SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 1998.
--------------------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO
_______________.
COMMISSION FILE NUMBER 0-12919
PIZZA INN, INC.
(EXACT NAME OF REGISTRANT IN ITS CHARTER)
MISSOURI 47-0654575
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5050 QUORUM DRIVE
SUITE 500
DALLAS, TEXAS 75240
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES,
INCLUDING ZIP CODE)
(972) 701-9955
(REGISTRANT'S TELEPHONE NUMBER,
INCLUDING AREA CODE)
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 PRECEDING 12 MONTHS (OR SUCH SHORTER PERIOD THAT THE REGISTRANT
WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTIONS 12, 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY A COURT. YES [X] NO
AT SEPTEMBER 27, 1998, AN AGGREGATE OF 11,733,926 SHARES OF THE
REGISTRANT'S COMMON STOCK, PAR VALUE OF $.01 EACH (BEING THE REGISTRANT'S ONLY
CLASS OF COMMON STOCK), WERE OUTSTANDING.
PIZZA INN, INC.
Index
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
- ------- -------------------------------------------------------------------------- ----
<S> <C> <C> <C>
Consoldiated Statements of Operations for the three months ended
September 27, 1998 and September 28, 1997 3
Consolidated Balance Sheets at September 27, 1998 and June 28, 1998 4
Condensed Consolidated Statements of Cash Flows for the three months ended 5
September 27, 1998 and September 28, 1997
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
- ------- --------------------------------------------------------------------------
Financial Condition and Results of Operations 9
-------------------------------------------------------------------------- ----
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 12
- ------- -------------------------------------------------------------------------- ----
Item 6. Exhibits and Reports on Form 8-K 12
- ------- -------------------------------------------------------------------------- ----
Signatures 13
</TABLE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL INFORMATION
- --------------------------------
<TABLE>
<CAPTION>
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
-------------------
SEPTEMBER 27, SEPTEMBER 28,
REVENUES: 1998 1997
------------------- --------------
<S> <C> <C>
Food and supply sales $ 14,442 $ 14,461
Franchise revenue 1,454 1,794
Restaurant sales 596 697
Other income 92 98
------------------- --------------
16,584 17,050
------------------- --------------
COSTS AND EXPENSES:
Cost of sales 13,494 13,054
Franchise expenses 806 903
General and administrative expenses 1,491 1,300
Interest expense 113 140
------------------- --------------
15,904 15,397
------------------- --------------
INCOME BEFORE INCOME TAXES 680 1,653
Provision for income taxes 210 562
------------------- --------------
NET INCOME $ 470 $ 1,091
=================== ==============
BASIC EARNINGS PER COMMON SHARE $ 0.04 $ 0.09
=================== ==============
DILUTED EARNINGS PER COMMON SHARE $ 0.04 $ 0.08
=================== ==============
DIVIDENDS DECLARED PER COMMON SHARE $ 0.06 $ 0.06
=================== ==============
WEIGHTED AVERAGE COMMON SHARES 12,212 12,680
=================== ==============
WEIGHTED AVERAGE COMMON AND
DILUTIVE POTENTIAL COMMON SHARES 13,009 13,466
=================== ==============
<FN>
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
PIZZA INN, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 27, JUNE 28,
ASSETS 1998 1998
--------------- ---------
(unaudited)
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 1,050 $ 2,335
Accounts receivable, less allowance for doubtful
accounts of $854 and $825, respectively 5,737 6,021
Notes receivable, current portion, less allowance
for doubtful accounts of $204 and $174, respectively 705 741
Inventories 2,196 1,953
Prepaid expenses and other 466 556
--------------- ---------
Total current assets 10,154 11,606
Property, plant and equipment, net 1,916 1,921
Property under capital leases, net 1,008 761
Deferred taxes, net 6,535 6,705
OTHER ASSETS
Long-term notes receivable, less
allowance for doubtful accounts of $8 and $8,
respectively 360 436
Deposits and other 528 344
--------------- ---------
$ 20,501 $ 21,773
=============== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade $ 3,082 $ 2,014
Accrued expenses 2,382 2,507
Current portion of capital lease obligations 224 125
--------------- ---------
Total current liabilities 5,688 4,646
LONG-TERM LIABILITIES
Long-term debt 6,652 4,700
Long-term capital lease obligations 931 754
Other long-term liabilities 756 756
--------------- ---------
14,027 10,856
--------------- ---------
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value; authorized 26,000,000
shares; outstanding 11,733,926 and 12,528,436
shares, respectively (after deducting shares in
treasury: September - 3,179,986; June -2,381,386) 117 125
Additional paid-in capital 4,662 4,911
Retained earnings 1,695 5,881
--------------- ---------
Total shareholders' equity 6,474 10,917
--------------- ---------
$ 20,501 $ 21,773
=============== =========
<FN>
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
--------------------
SEPTEMBER 27, SEPTEMBER 28,
1998 1997
