
Amount payable to related parties in connection with $3,000,000
acquisition of International trademarks (see Note 10)
Common shares issuable in connection with acquisition of 508,594
Canadian trademark (see Note 10)
----------
$3,508,594
----------
</TABLE>
NOTE 8: INCOME TAXES
The provision for income taxes is comprised as follows for the years ended
June 30:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Federal
Current $ 1,810,000 $ 1,959,000 $ 1,388,000
Deferred (98,000) 161,000 (31,000)
----------- ----------- -----------
1,712,000 2,120,000 1,357,000
----------- ----------- -----------
State
Current 320,000 346,000 232,000
Deferred (17,000) 29,000 (5,000)
----------- ----------- -----------
303,000 375,000 227,000
----------- ----------- -----------
$ 2,015,000 $ 2,495,000 $ 1,584,000
----------- ----------- -----------
</TABLE>
The following is a reconciliation of income taxes to normal expected Federal
income tax computed by applying statutory rates for the years ended June 30:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Federal statutory rate - 34% $ 1,800,000 $ 2,222,000 $ 1,334,000
State or local taxes, net of
federal benefit 198,000 245,000 153,000
Non deductible expenses 23,000 27,000 26,000
Other (6,000) 1,000 71,000
----------- ----------- -----------
$ 2,015,000 $ 2,495,000 $ 1,584,000
----------- ----------- -----------
</TABLE>
For the year ended June 30, 1995, the Internal Revenue Service granted a
change in accounting method relating to the recognition, for tax purposes, of
subfranchisor and franchise revenue and related expenses. The remaining revenue
and related expenses from these changes will be recognized for tax purposes in
equal amounts over the next four years. The components of temporary differences
and their tax effects which comprise the Company's net deferred tax asset
(liability) are as follows at June 30:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Deferred tax assets:
Franchise revenue recognition $ 145,863 $ 148,532 $ 187,901
Other 132,687 97,226 64,917
--------- --------- ---------
278,550 245,758 252,818
--------- --------- ---------
Deferred tax liabilities:
Subfranchisor revenue recognition (317,550) (399,758) (216,818)
--------- --------- ---------
$ (39,000) $(154,000) $ 36,000
--------- --------- ---------
</TABLE>
58
<PAGE> 59
WBLIMPIE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9: COMMITMENTS AND CONTINGENCIES
The Company leases its facilities under noncancelable operating leases,
expiring in various years through the year 2003. The minimum future annual
rentals under these noncancelable operating leases as of June 30, 1997 for each
of the next five years and in the aggregate, are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1998 $ 359,286
1999 355,968
2000 331,699
2001 339,978
2002 96,000
Thereafter 88,000
----------
$1,570,931
----------
</TABLE>
The Company is also obligated for increases in real estate taxes and
operating costs. Rent expenses including real estate taxes and operating costs
amounted to $382,867 in 1997, $307,410 in 1996 and $280,588 in 1995.
The Company's leasing subsidiaries execute leases for the approved Blimpie
restaurant locations. The subsidiaries have been organized for the purpose of
negotiating and signing the primary lease and, after execution, sublease the
premises to a franchisee. Under the terms of the agreement, the subsidiary's
liability is limited to its net assets and the landlord agrees to not commence
any legal proceedings against Blimpie International, Inc. The franchisee assumes
the payment of rent and agrees to perform all terms, covenants and conditions
of the original lease. Since the franchisee is substituted under the original
lease agreement and the subsidiary is secondarily liable only to the extent of
its net assets, accounting and reporting of the sublease is not included in the
consolidated financial statements. As of June 30, 1997 there were 533 leasing
subsidiaries with aggregate net assets of $714,046, which are included in cash
and other assets on the consolidated balance sheet. The terms of these leases
range from 5 to 20 years. The minimum annual lease payments for the fiscal years
ending June 30 are as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1998 $14,617,993
1999 14,279,109
2000 13,439,573
2001 11,750,048
2002 9,953,461
Thereafter 27,867,208
-----------
$91,907,392
-----------
</TABLE>
According to the terms of signed agreements between the Company and its
franchisees, the Company is obligated, among other things, to supply to the
franchisee logo types, dies, mats, etc., of its trademarks, along with sets of
materials, manuals and forms at a price equivalent to the Company's cost for
such materials, and certain training and continued support. The Company also
assists in the selection and purchase of equipment and helps the franchisee to
obtain financing of the initial cost of franchising. Area subfranchisors and
master licensors responsible for providing day-to-day operational support for
Blimpie franchise restaurants in their territory, while receiving compensation
amounting to half of the fees from the individual Blimpie franchises, are under
the Company's supervision.
