10-K 1 d10k.txt ANNUAL REPORT, 6-30-2001 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended June 30, 2001 Commission File Number 0-21036 BLIMPIE INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) New Jersey 13-2908793 (State or Other Jurisdiction of (IRS Employer Identification No.) Incorporation or Organization) 740 Broadway, New York, NY 10003 (Address and Zip Code of Principal Executive Offices) (212) 673-5900 (Registrant's telephone number including area code) Securities Registered Under Section 12(b) of the Exchange Act: Common Stock, $.01 Par Value Securities Registered Under Section 12(g) of the Exchange Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __ No X --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the registrant's common stock held by non- affiliates of the registrant as of September 18, 2001 was approximately $6,281,000. Solely for purposes of the foregoing calculation all of the registrant's directors and officers are deemed to be affiliates. There were 9,163,659 shares of the registrant's common stock outstanding as of October 8, 2001. Table of Contents

2 PART I ITEM 1. BUSINESS Forward-looking Statements Certain forward-looking statements are included in this report. They use such words as "may," "will," "expect," "believe," "plan," "anticipate" and other similar terminology. These statements reflect management's current expectations and involve a number of risks and uncertainties. Actual results could differ materially due to changes in: global and local business and economic conditions; legislation and governmental regulation; competition; success of operating initiatives and advertising and promotional efforts; food, labor and other operating costs; availability and cost of land and construction; adoption of new or changes in accounting policies and practices; consumer preferences, spending patterns and demographic trends; political or economic instability in local markets; and currency exchange rates. Recent Developments - Anticipated Sale of the Company On October 5, 2001, we entered into an agreement and plan of merger with an investor group headed by Jeffrey Endervelt (the "Endervelt Group"), one of our subfranchisors. Pursuant to the merger agreement, Mr. Endervelt's company, Sandwich Acquisition Corporation ("SAC"), will merge with and into us, and we will be the surviving corporation. In the merger, the Endervelt Group will acquire all of our outstanding common stock at a price of $2.80 per share, or approximately $25,800,000. The transaction, which is expected to close during the first quarter of calendar 2002, is subject to the approval of our shareholders. In connection with the merger agreement, the following members of our senior management, who currently own approximately 58% of our outstanding shares, entered into a voting agreement with SAC: . Anthony P. Conza, Chairman of the Board and Chief Executive Officer . David L. Siegel, Vice Chairman of the Board and Chief Operating Officer . Charles G. Leaness, a director and Executive Vice President . Patrick Pompeo, a director and Executive Vice President and . Joseph Conza, a Senior Vice President In accordance with the voting agreement, those officers have agreed to vote their shares in favor of the merger agreement, and have granted to SAC a proxy to vote their shares in favor of the transaction. Those officers may terminate the voting agreement and revoke their proxies if our Board of Directors withdraws its recommendation of the merger in favor of a superior proposal (a term which is defined in the merger agreement). Additionally, the merger agreement provides that we will have the ability to conduct a market check for a 30-day period. The merger agreement allows us to terminate the merger if the Board determines that it has received a superior proposal, which would require the payment by us of a break-up fee of $1.3 million plus up to $200,000 of expenses. The foregoing statements have been included in this Report for the sole purpose of disclosing material information that we believe anyone reading this Report should know about us. Such statements should not be considered by anyone --- to be a solicitation of any shareholder's proxy. We will file a proxy statement and other relevant documents concerning the proposed merger transaction with the SEC. We urge all of our shareholders to read the proxy statement when it becomes available and any other relevant documents filed with the SEC because they will contain important information about the proposed transaction. Shareholders will be able to obtain the documents that we file with the SEC free of charge at 3 the Web site maintained by the SEC at www.sec.gov. In addition, interested investors may obtain copies of the documents we file with the SEC free of charge by requesting them in writing from us at the following address: Blimpie International, Inc., 1775 The Exchange, Atlanta, GA, 30339 Attention: Investor Relations, or by telephoning our Investor Relations Department at (800) 447-6256 Ext. 165. General We engage in franchising, subfranchising and master licensing of the trademarks, trade names, service marks, logos, know-how, marketing concepts and marketing programs for each of our brands. We franchise our BLIMPIE Subs & Salads and PASTA CENTRAL brands directly through our Company, and we franchise the MAUI TACOS and SMOOTHIE ISLAND brands through our majority owned subsidiary, Maui Tacos International, Inc. ("MTII"). Our menu of BLIMPIE Subs & Salads, consisting of quick-service, healthy, sub sandwiches, is offered by approximately 2,000 franchise outlets operating throughout the United States, Puerto Rico and in 14 other countries. BLIMPIE is our registered trademark. Unless otherwise specified, the term "BLIMPIE" includes BLIMPIE. As of June 30, 2001, there were eight PASTA CENTRAL restaurants operating in the United States and Puerto Rico, 15 MAUI TACOS restaurants operating in the United States, including two that are owned by us, and 80 SMOOTHIE ISLAND locations located throughout the United States, Puerto Rico and in four other countries. The baked pasta meals served at our PASTA CENTRAL outlets address current eating trends for eat-in or take home replacement meals. MAUI TACOS restaurants provide a healthy, affordable menu of "Maui-Mex" items, including traditional Mexican food marinated in Hawaiian spices. SMOOTHIE ISLAND is a selection of blended beverages of frozen yogurt, fruit and nutritional supplements sold through the BLIMPIE, PASTA CENTRAL, and MAUI TACOS locations. We also provide professional store design service and equipment sales through our wholly-owned subsidiary, B I Concept Systems, Inc. Currently, we operate the subfranchise territory in Puerto Rico, but do not operate any other subfranchisor or master licensor areas within the Blimpie International system. A franchisee pays a non-refundable initial franchise fee in connection with an executed franchise agreement which grants to the franchisee the right to use the various trademarks, trade names, service marks, logos, marketing concepts and marketing programs, and to operate an outlet at a location to be agreed upon by the franchisee and us in accordance with the operations manual which we issue to our franchisees. Each franchisee is obligated to purchase raw materials, both food and non- food, from authorized and designated distributors who may only sell authorized and approved raw materials purchased from approved manufacturers and suppliers. We negotiate relationships with manufacturers and suppliers on a national level for all products except produce, whether or not they bear our logos. We negotiate and enter into recognition agreements authorizing approved distributors to deliver raw products to our franchise outlets from approved manufacturers and suppliers. All products purchased by franchisees on a local level must meet our quality standards. Franchisees may request approval of additional manufacturers, suppliers or distributors subject to our approval. We base our approval upon a number of conditions including price, quality, ability to service the system on a national basis and such other reasonable standards as we may promulgate from time to time. Currently, there are no other manufacturers, suppliers or distributors approved by us other than those that we have designated. We believe that we could easily obtain alternate manufacturers, suppliers and distributors should any of our current manufacturers, suppliers or distributors become unwilling or unable to provide our franchisees with the authorized required raw materials. Our rights regarding the various BLIMPIE trademarks employed by all of our BLIMPIE outlets located throughout the world, and the methodology and know-how which comprise our BLIMPIE marketing concepts and programs, are limited to specific geographic regions throughout the world, pursuant to written licensing agreements between us and Metropolitan Blimpie, Inc. ("MBI"), a company with which we have no affiliation. See "Business - Trademarks, Trade Names, Service Marks and Logos; Know-How and Methods of Operation." Since our incorporation in 1977, the chain of franchised BLIMPIE outlets has expanded to encompass 1,955 outlets located in 47 states, Argentina, Aruba, Canada, Cyprus, Dominican 4 Republic, Great Britain, Guam, Lebanon, Mexico, Panama, Poland, Puerto Rico, Saudi Arabia, South Africa and Venezuela (as of June 30, 2001). See "Business - Outlet Locations." There are approximately 250 additional BLIMPIE outlets which are controlled by MBI that are located in areas of the country in which we do not possess rights to license the BLIMPIE trademarks or sell franchises or subfranchises. Commencing in 1977, we began selling individual outlet franchises and area subfranchises. In 1995, we began selling master licenses for various territories located outside of the United States. We and MBI own, respectively, undivided 60% and 40% interests in the BLIMPIE Trademarks. We distribute the internationally registered BLIMPIE Trademarks pursuant to an agreement with MBI which provides for automatic annual renewals until July, 2090. See "Business - Trademarks, Trade Names, Service Marks and Logos; Know-How and Methods of Operation." We derive our revenue primarily from four sources: (1) store equipment sales, (2) continuing franchise fees based upon each franchisee's gross sales, (3) fees from the grant of individual outlet franchises and (4) fees from the grant of subfranchises to Subfranchisors and the grant of master licenses to Master Licensors worldwide. Individual outlet franchises are granted for both "traditional" locations such as free-standing buildings, shopping malls, and in- line urban store clusters, and "nontraditional" locations, i.e., convenience stores, institutional food service entities, colleges, schools, mass feeders (such as institutional food service providers and in-facility commissaries) and hospitals. These locations may sell or otherwise make all or part of our various food product brands available to their customers, clientele or attendees through facilities that may or may not contain all of the components normally associated with a traditional outlet, such as kitchen, food preparation and customer dining areas. We also have commenced developing several new types of product distribution formats, some of which we have begun to introduce and some of which we anticipate introducing in the future. The initial franchise fee currently is $18,000 for a traditional BLIMPIE location, $28,000 for a co-branded BLIMPIE / PASTA CENTRAL location, $20,000 for a co-branded MAUI TACOS / SMOOTHIE ISLAND location and $2,500 for a SMOOTHIE ISLAND location. The initial franchise fee for a nontraditional franchise can range between $1.00 and $15,000 depending on the number of nontraditional transactions executed, the location of the nontraditional franchisee, the marketing area in question and other subjective factors. After a location has been found and the lease or purchase thereof has been negotiated by the franchisee and approved by us, the franchisee then constructs and installs the outlet in accordance with design and layout specifications provided by us. Franchisees are required to maintain specified standards as to food quality, menu items, uniforms, appearance, sanitation and all other aspects of outlet operations. In addition to the initial franchise fee, a franchisee also pays all other costs and expenses related to the installation of the outlet at an approved location. An equipment package, which typically includes slicing machines, refrigeration cases, food preparation counters and signs bearing the registered logos, costs approximately $25,000 to $40,000 for a BLIMPIE outlet, and may cost in excess of $100,000 for a co-branded BLIMPIE / PASTA CENTRAL or MAUI TACOS / SMOOTHIE ISLAND outlet. Construction of an outlet, which generally includes walls, floor, ceiling, plumbing and electrical work required to modify an existing premises to an approved design costs between $10,000 to $80,000 to complete. These costs, plus the initial lease security payable to the owner of the leased premises and utility deposits to the various utility companies and recommended minimum opening inventory and working capital aggregating approximately $5,000 to $15,000, comprise the approximate cash investment of an average franchise. Franchisees are required to pay continuing franchise fees of 6% of their weekly gross sales, as well as mandatory advertising contributions of 4% of weekly gross sales. BLIMPIE outlet Franchisees who acquired their franchise agreements before the fall of 1994 are required to pay 6% continuing fees, but mandatory advertising contributions of 3%. Three percent of the advertising contributions made by franchisees in the same general marketing area are used for the payment of advertising which benefits all franchisees in that local marketing area, while the remainder is used for national advertising. 5 Financial Information About Business Segments See Note 13 to our audited consolidated financial statements. The BLIMPIE Outlet Franchise A BLIMPIE outlet is a non-cooking sandwich outlet characterized by portion- controlled meat and cheese combinations generally sold on six inch or twelve inch French/Italian white or wheat bread garnished with special BLIMPIE spices and dressings along with salads and other food items. The sandwich products sold in these outlets are known as BLIMPIE sandwiches and the outlets themselves are known as BLIMPIE outlets. We require each of our franchisees to offer food products from a list of products authorized by us. Such products for a BLIMPIE outlet include hot sandwiches, including items such as Italian meatball sandwiches and chicken breast sandwiches, and cold sandwiches, including items such as roast beef and club sandwiches. Our "signature" item is the "BLIMPIE Best" sandwich, which consists of ham, salami, cappacola, prosciuttini and provolone. In addition, all BLIMPIE sandwiches are dressed at no additional charge with tomatoes, lettuce, onions, oil and vinegar and oregano. We establish recommended prices for food products that franchisees may or may not adopt. Accordingly, such prices differ depending upon geographic location. For example, in New York City a "BLIMPIE Best" may sell for $4.19, while in Atlanta, Georgia, the same sandwich may be purchased for $3.19. In addition to the authorized BLIMPIE sandwich line, BLIMPIE outlets also offer a variety of salads, baked products, and a variety of other products produced mostly from raw frozen dough products and baked in the approved BLIMPIE deck oven installed in each BLIMPIE outlet. Prices for all authorized products vary depending upon geographic location. The PASTA CENTRAL Outlet Franchise A PASTA CENTRAL outlet offers Italian-style baked pasta dishes, gourmet pizzas, and salads for in-store dining, take-away, or for final preparation and consumption at home. The concept currently is being developed as a co-brand with our BLIMPIE Subs & Salads franchises as a way to increase the sales potential, particularly during the dinner day part for co-branded locations, with only a small increase in the initial investment. PASTA CENTRAL's menu items include baked pasta dishes, gourmet pizzas, salads, and dessert items. Its "signature" item is the "Central Special," which consists of penne pasta tossed with a cream-based tomato sauce and served with grilled chicken and shaved cheese. Menu items are offered individually or in various combinations at recommended price points, which the franchisee may or may not adopt. The MAUI TACOS Outlet Franchise A MAUI TACOS outlet offers quality Mexican items like tacos and burritos in a quick-service restaurant atmosphere. The menu includes typical Mexican offerings using beef, chicken or seafood that has been marinated in Hawaiian spices. The outlets are known as MAUI TACOS outlets. The MAUI TACOS product line consists of traditional Mexican items such as tacos, quesadillas, and burritos filled with charbroiled steak, chicken, and seafood entrees marinated in pineapple and lime juices with Hawaiian spices. As an accompaniment, tortilla chips, guacamole, and a variety of salsas are available. Our Subfranchises and Master Licenses Each Subfranchisor of one of our brands pays a subfranchise fee that is based upon the population of the subfranchise territory. At present, the fee, which can typically range from $10,000 to over 6 $1,000,000, is based upon a calculation of $.10 per person located within the area that is the subject of the subfranchise for BLIMPIE and MAUI TACOS subfranchise territories. Domestic PASTA CENTRAL territories are managed by BLIMPIE subfranchisors, and SMOOTHIE ISLAND territories are managed by either the BLIMPIE or MAUI TACOS subfranchisor in the area. We do not charge a separate fee for the right to subfranchise our PASTA CENTRAL or SMOOTHIE ISLAND brands for existing BLIMPIE or MAUI TACOS subfranchisors located in the United States. In addition to paying our subfranchise fees, each Subfranchisor must join and make contributions to a Subfranchisor advertising cooperative association sponsored by us, which purchases franchise advertisements in national periodicals for the benefit of all Subfranchisors. A Subfranchisor's annual contribution to the advertising cooperative typically ranges between $1,200 and $6,000. We make voluntary contributions to the cooperative association that match the contributions made by the Subfranchisors. We award subfranchises consisting of a specifically defined territory within which the Subfranchisor has the exclusive right to solicit potential purchasers of our franchises for a period of 50 to 60 years. Such individual purchasers of our franchises then purchase, or sublicense, the right to use our trademarks, trade names, service marks, logos, marketing concepts and marketing programs directly from us. Our standard form of subfranchise agreement grants to the Subfranchisor the exclusive license to purchase the territory for a one year period, followed by four to ten renewal terms, all but the last of which are annual in duration. The license is subject to our continuing right to market and sell the trademarks, trade names, service marks, logos, marketing concepts and marketing programs within specified territories. If all terms and conditions of the subfranchise agreement have been met during the initial one-year term and each of the subsequent one year renewal terms, a 50 to 60 year right is granted during the final renewal term upon payment of the fee set forth in the agreement. Each subfranchise agreement obligates the Subfranchisor to satisfy all of the operational obligations owed by us to each franchisee within the Subfranchisor's territory at the sole expense of the Subfranchisor; to use his best efforts to promote the sale of franchises within his territory; and to meet certain sales quotas. In the event of the Subfranchisor's default, each such agreement is terminable by us upon giving thirty days' notice under certain provisions of the agreement. The Subfranchisor may terminate the agreement upon certain defaults by us, if such defaults remain uncured for more than 30 days to more than 75 days, depending on the nature of the default. Subfranchisors who are in full compliance with the obligations imposed upon them pursuant to the subfranchise agreement are entitled to receive one half of each initial franchise fee (after deductions for sales commissions, design, and training fees) paid by new franchisees establishing outlets within the Subfranchisor's territory, and one half of the 6% of gross sales continuing franchise fees paid by such franchisees pursuant to their respective franchise agreements. For territories outside of the United States, Canada and Puerto Rico, we grant master license agreements that are generally equivalent to a domestic subfranchise agreement. The significant differences between a master license and a subfranchise are that the master license fee may be as low as $0.01 per person located in the master license territory; the individual franchisees pay a continuing fee royalty of 8% of gross sales, which is split 5% to the master licensor and 3% to us; the individual franchisee pays an advertising contribution of 2% of gross sales; and the master licensor, not us, is responsible for establishing and managing the advertising cooperatives within the territory. We market and sell franchises, subfranchises and master licenses through advertisements placed in local and national periodicals, through presentations at trade shows and franchise conventions, through referrals from existing franchisees, Subfranchisors and Master Licensors and through informational materials placed in operating outlets. As of June 30, 2001 there were 84 existing domestic BLIMPIE subfranchisors, at least one of which is located in each of the 47 states in which the 1,894 domestic BLIMPIE outlets are located; six Canadian BLIMPIE subfranchisors, which are located in the Provinces of Alberta, British Columbia, Manitoba, Ontario and Saskatchewan, in which 13 BLIMPIE outlets are located; 12 Master Licensors for the 7 countries of Argentina, Aruba, Cyprus, Dominican Republic, Great Britain, Guam, Lebanon / Saudi Arabia, Mexico, Panama, Poland, South Africa, and Venezuela in which collectively there are 41 outlets located, and one Company-operated territory in Puerto Rico in which seven BLIMPIE outlets are located. Included in these BLIMPIE outlets were eight BLIMPIE / PASTA CENTRAL co-branded outlets, one each in Georgia, South Carolina, Texas and Wyoming and four in Puerto Rico. Also as of June 30, 2001, there were 13 domestic MAUI TACOS subfranchisors and 15 domestic locations in operation. There were five MAUI TACOS outlets in operation in Georgia, two in Hawaii, and one each in Alabama, Florida, Illinois, Minnesota, New Jersey, New York, Texas and Washington, D.C. We own two of these locations, but intend to sell or close the location in New York City early in fiscal 2002. Such subfranchises and master licenses range in size, depending upon the specific geographical area involved, from entire countries or states to a specific county or counties. See "Business - Outlet Locations"; "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations." Services to Franchisees On a continuing basis, franchisees in the U.S., Canada and Puerto Rico are furnished with advisory assistance from us regarding outlet operations, new menu items and new marketing aids developed by us. No additional fees are charged to franchisees for these services or for the training program described below. We also provide, when we, in our sole discretion deem it appropriate to do so, services to franchisees by visiting their outlets and inspecting them for quality, cleanliness and service. A written operation inspection analysis is provided after each inspection. Outside of the U.S., Canada and Puerto Rico, Master Licensors provide all such services, with our assistance. We provide training for new franchisees in the U.S., Canada and Puerto Rico consisting of (i) 40 hours of pre-training classes at an existing outlet approved by us, (ii) 80 hours of classroom training at our Georgia training center, and (iii) an additional 80 hours of operational post-training at an existing outlet approved by us. We provide training for new Subfranchisors and Master Licensors consisting of two weeks of classroom training at our Georgia training center, plus 80 hours of operational training at an existing outlet approved by us. The training program addresses all phases of outlet operations from service training to financial management, including the various controls of the marketing system specified in the Operations Manual. The training program covers inventories, ordering procedures, hiring and firing, equipment maintenance, product controls, bookkeeping and accounting. The training provided to Subfranchisors and Master Licensors also encompasses franchisor-related activities including, but not limited to, franchise sales, communication, analysis of franchisee construction needs and the fulfillment thereof. After an outlet is constructed or renovated and the equipment installed, one of our representatives or a representative of the Subfranchisor or Master Licensor generally is on site for one week after the outlet opens for the purpose of providing additional operational assistance and supervisory functions. Each Subfranchisor or Master Licensor is responsible for providing each franchisee within its territory with operational assistance throughout the term of its subfranchise or master license agreement. Generally, our representative is only on site as described above for the opening of the first three outlets that open within a territory. However, our representatives remain available on a continuing basis to provide additional support to franchisees, Subfranchisors and Master Licensors. As an additional means of support, we maintain a toll-free hotline by which franchisees and Subfranchisors may contact our representatives for advice and assistance regarding operational matters. Outlet Properties Each traditional franchisee in the U.S., Canada and Puerto Rico generally is required to lease the outlet premises from one of our designated leasing subsidiaries. Each franchisee outside of the U.S., Canada and Puerto Rico generally is required to lease the outlet premises from a corporation in which the Master Licensor owns 50% and we or our designee owns 50%, or such franchisee is required to provide a 8 collateral assignment of the lease to the jointly owned corporation. In all such cases, it is the franchisee's sole obligation to find the premises to be leased and to obtain our approval of the site of his franchised outlet. Once the location is approved, we (or our leasing subsidiary) will negotiate and enter into a lease of the premises, subject to the franchisee's approval. Subsequently, we (or our leasing subsidiary) will enter into a sublease with the franchisee for the entire term and renewal term, if any, of the lease of the premises less one day (generally 10 to 20 years). The percentage royalty and advertising payments due under the franchise agreement constitute additional rent under the sublease. Payment of the percentage royalties and advertising fees under the franchise agreement satisfies the additional rental payment obligation under the sublease. All rents specified in the lease are paid directly by the franchisee to the landlord specified in the lease pursuant to the cancelable authorization by the subsidiary leasing corporation set forth in the sublease. Accordingly, except in a rare case in which we or one of our subsidiaries may be the owner and landlord of a franchisee's outlet, no funds that constitute rental payments are ever collected for use by us. We have no payment or performance obligations with respect to any of the existing outlet location leases, except for less than one percent of those leases. The leasing/subleasing mechanism described above enables us to maintain control of each outlet premises and to enforce franchisee compliance with our authorized product line and quality standards. Additionally, since percentage royalties and advertising fees constitute additional rent under the subleases, the leasing/subleasing mechanism gives us an additional vehicle through which to enforce our rights regarding receipt of such payments and payments to the landlord of the outlet premises. Typically, upon a franchisee's failure to make timely rental payments, our leasing subsidiary will receive notice from the landlord. The franchisee is then notified of its default and is given the opportunity to cure the default. If the franchisee fails to cure the default, eviction proceedings usually will be instituted by either the unaffiliated landlord or our leasing subsidiary. Following eviction of the franchisee, we, with the landlord's approval, will attempt to sell the existing franchised outlet to a new franchisee who will take possession of the premises subject to the terms of the prior lease and sublease, or under a new lease negotiated by us with the landlord, and a new sublease. In cases where a lease has been terminated and/or a franchisee has been evicted and a replacement franchisee cannot be obtained by us to cure all defaults and operate or re-open the outlet in question, it is our general policy either to abandon the location and the leasing subsidiary, or to dispose of ownership of the leasing subsidiary to unaffiliated parties for nominal consideration. Substantially all leases executed by our various leasing subsidiaries during the past five years include provisions (and it is our intention that all future leases will include provisions) that the respective landlords thereunder will not directly or indirectly claim or institute legal proceedings against us. All of the 1,955 existing BLIMPIE and BLIMPIE / PASTA CENTRAL outlets and the 15 MAUI TACOS outlets (as of June 30, 2001) are operating in premises located in free-standing buildings, shopping malls, shopping centers, in-line urban store clusters, convenience stores, institutional food service facilities, colleges, schools, mass feeders, hospitals, bowling alleys, golf courses and subway stations. The size of an outlet varies from 400 square feet to approximately 3,500 square feet. Since the cost of renovating pre-existing premises into an approved outlet is dependent upon the condition and prior use of the premises, an exact estimation is impossible. Historically, the cost of outlet construction/renovation, which must be completed in accordance with design and layout specifications provided by us, and at the franchisee's sole expense, has ranged from as low as $10,000 to as high as $95,000. The franchisee must also equip the outlet at the franchisee's sole cost and expense. Such equipment costs total, in the aggregate, approximately $25,000 to $100,000. 9 Outlet Locations As of June 30, 2001, we operated one MAUI TACOS outlet in Atlanta, Georgia, and one in New York City, and had four franchised MAUI TACOS locations in Georgia, two in Hawaii, and one in each of Alabama, Florida, Illinois, Minnesota, New Jersey, Texas and Washington, D.C. The following table sets forth the number of BLIMPIE franchised outlets in operation as of June 30, 2001, and includes eight co-branded BLIMPIE / PASTA CENTRAL locations, four of which were located in Puerto Rico and one in each of Georgia, South Carolina, Texas and Wyoming:

Government Regulation The Federal Trade Commission and various state governmental authorities have adopted laws regulating franchise operations and the franchisor-franchisee relationship. Such laws vary from merely requiring the filing of disclosure documents concerning the offer and sale of franchises to the application of statutory standards regulating established franchise relationships. The most common provisions of those laws regulate the substance of franchisor-franchisee relationships and establish restrictions on the ability of franchisors to terminate or to refuse to renew franchise agreements. Some states' laws contain 10 provisions designed to ensure the fairness of the franchise agreements to franchisees by, among other means, including limitations, prohibitions and/or restrictions pertaining to the assignability of the rights of franchisees; a franchisee's right to own or be involved in other businesses; franchisee membership in trade associations; and franchisor interference with franchisee employment practices. In addition to the foregoing state regulations, the Federal Trade Commission has adopted rules and guidelines that require franchisors to make certain disclosures to prospective franchisees prior to the offer or sale of franchises. In addition to requiring the disclosure of information necessary for a franchisee to make an informed decision on whether to enter into a franchise relationship, the guidelines delineate the circumstances in which franchisors may make predictions on future sales, income and profits. We do not furnish or authorize our salespersons to furnish any oral or written information on the actual or projected sales, costs, income or profits of a franchise. Failure to comply with such rules constitutes an unfair trade practice under Section 5 of the Federal Trade Commission Act. Several state and federal courts have revealed a tendency to be sympathetic to and desirous of protecting the rights and interests of franchisees in litigation with their franchisors. Taking such tendencies into consideration, we may modify our licensing activities, or we may choose not to enforce certain of our rights and remedies under certain franchise and lease agreements. However, we do not believe that such modifications, delays, or failures will have a materially adverse effect on our operations. The law applicable to franchise operations and relationships is rapidly developing, and we are unable to predict the effect on our operations of additional requirements or restrictions, which may be enacted or promulgated, or of court decisions which may generally be adverse to the franchise industry. We believe that we have conducted and are conducting our business in substantial compliance with all applicable laws and regulations governing our operations. The franchisees' outlets also are subject to regulatory provisions relating to the wholesomeness of food, sanitation, health, safety, fire, land use and environmental standards. Suspension of certain licenses or approvals, due to failure to comply with applicable regulations or otherwise, could interrupt the operations of the affected outlet or otherwise adversely affect the outlet. The franchisees are also subject to federal and state laws establishing minimum wages and regulating overtime and working conditions. Changes in such laws could result in an increase in labor costs that could adversely affect the outlet. We believe that we are conducting our business in substantial compliance with all applicable laws and regulations governing our operations. Trademarks, Trade Names, Service Marks and Logos; Know-How and Methods of Operation We regard our trademarks and the methodologies and know-how which comprise each of the marketing concepts and programs employed by our various brands (each, a "Marketing System") as having significant value and as being important to our marketing efforts. Each of our franchise and subfranchise agreements authorizes our franchisees and subfranchisors, respectively, to use the trademarks and Marketing System pertaining to the brand that is the subject of such agreements, along with all other future trademarks pertaining thereto. Our trademarks and Marketing Systems may only be used by traditional and nontraditional outlets that sell our products, and by our licensed distribution points. There are specific product limitations regulating each outlet so that franchisees may sell only those products authorized by their particular franchise agreement and Operations Manual, or that we otherwise approve. Any variation from the authorized product line is actionable by us. We currently own an undivided 60% interest in the domestic and international BLIMPIE trademarks. The remaining 40% interest in those trademark rights is owned by MBI. Through various agreements that we have entered into with MBI, the trademark rights are shared by both MBI and us. Both companies have the exclusive rights to the trademarks in certain domestic territories, and for the remaining territories, we have licensed the rights to the trademarks from MBI in exchange for a licensing 11 fee generally equal to 30% of the revenues, after deducting direct expenses incurred by us in the territories. The territories for which we have licensed the right to distribute the BLIMPIE trademarks and license the BLIMPIE Marketing System from MBI include: Alaska, Arkansas, Northern California, Colorado, Hawaii, Iowa, Kansas, Missouri, Nebraska, Nevada, North Dakota, Oklahoma, South Dakota, and all territories outside of the United States. The territories in which MBI has retained the right to distribute the BLIMPIE trademarks and license the BLIMPIE Marketing System (the "MBI Territories") include Delaware, Maryland, New Jersey (except for portions of the northeastern section of the State), the counties of New York, Queens, Kings, Richmond, Rockland, Bronx and Westchester in New York, Pennsylvania (from the eastern border westward to and including Harrisburg), Virginia and Washington, D.C. We possess the exclusive right to license the BLIMPIE trademarks and BLIMPIE Marketing System in the area of Northern California between the southern border of Monterrey and the northern border of the state. Blimpie of California, Inc. ("BOC"), a corporation which is not affiliated with us, possesses the exclusive right to license the BLIMPIE trademarks and BLIMPIE Marketing System throughout the balance of the state of California. A number of franchised BLIMPIE outlets located in Southern California have been established pursuant to trademark licenses granted by BOC. We receive 2.5% of the gross sales by such franchisees, and share half of such receipts with MBI. The agreement we entered into with MBI in 1991 with respect to the licensing of the BLIMPIE trademarks and the BLIMPIE marketing system outside of the United States (the "1991 Agreement") provides for automatic annual renewals until July 2090, provided that we make all payments due to MBI, subject to a minimum annual payment of $100,000. If we ever failed to satisfy our payment obligations under that agreement, we would lose the right to license the BLIMPIE trademarks and BLIMPIE Marketing System outside of the U.S. and throughout the MBI Territories. From July 1991 through June 30, 2001, we paid approximately $4,718,000 to MBI pursuant to the 1991 Agreement. We have no reason to believe that MBI would ever seek to cancel or terminate the 1991 Agreement. Furthermore, we believe that we will continue to comply with the terms of the agreement, and that it will remain in effect throughout its entire permissible term. However, no assurance can be given that the agreement will remain in full force and effect until July 2090. We acquired our 60% interest in the trademark rights noted above through various transactions with Anthony P. Conza, our Chairman and Chief Executive Officer ("Conza") and David L. Siegel, our Chief Operating Officer ("Siegel"). We received a 99-year license in the domestic rights in the BLIMPIE trademarks from Conza and Siegel in 1976. In 1997, we purchased our share of the international rights to the BLIMPIE trademarks from Conza and Siegel under an agreement which was negotiated on our behalf by a Committee of the Board of Directors that consisted solely of outside directors. We agreed to pay $4.5 million ($3 million to Conza and $1.5 million to Siegel), plus certain contingent fees which were to take effect after cumulative international revenues exceeded $5 million, in consideration for their sale of such rights to us. That agreement further provided that Conza and Siegel could receive annual payments totaling $150,000 per year for 50 years, or could elect, at any time prior to January 1, 2001, to receive a lump sum distribution of $3 million on January 1, 2001, with $2 million payable to Conza and $1 million payable to Siegel. In February 1999, both Conza and Siegel elected to receive the lump-sum payment. They also agreed to terminate the 99-year license for the domestic trademark rights and contribute those rights to us. In consideration for the contribution of these trademark rights and in satisfaction of the lump-sum payment due in 2001, we amended our 1997 international trademark agreement with Conza and Siegel, and paid the full $3 million payment in February 1999. In 1997, we acquired, in connection with our majority interest in MTII, all of the MAUI TACOS trademarks. MTII owns all of those trademarks, as well as the MAUI TACOS name. Additionally, MTII owns the trademarks relating to SMOOTHIE ISLAND. 12 Also, we are the sole owners of the trademark rights relating to PASTA CENTRAL. To our knowledge, there are no infringing uses of any of our trademarks in any territory where any of our franchisees has established or attempted to establish operations that would in any way materially affect the use of such trademarks by us or by any of our franchisees. Research and Development We conduct ongoing development of new menu items and test markets such items, as well as new company-developed food marketing aids, in selected outlets. Although such research and development activities are important to our business, the amounts that we have previously expended for these activities have not been material. Business Expansion Domestic Expansion. We plan to grow through continued development of ------------------ traditional and nontraditional BLIMPIE outlets, co-branded BLIMPIE / PASTA CENTRAL outlets, MAUI TACOS outlets and SMOOTHIE ISLAND outlets co-branded with the other outlets throughout the U.S. We also plan to continue to develop new types of BLIMPIE distribution points throughout the U.S., including expanding the vending machine program, the school lunch program, and other initiatives. International Expansion. We continue to grow internationally through the ----------------------- sale of master license agreements. The agreements are analogous to subfranchise agreements, except that the master licensor or one of our wholly-owned subsidiaries enters into franchise agreements directly with the franchisees in each international market. The master licensor, in effect, is our representative in that specific country and is obligated to provide all of the support services and selling activities required to develop the franchised market. Initially, however, we will provide administrative support to assist the master licensors. As of June 30, 2001, we had entered into BLIMPIE master license agreements for the following countries: Argentina, Bahrain, Canada, Cyprus, Dominican Republic, Great Britain, Greece, Guam, Kuwait, Mexico (primarily states in the northeastern and northwestern parts of the country), Northern Ireland, Oman, Panama, Poland, Portugal, Qatar, The Republic of Ireland, Romania, Saipan, Saudi Arabia, South Africa, United Arab Emirates, Uruguay, and Venezuela. The master licensors for Mexico have purchased the master license for PASTA CENTRAL as well. Currently, we operate the master license territory in Puerto Rico. We anticipate that we will execute master license agreements for our BLIMPIE and other brands in various other countries in the near future. We also plan to develop joint venture agreements with various entities such as petroleum marketers or convenience store chains for the installation of BLIMPIE and other outlets in such entities' locations. There can be no assurance, however, that we will consummate any such transactions. Development of BLIMPIE Branded Products. Our long term strategic plan --------------------------------------- includes developing products for sale at distribution points such as BLIMPIE restaurants, supermarkets and convenience stores. We began selling BLIMPIE branded peppers, potato chips and potato sticks during the year ended June 30, 1998 in a limited number of BLIMPIE outlets. We have expanded this initiative by increasing the number of BLIMPIE branded products and the number of locations in which they are sold. No assurances can be given, however, that the sale of BLIMPIE branded products will continue to generate increased revenue for us. Acquisition of Existing Franchise Concept. On October 29, 1997 we entered ----------------------------------------- into an agreement with Maui Tacos International, Inc. (MTII) which resulted in our acquisition of a majority interest in MTII. See "Business - Business Expansion - Development of New Franchise Concepts" below. We believe that our mature infrastructure is capable of supporting additional franchise systems, and that additional acquisitions of this nature will open up additional market segments for our development. However, no 13 assurances can be given that additional acquisitions will be consummated, and if consummated, that they will generate increased revenues or net income for us. MAUI TACOS(TM) - In October 1997 we acquired a majority interest in MTII, a concept featuring a health-oriented, affordable restaurant-quality menu of "Maui-Mex" items, including traditional Mexican foods marinated in Hawaiian spices. Our intention in acquiring the trademarks and development rights for MAUI TACOS is to convert the pre-existing MAUI TACOS full service restaurant concept with six locations operating in Hawaii into a quick-service restaurant concept. We intend to accomplish that goal by awarding development rights to subfranchisors and master licensors across the United States and internationally. As of June 30, 2001, we had 13 subfranchise territories operating in the United States, and had 15 locations operating, including two Company-owned locations. PASTA CENTRAL(TM) - This Company-created concept features baked pasta and pizza offerings in the HMR (Home Meal Replacement) category that address current eating trends for eat-in or take home meals. Our strategy for this concept is to co-brand PASTA CENTRAL with BLIMPIE outlets to create natural synergies and cost efficiencies. In the typical BLIMPIE location, the majority of sales take place at lunchtime. We anticipate that PASTA CENTRAL will generate significant evening traffic, since it includes meals for in-store dining, take-away, or for final preparation and consumption at home. We expect that the two concepts can co- exist in the same location and generate greater returns to the franchisee and us based on higher revenues and lower costs as a percentage of these revenues. The concept may eventually be developed as a stand-alone location. As of June 30, 2001, we had seven franchised locations and one Company-owned location operating within BLIMPIE outlets in the United States and Puerto Rico. SMOOTHIE ISLAND(TM) - This MTII-created concept features offerings of blended beverages of frozen yogurt, fruit and nutritional supplements. SMOOTHIE ISLAND will be co-branded with BLIMPIE and MAUI TACOS locations, and may also stand alone in other venues such as airports, sporting arenas, and fitness centers. As of June 30, 2001, there were 80 locations open and operating in 21 states and in Aruba, Canada, Guam, Mexico and Puerto Rico. No assurances can be given that we will be able to successfully develop any or all of these new franchise food concepts. We have incurred substantial initial costs associated with the development of these new concepts and we may continue to incur substantial costs that will exceed the initial revenues derived. Furthermore, no assurances can be given that we will be able to develop sufficient market acceptance and market penetration with respect to any of the new franchise concepts, or that we will be able to derive any revenues or net income from such undertakings. COMPETITION We and our franchisees compete in the quick-service restaurant industry, which is highly competitive with respect to price, service, outlet location and food quality, and is often affected by changes in consumer tastes, local and national economic conditions affecting consumer spending habits, population trends and traffic patterns. We and our franchisees compete with an increasing number of national chains of quick-service outlets, a number of which have dominant market positions, and possess substantially greater financial resources and longer operating histories than we possess. Our most significant competitor is the Subway(R) chain of sandwich outlets, whose outlets offer food products substantially similar to those offered by BLIMPIE outlets, at comparable prices. We and our franchisees also compete with regional and local franchised and independently owned outlet operations, many of which are larger in terms of financial resources and sales volume, than our chain of franchised outlets and our franchisees, respectively. Our outlets compete principally on the basis of price, nature of product, food quality and quality of service. In selling franchises, we compete with a number of franchisors of outlets and other business concepts. In general, there is also active competition for management personnel, as well as for attractive commercial real estate sites suitable for outlets. 14 We also are required to respond to various consumer preferences, tastes and eating habits; demographic trends and traffic patterns; increases in food and labor costs; and national, regional and local economic conditions. In the past, several quick-service restaurant companies have experienced flat growth rates and declines in average sales per outlet, in response to which certain of such companies have adopted "value pricing" strategies. Such strategies could have the effect of drawing customers away from companies that do not engage in discount pricing and also could negatively impact the operating margins of competitors that do attempt to match competitors' price reductions. Continuing or sustained price discounting in the fast food industry could have an adverse effect on our business and financial condition. EMPLOYEES As of June 30, 2001, we employed 109 full-time employees (including 12 officers) in our corporate offices. Twenty-two employees (including six officers) attend to our franchisee operations support, executive management and legal staffing needs at our New York City office; 12 employees (including one officer) provide construction and design and franchisee operations support services at our Houston, Texas office; and 75 employees (including five officers) are engaged in accounting, franchisee operations support and training, marketing and franchise development activities at our Atlanta, Georgia office. None of our employees are covered by collective bargaining agreements. All of our full-time employees, including executive officers, are covered by a health plan and our 401(k) profit sharing plan. As of June 30, 2001, we employed 49 full- and part-time employees in our Company-owned store operations that are located in Atlanta, Georgia, Athens, Georgia and New York, New York. We consider our employee relations to be good. We believe that we provide working conditions and pay salaries and bonuses that compare favorably with those of our competitors. We have adopted a stock incentive plan for our employees and officers. See "Executive Compensation - Omnibus Stock Incentive Plan." ITEM 2. PROPERTIES Our principal office is located at 740 Broadway, New York, New York, where we lease, through a wholly-owned subsidiary, 740 Broadway Top Floor Corp., approximately 6,000 square feet of office space from an unaffiliated landlord. We have guaranteed the obligations of our subsidiary under that lease. Our subsidiary pays a monthly rent of $9,546, which is subject to escalations, plus certain utilities and other fees. The term of the lease expires in February 2003. We also lease 16,554 square feet of office space in Atlanta, Georgia from an unaffiliated landlord, through our wholly owned subsidiary Blimpie Capital Corporation. The monthly payments under this lease currently approximate $22,834 and escalate to approximately $23,500 per month during the last year of the lease term in 2003. We also sublease 3,585 square feet of office space in Houston, Texas, on a month-to-month basis pursuant to an oral agreement with Vet Con Management Company, Inc. ("Vet Con"), a company wholly owned by Joseph Conza. Vet Con holds the lease relating to such office space with a landlord unaffiliated with us. We make monthly payments under such sublease directly to the landlord. The monthly payments under such sublease made by us are currently $3,954 and, if we continue to occupy the premises pursuant to our oral sublease, may escalate to include annual common area maintenance payments during the final three years of the lease term, which may require moderate increased payments to the landlord for expenses incurred by the landlord in maintaining common areas. We also own a building and are the lessee of a ground lease relating to property in Marietta, Georgia. We purchased the building in 1984 for $80,855 and currently sublease it to a BLIMPIE franchisee for use as a BLIMPIE outlet. There is no mortgage on that building. 15 Each franchisee is required to lease the outlet premises from one of our wholly owned leasing subsidiaries. Each leasing subsidiary leases such premises from a landlord unaffiliated with us. See "Business - Outlet Properties." ITEM 3. LEGAL PROCEEDINGS An arbitration proceeding was commenced in February 1998 in the San Francisco, California office of the AAA entitled Peacox Ventures LLC v Blimpie International, Inc. (case no. 74-114-0209-98). The claim alleges violations of the California Franchise Investment Law, the California Unfair Practices Act, fraud and negligent misrepresentation based on alleged misrepresentations and omissions in the sale of franchises by our subfranchisor, who is alleged to be our agent, as well as a claim for breach of contract based on our alleged failure to provide operational support and assistance to the claimant. A decision in favor of the claimant in the amount of approximately $215,000 was rendered in October, 2000. We deposited the entire amount of the award in court, commenced proceedings to recover approximately $50,000 owed to us by the claimants and accrued a charge for the payment we made pursuant to the arbitrator's decision in our audited financial statements for the year ended June 30, 2000. We settled these proceedings during fiscal 2001 by agreeing to relinquish our rights to the deposited amount, and to pay an additional $7,500 to resolve Peacox's claim for post-judgment interest. An arbitration proceeding was commenced in March 2000 in the New York, New York office of the AAA entitled Upchurch v Blimpie International, Inc. (case no. 13 114 00425 00). The claimant, one of our franchisees who formerly operated a Blimpie outlet in California, is seeking compensatory damages of $248,000, rescission damages of $49,000 and punitive damages in an unspecified amount based upon allegations that a representative of one of our Subfranchisors in California, who is alleged to be our agent, made representations regarding sales volumes of our restaurants which amounted to earnings claims in violation of the California Franchise Investment Law, as well as statutory and common law fraud and an unfair trade practice. Claimant also alleged that we breached the franchise agreement as well as an implied covenant of good faith and fair dealing. We denied all liability, and have vigorously defended all of these claims. A hearing was held in April, 2001, and a decision in favor of the claimant in the amount of approximately $232,000 was rendered in August, 2001. We believe this award will be paid under our Franchisor Errors & Omissions insurance policy, and are in the process of submitting a request for payment from our insurer. An arbitration proceeding was commenced in June 2000 in the New York, New York office of the AAA entitled Pile v Blimpie International, Inc. and Maui Tacos International, Inc. (case no. 13 114 00585 00). The Claimant, who formerly operated a combined Blimpie/Pasta Central/Smoothie Island restaurant in Missouri pursuant to three separate franchise agreements, alleges that various representatives of our company misrepresented the nature of the Pasta Central concept and the expected revenue of Claimant's business. Claimant also alleges that such misrepresentations constituted common law fraud and violations of the New York franchise statute. Claimant further alleges that we violated Missouri's franchise law by utilizing franchise agreements that contained provisions not sanctioned under such law. Additionally, the Claimant alleges that his franchise agreements were breached by reason of our failure to provide inadequate training and operational assistance, and by our failure to designate a competent food supplier. We interposed a number of defenses to and vigorously defended against all of such claims. A hearing was held in March and May, 2001. In his post- hearing brief, the Claimant requested damages of $404,700 plus costs and counsel fees in an unspecified amount. No decision in the proceedings was rendered prior to the date of this Report. An arbitration proceeding was commenced in February 2000 in the New York, New York office of the AAA entitled Sheskier, et al v Blimpie International, Inc. (case no. 13 114 00309 00). Claimants are franchisees who formerly owned a Blimpie outlet in Montgomery, NY. They claim that we violated New York's franchise law by failing to disclose the litigation history of one of our franchise development managers in our franchise disclosure document. They also allege, that the franchise development manager, who is alleged to have been our agent, made various misrepresentations in connection with the purchase of their franchises, and that we failed to provide operational assistance that we were 16 contractually obligated furnish to them. We interposed a number of defenses to and vigorously defended against all of such claims. A hearing was held in January and April 2001. In his post-hearing brief, the Claimants requested compensatory damages of $287,000 and pre-judgment interest in the amount of $120,539, as well as an unspecified amount for attorney's fees, costs and punitive damages. No decision was rendered prior to the date of this Report. An action entitled OTR Associates v IBC Services, Inc. a/k/a International Blimpie Corporation a/k/a Blimpie International, Inc. and Garden State Blimpie, Inc. was commenced in the Superior Court of the State of New Jersey, Law Division, Middlesex County under Case No. L-4650-98. Plaintiff, a landlord of premises where a former franchisee operated its business, sued two of the Company's leasing subsidiaries for failure to pay rent under the lease. A non- jury trial took place in December 2000. At the close of the evidence, the Company was added as a defendant and the Court entered judgment against all defendants, including the Company, jointly and severally, in the amount of $208,602 inclusive of interest through the date of the judgment's entry. The Company and its two subsidiaries have appealed the judgment to the Appellate Division of the Superior Court of New Jersey (Docket No. A-2826-00T2) where it is currently pending. It is the opinion of management that the liability, if any, arising from all pending claims and lawsuits will not have a material adverse impact upon our consolidated earnings, financial position or cash flows. Item 3a. Our Executive Officers The following table sets forth certain information concerning all of our executive officers. Executive officers are elected by the Board of Directors to serve at the pleasure of the Board.