-------------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 470 $ 1,091
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 288 225
Provision for bad debt 60 -
Utilization of pre-reorganization net operating
loss carryforwards 170 529
Changes in assets and liabilities:
Notes and accounts receivable 336 (577)
Inventories (243) 361
Accounts payable - trade 1,068 23
Accrued expenses (27) (370)
Prepaid expenses and other 32 (18)
-------------------- ---------------
CASH PROVIDED BY OPERATING ACTIVITIES 2,154 1,264
-------------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (369) (220)
Acquisition of area development territory - (986)
-------------------- ---------------
CASH USED FOR INVESTING ACTIVITIES (369) (1,206)
-------------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term bank debt 1,952 -
Repayments of long-term bank debt and capital lease obligations (14) (252)
Dividends paid (754) -
Proceeds from exercise of stock options 15 284
Purchases of treasury stock (4,269) (860)
-------------------- ---------------
CASH USED FOR FINANCING ACTIVITIES (3,070) (828)
-------------------- ---------------
Net increase (decrease) in cash and cash equivalents (1,285) (770)
Cash and cash equivalents, beginning of period 2,335 2,332
-------------------- ---------------
Cash and cash equivalents, end of period $ 1,050 $ 1,562
-------------------- ---------------
<FN>
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
-------------------
SEPTEMBER 27, SEPTEMBER 28,
1998 1997
------------------- --------------
CASH PAYMENTS FOR:
<S> <C> <C> <C>
Interest $ 93 $ 152
Income taxes - -
NONCASH FINANCING AND INVESTING
ACTIVITIES:
Capital lease obligations incurred $ 290 $ -
</TABLE>
PIZZA INN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) The accompanying condensed consolidated financial statements of Pizza
Inn, Inc. (the "Company") have been prepared without audit pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in the financial statements have been
condensed or omitted pursuant to such rules and regulations. The condensed
consolidated financial statements should be read in conjunction with the notes
to the Company's audited consolidated financial statements in its Form 10-K/A
for the fiscal year ended June 28, 1998.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary to fairly present the
Company's financial position and results of operations for the interim periods.
All adjustments contained herein are of a normal recurring nature.
(2) In September 1998, the Company's Board of Directors declared a quarterly
dividend of $0.06 per share on the Company's common stock, payable October 23,
1998 to shareholders of record on October 8, 1998. The Company's balance sheet
as of September 27, 1998 includes a current liability of $704,000 for dividends
declared and payable.
(3) In September 1998, the Company signed an agreement with its current
lender to extend the term of its existing $9.5 million revolving credit line
through August 2000 and to modify certain financial covenants. As of September
27, 1998, the Company was in compliance with all of its debt covenants.
(4)
Effective December 28, 1997, the Company adopted SFAS 128, "Earnings Per Share",
which establishes standards for computing and presenting earnings per share
(EPS). The statement requires dual presentation of basic and diluted EPS on the
face of the income statement for entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic EPS
computation, to the numerator and denominator of the diluted EPS calculation.
Basic EPS excludes the effect of potentially dilutive securities while diluted
EPS reflects the potential dilution that would occur if securities or other
contracts to issue common stock were exercised, converted or resulted in the
issuance of common stock that then shared in the earnings of the entity. SFAS
128 requires restatement of earnings per share for prior periods. Accordingly,
earnings per share data for all periods presented have been restated to reflect
the computation of earnings per share in accordance with provisions of SFAS 128.
The following table shows the reconciliation of the numerator and denominator of
the basic EPS calculation to the numerator and denominator of the diluted EPS
calculation (in thousands, except per share amounts).
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- ----------
<S> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 27, 1998
BASIC EPS
Income Available to Common Shareholders $ 470 12,212 $ 0.04
Effect of Dilutive Securities - Stock Options 797
-------------
DILUTED EPS
Income Available to Common Shareholders
& Assumed Conversions $ 470 13,009 $ 0.04
============ ============= ==========
THREE MONTHS ENDED SEPTEMBER 28, 1997
BASIC EPS
Income Available to Common Shareholders $ 1,091 12,680 $ 0.09
Effect of Dilutive Securities - Stock Options 786
-------------
DILUTED EPS
Income Available to Common Shareholders
& Assumed Conversions $ 1,091 13,466 $ 0.08
============ ============= ==========
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-------------------------------------------------------------------------------
RESULTS OF OPERATIONS
----------------------
Quarter ended September 27, 1998 compared to the quarter ended September 28,
1997.