Various claims and lawsuits arise in the normal course of business. It is the
Company's practice to vigorously defend all actions. Although the amount of
liability as of June 30, 1997 with respect to all claims and lawsuits cannot be
ascertained, in the opinion of management, the resulting liability, if any, will
not materially affect the Company's results of operations or financial position.
59
<PAGE> 60
BLIMPIE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10: TRADEMARKS
Messrs. Anthony P. Conza and David L. Siegel (both of whom are officers,
directors and principal shareholders of the Company), and Metropolitan Blimpie,
Inc. ("MBI"), an unrelated company, own respectively, undivided 40%, 20% and 40%
interests in the Blimpie trademarks and the Blimpie marketing system. Pursuant
to various agreements made by and among such parties, (1) Messrs. Conza and
Siegel possess the exclusive right to exploit, directly or indirectly, the
Blimpie trademarks and Blimpie marketing system in 35 entire states and various
portions of other states throughout the USA (the "Conza-Siegel Territory"); (2)
MBI possessed the exclusive right to exploit, directly or indirectly, the
Blimpie trademarks and Blimpie marketing system in the balance of the USA
outside of the Conza-Siegel Territory (the "MBI Territories"); and (3) Messrs.
Conza and Siegel and MBI possess the exclusive right to exploit, directly or
indirectly, the Blimpie trademarks and Blimpie marketing system throughout the
world outside of the USA.
The Company, pursuant to 99 year grants made to it in 1976 by Messrs. Conza
and Siegel, has the exclusive right to distribute the Blimpie trademarks and
license the use of the Blimpie marketing system throughout the Conza-Siegel
Territory. By agreement dated July 19, 1991 (the "1991 Agreement"), MBI granted
to the Company the right to license the Blimpie trademarks and Blimpie marketing
system throughout the MBI Territories (with specific exceptions). Pursuant to
the 1991 Agreement, the Company may also exploit the rights possessed by MBI
outside of the USA with respect to the Blimpie trademarks and Blimpie marketing
system. In consideration for the grants made to the Company by the 1991
Agreement, the Company agreed to pay specified percentages of all revenues
derived by the Company from the sales of franchises within the MBI Territories
and outside of the USA, subject to a minimum annual payment requirement of
$100,000. The 1991 Agreement provided for an initial term of 42 months, and
further provides for automatic annual renewals until July, 2090, provided that
the Company continues to pay said minimum annual payments. The payments made to
MBI under this arrangement were $968,360, $785,222 and $603,219 during the years
ended June 30, 1997, 1996 and 1995, respectively.
On February 18, 1997, the Company entered into an agreement with Anthony P.
Conza and David L. Siegel to acquire the ownership of the undivided 60% interest
in the international rights to the Blimpie trademarks and Blimpie marketing
system owned by such individuals. The agreement supersedes a licensing agreement
pertaining to such international trademark and marketing system rights which the
Company had previously entered into with such individuals. Pursuant to the
agreement, the Company acquired the rights for $4.5 million of cash paid at
closing, plus certain contingent payments. The contingent payments would
generally be required once cumulative international revenues exceed $5,000,000.
The contingent payments of $150,000 per year would generally commence on January
1, 2002 and continue for 50 years. The agreement also provides Messrs. Conza and
Siegel with an option to require, anytime prior to January 1, 2001, the Company
to pay $3,000,000 of cash to Messrs. Conza and Siegel in exchange for a
cancellation of their right to receive the contingent payments. As of June 30,
1997, the Company believes it is probable that Messrs. Conza and Siegel will
elect to effect a cancellation of the contingent payments in exchange for the
receipt of $3,000,000. Therefore, the Company has recorded, at June 30, 1997,\
the remaining international trademark rights and related trademark obligation of
$3,000,000 on the balance sheet as trademark assets and trademark obligations,
respectively.