Mr. Anthony P. Conza, together with two individuals who are not affiliated with us, originally created the BLIMPIE concept in 1964. He is one of the original founders of the BLIMPIE outlet chain, and is one of our co-founders. He has been Chairman of our Board of Directors, and our Chief Executive Officer since we commenced business operations in 1977. In 1992, the "Entrepreneur of the Year" for New York, an award sponsored by Ernst & Young, Merrill Lynch and Inc. Magazine, was presented to Mr. Conza. In the same year, he was also named Chain Operator of the Year by the New York State Restaurant Association. He is a member of the Board of the Jose Limon Dance Company, a member of the Board of Governors of The Boys & Girls Clubs of America and he serves on the Dean's Council at 17 Harvard University's JFK School of Government. Mr. Conza is the brother of Joseph A. Conza, the brother-in-law of Patrick Pompeo and the father-in-law of Joseph Morgan. Mr. Siegel, one of our co-founders, served as our Executive Vice President and General Counsel and as a member of our Board of Directors since our formation in 1977. In September 1995, he was appointed as our Vice Chairman of the Board, Chief Operating Officer and General Counsel. He also served as our Treasurer from 1977 until January 1991. He is also a practicing attorney in the City of New York. Mr. Siegel received a Bachelor of Arts degree in 1965 from Marietta College, a Juris Doctor Degree in 1968 from New York University School of Law and a Master of Laws Degree in 1970 from New York University School of Law. During the past five years, Mr. Siegel has also served as an officer of each of our leasing subsidiaries. Mr. Pompeo has served as a director and Senior Vice President in charge of operations since the time of commencement of our business operations in 1977. In September 1995, he became Executive Vice President of Research Development and Procurement. Mr. Pompeo was employed for 16 years as a floor supervisor by E.F. Hutton & Co., the former New York Stock Exchange member firm. Mr. Pompeo is also a principal shareholder, officer and director of Georgia Enterprises, Inc., our Subfranchisor for the State of Georgia. Mr. Pompeo is the brother-in-law of Anthony Conza. Mr. Leaness has been a member of our Board of Directors since we commenced business operations, and served as our Senior Vice President-Corporate Counsel for more than the past five years. He was appointed Chief Executive Officer of Maui Tacos International, Inc. in February 1999. In September 1995, he was appointed as one of our Executive Vice Presidents. Mr. Leaness is also a principal shareholder, officer and director of Llewellyn Distributors, Inc., our BLIMPIE Subfranchisor for a part of New Jersey, of Manhattan Maui, Inc., our subfranchisor for MAUI TACOS for the County of New York in New York State, and of New Jersey Maui, Inc., our subfranchisor for parts of New Jersey, including Bergen, Essex, Hudson, Morris, and Middlesex counties. Mr. Leaness received a Bachelor of Arts degree from Tulane University in 1972 and a Juris Doctor degree from New York Law School in 1982. Mr. Leaness is a practicing attorney in New York State. He currently serves as Director of the New York State Restaurant Association and serves as its Treasurer. Mr. Leaness also serves on the Board of Directors of the International Franchise Association (IFA) and the National Restaurant Association (NRA). Mr. Joseph A. Conza held the position of Vice President - Construction and Design from February 1991 through August 1995. In September 1995, he was appointed Senior Vice President - Equipment and Design Services. In November 1997, he was appointed President of BI Concept Systems, Inc., our wholly-owned equipment and design subsidiary. From 1986 through his appointment as one of our Vice Presidents, Mr. Conza was employed as President of Lone Star Blimpie, Inc. He has also served as President of International Southwest Blimpie, Inc. since 1990. Mr. Conza is also a principal shareholder, officer and was director of International Southwest Blimpie, Inc., our Subfranchisor for the Harris County (Houston), Texas market through the sale of this market to an unrelated party in November 1998. Mr. Conza also is a principal shareholder of Georgia Enterprises, Inc., our Subfranchisor for the State of Georgia. Mr. Conza is the brother of Anthony P. Conza. Mr. Sitkoff served as our Vice President, Treasurer and Chief Financial Officer from January 1991 through August 1995. In September 1995, he was appointed Senior Vice President, Treasurer and Chief Financial Officer. In September 1997, he was appointed President of Maui Tacos International, Inc. In April 2000, he was appointed Senior Vice President, Corporate Services. Between 1980 and 1985, he was self-employed as a distributor for Pepperidge Farms' Biscuit Division. Between 1986 and 1988, he was a principal shareholder and President of Blimpie of Central Florida, Inc., our Subfranchisor for the Orlando, Florida market. From 1989 through 1990 he was employed as our Controller. Mr. Sitkoff received a B.S. degree in Industrial Management from Georgia Institute of Technology in 1974. Mr. Morgan joined us in 1992 in the capacity as a corporate counsel. From 1994 through August 1995, he served as our director of strategic planning. In September 1995, he was appointed as Vice President of Strategic Planning and in December 1996 he was appointed to Senior Vice President of Strategic Planning. In September 1997 he was appointed President of our BLIMPIE Subs & Salads 18 division. During the three-year period prior to joining us, Mr. Morgan attended the University of Miami School of Law, and received a J.D. degree from said institution in June 1992. Mr. Morgan is the son-in-law of Anthony P. Conza. Mr. Lane joined us in May 1998 in the capacity of Vice President, Chief Financial Officer. After graduating from the University of Georgia in 1984 with a Bachelor of Business Administration in Accounting, Mr. Lane joined Ernst & Young LLP as a staff accountant. He progressed to the position of Audit Senior Manager before leaving the firm in 1995. Mr. Lane then joined Checkmate Electronics, Inc., an electronics manufacturer in Roswell, Georgia, as Director of Finance. He was promoted to Vice President of Finance before leaving that company to join us. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of our security holders during the fourth quarter of our fiscal year ended June 30, 2001. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our Common Stock is listed on the American Stock Exchange under the symbol BLM. The quarter by quarter ranges of the high, low and closing prices of our Common Stock on that Exchange during the fiscal years ended June 30, 2000 and 2001 were as follows: Quarter-End High Low Close ----------------- -------- --------- --------- 9/99 3.319 2.000 2.000 12/99 2.063 1.250 1.875 3/00 1.907 1.292 1.846 6/00 2.215 1.563 1.813 9/00 1.960 1.531 1.625 12/00 1.813 1.188 1.250 3/01 1.953 1.240 1.510 6/01 1.750 1.350 1.720 As of September 18, 2001, there were 537 holders of record of our Common Stock. We paid our first cash dividends on our Common Stock in the amount of $.025 per share during the fiscal year ended June 30, 1993 ($.017 per share as adjusted for a 3:2 stock split effected during the fiscal year ended June 30, 1994. During the fiscal year ended June 30, 1996, we paid cash dividends aggregating $.06. During the fiscal years ended June 30, 1997, 1998, 1999, 2000 and 2001, we paid cash dividends aggregating $.07 per share in each fiscal year. It is our present intention to pay dividends in or about October and April of each year, subject to such factors as earnings levels, anticipated capital requirements, our operating and financial condition and other factors deemed relevant by the Board of Directors. During the fiscal years ended June 30, 1999, 2000 and 2001, we did not sell any securities which were not registered under the Securities Act of 1933. 19 ITEM 6. SELECTED FINANCIAL DATA

