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 MARCH 29, 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 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 NO
AT MARCH 29, 1998, AN AGGREGATE OF 12,744,224 SHARES OF THE REGISTRANT'S
COMMON STOCK, PAR VALUE OF $.01 EACH (BEING THE REGISTRANT'S ONLY CLASS OF
COMMON STOCK), WERE OUTSTANDING.
<PAGE>
<TABLE>
<CAPTION>
PIZZA INN, INC.
Index
-----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
- ------- --------------------------------------------------------- ----
<S> <C> <C>
Condensed Consolidated Statements of Operations
for the three months and nine months ended March 29, 1998
and March 30, 1997 3
Condensed Consolidated Balance Sheets at
March 29, 1998 and June 29, 1997 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended March 29, 1998
and March 30, 1997 5
Notes to Condensed Consolidated Financial Statements 6
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>
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
PIZZA INN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- -------------------------------
March 29, March 30, March 29, March 30,
1998 1997 1998 1997
------------ ------------ -------------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Food and supply sales $ 14,516 $ 14,217 $ 43,678 $ 44,784
Franchise revenue 1,579 1,581 4,944 4,920
Restaurant sales 619 679 2,063 2,009
Other income 150 26 299 83
------------ ------------- ------------ ------------
16,864 16,503 50,984 51,796
------------ ------------- ------------ ------------
COSTS AND EXPENSES:
Cost of sales 13,094 12,737 39,407 40,417
Franchise expenses 882 795 2,540 2,217
General and administrative
expenses 1,383 1,187 3,825 3,744
Interest expense 117 154 375 514
------------ ------------ ------------ ------------
15,476 14,873 46,147 46,892
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 1,388 1,630 4,837 4,904
Provision for income taxes 209 554 1,382 1,667
------------ ------------ ------------ ------------
NET INCOME $ 1,179 $ 1,076 $ 3,455 $ 3,237
============ ============ ============ ============
EARNINGS PER COMMON SHARE $ 0.09 $ 0.08 $ 0.27 $ 0.25
============ ============ ============ ============
EARNINGS PER COMMON SHARE -
ASSUMING DILUTION $ 0.09 $ 0.08 $ 0.25 $ 0.24
============ ============ ============ ============
DIVIDENDS PER COMMON SHARE $ - $ - $ 0.12 $ -
============ ============ ============ ============
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PIZZA INN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands,except share amounts)
March 29, June 29,
1998 1997
----------- --------
(Unaudited)
<S> <C> <C>
ASSETS
- ----------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 1,241 $ 2,037
Restricted cash and short-term investments, 340 295
Accounts receivable, less allowance
for doubtful accounts of $836 and $939,
respectively 8,050 6,711
Notes receivable, less allowance
for doubtful accounts of $40 and
$60, respectively 509 593
Inventories 1,954 2,224
Prepaid expenses and other 596 452
--------- ---------
Total current assets 12,690 12,312
PROPERTY, PLANT AND EQUIPMENT, net 1,952 2,044
PROPERTY UNDER CAPITAL LEASES, net 805 934
DEFERRED TAXES, net 7,207 8,492
OTHER ASSETS
Long-term notes receivable, less
allowance for doubtful accounts
of $142 and $122, respectively 583 149
Other long-term assets 308 379
--------- ---------
$ 23,545 $ 24,310
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ----------------------------------------------------
CURRENT LIABILITIES
Current portion of capital lease obligations $ 122 $ 115
Accounts payable - trade 2,144 1,482
Accrued expenses 2,003 2,917
--------- ---------
Total current liabilities 4,269 4,514
LONG-TERM LIABILITIES
Long-term debt 5,500 6,910
Long-term capital lease obligations 786 879
Other long-term liabilities 774 786
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value; 26,000,000
shares authorized; outstanding 12,744,224
and 12,713,562 shares, respectively (after
deducting shares in treasury:
December - 2,131,707; June - 1,790,416) 128 127
Additional paid-in capital 4,718 4,061
Retained earnings 7,370 7,033
--------- ---------
Total shareholders' equity 12,216 11,221
--------- ---------
$ 23,545 $ 24,310
========= =========
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PIZZA INN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
------------------------------
March 29, March 30,
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,455 $ 3,237
Add non-cash items 2,098 2,088
Changes in assets and liabilities:
Accounts and notes receivable (1,789) (1,144)
Inventories 270 (111)
Prepaid expenses (210) 61
Accounts payable - trade 662 (685)
Accrued expenses (592) (218)
Deferred income (322) 5
Other - net (175) 38
---------- ------------
Cash provided by operating activities 3,397 3,271
---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (301) (433)
Proceeds from sales of assets 66 -
Proceeds from sale of reacquired are development 986 -
Rreacquisition of area development territory (986) -
---------- ------------
Cash used for investing activities (235) (433)
---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of long-term bank debt and
capital lease obligations (1,496) (1,579)
Dividends paid (1,530) -
Proceeds from exercise of stock options 778 277
Purchases of treasury stock (1,710) (1,237)
---------- ------------
Cash used for financing activities (3,958) (2,539)
---------- ------------
Net decrease in cash and cash equivalents (796) 299
Cash and cash equivalents, beginning of period 2,037 653
---------- ------------
Cash and cash equivalents, end of period $ 1,241 $ 952
========== ============
- --------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAYMENTS FOR:
Interest $ 406 $ 473
Income taxes 120 110
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE>
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 for
the fiscal year ended June 29, 1997.