On October 1, 1995, the Company entered into an agreement to settle a
trademark infringement proceeding which it commenced in Canada against an
unaffiliated party ("claimant") who had filed trademark registration documents
seeking Canadian trademark protection for the word "Blimpie" prior to the time
the Company made such filings in Canada. Pursuant to the agreement, the Company
acquired all rights held by the claimant in said Canadian trademark registration
in consideration for the payment of $40,000 and an agreement to issue 125,000
unregistered shares of the Company's common stock at the rate of 25,000 shares
per year. The first 25,000 shares of common stock were issued at closing, and
the second installment of common stock was issued October 1, 1996. The future
installments of such share are subject to the claimant's ongoing compliance with
various conditions specified in the agreement. Prior to the fiscal year ended
June 30, 1997, the shares and related trademark rights have been recorded on the
anniversary date of the agreement and after it was determined that claimant had
complied with the various conditions specified in the agreement. However, based
upon the claimant's compliance with the provisions of the agreement through June
30, 1997, the Company believes that it is probable that the claimant will
continue to comply with the provisions of the agreement. Accordingly, the
Company has recorded, at June 30, 1997, the remaining trademark rights and
obligation to issue the unregistered shares on the balance sheet as trademark
assets and trademark obligations, respectively.
60
<PAGE> 61
BLIMPIE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11: RELATED PARTY TRANSACTIONS
The Company had numerous transactions which result from written agreements
between the Company and subfranchisors who are related parties. The following is
a summary of the types of transactions and revenue or expense recognized related
to these transactions for the years ended June 30:
<TABLE>
<CAPTION>
Revenue or Expense
Related Party Recognized 1997 1996 1995
------------- ---------- ---- ---- ----
<S> <C> <C> <C> <C>
Georgia Enterprises, Inc. Revenue derived from area $ 3,121,600 $ 2,981,000 $ 2,378,500
A corporation partially owned by two Management fees collected 167,537 244,960 163,028
officers of the Company Fees paid to subfranchisor 983,570 893,820 780,993
Llewellyn Distributors, Inc. Revenue derived from area $ 715,550 873,900 806,900
A corporation partially owned by an Management fees collected 101,112 85,188 61,387
Officer the Company Fees paid to subfranchisor 289,400 336,980 317,723
International Southwest Blimpie, Inc. Revenue derived from area $ 531,730 741,540 473,900
A corporation principally owned and Management fees collected 49,200 61,095 67,087
controlled by an officer of the Company Fees paid to subfranchisor 150,300 165,440 119,987
</TABLE>
During fiscal year ended June 30, 1992, certain officers issued demand notes
to the Company in the amount of $270,000 for the purchase of shares of the
Company's common stock. The balance of these notes have been recorded as a
reduction to equity as subscriptions receivable. In April, 1994, an officer was
granted an additional loan of $20,000 against these shares. These notes bear
interest at the rate of 5% per annum, payable quarterly. Interest income of
$11,851, $13,762 and $13,728, was recognized by the Company for the years ended
June 30, 1997, 1996 and 1995, respectively.
The Company pays rent based on use of an apartment in New York City, which is
owned by an officer/employee of the Company. Rental expense of $8,243, $7,182
and $0 was recognized for the years ended June 30, 1997, 1996 and 1995,
respectively. (See Note 7 and Note 10 with regard to trademark transactions with
related parties).
NOTE 12: STOCK OPTIONS AND WARRANTS
During fiscal year ended June 30, 1996, the Company adopted an Omnibus Stock
Incentive Plan (the Plan) which replaced the 1993 Stock Incentive Plan. The Plan
provides the Company with a wider array of incentive compensation tools. Through
June 30, 1997 the Company granted to certain employees, pursuant to its
incentive plan: (a) options to acquire a total of 412,650 shares of common
stock; and (b) stock grants of 92,400 shares of common stock. The options are
exercisable at the fair market value on the date of grant. The options and stock
grants provide for vesting at the rate of 20% per annum. The options are
exercisable at prices ranging from $3.25 to $11.31 per share and expire five
years after the date of the grant. As of June 30, 1997, 4,100 options had been
exercised and 152,200 shares of stock had been vested. At June 30, 1997 the
weighted average exercise price was $6.15 per share. The Company recognized
compensation expense of $255,197 in 1997, $136,058 in 1996 and $93,062 in 1995.
During fiscal year ended June 30, 1996, the Company granted common stock
purchase warrants for 8,000 shares of the Company's common stock to two outside
members of the Board of Directors. The per share price at which such warrants
are exercisable is $8.875, which was the fair market value at the date of grant.