Diluted earnings per share for the first quarter of the current fiscal year
decreased 50% to $0.04 from $0.08 for the same period last year. Net income for
the quarter decreased 57% to $470,000 from $1,091,000 for the same quarter last
year. Net income and earnings per share decreased primarily because of the
temporary closing of a number of the Company's restaurants in larger revenue
producing southeastern states due to three significant hurricanes in this
quarter, lower revenues from area development territory sales, slower than
anticipated new unit openings (especially in our international markets), and
significantly higher cheese costs.
Food and supply sales were flat for the quarter compared to the same period
last year. Increases in domestic food sales to franchise restaurants due to
higher cheese prices were offset by fewer sales in hurricane effected areas and
a decrease in equipment sales to domestic franchisees due to fewer new store
openings.
Franchise revenue, which includes income from royalties, license fees and
area development and foreign master license (collectively, "Territory") sales,
decreased 19% or $340,000 compared to the same period of the prior year. The
first quarter of the prior year included the recognition of proceeds from the
sale of foreign master license rights in Brazil, the Palestinian Territories and
Korea in the amount of $230,000. Current year revenues include partial
recognition of proceeds from the sale of foreign master license rights in Puerto
Rico in the amount of $25,000. Royalty revenue was down $101,000 compared to
the first quarter last year, mainly resulting from a slightly lower average
royalty rate due to more restaurants within area development territories, lost
store days due to the weather, and fewer international units.
Restaurant sales, which consists of revenue generated by Company-owned
stores, decreased 14% or $101,000 compared to the same period of the prior year.
This was due to the sale of one full service store in December 1997 and the
lease expiration and closing of one Delco store in August 1998.
Cost of sales increased 3% or $440,000 for the quarter due to the increase
in domestic food sales. As a percentage of sales, cost of sales increased to
90% from 86% for the same period last year. This was primarily due to higher
cost of cheese product, an increase in allocation of corporate services
overhead, and increases in transportation costs associated with a temporary
shortage of truck drivers.
Franchise expenses include selling, general and administrative expenses
directly related to the sale and service of franchises and Territories. These
costs decreased 11% or $97,000 for the first quarter primarily due to an
increase in corporate services overhead allocation to the distribution center,
resulting in a corresponding decrease in franchise expenses, and decreases in
travel expenses. Additionally, franchise expenses for the first quarter of the
prior year also included the amortization of a reacquired area development
Territory.
General and administrative expenses increased 15% or $191,000 during the
first quarter, compared to the same period last year, principally due to an
increase in the allowance for doubtful accounts, as well as higher insurance
expense and professional fees.
Interest expense decreased 19% or $27,000 for the quarter, as a result of
lower average debt and lower interest rates.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of fiscal 1999, the Company utilized cash provided
by operations in the amount of $2,154,000, bank borrowings of $1,952,000, and a
portion of its cash balances to purchase 798,600 shares of its own common stock
for $4,269,000 and to pay dividends of $754,000 on the Company's common stock.
Capital expenditures of $369,000 during the first quarter included $219,000
for upgrading the Company's computer system (including compliance with Year 2000
issues). This new system will be financed under a 36-month capitalized lease.
During the first fiscal quarter the Company's lease for its transportation
fleet expired. In September 1998, the Company entered into a new lease
agreement for replacement of transportation equipment. The new four-year lease
contains substantially the same terms and provides a modernized fleet for
distribution of goods.
In September 1998, the Company's Board of Directors declared a quarterly
dividend of $0.06 per share on the Company's common stock, payable October 23,
1998 to shareholders of record on October 8, 1998. The Company's balance sheet
as of September 27, 1998 includes a current liability of $704,000 for dividends
declared, and payable.
The Company continues to realize substantial benefit from the utilization
of its net operating loss carryforwards (which currently total $14.1 million and
expire in 2005) to reduce its federal tax liability from the 31% to 34% tax rate
reflected on its statement of operations to an actual payment of approximately
2% of taxable income. Management believes that future operations will generate
sufficient taxable income, along with the reversal of temporary differences, to
fully realize its net deferred tax asset balance ($6.5 million as of September
27, 1998) without reliance on material, non-routine income. Taxable income in
future years at the same level as fiscal 1998 would be sufficient for full
realization of the net tax asset.