___________________ (a) Results for fiscal 1998 and 1997 have been adjusted to reflect a reclassification of certain management fees from Management fees and other income to Selling, general and administrative expenses. (b) Pro forma amounts assuming the new revenue recognition method is applied retroactively are unaudited for fiscal 1998 and 1997. (c) Outlets includes only BLIMPIE Subs & Salads outlets. 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-looking Statements The following discussion contains certain forward-looking statements subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. These statements use such words as "may," "will," "expect," "believe," "plan," "anticipate" and other similar terminology. These statements reflect management's current expectations and involve a number of risks and uncertainties. Actual results could differ materially due to changes in: global and local business and economic conditions; legislation and governmental regulation; competition; success of operating initiatives and advertising and promotional efforts; food, labor and other operating costs; availability and cost of land and construction; adoption of new or changes in accounting policies and practices; consumer preferences, spending patterns and demographic trends; political or economic instability in local markets; and currency exchange rates. Overview Fiscal 2001 was a year of many changes for Blimpie International, Inc. When the year began, we continued to invest in store operations, opening three SMOOTHIE ISLAND JUICE BAR locations in the first four months, and a tri-branded BLIMPIE / PASTA CENTRAL / SMOOTHIE ISLAND location in April 2001. While the Blimpie division was performing up to our expectations in the first half of the year, our other operations were well below plan. At the midpoint of the year, we decided to scale back our Maui Tacos operations, reducing discretionary expenses, cutting the corporate staff from five to one and merging the corporate office into the existing Blimpie International office in Atlanta. Since the losses from the Maui Tacos division currently cannot be offset against Blimpie International's profits for income tax purposes, these savings also should result in the Company recognizing a lower effective income tax rate in fiscal 2002 than in recent fiscal years. Next, we evaluated the SMOOTHIE ISLAND JUICE BAR operations and determined that we would be best served to sell or close all of the six locations in operation. Similarly, we decided to sell or close the MAUI TACOS location in New York City. We had already closed the first location in that city in October 2000, and sold the second location in September 2001. The operating losses, which include losses on the sales and / or closings of these eight locations, totaled $2,075,000 in fiscal 2001. These changes resulted in our operating only two Company-owned restaurants at the beginning of fiscal 2002, including a MAUI TACOS location in Atlanta, GA and a tri-branded BLIMPIE / PASTA CENTRAL / SMOOTHIE ISLAND location in Athens, GA. The changes described above negatively impacted operating results in fiscal 2001. Our net income was $74,000, or $0.01 per share, compared to $1,095,000, or $0.12 per share in the prior year. We believe that the changes made in fiscal 2001 have enabled us to enter fiscal 2002 with the ability to dramatically improve our operating results from the levels achieved in fiscal 2001. Results Of Operations Fiscal Year Ended June 30, 2001 Compared With Fiscal Year Ended June 30, 2000. Our continuing fees derived from franchises increased 0.4% to $19,200,000 in fiscal 2001 from $19,129,000 in fiscal 2000. This increase resulted from an increase in the sales in stores open during both fiscal 2001 and fiscal 2000, partially offset by a decrease in the number of locations open. BLIMPIE Subs & Salads' traditional location same store sales increased 1.3% in fiscal 2001. For the year, BLIMPIE Subs & Salads opened 188 locations and closed 223 locations, a net decrease of 35 locations. There were 1,955 BLIMPIE Subs & Salads locations open at June 30, 2001 as compared to 1,990 locations open at June 30, 2000. 21 Subfranchisor fees, master license fees and fees from the sales and resales of franchises increased 1.7% to $4,093,000 in fiscal 2001 from $4,026,000 in fiscal 2000. The following table summarizes the components of these fees for fiscal 2001 and 2000:

During fiscal 2001, we granted development rights for one MAUI TACOS subfranchise territory, three international BLIMPIE territories, three international PASTA CENTRAL territories, and one domestic BLIMPIE territory. In fiscal 2001, the amortization of these fees was 5.9% lower than in fiscal 2000 due primarily to decreased amortization of BLIMPIE subfranchise fees caused by deferred amounts becoming fully amortized. Revenues from sales of franchises increased 2.1% in fiscal 2001. New outlets opened, including BLIMPIE, MAUI TACOS and PASTA CENTRAL outlets, decreased 6.4% from 220 in fiscal 2000 to 206 in fiscal 2001. The increase in revenues despite a decrease in outlets opened is due to a higher average franchise fee for locations opened, as well as revenues recognized for outlets sold more than two years ago, but not opened as of June 30, 2001. Resale fees increased 25.2% in fiscal 2001 due primarily to a higher average resale fee per store. Store equipment sales decreased 21.6% to $4,978,000 in fiscal 2001 from $6,351,000 in fiscal 2000. New outlets opened decreased 6.4% from 220 in fiscal 2000 to 206 in fiscal 2001, resulting in a portion of this decrease. The remaining decrease is due primarily to certain new locations purchasing used equipment, either from a closed BLIMPIE location or another source. License fees and other income for the year ended June 30, 2001 increased 21.1% to $791,000 from $653,000 in fiscal 2000. This increase was due primarily to greater license fees from the Canteen Vending Service Program and from Blimpie branded product sales. Company restaurant sales increased 94.9% to $1,672,000 in fiscal 2001 from $858,000 in fiscal 2000. In fiscal 2000, we operated one MAUI TACOS location. This increase was due to an increase in the number of outlets open for the majority of each fiscal year. Late in fiscal 2001, we sold or closed seven of the nine Company-owned restaurants operating at April 30, 2001. We do not expect to open additional Company-owned outlets in the upcoming fiscal year, and therefore expect the related sales to decline in fiscal 2002. The Subfranchisors' shares of franchise and continuing fees increased 1.9% to $11,714,000 in fiscal 2001 from $11,499,000 in fiscal 2000. The most significant portion of this expense is the subfranchisor's share of continuing fees, which generally is 50% of the fees we collect. Continuing fees increased 0.4%, and franchise fees and resale fees together increased 6.5% in fiscal 2001, resulting in the increase in this expense. Store equipment cost of sales decreased 19.4% to $4,261,000 in fiscal 2001 from $5,285,000 in fiscal 2000. This decrease was due to the 21.6% decrease in store equipment sales, combined with a decrease in the profit margin on the sales. The gross margin on store equipment sales decreased to 14.4% in fiscal 2001 from 16.8% in fiscal 2000 due to normal fluctuations in the product mix. Selling, general and administrative expense declined 0.8% to $11,207,000 in fiscal 2001 from $11,294,000 in fiscal 2000. This decrease was due primarily to lower payroll and travel expenses due to fewer employees, which was partially offset by higher legal fees and the cost of assigning the cash surrender value of key man life insurance policies to the executives for whom we purchased the policies. We continue to try to reduce selling, general and administrative expenses, but no assurances can be 22 given that we will be successful in that regard in fiscal 2002. Company restaurant operations increased 165.6% to $3,747,000 in fiscal 2001 from $1,411,000 in fiscal 2000. We opened most of our Company-owned locations in late in fiscal 2000 or early in fiscal 2001. Company restaurant sales increased 94.9% in fiscal 2001 as a result of these openings. We incurred losses from these restaurant operations of $2,075,000 in fiscal 2001, up from losses of $553,000 in fiscal 2000. The increase in the losses is due to more locations in operation and to the losses incurred in the sale, closing or impairment of most of these locations. We anticipate that Company restaurant operations will decrease in fiscal 2002 due to there being only two Company-owned restaurants expected to be operating during the year. Interest income in fiscal 2001 increased by 1.6% to $636,000 from $626,000 in fiscal 2000. The effective income tax rates (income taxes expressed as a percentage of pre-tax income) were 83.2% in fiscal 2001, as compared to 49.2% in fiscal 2000. The increase in fiscal 2001 was due to an increase in non-deductible losses as a percentage of our overall taxable income. Certain losses of our subsidiary, Maui Tacos International, Inc., currently are not deductible for income tax purposes because we cannot consolidate this subsidiary in our income tax returns. Although the Maui Tacos losses were lower in fiscal 2001 than in fiscal 2000, the income from the remainder of the Company decreased a greater amount, causing the increase in the percentage of non-deductible losses to income before income taxes. Fiscal Year Ended June 30, 2000 Compared With Fiscal Year Ended June 30, 1999. Our income before income taxes and cumulative effect of change in accounting principle increased 10.1% to $2,154,000 in fiscal 2000 from $1,956,000 in fiscal 1999. Our basic and diluted earnings per share before cumulative effect of change in accounting principle was $0.12 per share in both years. The improvement in income before income taxes and cumulative effect of change in accounting principle was due primarily to lower S,G&A expenses, partially offset by losses from Company restaurant operations. Due to a higher effective tax rate, income before cumulative effect of change in accounting principle decreased 5.3% to $1,095,000 in fiscal 2000 from $1,156,000 in fiscal 1999. These changes and others are discussed further below. Our continuing fees derived from franchises increased 0.9% to $19,129,000 in fiscal 2000 from $18,956,000 in fiscal 1999. This increase resulted from an increase in the sales in stores open during both fiscal 2000 and fiscal 1999, but partially offset by a decrease in the number of locations open. BLIMPIE Subs & Salads' traditional location same store sales increased 2.7% in fiscal 2000. For the year, BLIMPIE Subs & Salads opened 206 locations and closed 313 locations, a net decrease of 107 locations. There were 1,990 BLIMPIE Subs & Salads locations open at June 30, 2000 as compared to 2,097 locations open at June 30, 1999. During fiscal 2000, we experienced a shift in demand for our traditional and nontraditional locations. From fiscal 1995 to 1999, nontraditional development outpaced the growth in traditional locations. Nontraditional locations include convenience stores, hospitals, universities, and other locations within another structure. In fiscal 2000, which included the opening of 122 new traditional locations and 84 nontraditional locations, this trend reversed. Historically, traditional locations have had significantly higher sales volumes than nontraditional locations. In fiscal 2000, we and several of the convenience store chains who operate nontraditional locations reviewed the growth and performance of their BLIMPIE Subs & Salads operations. After these reviews, locations with poor performance were closed. In addition, a greater number of traditional locations closed during the past year than in prior years due to a variety of factors. Certain international stores and domestic stores in areas in which we do not have a strong presence were closed as a result of poor sales. Many older locations were closed as either rents escalated too much, which made operations too costly, or demographics shifted, which lowered sales below acceptable levels. Accordingly, during fiscal 2000, 143 traditional locations and 170 nontraditional locations were closed. We believe that certain 23 convenience store operators will continue to close weaker locations, while others will continue to expand their BLIMPIE Subs & Salads operations. Similar fluctuations will continue to occur with traditional locations as well. Our current focus is on helping our franchised locations improve their operating performance, which we believe will diminish the number of store closings. However, we can give no assurances that our efforts in this area will be successful, or that store closings will not increase from the levels experienced in fiscal 2000. Subfranchisor fees, master license fees and fees from the sales and resales of franchises decreased 9.5% to $4,026,000 in fiscal 2000 from $4,451,000 in fiscal 1999. The following table summarizes the components of these fees for fiscal 2000 and 1999:

During fiscal 2000, we granted development rights for nine MAUI TACOS subfranchise territories, one international BLIMPIE territory, one international PASTA CENTRAL territory, and one domestic BLIMPIE territory. During fiscal 1999, we granted development rights for five MAUI TACOS subfranchise territories and two international BLIMPIE territories. In fiscal 2000, the amortization of these fees was 8.9% higher than in fiscal 1999 due primarily to increased amortization of MAUI TACOS subfranchise fees. Revenues from sales of franchises decreased 18.5% in fiscal 2000 due primarily to a 28.7% decrease in new outlets opened, from 289 new outlets in fiscal 1999 to 206 new outlets in fiscal 2000. The lower decrease in revenues as compared to outlets opened is due to a higher average franchise fee for locations opened, as well as revenues recognized for outlets sold more than two years ago, but not opened as of June 30, 2000. Resale fees decreased 17.6% in fiscal 2000 due primarily to fewer outlets and subfranchise territories being transferred to new owners. As of June 30, 2000, we had Master Licensors operating in 25 countries, and 57 BLIMPIE outlets operating in 13 of these countries. Our focus in 2000 will be to continue to sell new international territories while assisting our Master Licensors with the aggressive development of the existing areas. Although we have strengthened our infrastructure and created an international department to support international expansion, the international market has not developed as rapidly as expected with regard to master license fees and outlet openings. No assurances can be given that our investment in the international marketplace will increase either franchise grants, master license fees or outlet openings, or if such increases do occur, that they will result in material increases in revenue. Store equipment sales decreased 31.9% to $6,351,000 in fiscal 2000 from $9,328,000 in fiscal 1999. This decrease was consistent with the 28.7% decrease in new outlets opened in the two years. In addition, we stopped soliciting new business from sales to customers other than our franchisees, and stopped selling the point-of-sale systems to the franchisees. In most of fiscal 2000, the point- of-sale vendor sold systems directly to the franchisees. License fees and other income for the year ended June 30, 2000 increased 36.9% to $653,000 from $477,000 in fiscal 1999. This increase was due primarily to greater license fees from the Canteen Vending Service Program. Company restaurant sales increased 153.8% to $858,000 in fiscal 2000 from $338,000 in fiscal 1999. In fiscal 1999, we operated one MAUI TACOS location. In fiscal 2000, we opened a MAUI TACOS location with two other investors, opened a second Company-owned MAUI TACOS location, and opened three Company-owned SMOOTHIE ISLAND JUICE BAR locations. We opened a fourth SMOOTHIE ISLAND JUICE BAR location in July 2000. 24 The Subfranchisors' shares of franchise and continuing fees decreased 2.4% to $11,499,000 in fiscal 2000 from $11,782,000 in fiscal 1999. The most significant portion of this expense is the subfranchisor's share of continuing fees, which generally is 50% of the fees we collect. Continuing fees increased 0.9%, but franchise fees and resale fees both decreased in fiscal 2000, resulting in the decrease in this expense. Store equipment cost of sales decreased 35.0% to $5,285,000 in fiscal 2000 from $8,137,000 in fiscal 1999. This decrease was due to the 31.9% decrease in store equipment sales, combined with an increase in the profit margin on the sales. The gross margin on store equipment sales increased to 16.8% in fiscal 2000 from 12.8% in fiscal 1999 due to lower sales in two segments with low gross profit margins, including sales to customers other than our franchisees and of point-of-sale systems. Selling, general and administrative expense declined 7.1% to $11,294,000 in fiscal 2000 from $12,156,000 in fiscal 1999. This decrease was due primarily to abnormally high expenses in fiscal 1999, when we incurred higher professional fees related to changing to a different subfranchisor and master license fee revenue recognition method, increased our allowance for doubtful accounts and wrote off certain deferred franchise fees and start-up costs. Company restaurant operations increased 312.6% to $1,411,000 in fiscal 2000 from $342,000 in fiscal 1999. As noted above, we opened several Company-owned MAUI TACOS and SMOOTHIE ISLAND JUICE BAR locations in fiscal 2000. Company restaurant sales increased 153.8% in fiscal 2000 as a result of these openings. We incurred losses of $553,000 from these restaurant operations, due primarily to high pre-opening costs and low sales as the new concepts develop a customer base. Interest income in fiscal 2000 decreased by 23.9% to $626,000 from $823,000 in fiscal 1999. This decrease was the result of the selling of a portion of the U.S. Treasury notes we owned in February 1999 in order to satisfy the remaining $3,000,000 trademark obligation, as well as lower average notes receivable in fiscal 2000. The effective income tax rates (income taxes expressed as a percentage of pre-tax income) were 49.2% in fiscal 2000, as compared to 40.9% in fiscal 1999, excluding the impact of the change in accounting principle. The increase in fiscal 2000 was due to an increase in non-deductible losses as a percentage of our overall taxable income. Liquidity And Capital Resources During fiscal years 2001, 2000 and 1999 we did not incur any material capital commitments. As of June 30, 2001, our working capital was $9,624,000 and total cash and investments were $11,197,000. We generated cash flows from operating activities of $3,190,000, $1,224,000 and $3,217,000 in the fiscal years ended June 30, 2001, 2000 and 1999, respectively. The increase in fiscal 2001 was due primarily to increases in accounts payable and accrued expenses, an increase in customer equipment deposits and decreases in other assets, income taxes receivable and deferred tax assets, partially offset by an increase in accounts receivable and a decrease in deferred revenues. The decrease in fiscal 2000 was due primarily to decreases in accounts payable and accrued expenses, and customer equipment deposits and an increase in income taxes receivable, partially offset by a decrease in accounts receivable. Net cash used in investing activities during fiscal 2001 and 1999 totaled $992,000 and $1,868,000, respectively. Net cash provided by investing activities was $3,293,000 in fiscal 2000. The cash provided in fiscal 2000 was due to the proceeds from U.S. Treasury bills, which were reinvested in money market funds and therefore classified as cash and cash equivalents as of June 30, 2001. This increase was partially offset by higher purchases of property and equipment due to opening several Company-owned restaurants during the year. The absence of proceeds from sales of available-for-sale securities in fiscal 2001 resulted in the use of cash in that year, primarily for the purchases of property and equipment associated with opening Company-owned restaurants during the year. Fiscal 1999 included 25 $3,077,000 in payments made for international trademark rights, partially offset by net proceeds from the sale of investments. Net cash used in financing activities during fiscal 2001, 2000 and 1999 totaled $978,000, $927,000 and $688,000, respectively. The increase in the use of cash in fiscal 2001 was due to higher purchases of treasury stock. The lower use of cash in fiscal 1999 was due to collections on subscriptions receivable in that year. Our primary liquidity needs arise from opening Company-owned outlets, expansion and capital expenditures. These needs are primarily met by the cash flows from operations and from our cash and investments. We believe that our cash flows from operations and our cash and investments will be sufficient to fund our liquidity needs for the foreseeable future. ITEM 8. FINANCIAL STATEMENTS Our financial statements described below and the reports of independent auditors thereon are set forth following the Index to Financial Statements on page F-1 of this report: Report of independent auditors Consolidated balance sheets at June 30, 2001 and 2000 Consolidated statements of operations and comprehensive income (loss) for each of the three years in the period ended June 30, 2001 Consolidated statements of shareholders' equity for each of the three years in the period ended June 30, 2001 Consolidated statements of cash flows for each of the three years in the period ended June 30, 2001 Notes to consolidated financial statements Consolidated schedule of valuation and qualifying accounts ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 26 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS Information regarding all of our executive officers and employee directors is included in Part I at Item 3a. Following is information regarding all of our non-employee directors. Alvin Katz, Age 72 Mr. Katz was appointed to our Board of Directors on November 23, 1993. Mr. Katz has been a member since September 1993 of the Board of Directors of Nastech Pharmaceutical Company, Inc., a company engaged in the development of pharmaceuticals. Since 1981, he has served as an adjunct professor of business management at Florida Atlantic University. In 1991, Mr. Katz was appointed Chief Executive Officer of Odessa Engineering Corp., a company engaged in the manufacturing of pollution monitoring equipment. He held this position until that company was sold in September 1992. Mr. Katz also serves on the Board of Directors of Amtech Systems Inc. which is engaged in the manufacture of capital equipment in the chip manufacturing business. Mr. Katz holds a B.S. in Business Administration degree from New York University and has done graduate work at C.U.N.Y.-Baruch School. Harry G. Chernoff, Age 55 Dr. Chernoff was appointed to our Board of Directors on November 23, 1993. For more than the past five years, Dr. Chernoff has been a principal of HMS Properties, Inc., a real estate investment, development and management firm. Dr. Chernoff has an active financial and operational consulting practice with major financial institutions, and food and hospitality firms as his clients. Dr. Chernoff received a Ph.D. in Operations Management from the New York University Leonard N. Stern School of Business in 1985, and has been a member of the faculty of New York University for 20 years. He also received a B.S. degree from New York University in 1968 and an M.S. degree from that institution in 1975. Jim L. Peterson, Age 65 Mr. Peterson was appointed to our Board of Directors on May 1, 2001. For 23 years, Mr. Peterson was the CEO of Whataburger, Inc. Since 1994, Mr. Peterson has been Chairman of the Board and Chief Executive Officer of Bojangles Restaurants, Inc., a private company engaged in the operation and franchising of fast food restaurants. Mr. Peterson serves on the Board of Directors of Back Yard Burgers, Inc., which owns, operates and franchises quick-service and fast- casual restaurants. Mr. Peterson also serves on the Board of Directors of Earful of Books, Inc., a leading audiobook-only retailer in the United States. 27 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth compensation awarded to, earned by or paid to our Chief Executive Officer and our four highest-paid executive officers who served as such at June 30, 2001 and whose annual compensation and bonus was $100,000 or more (collectively, the "Named Executive Officers"). Information with respect to salary, bonus, other annual compensation, restricted stock and options is included for the fiscal years ended June 30, 2001, 2000 and 1999. We have not paid any compensation that would qualify as "Restricted Stock Awards," payouts pursuant to long-term incentive plans ("LTIP Payouts"), or "All Other Compensation" in any of the three years in the period ended June 30, 2001.

(1) Represents commissions paid with respect to master license sales consummated. Also includes personal expenses paid by the Company of $2,391 for Mr. Siegel in 2001 and $4,305 for Mr. Morgan in 2001. (2) Includes the cash surrender value of life insurance distributed to the officer of $238,047 for Mr. Conza, $174,742 for Mr. Siegel, and $64,299 for Mr. Leaness. (3) Represents matching contributions which we made to our 401(k) Plan on behalf of each of the Named Executive Officers. 28 Options/SAR Grants In Last Fiscal Year

Fiscal Year End Option Values The following table sets forth the number of unexercised options held by our Named Executive Officers during the fiscal year ended June 30, 2001. No options were exercised during such period.

29 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth the holdings of our Common Stock as of October 8, 2001 by (1) each person or entity known to us to be the beneficial owner of more than five percent (5%) of the outstanding shares of our Common Stock; (2) each director and executive officer; and (3) all directors and executive officers as a group. All of the holders of our Common Stock are entitled to one vote per share.