These warrants expire on September 1, 2000. As of June 30, 1997 there are 23,000
stock purchase warrants outstanding to the outside members of the Board of
Directors. These warrants are exercisable at prices ranging from $6.00 to $8.875
per share and expire September 1, 2000.
In 1994 the Company issued options to purchase up to 21,971 shares of the
Company's common stock to an unaffiliated advertising agency as part of its
compensation to perform certain advertising services for the national
advertising cooperative sponsored by the Company. These options are exercisable
at $7.51 per share and expire September 15, 2000. As of June 30, 1997, none of
the options have been exercised.
In conjunction with the Company's common stock offering on August 11, 1995
(See Note 16), the Company granted common stock purchase warrants for 150,000
shares of the Company's common stock to the Underwriter. The per share price at
which such warrants are exercisable is $8.575, which was 140% of the public
offering price per share, exercisable
61
<PAGE> 62
BLIMPIE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 12: STOCK OPTIONS AND WARRANTS (continued)
for a period of four years commencing August 11, 1996. As of June 30, 1997, none
of the warrants have been exercised. As of June 30, 1997 there are 300,000 stock
purchase warrants outstanding to the Company's investment banker. These warrants
are exercisable at prices ranging from $4.00 to $6.67 per share and expire
February 15, 1999.
On July 1, 1996 the Company adopted Statement of Financial Accounting
Standards No. 123 "Accounting for Stock Based compensation" (SFAS 123). As
permitted by SFAS 123, the Company has chosen to apply APB Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its Plan. Therefore, there is no impact on earnings as a
result of this election. The application of SFAS 123 does not result in
significant differences between proforma net income and earnings per share and
reported net income and earnings per share
NOTE 13: EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) Profit Sharing Plan available to substantially
all employees. Under the plan the Company can elect to make matching
contributions of up to 100% of the elective deferral contributions. During the
years ended June 30, 1997, 1996 and 1995, contributions charged to earnings were
$47,544, $24,005 and $11,979, respectively.
The Company maintains a Flexible Benefits Plan available to substantially all
employees. Under the plan employees can elect to transfer pretax earnings to a
reimbursement account which covers various medical, dental and child care
expenses. The Company bears all administrative cost of the plan.
NOTE 14: BUSINESS SEGMENT INFORMATION
During 1996 the Company began operations outside of the United States. As of
June 30, 1997 the Company operates in the United States and in the countries of
Sweden, Spain, United Kingdom, Egypt, Lebanon, Dominican Republic, Jordan,
Australia, Argentina, Uruguay, Saudi Arabia, Oman, Qatar, Bahrain, United Arab
Emirates, Greece, Cyprus, Venezuela, South Africa, Peru, Poland, Northern
Ireland and the Republic of Ireland. There were no capital expenditures outside
of the United States in 1997 or 1996. Financial information by geographic area
is as follows for the years ended June 30:
<TABLE>
<CAPTION>
1997 DEPRECIATION
OPERATING IDENTIFIABLE AND
REVENUE INCOME ASSETS AMORTIZATION
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
United States $36,099,023 $ 4,224,544 $18,801,616 $ 305,729
International 2,027,976 178,915 8,902,733 135,004
----------- ----------- ----------- -----------
$38,126,999 $ 4,403,459 $27,704,349 $ 440,733
----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
1996 DEPRECIATION
OPERATING IDENTIFIABLE AND
REVENUE INCOME ASSETS AMORTIZATION
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
United States $33,920,517 $ 5,089,864 $21,357,972 $ 218,365
International 1,070,865 430,299 464,689 19,132
----------- ----------- ----------- -----------
$34,991,382 $ 5,520,163 $21,822,661 $ 237,497
----------- ----------- ----------- -----------
</TABLE>
NOTE 15: SUBFRANCHISOR FEES AND FRANCHISE REVENUE
FRANCHISE FEES AND COSTS
The initial non-refundable fee for franchisees that have never owned a
Blimpie restaurant is $18,000, which is payable in cash at the time of execution
of the franchise agreement. Additional franchises are awarded at lesser amounts
based upon the number of units awarded. The initial non-refundable fee for new
concept franchisees, such as convenience stores, institutional food service
entities, colleges, schools, mass feeders, hospitals and others range from $1.00
to $18,000 (dependent upon the number of new concept transactions executed, the
location of the new concept franchisee, the marketing area and other subjective
concerns). The Company reserves the right to issue franchises to its
subfranchisors or their designees for $1.00 to $5,000 each in order to
accelerate the development of the area of
62
<PAGE> 63
BLIMPIE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
Note 16: Subfranchisor Fees and Franchise Revenue
FRANCHISE FEES AND COSTS (continued)
subfranchisor. The Company defers recognition of the revenues and costs related
to these transactions until the restaurant is opened. The number of franchised
restaurants open as of June 30, 1997, 1996 and 1995 were 1,684 (1,667 United
States, 17 International), 1,407 (1,402 United States, 5 International) and 986,
respectively. The following is a summary of the deferred franchise revenues and
costs.
