In return, the subfranchisor or master licensee receives a portion of the initial franchise fees and continuing royalties that the Company receives from the franchisees. In the past, the company, like other companies in its industry, has recorded these fees as revenue generally when received, or when collection was contractually due, as it was the company's opinion that all material services or conditions relating to the sale had been satisfied at that time.
Prior to the September 28, 1999 due date for the filing of the company's Form 10-K for the fiscal year ended June 30, 1999, the Company became aware that the Securities and Exchange Commission was challenging the revenue recognition policies of some registrants. After discussing the company's revenue recognition policy with their independent auditors, the company's management delayed the filing of its 10-K and asked the Staff of the Commission to meet with it in order to determine the most appropriate way to recognize its subfranchise and master license revenues.
The company has continued its dialogue and exchange of information with the SEC Staff over the past month while the Staff has considered the company's views as to what changes, if any, should be made to its revenue recognition policies. The company believes that it will achieve a resolution of the foregoing issues with the SEC Staff within the next several days, and will make a change in its revenue recognition policy for subfranchise and master license fees which will be accounted for as a cumulative effect of an accounting change.
The company believes such resolution will not require the company to restate earnings for prior periods. The company will file its Form 10-K, as well as its Form 10-Q for the quarter ended September 30, 1999, shortly thereafter. As previously disclosed, because of the company's failure to file its Form 10-K when it became due, the company did not meet the continued listing guidelines of the American Stock Exchange, and the Exchange halted trading in the company's common stock. Once the company is current in its filings and the Exchange has reviewed and accepted the filings, the company expects the Exchange will lift the trading halt and allow the company's common stock to resume trading.
Vice president and chief financial officer Brian Lane commented, "Shareholders need to understand that this issue affects only the way in which we recognize revenues that we either have received or have a contractual right to receive. There have been no assertions that the company has recorded fictitious revenues or overstated the fees that were due according to the related contracts." Mr. Lane continued, "At this point, the final outcome of this matter is uncertain. It is likely that the company will change its accounting policy to defer subfranchise and master license fees over a period of five to ten years, which will result in an adjustment in fiscal 1999 to defer some of the revenues that had been recorded in prior years. We have not completed all of the calculations necessary to determine the effect of this change on fiscal 1999 results, but we believe that the adjustment will result in our reporting a loss for the year.
"However, the adjustment that we record in fiscal 1999 will be recorded as deferred revenue at June 30, 1999, which will be amortized into income over the next five to ten years. As we stated in an earlier press release, this change in no way affects the past or future cash flows of the company. As of June 30, 1999, we expect to report cash and investments of nearly $11 million and working capital of approximately $10 million." Mr. Lane continued, "We have become aware that certain companies have tendered offers to purchase BLM at prices well below its book value per share and its cash and investments per share. Obviously, the decision to participate in such a transaction is solely at the discretion of shareholders. We believe that our investors should understand that this issue relates only to a change in an accounting policy, and does not affect our operations, cash flows or our financial condition."
Headquartered in New York and with offices in Atlanta and Houston, Blimpie International, Inc. franchises Blimpie Subs & Salads and Pasta Central and is the majority owner of Maui Tacos International, Inc., the franchisor of Maui Tacos and Smoothie Island.
Blimpie Subs & Salads, a quick-service sandwich chain, has approximately 2,100 units operating in locations throughout the United States and in 13 other countries. Pasta Central is a baked pasta concept in the home meal replacement category that addresses current eating trends for eat-in or take home meals. Maui Tacos offers a restaurant-quality menu of "Maui-Mex" items, including traditional Mexican food marinated in Hawaiian spices. Smoothie Island offers a menu of blended beverages of frozen yogurt, fruit and nutritional supplements. The Company also owns the subsidiary B1 Concept Systems, Inc., a professional design and equipment service company.
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