_________________________ * Represents less than 1%. (1) Except as otherwise noted, the address of each of the persons listed below is 740 Broadway, New York, New York 10003. (2) Includes shares actually and beneficially owned. (3) Based upon 9,163,659 shares outstanding on October 8, 2001 (not including 470,267 treasury shares), increased by the number of shares under options which the holder(s) thereof have the right to acquire within 60 days from October 8, 2001. (4) Includes 70,000 shares which Mr. Conza may acquire pursuant to options exercisable within 60 days of October 8, 2001. Does not include (a) 37,050 shares owned by Mr. Conza's daughter, (b) 9,300 shares owned by Mr. Morgan (Mr. Conza's son-in-law), (c) 125,000 shares owned jointly by Mr. Conza's daughter and Mr. Morgan over which Mr. Morgan has sole voting power, (d) 4,150 shares owned by Mr. Conza's parents, (e) 44,913 shares owned by Joseph Conza, the brother of Mr. Conza, and (f) 44,000 shares held by Mr. Conza's daughter as Trustee for the Anthony P. Conza Charitable Remainder Trust, as to all of which Mr. Conza disclaims beneficial ownership. (5) Includes 70,000 shares which Mr. Siegel may acquire pursuant to options exercisable within 60 days of October 8, 2001. Does not include 13,046 shares held by Mr. Siegel's daughter, as to which Mr. Siegel disclaims beneficial ownership. (6) Includes 50,000 shares which Mr. Leaness may acquire pursuant to options exercisable within 60 days of October 8, 2001. (7) Includes 50,000 shares which Mr. Pompeo may acquire pursuant to options exercisable within 60 days of October 8, 2001. Does not include 6,300 shares held by Mr. Pompeo's sister and brother-in-law, as to which Mr. Pompeo disclaims beneficial ownership. 30 (8) The address of Mr. Katz is 301 N. Birch Road, Ft. Lauderdale, Florida 33304. (9) Includes 23,600 shares which Mr. Katz may acquire pursuant to options exercisable within 60 days of October 8, 2001. (10) The address of Dr. Chernoff is 286 Spring Street, Suite 401, New York, New York 10013. (11) Includes 23,600 shares which Dr. Chernoff may acquire pursuant to options exercisable within 60 days of October 8, 2001. (12) The address of Mr. Peterson is 218 Fannin Street, Gilead, Texas 77963. (13) Includes 2,000 shares which Mr. Peterson may acquire pursuant to options exercisable within 60 days of October 8, 2001. (14) Includes 128,000 shares which Mr. Morgan may acquire pursuant to options exercisable within 60 days of October 8, 2001. Does not include (a) 37,050 shares held by Mr. Morgan's wife (Mr. A. Conza's daughter), (b) 13,100 shares held by Mr. Morgan's children, (c) 700 shares held by Mr. Morgan's wife as custodian for his son under the Transfers to Minors Act, (d) 44,000 shares held by Mr. Morgan's wife as Trustee for the Anthony P. Conza Charitable Remainder Trust, and (e) 16,500 shares held by a corporation of which Mr. Morgan's wife is the sole shareholder, as to all of which Mr. Morgan disclaims beneficial ownership. (15) Includes 41,000 shares which Mr. Conza may acquire pursuant to options exercisable within 60 days of October 8, 2001. (16) Includes 70,000 shares which Mr. Sitkoff may acquire pursuant to options exercisable within 60 days of October 8, 2001. (17) Includes 20,000 shares which Mr. Lane may acquire pursuant to options exercisable within 60 days of October 8, 2001. (18) Includes 548,200 shares which all of such persons may acquire pursuant to options exercisable within 60 days of October 8, 2001. Does not include the shares excluded from the percentage ownership calculations made with respect to Messrs. Conza, Siegel, Pompeo and Morgan pursuant to notes 4, 5, 7 and 14 above. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During the fiscal years ended June 30, 2001, 2000 and 1999, we paid $1,155,000, $1,162,000, and $1,155,000, respectively, to Georgia Enterprises, Inc. ("Georgia Enterprises"), a corporation partially owned by Patrick Pompeo, one of our Executive Vice Presidents and directors, and Joseph Conza, one of our Senior Vice Presidents and President of B I Concept Systems, Inc., in payment of the fees that Georgia Enterprises earned as the Subfranchisor for the Georgia market. During the same three fiscal years, we paid $273,000, $280,000, and $305,000, respectively, to Llewellyn Distributors, Inc. ('Llewellyn"), a corporation partially owned by Charles G. Leaness, one of our directors and Executive Vice Presidents, who also serves as CEO of Maui Tacos International, Inc., in payment of Llewellyn's share of the fees that it earned as the Subfranchisor for the northern New Jersey market. We also paid $53,000 in fiscal 1999 to International Southwest Blimpie, Inc. ('Southwest'), a corporation principally owned and controlled by Joseph Conza until its sale to an unrelated third party in November 1998, in payment of said corporation's share of the fees that it earned as the Subfranchisor for the Houston, Texas market. In fiscal 2000, we paid $8,000 to Manhattan Maui, Inc., a corporation partially owned by Charles G. Leaness, in payment of fees that Manhattan Maui, Inc. earned as subfranchisor for the New York County, NY market for Maui Tacos. Each of the aforementioned transactions was effected pursuant to written agreements between us 31 and the parties thereto. Such agreements are substantially identical to the standard form of subfranchise agreement that we enter into with unaffiliated subfranchisors. In the opinion of our management, each such agreement is on terms as favorable to us as would be available from an unrelated third party. During the years ended June 30, 2001, 2000 and 1999, we paid $17,000, $13,000 and $11,000, respectively, to Joseph Conza as compensation for the use of his apartment in New York City by employees of our Atlanta and Houston offices during business trips. In our estimation, this practice reduced our lodging expense inasmuch as the per diem amounts paid to Mr. Conza were below the market rates for hotel accommodations which we would have been required to pay in order to house such employees during such trips to New York. During the fiscal years ended June 30, 2001, 2000 and 1999, we received $108,000, $111,000 and $110,000, respectively, in reimbursements of expenses from Llewellyn. Such amounts were paid pursuant to a written agreement which provides that we shall be reimbursed by Llewellyn for costs incurred by us in providing operational support services to Llewellyn. The agreement also provides that in the event the costs of such support services shall rise, then the fees paid pursuant to the agreement shall rise accordingly. In the opinion of our management, the agreement is on terms as favorable to us as would be available from an unrelated third party. In April 1994, Mr. Leaness borrowed the sum of $20,000 from us, and collateralized the payment thereof with the same 120,000 shares of Common Stock which he pledged in connection with a $60,000 option exercise and loan transaction consummated in December 1991. This $20,000 loan is payable upon demand and bears interest at the rate of 5% per annum. In March 1995, Joseph Conza borrowed the principal amount of $55,500 from us. That indebtedness is payable in constant bi-monthly payments of principal and interest computed at the rate of 8% per annum through April 15, 2015. Mr. Conza pledged 10,000 unregistered shares of our Common Stock as collateral security for the payment of all sums due under the loan. As of the end of the fiscal year, Mr. Conza was current with respect to his payment obligations and the outstanding principal balance had been reduced to approximately $46,000. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial statements: Consolidated financial statements filed as part of this report are listed under Part II, Item 8 of this Form 10-K. 2. Financial statement schedule: The financial statement schedule filed as part of this report is listed under Part II, Item 8 of this Form 10-K. 3. Exhibits: The exhibits listed in the accompanying index are filed as part of this report. Exhibit Number Description ------ ----------- 3.1 Certificate of Incorporation, as Amended* 3.2 By-laws * 32 4.1 Specimen stock certificate of common stock* 10.1 Trademark Agreement dated as of August 1, 1976 among Peter DeCarlo, Anthony P. Conza and David L. Siegel* 10.2 Modification Agreement dated as of November 15, 1977 by and among Peter DeCarlo, Anthony P. Conza and David L. Siegel* 10.3 Agreement dated as of June 15, 1981 by and between Peter DeCarlo, Anthony P. Conza and David L. Siegel* 10.4 Agreement dated as of June 1, 1977 by and between Anthony P. Conza and David L. Siegel and International Blimpie Corporation* 10.5 Agreement dated as of December 15, 1980 by and between International Blimpie of Illinois, Inc. and International Blimpie Corporation* 10.6 Trademark Distribution Agreement dated July 18, 1984 by and between International Blimpie Corporation and ISM, Inc. and Anthony P. Conza, Peter DeCarlo and David Siegel* 10.7 Agreement dated April 30, 1992 by and between Astor Restaurant Group, Inc. and Blimpie of California, Inc. and ISM, Inc.* 10.8 Replacement Subfranchise Agreement dated as of October 17, 1991 by and between Astor Restaurant Group, Inc. and Patrick J. Pompeo and Joseph Conza* 10.9 Agreement dated July 19, 1991 by and between Metropolitan Blimpie, Inc. and Astor Restaurant Group, Inc.* 10.10 Area Distributor's Agreement dated October 6, 1976 between International Blimpie Corporation and Jeffrey P. Wiener and Charles Leaness* 10.11 Subfranchise Agreement dated April 1, 1984 by and between International Blimpie Corporation and Joseph P. Conza* 10.12 Lease dated as of December 2, 1987 by and between First Capital Income Properties, Ltd. - Series IX and Blimpie Capital Corporation and Lease Modification Agreement dated November 1, 1989 and Second Lease Modification Agreement dated August 21, 1991 between the parties thereto* 10.13 Service Agreement dated as of August 1, 1992 between the Company and Mellon Securities Trust Company* 10.14 Option, Loan, and Pledge Agreements and Promissory note dated as of December 20, 1991 between Astor Restaurant Group, Inc. and Patrick J. Pompeo* 10.15 Option, Loan and Pledge Agreements and Promissory Note dated as of December 20, 1991 between Astor Restaurant Group, Inc. and David L. Siegel* 10.16 Option, Loan and Pledge Agreements and Promissory Note dated as of December 20, 1991 between Astor Restaurant Group, Inc. and Charles G. Leaness* 10.17 Option, Loan and Pledge Agreements and Promissory Note dated as of December 20, 1991 between Astor Restaurant Group, Inc. and Anthony P. Conza* 33 10.18 Agreement dated as of January 31, 1992 by and between Astor Restaurant Group, Inc. and Barber & Bronson, Inc.* 10.19 Blimpie Retirement Plan 401(k) Profit Sharing Plan* 10.20 Copy of the Company's Group Life, Accident and Health Insurance Policy* 10.21 Agreement dated December 18, 1991 between Astor Restaurant Group, Inc. and Llewellyn Distributors, Inc.* 10.22 Agreement dated March 1, 1992 between Blimpie International, Inc. and International Southwest Blimpie, Inc.* 10.23 Agreement dated March 1, 1992 between Blimpie International, Inc. and Blimpie of Atlanta, Inc.* 10.24 1993 Stock Incentive Plan* 10.25 Form of Option Issuable Under the 1993 Stock Incentive Plan* 10.26 Standard Form of Franchise Agreement* 10.27 Standard Form of Subfranchise Agreement* 10.28 Agreement dated June 13, 1991 by and between International Blimpie Co., an unincorporated division of Astor Restaurant Group, Inc. and Blimpie Fifty-Seven, Inc.* 10.29 Form of indemnity agreement between the Company and its directors and/or officers* 10.30 Standard Form of Sublease Agreement* 10.31 Lease dated February 18, 1993 between Lafayette Astor Associates and 740 Broadway Top Floor Corp. and Guaranty of Blimpie International, Inc. with respect thereto* 10.32 Fourth Lease Modification Agreement dated April 27, 1994 between First Capital Income Properties, Ltd., - Series IX and Blimpie Capital Corporation* 10.33 Agreement dated July 19, 1993 by and between Marc Haskell, Andrew Whitman, Riaz Baksh and The Border Cafe, Inc. and Blimpie International, Inc.* 10.34 Agreement dated May 24, 1993 by and between Metropolitan Blimpie, Inc., Anthony P. Conza, David L. Siegel and Blimpie International, Inc.* 10.35 Equipment Lease Agreement dated January 24, 1992 by and between Rapid Leasing International, Inc. and Consal Enterprises, Inc.* 10.36 License Agreement dated July 19, 1993 between The Border Cafe, Inc. and Blimpie International, Inc.* 10.37 Promissory Note, Note Addendum and Pledge Agreement dated March 24, 1995 between Joseph Conza and the Company* 10.38 Form of Warrant Issued to Non-Employee Directors* 10.39 Warrant dated February 12, 1993 Issued to Barber & Bronson Incorporated* 34 10.40 Option dated September 15, 1994 Issued to Kirschenbaum & Bond, Inc.* 10.41 Financial Consulting Agreement by and between Barber & Bronson Incorporated and Blimpie International, Inc. (a copy of which was filed with the Commission on July 19, 1995 as Exhibit 10.41 to Amendment No. 1 to the Company's Registration Statement on Form SB-2 (Reg. No. 33-93738), and is hereby incorporated herein by this reference). 10.42 International Trademark Licensing Agreement among Anthony P. Conza, David L. Siegel and the Company* 10.43 Agreement made as of the 18th day of February, 1997 by and between Anthony P. Conza, David L. Siegel and Blimpie International, Inc.** 10.44 Amendment agreement made as of the 3rd day of February, 1999 by and between Anthony P. Conza, David L. Siegel, and Blimpie International, Inc.*** 10.45 Form of basic MAUI TACOS Franchise Agreement**** 10.46 Form of basic MAUI TACOS Subfranchise Agreement**** 10.47 Form of basic PASTA CENTRAL Franchise Agreement**** 10.48 Form of basic PASTA CENTRAL Subfranchise Agreement**** 10.49 Form of basic SMOOTHIE ISLAND Franchise Agreement**** 10.50 Blimpie International, Inc. 2000 Omnibus Stock Incentive Plan (a copy of which was filed with the Commission on February 14, 2001 as Exhibit 4.2 to the Company's Registration Statement on Form S-8, and is hereby incorporated herein by this reference) 10.51 Agreement and Plan of Merger dated as of the 5th day of October 2001 between Blimpie International, Inc. and Sandwich Acquisition Corporation (a copy of which was filed as an exhibit of corresponding number to the Company's Report on Form 8-K dated October 8, 2001, and is hereby incorporated herein by this reference). 10.52 Voting Agreement dated as of the 5th day of October 2001 among certain shareholders of Blimpie International, Inc. and Sandwich Acquisition Corporation (a copy of which was filed as an exhibit of corresponding number to the Company's Report on Form 8-K dated October 8, 2001, and is hereby incorporated herein by this reference). 18 Letter dated December 13, 1999 from Ernst & Young LLP regarding change in accounting principle related to subfranchise and master license fee revenues (a copy of which was filed with the Commission on September 28, 2000 as an Exhibit of corresponding number to the Company's Annual Report on Form 10-K for the year ended June 30, 2000, and is hereby incorporated herein by this reference) 21 Subsidiaries of the Company* 23 Consent of Independent Auditors 99.1 Press Release dated October 8, 2001 of Blimpie International, Inc. (a copy of which was filed as an exhibit of corresponding number to the Company's Report on Form 8-K dated October 8, 2001, and is hereby incorporated herein by this reference). __________________________ 35 * (a copy of which was filed with the Commission on June 30, 1995 as an Exhibit of corresponding number to the Company's Registration Statement on Form SB-2 (Reg. No. 33-93738), and is hereby incorporated herein by this reference). ** (a copy of which was filed with the Commission on May 12, 1997 as an Exhibit of corresponding number to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1997, and is hereby incorporated herein by this reference). *** (a copy of which was filed with the Commission on February 12, 1999 as an Exhibit of corresponding number to the Company's Current Report on Form 8-K dated February 10, 1999, and is hereby incorporated herein by this reference). **** (a copy of which was filed with the Commission on December 15, 1999 as an Exhibit of corresponding number to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1999, and is hereby incorporated herein by this reference). (b) Reports on Form 8-K: The Company did not file any Current Reports on Form 8-K during the fourth quarter of its fiscal year ended June 30, 2001. 36 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BLIMPIE INTERNATIONAL, INC. Dated: October 10, 2001 By: /s/ Anthony P. Conza ----------------------------------------- Anthony P. Conza, Chairman In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Principal Executive Officer Date: October 10, 2001 /s/ Anthony P. Conza -------------------------------------------- Anthony P. Conza, Chairman and Chief Executive Officer Principal Financial And Accounting Officer Date: October 10, 2001 /s/ Brian D. Lane -------------------------------------------- Brian D. Lane, Vice President, Chief Financial Officer Date: October 10, 2001 /s/ David L. Siegel -------------------------------------------- David L. Siegel, Vice Chairman, Chief Operating Officer and General Counsel Date: October 10, 2001 /s/ Patrick J. Pompeo -------------------------------------------- Patrick J. Pompeo, Executive Vice President and Director Date: October 10, 2001 /s/ Charles G. Leaness -------------------------------------------- Charles G. Leaness, Executive Vice President, Secretary and Director Date: October 10, 2001 /s/ Alvin Katz -------------------------------------------- Alvin Katz, Director Date: October 10, 2001 /s/ Harry G. Chernoff -------------------------------------------- Harry G. Chernoff, Director Date: October 10, 2001 /s/ Jim L. Peterson -------------------------------------------- Jim L. Peterson, Director 37 INDEX TO FINANCIAL STATEMENTS Report of Independent Auditors F-2 Consolidated Balance Sheets at June 30, 2001 and 2000 F-3 Consolidated Statements of Operations and Comprehensive Income (Loss) for each of the three years in the period ended June 30, 2001 F-4 Consolidated Statements of Shareholders' Equity for each of the three years in the period ended June 30, 2001 F-5 Consolidated Statements of Cash Flows for each of the three years in the period ended June 30, 2001 F-6 Notes to Consolidated Financial Statements F-7 Consolidated Schedule of Valuation and Qualifying Accounts for each of the three years in the period ended June 30, 2001 F-22 F-1 Report of Independent Auditors Board of Directors and Shareholders Blimpie International, Inc. We have audited the accompanying consolidated balance sheets of Blimpie International, Inc. and subsidiaries as of June 30, 2001 and 2000, and the related consolidated statements of operations and comprehensive income (loss), shareholders' equity, and cash flows for each of the three years in the period ended June 30, 2001. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Blimpie International, Inc. and subsidiaries at June 30, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 2 to the consolidated financial statements, in 1999 the Company changed its method of accounting for subfranchisor and master license fee revenues. /s/ Ernst & Young LLP Atlanta, Georgia September 14, 2001, except for Note 17, as to which the date is October 9, 2001 F-2