<TABLE>
<CAPTION>
NO. OF
REVENUE COSTS UNITS
----------- ----------- -----------
<S> <C> <C> <C>
Balance June 30, 1994 $ 2,506,880 $ 1,728,311 366
Franchises awarded 4,775,377 3,679,125 792
Revenue recognized (3,276,524) (2,425,533) (451)
----------- ----------- -----------
Balance June 30, 1995 4,005,733 2,981,903 709
Franchises awarded 3,881,419 3,019,592 774
Revenue recognized (3,991,459) (3,091,749) (605)
----------- ----------- -----------
Balance June 30, 1996 3,895,693 2,909,746 878
Franchises awarded 3,356,041 2,612,079 603
Revenue recognized (3,710,820) (2,833,585) (708)
----------- ----------- -----------
Balance June 30, 1997 $ 3,540,914 $ 2,688,240 773
=========== =========== ===========
</TABLE>
SUBFRANCHISOR AND MASTER LICENSOR FEES
The subfranchisor and master licensor fee ranges from $10,000 to $575,000.
These fees are established by calculating the population of the area of the
subfranchisor or master licensor and multiplying the population by $0.10 for the
United States and $0.01 for International. Subfranchisors and master licensors
in operation as of June 30, 1997, 1996 and 1995 were, 121 (105 United States,
16 International), 117 (109 United States, 8 International) and 107,
respectively. During the year ended June 30, 1995, the Company implemented new
subfranchisor agreements which provide for annual renewals. In addition, the
Company amended certain of the existing subfranchisor agreements to an annual
renewable basis. The aggregate revenue recognized in the year ended June 30,
1995 related to these replacement agreements was approximately $75,000. Pursuant
to the new form of agreement, the Company sells a territory to a subfranchisor
or master licensor for a one year period, followed by four to six renewal terms,
all but the last of which are annual in duration. If the subfranchisor or master
licensor has met all terms and conditions of the subfranchise or master license
agreement during the initial one year term and each of the one year renewal
terms, a 50 to 60 year right is granted during the final renewal term upon
payment of the fee set forth in the agreement. The following is a summary of the
remaining deferred subfranchisor fees.
<TABLE>
<CAPTION>
REVENUE
-----------
<S> <C>
Balance June 30, 1994 $ 2,627,772
Subfranchisor fees 1,322,238
Revenue recognized (1,722,662)
Contracts amended (613,159)
-----------
Balance June 30, 1995 1,614,189
Revenue recognized (921,218)
-----------
Balance June 30, 1996 692,971
Revenue recognized (220,499)
-----------
Balance June 30, 1997 $ 472,472
===========
</TABLE>
NOTE 16: COMMON STOCK OFFERING
On August 11, 1995 the Company completed the issuance of an additional
862,500 shares of its common stock at $6.125 per share in a public offering.
Proceeds from the offering, net of commissions and other related expenses
totaling $821,278, were $4,461,535. The proceeds were used to provide equipment
lease and purchase financing to Blimpie franchises, expansion of operations to
domestic and international markets and development of Blimpie branded products
for sale in supermarkets and retail locations.
63
<PAGE> 64
BLIMPIE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The following table sets forth a summary of the unaudited quarterly
results of operations for the twelve month periods ended June 30, 1997 and June
30, 1996.