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 July 1997, the Company reacquired the area development rights for the
majority of Tennessee and portions of Kentucky. The Company paid $986,000 in
cash for these rights, and recorded a long-term asset for the same amount which
was amortized over a five year life. In March 1998, the Company sold this area
development territory for $986,000 and recognized a gain on the sale of the
asset in the amount of $125,000. This transaction also included the full
collection of receivables from the original ownership of this territory totaling
an additional $341,000.
(3) In April 1998, the Company's Board of Directors declared a quarterly
dividend of $0.06 per share on the Company's common stock, payable April 23,
1998 to shareholders of record on April 13, 1998.
(4) In August 1997, the Company signed a new agreement (the "New Loan
Agreement") with its current lender, Wells Fargo, to refinance its existing debt
under a new revolving credit facility. The new $9.5 million revolving credit
line combines the Company's existing $6.9 million term loan with its $1 million
revolving credit line, plus an additional $1.6 million revolving credit
commitment. The new revolving credit note matures in August 1999 and is secured
by essentially all of the Company's assets.
Interest on the revolving credit line is payable monthly. Interest is
provided for at a rate equal to prime plus an interest margin from -1.0% to 0.0%
or, at the Company's option, at the Eurodollar rate plus 1.25% to 2.25%. The
interest rate margin is based on the Company's performance under certain
financial ratio tests. A 0.5% annual commitment fee is payable on any unused
portion of the revolving credit line.
The New Loan Agreement contains covenants which, among other things,
require the Company to satisfy certain financial ratios and restrict additional
debt. At March 29, 1998, the Company is in compliance with all financial
covenants.
The Company also entered into a separate cash management agreement with
Wells Fargo, under which excess cash in the Company's bank accounts is applied
against its revolving credit advance on a daily basis. For the nine months
ended March 29, 1998, net payments against the advance were $1.4 million.
(5) The Company increased the net deferred tax asset during the quarter by
$263,000 for general business tax credits through a reduction of the tax
valuation allowance. These tax credits, expiring between 2000 and 2001, will be
available for utilization prior to expiration due to increased taxable income in
recent years. The Company believes that it is more likely than not that these
credits will be realized. This benefit is included in the provision for income
tax for the quarter and the nine months.
(6) In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings per Share ("SFAS
128"), 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 into or
resulted in the issuance of common stock that then shared in the earnings of the
entity. 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).
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 29, 1998 March 30, 1997
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------ ------------- ---------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income Available to
Common Shareholders $ 1,179 12,734 $ 0.09 $ 1,076 12,877 $ 0.08
EFFECT OF DILUTIVE
SECURITIES
Stock Options 1,134 878
------------- -------------
DILUTED EPS
Income Available to
Common Shareholders
& Assumed Conversions $ 1,179 13,868 $ 0.09 $ 1,076 13,755 $ 0.08
============ ============= ========== ============ ============= ==========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
March 29, 1998 March 30, 1997
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------ ------------- ---------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income Available to
Common Shareholders $ 3,455 12,709 $0.27 $3,237 12,916 $0.25
EFFECT OF DILUTIVE
SECURITIES
Stock Options 921 854
------------- -------------
DILUTED EPS
Income Available to
Common Shareholders
& Assumed Conversions $ 3,455 13,630 $ 0.25 $ 3,237 13,770 $ 0.24
============ ============= ========== ============ ============= ==========
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- -----------------------
Quarter and nine months ended March 29, 1998 compared to the quarter and nine
months ended March 30, 1997.
Net income for the third quarter of the current fiscal year rose 10% to
$1,179,000 or $0.09 per share ($0.09 per share assuming dilution) compared to
$1,076,000 or $0.08 per share ($0.08 per share assuming dilution) for the same
quarter last year. For the nine months ended March 29, 1998, net income
increased 7% to $3,455,000 or $0.27 per share ($0.25 per share assuming
dilution), from $3,237,000 or $0.25 per share ($0.24 per share assuming
dilution) for the same period last year.
Food and supply sales increased 2% for the quarter, compared to the same
period last year, due to 3% higher domestic food sales to more franchise
restaurants offset by a decrease in food and equipment sales to international
franchisees. For the nine month period, food and supply sales decreased 2%,
largely due to lower international food and equipment sales as compared to the
nine month period in 1997 which included several large initial shipments for
international openings.
Franchise revenue, which includes income from royalties, license fees and
area development and foreign master license (collectively, "Territory") sales,
was unchanged for the quarter and increased 1% for the nine month period.
Domestic franchise revenues increased 15% and 10% during the quarter and the
nine months of the current fiscal year, respectively, offset by a decrease in
international franchise revenues. The timing and amount of proceeds may vary
significantly from year-to-year and during the year. Current year revenues
include partial recognition of proceeds from the sale of Territory rights for
Korea, the Palestinian Territories, Brazil, South Carolina, Virginia, Tennessee
and Kentucky.