The Company continues to assess its computerized systems to determine their
ability to correctly identify the year 2000 and is devoting the necessary
internal and external resources to replace, upgrade or modify all significant
systems related to the year 2000. The Company's assessment, purchase of new
equipment and installation of new software are completed. The conversion and
testing of data began in October 1998. Management anticipates that all systems
will be year 2000 compliant by June 1999. The Company's existing software
system had a remaining book value of $137,000 at September 27, 1998 which will
be amortized over nine months through June 1999.
Because third party computer failures could also have a material impact on
a company's ability to conduct business, confirmations are being requested from
our material vendors and suppliers to certify that plans are being developed by
them to address and become compliant with the year 2000 issues. As of November
12, 1998, the Company had received responses from approximately 24% from such
parties and all the responding companies have provided written assurances that
they expect to address all their significant year 2000 issues on a timely basis.
The Company believes that any year 2000 impact on its franchisee base will have
no material effect on the Company's results of operations since sales
information is not currently communicated through computer systems. Through the
assessment of the Company's non-information technology systems, management has
determined that no modifications are required for year 2000 compliance in this
area.
Currently, the Company can not clearly identify or therefore address the
most reasonably likely worse case scenario regarding year 2000 compliance.
Additionally, we plan to have all new compliance systems noted above fully
implemented by June 1999. Therefore, management does not believe there is an
immediate need for a contingency plan. However, during the implementation
process, management plans to closely monitor any problems which should arise
requiring a contingency plan and to then expeditiously develop such alternative
plan based on these specific needs.
Although management presently believes the Company is taking appropriate
steps to assess and correct its year 2000 issues, due to the general uncertainty
inherent in the year 2000 issue, in part due to the uncertainty of year 2000
readiness of third parties, management is unable to determine at this time
whether year 2000 issues will have a material adverse effect on the Company's
results of operations or financial condition.
New software, testing, and conversion of systems and applications will cost
approximately $450,000 and new hardware components will cost approximately
$300,000. Total system upgrades are expected to position the Company for
anticipated future growth and enhance corporate service capabilities. Of these
costs, approximately $509,000 has been incurred as of September 27, 1998. All
the above capital expenditures are to be funded through a 36-month capitalized
lease.
This report contains certain forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) relating to the
Company that are based on the beliefs of the management of the Company, as well
as assumptions and estimates made by and information currently available to the
Company's management. When used in this report, the words "anticipate,"
"believe," "estimate," "expect," "intend" and similar expressions, as they
relate to the Company or the Company's management, identify forward-looking
statements. Such statements reflect the current views of the Company with
respect to future events and are subject to certain risks, uncertainties and
assumptions relating to the operations and results of operations of the Company
as well as its customers and suppliers, including as a result of competitive
factors and pricing pressures, shifts in market demand, general economic
conditions and other factors including but not limited to, changes in demand for
Pizza Inn products or franchises, the impact of competitors' actions, changes in
prices or supplies of food ingredients, and restrictions on international trade
and business. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions or estimates prove incorrect, actual results
may vary materially from those described herein as anticipated, believed,
estimated, expected or intended.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ---------------------------------------------------------------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------------
There are no exhibits filed with this report. No reports on Form 8-K were
filed in the quarter for which this report is filed.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PIZZA INN, INC.
Registrant
By: /s/Ronald W. Parker
---------------------
Ronald W. Parker
Executive Vice President and
Principal Financial Officer
By: /s/Nancy Deemer
----------------
Nancy Deemer
Controller and
Principal Accounting Officer
Dated: November 12, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-28-1998
<PERIOD-START> JUN-29-1998
<PERIOD-END> SEP-27-1998
<CASH> 1050
<SECURITIES> 0
<RECEIVABLES> 6442
<ALLOWANCES> 1058
<INVENTORY> 2196
<CURRENT-ASSETS> 10154
<PP&E> 1916
<DEPRECIATION> 0
<TOTAL-ASSETS> 20501
<CURRENT-LIABILITIES> 5688
<BONDS> 0
<COMMON> 117
0
0
<OTHER-SE> 6357
<TOTAL-LIABILITY-AND-EQUITY> 20501
<SALES> 15038
<TOTAL-REVENUES> 16584
<CGS> 13494
<TOTAL-COSTS> 13494
<OTHER-EXPENSES> 806
<LOSS-PROVISION> 60
<INTEREST-EXPENSE> 113
<INCOME-PRETAX> 680
<INCOME-TAX> 210
<INCOME-CONTINUING> 470
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 470
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