NOTE 17: QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1997 First Second Third Fourth Total
<S> <C> <C> <C> <C> <C>
Total Revenues $10,017,062 $9,186,739 $8,928,875 $9,994,323 $38,126,999
Gross Profit 3,923,459 3,553,852 3,453,292 4,394,573 15,325,176
Net Income 940,723 850,714 755,748 730,809 3,277,994
Primary Earnings Per Share 0.10 0.08 0.08 0.08 0.34
Fully Diluted Earnings
Per Share $ 0.10 $ 0.08 $ 0.08 $ 0.08 $ 0.34
</TABLE>
<TABLE>
<CAPTION>
1996 First Second Third Fourth Total
<S> <C> <C> <C> <C> <C>
Total Revenues $7,767,427 $8,578,196 $8,929,892 $9,715,867 $34,991,382
Gross Profit 3,059,062 3,667,177 3,937,010 4,063,098 14,726,347
Net Income 784,463 1,015,846 1,247,379 992,587 4,040,275
Primary Earnings Per Share 0.09 0.11 0.13 0.10 0.43
Fully Diluted Earnings
Per Share $ 0.09 $ 0.11 $ 0.13 $ 0.08 $ 0.41
</TABLE>
See accompanying notes to consolidated financial statements.
64
<PAGE> 65
Report of Independent Accountants
To the Board of Directors and Shareholders
Blimpie International, Inc. and Subsidiaries
Our report on the consolidated financial statements of Blimpie International,
Inc. is included on page 50 of this Form 10-K. In connection with our audits
of such financial statements, we have also audited the related financial
statement schedule listed in the index on page 49 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
September 12, 1997
65
<PAGE> 66
BLIMPIE INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II
CONSOLIDATED SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- --------------------------------------------------------------------------------------------------------
Additions
-------------------------
Balance at Charged to Charged to Balance at
Beginning of Cost and Other End of
Description Period Expenses Account Deductions Period
- ------------------------ ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1997
Accounts receivable $ 46,400 $ 78,350 -- $ 42,000 $ 82,750
Notes receivable 46,656 13,644 -- -- 60,300
Year ended June 30, 1996
Accounts receivable 129,475 52,830 -- 135,905 46,400
Notes receivable 88,390 -- -- 41,734 46,656
Year ended June 30, 1995
Accounts receivable 107,925 117,600 -- 96,050 129,475
Notes receivable 111,622 -- -- 23,232 88,390
</TABLE>
66
<PAGE> 67
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS
Information regarding directors is incorporated herein by reference from the
Company's definitive proxy statement which will be filed no later than 120 days
after June 30, 1997.
Information regarding all of the Company's executive officers is included in
Part I at Item 3a.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Company's definitive proxy
statement which will be filed no later than 120 days after June 30, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Company's definitive proxy
statement which will be filed no later than 120 days after June 30, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Company's definitive proxy
statement which will be filed no later than 120 days after June 30, 1997.
67
<PAGE> 68
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial statements:
Consolidated financial statements filed as part of this report are
listed under Part II, Item 8 of this Form 10-K.
2. Financial statement schedule.
The financial statement schedule filed as part of this report is listed
under Part II, Item 8 of this Form 10-K.
3. Exhibits:
The exhibits listed in the accompanying index are filed as part of this
report.
Exhibit No. Description
3.1 Certificate of Incorporation of the Company, as amended*
3.2 By-laws of the Company*
4.1 Specimen stock certificate of the Company's common stock*
10.1 Trademark Agreement dated as of August 1, 1976 among Peter
DeCarlo, Anthony P. Conza and David L. Siegel*
10.2 Modification Agreement dated as of November 15, 1977 by and among
Peter DeCarlo, Anthony P. Conza and David L. Siegel*
10.3 Agreement dated as of June 15, 1981 by and between Peter DeCarlo,
Anthony P. Conza and David L. Siegel*
10.4 Agreement dated as of June 1, 1977 by and between Anthony P. Conza
and David L. Siegel and International Blimpie Corporation*
10.5 Agreement dated as of December 15, 1980 by and between
International Blimpie of Illinois, Inc. and International Blimpie
Corporation*
68
<PAGE> 69
10.6 Trademark Distribution Agreement dated July 18, 1984 by and