Other income consists primarily of interest and non-recurring revenue
items. The current period includes a gain on the sale of a liquor license in
New Mexico during the first quarter and a gain on the sale of a reacquired area
development Territory during the third quarter.
Cost of sales increased 3% for the quarter and decreased 2% for the nine
month period. As a percentage of food and supply sales, the cost of sales
increased during the quarter due to higher transportation costs associated with
a temporary shortage of truck drivers but remained lower for the nine months due
to increased purchasing efficiencies.
Franchise expenses increased 11% for the quarter and 15% for the nine month
period, compared to the same periods last year. This reflects increases in
expenditures for sales, marketing, training and field service personnel.
Franchise expenses for the current year also include the amortization of a
reacquired area development Territory.
General and administrative expenses increased 17% and 2% for the quarter
and nine months, respectively, compared to the same periods last year. This
increase is principally due to a $50,000 fee to NASDAQ to be listed on the
national market exchange, a $75,000 increase in the allowance for doubtful
accounts and $42,000 in additional insurance expenses.
Interest expense decreased 24% and 27% for the three and nine month
periods, respectively, as a result of lower average debt balances and lower
interest rates.
The Company increased the net deferred tax asset during the quarter by
$263,000 for general business tax credits through a reduction of the tax
valuation allowance. These tax credits, expiring between 2000 and 2001, will be
available for utilization prior to expiration due to increased taxable income in
recent years. The Company believes that it is more likely than not that these
credits will be realized. This benefit is included in the provision for income
tax for the quarter and the nine months.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations totaled $3,397,000 for the first nine months of
fiscal 1998, and consisted primarily of net income plus the benefit of the
Company's net operating loss carryforwards which significantly reduce the amount
of federal income tax actually paid. The Company's agreement with its bank
provides that excess cash will be applied against any outstanding revolving
credit advance. For the nine months ended March 29, 1998, net cash applied
against the advance was $1.4 million. The Company currently has $4 million
available under its revolving line of credit. The Company also utilized cash to
pay dividends of $1,530,000 on the Company's common stock and to repurchase
343,291 shares of its own common stock for $1,710,000.
The Company is in the final stages of evaluating software vendors to
replace its existing financial and distribution operating software. In addition
to providing improved computing capacity and technological capabilities, the new
system will be Year 2000 compliant. Installation of new hardware will be
completed by December 1998 with implementation of the new software to be phased
in by June 1999.
During the nine month period, the Company signed an agreement for the sale
of an area development Territory covering certain counties in Virginia and South
Carolina to an existing area developer for a cash price of $240,000. Effective
March 1998, the Company resold an area development Territory covering certain
counties in Tennessee and Kentucky for $986,000 and recognized a gain on the
sale of the asset in the amount of $125,000. In connection with this
transaction, the area developer's lender has received a pledge of all royalties
and franchise fees payable to the area developer as security for the area
developer's monthly note payments. In the event of a payment default, the
Company has a contingent guarantee for any monthly note payment shortfall after
application of such royalties and franchise fees which is not paid by the area
developer or from his other collateral. These area development agreements,
along with other agreements signed during the last five years, contain
development commitments for a significant number of additional units over the
next four years. The occurrence of any additional area development sales, which
cannot be predicted with any certainty, may also provide significant infusions
of cash. Growth in royalties and distribution sales are expected to provide
adequate working capital. External sources of cash are not expected to be
required in the foreseeable future.
The Company continues to realize substantial benefit from the utilization
of its net operating loss carryforwards (which currently total $15.6 million and
expire in 2005) to reduce its federal tax liability from the 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 ($7.2
million as of March 29, 1998) without reliance on material, non-routine income.
Taxable income in future years at the same level as fiscal 1997 would be
sufficient for full realization of the net tax asset.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contains certain projections and other forward-looking statements
that are not historical facts and are subject to various risks and
uncertainties, including but not limited to: changes in demand for Pizza Inn
products and franchises; the impact of competitors' actions; changes in prices
or supplies of food ingredients; and restrictions on international trade and
business.
<PAGE>
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: May 13, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-28-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 1241
<SECURITIES> 0
<RECEIVABLES> 8559
<ALLOWANCES> 876
<INVENTORY> 1954
<CURRENT-ASSETS> 12690
<PP&E> 1952
<DEPRECIATION> 0
<TOTAL-ASSETS> 23545
<CURRENT-LIABILITIES> 4269
<BONDS> 0
<COMMON> 128
0
0
<OTHER-SE> 12088
<TOTAL-LIABILITY-AND-EQUITY> 23545
<SALES> 45741
<TOTAL-REVENUES> 50984
<CGS> 39407
<TOTAL-COSTS> 39407
<OTHER-EXPENSES> 2540
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 375
<INCOME-PRETAX> 4837
<INCOME-TAX> 1382
<INCOME-CONTINUING> 3455
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3455
<EPS-PRIMARY> .27
<EPS-DILUTED> .25
</TABLE>