See accompanying notes to consolidated financial statements. F-3

See accompanying notes to consolidated financial statements. F-4

See accompanying notes to consolidated financial statements. F-5

See accompanying notes to consolidated financial statements. F-6 Blimpie International, Inc. and Subsidiaries Notes to Consolidated Financial Statements ________________________________________________________________________________ Note 1: Description of Company Blimpie International, Inc. (the "Company") engages in franchising, subfranchising and master licensing the BLIMPIE trademarks, trade names, service marks, logos, marketing concepts and marketing programs. The Company franchises BLIMPIE Subs & Salads and PASTA CENTRALTM and is the majority owner of Maui Tacos International, Inc. ("Maui Tacos"), the franchisor of MAUI TACOSTM and SMOOTHIE ISLANDTM. BLIMPIE Subs & Salads offers a quick-service, healthy, sub sandwich in approximately 2,000 franchise stores operating throughout the United States, Puerto Rico and in 14 other countries. PASTA CENTRAL's baked pasta meals address current eating trends for eat-in or take home meals. MAUI TACOS restaurants provide a health-oriented, affordable menu of "Maui-Mex" items, including traditional Mexican foods marinated in Hawaiian spices. SMOOTHIE ISLAND is a selection of blended beverages of frozen yogurt, fruit and nutritional supplements sold through the BLIMPIE, PASTA CENTRAL, and MAUI TACOS locations. The Company also provides professional store design services and equipment sales through its wholly-owned subsidiary, B I Concept Systems, Inc. At June 30, 2001, the Company operates two MAUI TACOS restaurants and one tri- branded BLIMPIE, PASTA CENTRAL, SMOOTHIE ISLAND restaurant. The Company operates the subfranchise in Puerto Rico, but does not operate any other subfranchisor or master licensor areas within the Blimpie International system. Note 2: Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Revenue Recognition and Change in Accounting Principle Prior to July 1, 1998, the Company recognized fees relating to subfranchisor and master licensor territory sales when collected or due. If fees were collectible over an extended period and no reasonable basis existed for estimating collectibility, those fees were recognized as they were collected or when the uncertainty regarding collectibility was resolved. Effective July 1, 1998, the Company changed its methodology of accounting for fees relating to subfranchisor and master licensor territory sales to recognize such fees as revenue on a straight-line basis over a 10-year period. Such period is estimated to approximate the period over which the Company's performance obligation to the subfranchisor and master licensor extends. The Company considers the new revenue recognition methodology to result in a better matching of revenues and related expenses incurred in the earnings process related to such revenues. The effect of the change in fiscal 1999 was to increase income before the cumulative effect adjustment by approximately $274,000 ($0.03 per share). The cumulative effect adjustment of $3,373,000 (after reduction for income taxes of $1,815,000) to apply retroactively the new method is included in the net loss in fiscal 1999. Initial fees from the awarding of individual franchises are recorded as revenue when the franchisee's restaurant is opened. Commissions paid and the subfranchisor's share of the initial fees are deferred and charged to expense when the initial fees are recognized. Continuing fees from franchised restaurants are recorded as revenue when earned. Revenue from equipment sales is recognized when the equipment is shipped. Cash and Cash Equivalents The Company considers all liquid investments with a maturity of three months or less when purchased to be cash equivalents. F-7 Note 2: Summary of Significant Accounting Policies (continued) Cash and Cash Equivalents (continued) The Company has cash deposits with financial institutions, which fluctuate in excess of federally insured limits. If these financial institutions were not to honor their contractual liability, the Company could incur losses. Management believes that there is no significant risk of loss because of the financial strength of the financial institutions. Investments Pursuant to Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," debt securities that may be sold prior to maturity and all marketable equity securities are classified as available-for-sale and carried at fair value. Fair value is estimated based on quoted market prices for those or similar investments. Net unrealized gains and losses, determined on the specific identification method, on securities classified as available-for-sale are recorded as a separate component of shareholders' equity. Fair Market Value Disclosure Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments" ("SFAS 107"), requires disclosure of the fair value of certain items, including receivables, payables and investments. The Company believes that the carrying amounts included in the consolidated balance sheets for such items do not differ significantly from their fair values as defined in SFAS 107. Accounts and Notes Receivable The Company provides an allowance for doubtful receivables equal to the estimated collection losses that will be incurred in the collection of such receivables. The estimated losses are based on historical collection experience coupled with a review of all outstanding receivables. Property, Equipment and Depreciation Property and equipment are carried at cost. Depreciation is computed over the estimated useful lives of the assets using straight-line methods. Significant expenditures for additions and improvements are capitalized and expenditures for routine repairs and maintenance are charged to expense as incurred. Trademarks Trademarks are carried at cost less accumulated amortization, which is calculated on a straight-line basis over the estimated useful lives of 15-40 years. Amortization expense was $310,000 in 2001, $305,000 in 2000, and $337,000 in 1999. Advertising The Company follows the policy of charging the costs of advertising to expense as incurred. Advertising expense was $327,000 in 2001, $374,000 in 2000, and $404,000 in 1999. The Company administers several advertising and promotional funds on behalf of the franchisees. The franchisees contribute 4% of their gross sales to The National Media Advertising Account. A portion of the 4% contribution is transferred to Regional Advertising Associations. Franchisees form voluntary regional advertising associations intended to coordinate advertising and marketing efforts and programs for local advertising. Blimpie Brand Building Fund, Inc. is a not-for-profit entity that is authorized to receive marketing allowances and payments from purveyors, distributors and manufacturers. Its activities are F-8 Note 2: Summary of Significant Accounting Policies (continued) Advertising (continued) controlled by franchisees elected to the National Blimpie Franchisee Advisory Council, subfranchisors elected to the National Blimipie Subfranchisor Advisory Council and Company representatives. The National Media Advertising Account and the Blimpie Brand Building Fund monies are spent for advertising and marketing uses, including marketing and advertising personnel, advertising agencies, operating expenses of all types, matching fund programs, research and development, production of educational or training materials, production of commercials, focus groups and other studies, television or radio media time, print advertising and other marketing and advertising uses. The Company also administers a grand opening fund and the local restaurant marketing fund. New franchisees generally pay $3,000 to the grand opening fund and $2,000 to the local restaurant marketing fund during their first year of operation. The franchisee, together with the Company, develops the marketing plan that will include the grand opening marketing, coupon events and monthly promotions. As the franchisee implements the marketing plan, the Company pays vendors or reimburses the franchisee for expenditures related to that plan up to the amount contributed. Aggregate receipts and expenditures for these funds were approximately $20,000,000 each for fiscal 2001. Total assets were approximately $6,000,000 and total liabilities were approximately $3,000,000 as of June 30, 2001. The net assets of these funds are held in a manner analogous to escrow accounts by the Company and are not consolidated. Income Taxes The provision for income taxes and corresponding balance sheet accounts are determined in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109, deferred tax liabilities and assets are determined based on temporary differences between the basis of certain assets and liabilities for income tax and financial reporting purposes. A valuation allowance is provided for deferred tax assets for which realization is uncertain. Use of Estimates The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect certain amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Supplemental Disclosure of Cash Flow Information

F-9 Note 3: Investments The following is a summary of available-for-sale securities included in investments as of June 30: Unrealized Fair 2001 Cost Gain (Loss) Value ------------ ---------- ------------ Available-for-Sale Securities: Current: Common stocks $ 88,000 $ 86,000 $ 174,000 Preferred stocks 362,000 5,000 367,000 Mutual funds 163,000 (17,000) 146,000 ------------ ---------- ------------ 613,000 74,000 687,000 Long-Term U. S. Government securities 997,000 21,000 1,018,000 ------------ ---------- ------------ $1,610,000 $ 95,000 $1,705,000 ============ ========== ============ 2000 Available-for-Sale Securities: Current: Common stocks $ 61,000 $108,000 $ 169,000 Preferred stocks 326,000 (24,000) 302,000 Mutual funds 163,000 (16,000) 147,000 ------------ ---------- ------------ 550,000 68,000 618,000 Long-Term U. S. Government securities 997,000 (27,000) 970,000 ------------ ---------- ------------ $1,547,000 $ 41,000 $1,588,000 ============ ========== ============ The long-term U.S. Government securities held at June 30, 2001 mature in 2004. Note 4: Notes Receivable Notes receivable consist of the following as of June 30:

F-10 Note 5: Property and Equipment The major components of property and equipment and related depreciation periods as of June 30 are: Cost --------------------------- Depreciation Item 2001 2000 Period ---------------------------------- ------------ ------------ --------------- Building and other $ 296,000 $ 739,000 7-14 years Office furniture and fixtures 3,007,000 3,087,000 5-10 years Automobiles 247,000 223,000 5 years Software 845,000 753,000 5 years ------------ ------------ 4,395,000 4,802,000 Less accumulated depreciation 2,954,000 2,412,000 ------------ ------------ $1,441,000 $2,390,000 ============ ============ Depreciation expense totaled $683,000 in 2001, $636,000 in 2000, and $519,000 in 1999. At June 30, 2001, the Company recorded an impairment loss on leasehold improvements and restaurant equipment related to its Company-owned Maui Tacos location in New York City. The impairment loss was recorded due to continued operating losses incurred in this location and management's intention to sell or close the location early in fiscal 2002. The Company recorded a net loss of $338,000 to write down all assets of the location to their estimated net realizable values of $25,000. The impairment loss has been included in Company restaurant operations in the accompanying consolidated statement of operations for the year ended June 30, 2001. The Company expects to dispose of all assets of the store during fiscal 2002. Note 6: Income Taxes The provision for income taxes is comprised as follows for the years ended June 30 : 2001 2000 1999 --------- ---------- ---------- Federal Current $ 96,000 $ 564,000 $789,000 Deferred 241,000 409,000 (91,000) --------- ---------- ---------- 337,000 973,000 698,000 --------- ---------- ---------- State Current 10,000 50,000 116,000 Deferred 20,000 36,000 (14,000) --------- ---------- ---------- 30,000 86,000 102,000 --------- ---------- ---------- $367,000 $1,059,000 $800,000 ========= ========== ========== The following is a reconciliation of income taxes to normal expected Federal income tax computed by applying statutory rates for the years ended June 30: 2001 2000 1999 --------- ---------- ---------- Federal statutory rate - 34% $150,000 $ 732,000 $665,000 State or local taxes, net of federal benefit 20,000 57,000 65,000 Non-deductible expenses 29,000 25,000 34,000 Valuation allowance 163,000 287,000 385,000 Other 5,000 (42,000) (349,000) --------- ---------- ---------- $367,000 $1,059,000 $800,000 ========= ========== ========== F-11 Note 6: Income Taxes (continued) The components of temporary differences and their tax effects which comprise the Company's net deferred tax asset are as follows at June 30: 2001 2000 ---------- ---------- Deferred tax assets: Subfranchisor deferred revenues $1,233,000 $1,509,000 Franchisee deferred revenues 196,000 259,000 Allowance for doubtful accounts 176,000 117,000 Start-up costs for Maui Tacos 57,000 83,000 Net operating loss carryforward of Maui Tacos 607,000 395,000 Other 124,000 20,000 Valuation allowance (835,000) (672,000) ---------- ---------- 1,558,000 1,711,000 ---------- ---------- Deferred tax liabilities: Trademark amortization (351,000) (243,000) ---------- ---------- (351,000) (243,000) ---------- ---------- $1,207,000 $1,468,000 ========== ========== The valuation allowance for deferred taxes relates to net deferred tax assets of Maui Tacos, a majority-owned subsidiary that is not consolidated for tax purposes. The valuation allowance was established due to the uncertainty of the related deferred tax assets' ultimate realization. Maui Tacos has net operating loss carryforwards totaling approximately $1,734,000 expiring beginning in 2020. Note 7: Commitments and Contingencies The Company leases its facilities under noncancelable operating leases, expiring in various years through 2012. The minimum future annual rentals under these noncancelable operating leases as of June 30, 2001 for each of the next five years and in the aggregate, are as follows: Year Amount --------------------- -------------- 2002 $ 538,000 2003 379,000 2004 77,000 2005 61,000 2006 28,000 2007 and thereafter 151,000 ---------- $1,234,000 ========== The Company also is obligated for increases in real estate taxes and operating costs. Rent expenses including real estate taxes and operating costs amounted to $852,000 in 2001, $765,000 in 2000, and $520,000 in 1999. Certain of these leases contain renewal provisions. The Company's leasing subsidiaries execute leases for approved BLIMPIE restaurant locations and then sublease the premises to franchisees. Under the terms of the typical lease agreement, the Company's leasing subsidiary's liability is limited to its net assets and the landlord agrees to not commence any legal proceedings against Blimpie International, Inc. The franchisee assumes the payment of rent and agrees to perform all terms, covenants and conditions of the original lease. As a result, the Company has not recorded lease expense and sublease income in the accompanying consolidated financial statements. As of June 30, 2001, there were approximately 600 leasing subsidiaries with aggregate net assets of $344,000, which are included in cash and other assets in the F-12 Note 7: Commitments and Contingencies (continued) accompanying consolidated balance sheet. The terms of these leases range from 3 to 30 years. As of June 30, 2001, there were approximately 923 leases held by these leasing subsidiaries. The aggregate minimum annual lease payments for all of these leases is estimated to be approximately $20,000,000 in fiscal 2002 and approximately $90,000,000 for all fiscal years subsequent to June 30, 2001. Various claims and lawsuits arise in the normal course of business. It is the Company's practice to vigorously defend all actions. Although the amount of liability as of June 30, 2001 with respect to all claims and lawsuits cannot be ascertained, in the opinion of management, the resulting liability, if any, will not materially affect the Company's results of operations or financial position. Note 8: Trademarks The Company currently owns an undivided 60% interest in the domestic and international BLIMPIE trademarks. The remaining 40% interest in those trademark rights is owned by Metropolitan Blimpie, Inc. ("MBI"), an unrelated company. Through various agreements that the Company has entered into with MBI, the trademark rights are shared by both MBI and the Company. Both companies have the exclusive rights to the trademarks in certain domestic territories, and for the remaining domestic territories, the Company has licensed the rights to the trademarks from MBI in exchange for a licensing fee generally equal to 30% of the revenues, after deducting direct expenses incurred by the Company in the territories. The territories for which the Company has licensed the right to distribute the BLIMPIE trademarks and license the BLIMPIE Marketing System from MBI include: Alaska, Arkansas, Northern California, Colorado, Hawaii, Iowa, Kansas, Missouri, Nebraska, Nevada, North Dakota, Oklahoma, South Dakota, and all territories outside of the United States. The domestic territories in which MBI has retained the right to distribute the BLIMPIE trademarks and license the BLIMPIE Marketing System (the "MBI Territories") include Delaware, Maryland, New Jersey (except for portions of the northeastern section of the State), the counties of New York, Queens, Kings, Richmond, Rockland, Bronx and Westchester in New York, Pennsylvania (from the eastern border westward to and including Harrisburg), Virginia and Washington, D.C. The agreement with MBI with respect to the licensing of the BLIMPIE trademarks and the BLIMPIE marketing system outside of the United States provides for automatic annual renewals until July 2090, provided that the Company makes all payments due to MBI, subject to a minimum annual payment of $100,000. The payments made to MBI under this arrangement were $627,000 in 2001, $700,000 in 2000, and $778,000 in 1999. The Company acquired its 60% interest in the trademark rights noted above through various transactions with Anthony P. Conza, Chairman and Chief Executive Officer ("Conza") and David L. Siegel, Chief Operating Officer ("Siegel"). The Company received a 99 year license in the domestic rights in the BLIMPIE trademarks from Conza and Siegel in 1976. In 1997, the Company purchased its share of the international rights to the BLIMPIE trademarks from Conza and Siegel. The Company agreed to pay $4.5 million ($3 million to Conza and $1.5 million to Siegel), plus certain contingent fees which were to take effect after cumulative international revenues exceeded $5 million, in consideration for their sale of such rights to the Company. That agreement further provided that Conza and Siegel could receive annual payments totaling $150,000 per year for 50 years, or could elect, at any time prior to January 1, 2001, to receive a lump sum distribution of $3 million on January 1, 2001, with $2 million payable to Conza and $1 million payable to Siegel. F-13 Note 8: Trademarks (continued) In February 1999, the Company amended the 1997 agreement with Messrs. Conza and Siegel to allow earlier payment of the cancellation option in exchange for a transfer of the domestic trademark rights held by such individuals to the Company. The amended agreement permitted Messrs. Conza and Siegel to exercise the lump-sum payment options and receive payment on or before February 15, 1999. Both individuals exercised their options, and were paid their lump-sum payments on February 10, 1999. In connection with such payment, the individuals repaid certain demand notes aggregating $150,000, plus accrued interest, relating to purchases of shares of the Company's stock. Such demand notes had been recorded as a reduction of shareholders' equity. As a result of the above transactions, the Company now owns an undivided 60% interest in the domestic and international BLIMPIE trademark rights. The remaining 40% of such rights are owned by MBI. Messrs. Conza and Siegel no longer own any of the rights to the BLIMPIE trademarks or the BLIMPIE marketing system. On October 1, 1995, the Company entered into an agreement to settle a trademark infringement proceeding which it commenced in Canada against an unaffiliated party ("claimant") who had filed trademark registration documents seeking Canadian trademark protection for the name "Blimpie" prior to the time the Company made such filings in Canada. Pursuant to the agreement, the Company acquired all rights held by the claimant in said Canadian trademark registration in consideration for the payment of $40,000 and an agreement to issue 125,000 unregistered shares of the Company's common stock at the rate of 25,000 shares per year. As of June 30, 2001, all 125,000 shares of common stock had been issued to the claimant. Note 9: Related Party Transactions The Company had numerous transactions which result from written agreements between the Company and subfranchisors who are related parties. The following is a summary of the types of transactions and revenue or expense recognized related to these transactions for the years ended June 30:

In November 1998, International Southwest Blimpie, Inc. was sold to a party unrelated to the Company. No additional revenue or expenses are expected to be earned or paid to this officer related to this territory subsequent to November 15, 1998. F-14 Note 9: Related Party Transactions (continued) The Company has subscriptions receivable from an officer of the Company totaling $57,000 at June 30, 2001 and $60,000 at June 30, 2000 related to a purchase of shares of the Company's common stock in fiscal 1992. Such receivable bears interest at the rate of 5% per annum, payable quarterly. Interest income of $4,000, $4,000, and $9,000 was recognized by the Company for the years ended June 30, 2001, 2000, and 1999, respectively. The Company has a note receivable from an officer of the Company due in semi- monthly installments including interest of 8% per annum through April, 2015 (see Note 4). Such note receivable was $46,000 and $48,000 at June 30, 2001 and 2000, respectively. The Company pays rent based on use of an apartment in New York City, which is owned by an officer/employee of the Company. Rental expense of $17,000, $13,000, and $11,000 was recognized for the years ended June 30, 2001, 2000, and 1999, respectively. In April 2001, the Company assigned certain key man insurance policies to three officers of the Company. The aggregate cash surrender value of these policies of approximately $477,000 was expensed as bonuses to the three officers and was recorded in selling, general and administrative expenses in the year ended June 30, 2001. Note 10: Stock Options and Warrants The Company has established an Omnibus Stock Incentive Plan ("the Plan") which permits the Company to award various forms of incentive compensation. Through June 30, 2001, the Company has issued incentive and nonstatutory stock options and stock grants under the Plan. A maximum of 1,293,700 shares may be issued under the Plan. The options are exercisable at the fair market value on the date of grant. The options and stock grants generally provide for vesting at the rate of 20% per annum and expire from five to ten years after issuance. In connection with the issuance of the stock grants, the Company recognized compensation expense of $3,000 in 2001, $6,000 in 2000, and $14,000 in 1999. Option activity under the Plan is as follows:

F-15 Note 10: Stock Options and Warrants (continued) The following table summarizes information concerning options outstanding and exercisable under the Plan at June 30, 2001:

The Company has issued common stock purchase warrants and stock options to various entities in consideration of services provided to the Company. None of these securities have been exercised as of June 30, 2001. The following table summarizes information concerning common stock purchase warrants and options held by non-employees as of June 30, 2001:

On July 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS 123). As permitted by SFAS 123, the Company has chosen to apply APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its Plan and apply the disclosure-only provisions of SFAS 123. Under APB 25, when the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by SFAS 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to June 30, 1995 under the fair value method of that Statement. The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for fiscal 2001, 2000 and 1999: risk-free interest rates of approximately 6.0%; dividend yield of $0.07 per share; volatility factor of the expected market price of the Company's common stock of .50; and a weighted-average expected life of the options of 4.5 years. The weighted-average fair value of options granted under the Plan was $0.47, $1.13, and $1.17 for fiscal 2001, 2000, and 1999, respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. F-16 Note 10: Stock Options and Warrants (continued) For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information, assuming SFAS 123 had been adopted, is as follows:

Note 11: Convertible Shares of Subsidiary The shareholders of the Company's majority-owned subsidiary, Maui Tacos, hold common stock in Maui Tacos that is convertible into Blimpie common stock, according to the terms stipulated in the Maui Tacos shareholder Agreement, as amended. Such agreement states that during the period commencing with the first day of Maui Tacos' third full fiscal year of operations (July 1, 2000) and ending with the ninetieth day after the Company files its annual financial statements, all Maui Tacos shareholders, except for the Company, have the right to convert all or a portion of their respective shares of Maui Tacos common stock into Company stock, pursuant to a formula calculated by dividing the lower of Maui Tacos' current or prior year earnings per share value by the Company's earnings per share value for the same period. The conversion privileges held by the Maui Tacos shareholders are subject to limitations on the number of shares of Company stock that are subject to such conversion rights, both for individual Maui Tacos shareholders and for aggregate levels of conversions. Maui Tacos incurred losses in both the current and prior year, and therefore no shares may be converted pursuant to such formula. Note 12: Employee Benefit Plan The Company maintains a 401(k) Profit Sharing Plan (the "Plan") available to substantially all employees. Under the Plan, the Company can elect to make matching contributions of up to 100% of the elective deferral contributions. During each of the three years in the period ended June 30, 2001, the Company made matching contributions of 20% of the elective deferral contributions. The matching contributions charged to earnings were $67,000, $76,000, and $66,000 for fiscal 2001, 2000 and 1999, respectively. At June 30, 2001 and 2000, the Plan held approximately 101,000 and 47,000 shares, respectively, of the Company's common stock with a fair value of approximately $174,000 and $85,000, respectively. The Plan received approximately $4,800, $2,200 and $300 in dividends on Company shares in fiscal 2001, 2000 and 1999, respectively. Note 13: Business Segment Information The Company's separately identifiable segments relate to: franchise operations, store design services and equipment sales, and restaurant operations of the Company-owned restaurants. During 1996, the Company began operations outside of the United States. As of June 30, 2001, the Company has master licenses operating in Argentina, Bahrain, Canada, Cyprus, Dominican Republic, Great Britain, Greece, Guam, Kuwait, Mexico (primarily states in the northeastern and northwestern parts of the country), Northern Ireland, Oman, Panama, Poland, Portugal, Puerto Rico, Qatar, The Republic of Ireland, Romania, Saipan, Saudi Arabia, South Africa, United Arab Emirates, Uruguay, and Venezuela. Franchisees are operating in the following countries: Argentina, Aruba, Canada, Cyprus, Dominican F-17 Note 13: Business Segment Information (continued) Republic, Great Britain, Guam, Lebanon, Mexico, Panama, Poland, Puerto Rico, Saudi Arabia, South Africa, and Venezuela. There were no capital expenditures outside of the United States in 2001, 2000, or 1999. Financial information by identifiable segments is as follows for the years ended June 30:

Note 14: Subfranchisor Fees and Franchise Revenue Franchise Fees and Costs The initial non-refundable fee for franchisees that have previously never owned a traditional BLIMPIE or MAUI TACOS restaurant is $18,000 and $20,000, respectively. MAUI TACOS agreements include franchise rights to SMOOTHIE ISLAND. BLIMPIE franchisees may purchase a SMOOTHIE ISLAND franchise for $1 to $2,500. These fees generally are payable in cash at the time of execution of the franchise agreement. Additional franchises are awarded at lesser amounts based upon the number of units awarded. The initial non-refundable franchise fee for nontraditional BLIMPIE restaurants, such as those in convenience stores, institutional food service entities, colleges, schools, mass feeders, hospitals and others range from $1.00 to $18,000 (depending upon the number of nontraditional restaurant transactions executed, the location of the nontraditional franchised restaurant, the marketing area and other subjective matters). The Company reserves the right to issue franchises to its subfranchisors or their designees for $1.00 to $5,000 each in order to accelerate the development of the area of the subfranchisor. The Company defers recognition of the revenues and costs related to these transactions until the restaurant is opened. The number of franchised BLIMPIE restaurants open as of June 30, 2001, 2000, and 1999 were 1,955 (1,894 United States, 61 International), 1,990 (1,933 United States, 57 International), and 2,097 (2,040 United States, 57 International), respectively. There were eight PASTA CENTRAL locations co-branded with BLIMPIE locations as of June 30, 2001, five as of June 30, 2000 and three as of June 30, 1999. F-18 Note 14: Subfranchisor Fees and Franchise Revenue (continued) Franchise Fees and Costs (continued) There were 15 MAUI TACOS restaurants operating as of June 30, 2001, 13 of which were franchised and two of which the Company had full or partial ownership. There were eight MAUI TACOS restaurants operating as of June 30, 2000, five of which were franchised and three of which the Company had full or partial ownership. There was one Company-owned MAUI TACOS restaurant operating as of June 30, 1999. There were 80 SMOOTHIE ISLAND locations co-branded with either a BLIMPIE or MAUI TACOS restaurant as of June 30, 2001, 50 as of June 30, 2000, and 30 as of June 30, 1999. There were three Company-owned SMOOTHIE ISLAND JUICE BAR locations operating as of June 30, 2000, all of which were closed or sold in fiscal 2001. The following is a summary of the deferred franchise revenues and costs.

According to the terms of signed agreements between the Company and its franchisees, the Company is obligated, among other things, to supply to the franchisee logo types, dies, mats, etc., of its trademarks, along with sets of materials, manuals and forms at a price equivalent to the Company's cost for such materials, and certain training and continued support. The Company, in conjunction with the subfranchisors and master licensors, assists in the selection and purchase of equipment and helps the franchisee to obtain financing of the initial cost of franchising. Subfranchisors and master licensors are responsible for providing day-to-day operational support for BLIMPIE and MAUI TACOS franchise restaurants in their territory, and in return receive compensation approximating half of the fees collected from the individual BLIMPIE and MAUI TACOS franchises. These services are performed under the Company's supervision. Subfranchisor and Master Licensor Fees The subfranchisor and master licensor fee ranges from $10,000 to $575,000. These fees typically are established by calculating the population of the area of the subfranchisor or master licensor and multiplying the population by $0.10 for the United States and $0.01 to $0.10 for International. Subfranchisors and master licensors in operation as of June 30, 2001, 2000 and 1999 were 102 (84 United States, 18 International), 107 (85 United States, 22 International) and 106 (85 United States, 21 International), respectively. During the year ended June 30, 1995, the Company implemented new subfranchisor agreements that provide for annual renewals. Pursuant to the new form of agreement, the Company sells a territory to a subfranchisor or master licensor for a one-year period, followed by four to ten renewal terms, all but the last of which are annual in duration. If the subfranchisor or master licensor has met all terms and conditions of the subfranchise or master license agreement during the initial one year term and each of the one year renewal terms, a right is granted during the final renewal term upon payment of the fee set forth in the agreement such that the entire term of the agreement is 50 to 60 years. F-19 Note 14: Subfranchisor Fees and Franchise Revenue (continued) Subfranchisor and Master Licensor Fees (continued) Effective July 1, 1999, the Company changed its accounting policy related to the recognition of subfranchisor and master licensor fees (see Note 2). This change was accounted for as a cumulative effect adjustment in fiscal 1999, as reflected in the table below. The following is a summary of the remaining deferred subfranchisor fees:

Note 15: Earnings Per Share Earnings per share on a basic and diluted basis is calculated as follows:

Certain options outstanding during each of the following years and their related exercise prices were not included in the computation of diluted earnings per share before cumulative effect of change in accounting principle because their exercise price was greater than the average market price of the shares and, therefore, the effect would be antidilutive: fiscal 2001 - 798,000 shares at prices ranging from $1.64 to $14.75, fiscal 2000 - 603,000 shares at prices ranging from $2.69 to $14.75, and fiscal 1999 - 590,000 shares at prices ranging from $3.03 to $14.75. F-20 Note 16: Quarterly Information (Unaudited) The following table sets forth a summary of the unaudited quarterly results of operations for the twelve month periods ended June 30, 2001 and June 30, 2000.

The fourth quarter of fiscal 2001 included provisions, net of tax, of approximately $305,000 related to the distribution of the cash surrender value of life insurance to three of the Company's executives, $225,000 related to additional trademark license fees due to MBI, and $592,000 for losses incurred or accrued for the sales or closings of the six SMOOTHIE ISLAND JUICE BAR locations in Houston, Texas and the MAUI TACOS location in New York City. Note 17: Subsequent Event On October 5, 2001, the Company entered into an agreement and plan of merger (the "Agreement") with an investor group headed by Jeffrey Endervelt (the "Endervelt Group"), one of its subfranchisors. Pursuant to the Agreement, Mr. Endervelt's company, Sandwich Acquisition Corporation ("SAC"), will merge with and into the Company, and the Company will be the surviving corporation. In the merger, the Endervelt Group will acquire all of the outstanding common stock of the Company at a price of $2.80 per share, or approximately $25,800,000. The transaction, which is expected to close during the first quarter of calendar 2002, is subject to the approval of the Company's shareholders. In connection with the merger agreement, five members of the Company's senior management, who currently own approximately 58% of the Company's outstanding shares, entered into a voting agreement with SAC. In accordance with the voting agreement, those officers have agreed to vote their shares in favor of the Agreement, and have granted to SAC a proxy to vote their shares in favor of the transaction. Those officers may terminate the voting agreement and revoke their proxies if the Company's Board of Directors withdraws its recommendation of the merger in favor of a superior proposal, as defined in the merger agreement. Additionally, the Agreement provides that the Company will have the ability to conduct a market check for a 30-day period. The Agreement allows the Company to terminate the merger if the Board determines that it has received a superior proposal, which would require the payment by the Company of a break-up fee of $1.3 million plus up to $200,000 of expenses. F-21 Blimpie International, Inc. and Subsidiaries SCHEDULE II CONSOLIDATED SCHEDULE OF VALUATION AND QUALIFYIING ACCOUNTS (in thousands) --------------------------------------------------------------------------------

(1) Represents amounts recorded as receivables but fully reserved at inception due to collectibility concerns. F-22

BLIMPIE INTERNATIONAL INC 10-K