between International Blimpie Corporation and ISM, Inc. and
Anthony P. Conza, Peter DeCarlo and David Siegel*
10.7 Agreement dated April 30, 1992 by and between Astor Restaurant
Group, Inc. and Blimpie of California, Inc. and ISM, Inc*
10.8 Replacement Subfranchise Agreement dated as of October 17, 1991 by
and between Astor Restaurant Group, Inc. and Patrick J. Pompeo and
Joseph Conza*
10.9 Agreement dated July 19, 1991 by and between Metropolitan Blimpie,
Inc. and Astor Restaurant Group, Inc*
10.10 Area Distributor's Agreement dated October 6, 1976 between
International Blimpie Corporation and Jeffrey P. Wiener and
Charles Leaness*
10.11 Subfranchise Agreement dated April 1, 1984 by and between
International Blimpie Corporation and Joseph P. Conza*
10.12 Lease dated as of December 2, 1987 by and between First Capital
Income Properties, Ltd. - Series IX and Blimpie Capital
Corporation and Lease Modification Agreement dated November 1,
1989 and Second Lease Modification Agreement dated August 21, 1991
between the parties thereto*
10.13 Service Agreement dated as of August 1, 1992 between the Company
and Mellon Securities Trust Company*
10.14 Option, Loan, and Pledge Agreements and Promissory Note dated as
of December 20, 1991 between Astor Restaurant Group, Inc. and
Patrick J. Pompeo*
10.15 Option, Loan and Pledge Agreements and Promissory Note dated as of
December 20, 1991 between Astor Restaurant Group, Inc. and David
L. Siegel*
10.16 Option, Loan and Pledge Agreements and Promissory Note dated as of
December 20, 1991 between Astor Restaurant Group, Inc. and Charles
G. Leaness*
69
<PAGE> 70
10.17 Option, Loan and Pledge Agreements and Promissory Note dated as of
December 20, 1991 between Astor Restaurant Group, Inc. and Anthony
P. Conza*
10.18 Agreement dated as of January 31, 1992 by and between Astor
Restaurant Group, Inc. and Barber & Bronson, Inc*
10.19 Blimpie Retirement Plan 401(k) Profit Sharing Plan*
10.20 Copy of the Company's Group Life, Accident and Health Insurance
Policy*
10.21 Agreement dated December 18, 1991 between Astor Restaurant Group,
Inc. and Llewellyn Distributors, Inc*
10.22 Agreement dated March 1, 1992 between Blimpie International, Inc.
and International Southwest Blimpie, Inc*
10.23 Agreement dated March 1, 1992 between Blimpie International, Inc.
and Blimpie of Atlanta, Inc*
10.24 1993 Stock Incentive Plan*
10.25 Form of Option Issuable Under the 1993 Stock Incentive Plan*
10.26 Standard Form of Franchise Agreement*
10.27 Standard Form of Subfranchise Agreement*
10.28 Agreement dated June 13, 1991 by and between International Blimpie
Co., an unincorporated division of Astor Restaurant Group, Inc.
and Blimpie Fifty-Seven, Inc*
10.29 Form of indemnity agreement between the Company and its directors
and/or officers*
10.30 Standard Form of Sublease Agreement*
10.31 Lease dated February 18, 1993 between Lafayette Astor Associates
and 740 Broadway Top Floor Corp. and Guaranty of Blimpie
International, Inc. with respect thereto*
70
<PAGE> 71
10.32 Fourth Lease Modification Agreement dated April 27, 1994 between
First Capital Income Properties, Ltd., - Series IX and Blimpie
Capital Corporation*
10.33 Agreement dated July 19, 1993 by and between Marc Haskell, Andrew
Whitman, Riaz Baksh and The Border Cafe, Inc. and Blimpie
International, Inc*
10.34 Agreement dated May 24, 1993 by and between Metropolitan Blimpie,
Inc., Anthony P. Conza, David L. Siegel and Blimpie International,
Inc*
10.35 Equipment Lease Agreement dated January 24, 1992 by and between
Rapid Leasing International, Inc. and Consal Enterprises, Inc*
10.36 License Agreement dated July 19, 1993 between The Border Cafe,
Inc. and Blimpie International, Inc*
10.37 Promissory Note, Note Addendum and Pledge Agreement dated March
24, 1995 between Joseph Conza and the Company*
10.38 Form of Warrant Issued to Non-Employee Directors*
10.39 Warrant dated February 12, 1993 Issued to Barber & Bronson
Incorporated*
10.40 Option dated September 15, 1994 Issued to Kirschenbaum & Bond,
Inc*
10.41 Financial Consulting Agreement by and between Barber & Bronson
Incorporated and Blimpie International, Inc. (a copy of which was
filed with the Commission on July 19, 1995 as Exhibit 10.41 to
Amendment No. 1 to the Company's Registration Statement on Form
SB-2 (Reg. No. 33-93738), and is hereby incorporated herein by
this reference).
10.42 International Trademark Licensing Agreement among Anthony P.
Conza, David L. Siegel and the Company*
10.43 Agreement made as of the 18th day of February, 1997 by and between
Anthony P. Conza, David L. Siegel and Blimpie International,
Inc.**
71
<PAGE> 72
11 Statement Re Computation of Per Share Earnings.
21 Subsidiaries of the Company*
The following document has been filed as an Exhibit solely with the
Securities and Exchange Commission:
27 Financial Data Schedule
_________________________
* (a copy of which was filed with the Commission on June 30, 1995 as an
Exhibit of corresponding number to the Company's Registration Statement on Form
SB-2 (Reg. No. 33-93738), and is hereby incorporated herein by this reference).
** (a copy of which was filed with the Commission on May 12, 1997 as an
Exhibit of corresponding number to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1997, and is hereby incorporated herein by this
reference).
(b) Reports on Form 8-K:
The Company did not file any Current Reports on Form 8-K during the
fourth quarter of its fiscal year ended June 30, 1997.
72
<PAGE> 73
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
BLIMPIE INTERNATIONAL, INC.
Dated: September 29, 1997 By: /s/ Anthony P. Conza
--------------------------------------
Anthony P. Conza, President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
PRINCIPAL EXECUTIVE OFFICER
Date: September 29, 1997 /s/ Anthony P. Conza
------------------------------------------
Anthony P. Conza, Chairman, President
and Chief Executive Officer
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
Date: September 29, 1997 /s/ Robert S. Sitkoff
------------------------------------------
Robert S. Sitkoff, Senior Vice President,
Chief Financial Officer and Treasurer
Date: September 29, 1997 /s/ David L. Siegel
------------------------------------------
David L. Siegel, Vice Chairman
Date: September 29, 1997 /s/ Patrick J. Pompeo
------------------------------------------
Patrick J. Pompeo, Director
Date: September 29, 1997 /s/ Charles G. Leaness
------------------------------------------
Charles G. Leaness, Director
Date: September 29, 1997 /s/ Alvin Katz
------------------------------------------
Alvin Katz, Director
Date: September 29, 1997 /s/ Harry G. Chernoff
------------------------------------------
Harry G. Chernoff, Director
73
<PAGE> 1
EXHIBIT 11
BLIMPIE INTERNATIONAL, INC. AND SUBSIDIARIES
COMPUTATION OF PER COMMON SHARE EARNINGS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Year Ended June 30,
1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income applicable to
Common shares $3,277,994 $4,040,275 $2,339,916
========== ========== ==========
Primary
- -------
Weighted average number
Of primary common shares
Outstanding 9,517,462 9,372,447 8,573,797
Incremental shares for
Stock options and warrants 240,474 132,537 218,532
---------- ---------- ----------
Total number of shares used
In per share calculations 9,757,936 9,504,984 8,792,329
========== ========== ==========
Primary Earnings per common share $0.34 $0.43 $0.27
===== ===== =====
Fully diluted
- -------------
Weighted average number
Of primary common shares
Outstanding 9,757,936 9,372,447 8,573,797
Increase to assume conversion
Of options and warrants to reflect
Maximum dilution effect -- 364,961 247,755
---------- ---------- ----------
Total 9,757,936 9,737,408 8,821,552
========== ========== ==========
Fully diluted earnings
per common share $0.34 $0.41 $0.27
===== ===== =====
</TABLE>
74
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 3,532,339
<SECURITIES> 4,462,253
<RECEIVABLES> 2,167,575
<ALLOWANCES> 82,750
<INVENTORY> 226,069
<CURRENT-ASSETS> 11,766,693
<PP&E> 2,121,622
<DEPRECIATION> 868,619
<TOTAL-ASSETS> 27,704,349
<CURRENT-LIABILITIES> 4,005,486
<BONDS> 0
0
0
<COMMON> 95,262
<OTHER-SE> 18,865,123
<TOTAL-LIABILITY-AND-EQUITY> 27,704,349
<SALES> 36,841,342
<TOTAL-REVENUES> 38,126,999
<CGS> 22,801,823
<TOTAL-COSTS> 22,801,823
<OTHER-EXPENSES> 10,917,566
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,151
<INCOME-PRETAX> 5,292,994
<INCOME-TAX> 2,015,000
<INCOME-CONTINUING> 3,277,994
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,277,994
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.34
</TABLE>
