SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 28, 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 as specified in its charter)
MISSOURI 47-0654575
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5050 QUORUM DRIVE
SUITE 500
DALLAS, TEXAS 75240
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 701-9955
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 EACH
(Title of Class)
At September 9, 1998, there were 11,772,896 shares of the registrant's
Common Stock outstanding, and the aggregate market value of registrant's Common
Stock held by non-affiliates was $31,164,923, based upon the average of the bid
and ask prices.
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 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.X
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 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
---
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement, to be filed
pursuant to Section 14(a) of the Securities Exchange Act of 1934 in connection
with the registrant's annual meeting of shareholders in December 1998, have been
incorporated by reference in Part III of this report.
PART I
ITEM 1 - BUSINESS
GENERAL
Pizza Inn, Inc. (the "Company"), a Missouri corporation incorporated in
1983, is the successor to a Texas company of the same name which was
incorporated in 1961. The Company is the franchisor and food and supply
distributor to a system of restaurants operating under the trade name "Pizza
Inn" (R).
On September 9, 1998, the Pizza Inn system consisted of 505 units,
including three Company operated units (which are used for product testing and
franchisee training, in addition to serving customers) and 502 franchised units.
The domestic units are comprised of 294 full service units, 40
delivery/carry-out units and 98 Express units. The international units are
comprised of 28 full service units, 25 delivery/carry-out units and 17 Express
units. Pizza Inn units are currently located in 22 states and 19 foreign
countries. Domestic units are located predominantly in the southern half of the
United States, with Texas, North Carolina and Arkansas accounting for
approximately 29%, 16% and 11% respectively of the total. Norco Manufacturing
and Distributing Company ("Norco"), a division of the Company, distributes food
products, equipment, and other supplies to units in the United States and, to
the extent feasible, in other countries.
PIZZA INN RESTAURANTS
Full service restaurants ("Full-Service") offer dine-in and carry-out
service and, in most cases, also offer delivery service. These restaurants
serve pizza on three different crusts (The Original Thin Crust, New York Pan,
and Italian Crust), with standard toppings and special combinations of toppings.
They also offer pasta, salad, sandwiches, desserts and beverages, including beer
and wine in some locations. They are generally located in free standing
buildings in close proximity to offices, shopping centers and residential areas.
The current standard Full-Service units are between 3,300 and 4,400 square feet
in size and seat 130 to 180 customers. The interior decor is designed to
promote a contemporary, family style atmosphere.
Restaurants that offer delivery and carry-out service only ("Delcos") are
growing in popularity and number. Delcos typically are located in shopping
centers or other in-line arrangements, occupy approximately 1,000 square feet,
and offer limited or no seating. Delcos generally offer the same menu as
Full-Service units, except for buffet service. The decor of these units is
designed to be bright and highly visible, featuring neon, lighted displays and
awnings.
A third version, Pizza Inn Express units ("Express"), are typically located
in a convenience store, college campus, airport terminal or other commercial
facility. They have limited or no seating and offer quick carry-out service of
a limited menu of pizza and other foods and beverages. An Express unit
typically occupies approximately 200 to 400 square feet and is operated by the
same person who owns the commercial facility or who is licensed at one or more
locations within the facility.
FRANCHISING
The Pizza Inn concept was first franchised in 1963. Since that time,
industry franchising concepts and development strategies have changed, thus
present franchise relationships are evidenced by a variety of contractual forms.
Common to those forms are provisions which: (i) provide an initial franchise
term of 20 years and a renewal term, (ii) require the franchisee to follow the
Pizza Inn system of restaurant operation and management, (iii) require the
franchisee to pay a franchise fee and continuing royalties, and (iv) prohibit
the development of one unit within a specified distance from another.
The Company's current form of franchise agreement provides for: (i) a
franchise fee of $20,000 for a Full-Service unit, $7,500 for a Delco and $3,500
for an Express unit, (ii) an initial franchise term of 20 years for a Full-
Service unit, 10 years for a Delco, plus a renewal term of 10 years in both
cases, and an initial term of five years for an Express unit plus a renewal term
of five years, (iii) contributions equal to 1% of gross sales to the Pizza Inn
Advertising Plan or to the Company, discussed below, (iv) royalties equal to 4%
of gross sales for a Full-Service or Delco and 5% of gross sales for an Express
unit and (v) required advertising expenditures of at least 4% of gross sales for
a Full-Service unit, 5% for a Delco and 2% for an Express unit.
The Company has adopted a franchising strategy which has three major
components: continued development within existing Pizza Inn market areas,
development of new domestic territories, and continued growth in the
international arena. As a cornerstone of this approach, the Company offers, to
certain experienced restaurant operators, area developer rights in both new and
existing domestic markets. An area developer pays a negotiated fee to purchase
the right to operate or develop, along with the Company, Pizza Inn restaurants
within a defined territory, typically for a term of 20 years plus renewal
options for 10 years. The area developer agrees to a new store development
schedule and assists the Company in local franchise service and quality control.
In return, half of the franchise fees and royalties earned on all units within
the territory are retained by the area developer during the term of the
agreement. Similarly, the Company offers master franchise rights to develop
Pizza Inn restaurants in certain foreign countries, with negotiated fees,
development schedules and ongoing royalties.
As with developers, a master licensee for a foreign country pays a
negotiated fee to purchase the right to develop and operate Pizza Inn
restaurants within a defined foreign territory, typically for a term of 20 years
plus renewal options for ten years. The master licensee agrees to a new store
development schedule and the Company trains the master licensee to monitor and
assist franchisees in their territory with local franchise service and quality
control, with support from the Company. In return, the master licensee
typically retains half the franchise fees and approximately half the royalties
on all units within the territory during the term of the agreement. While all
Pizza Inn restaurants opened in an area of developer's territory enter into
franchise agreements with the Company, a master licensee may open restaurants
owned and operated by the master licensee, or they may open sub-franchised
restaurants owned and operated by third parties through agreement with the
master licensee.
FOOD AND SUPPLY DISTRIBUTION
The Company's Norco division offers substantially all of the food and paper
products, equipment and other supplies necessary to operate a Pizza Inn
restaurant. Franchisees are required to purchase from Norco certain food
products which are proprietary to the Pizza Inn system. In addition, the vast
majority of franchisees also purchase other supplies from Norco. In May 1998,
the Company entered into an agreement with Pepsi, Inc. to distribute Pepsi
products through Pizza Inn restaurants. Pepsi agreed to provide each converted
restaurant with a sign-on bonus during the specified sign-up period, new loaned
fountain and support equipment, and various marketing support including cash
payments throughout the term of the agreement, while the Company received
reimbursement of various expenses related to the agreement, shares of its common
stock and a sign-on bonus for entering into the agreement.
Norco operates its central distribution facility six days per week, and it
delivers to all domestic units on a weekly basis, utilizing a fleet of
refrigerated tractor-trailer units operated by Company drivers and independent
owner-operators. Norco also ships products and equipment to its international
franchisees. The food, equipment, and other supplies distributed by Norco are
generally available from several qualified sources, and the Company is not
dependent upon any one supplier or limited group of suppliers. The Company
contracts with established food processors for the production of its proprietary
products. The Company does not anticipate any difficulty in obtaining supplies
in the foreseeable future.
ADVERTISING
The Pizza Inn Advertising Plan ("PIAP") is a non-profit corporation which
creates and produces print advertisements, television and radio commercials, and
in-store promotional materials along with related research and advertising
services for use by its members. Each operator of a Full-Service or Delco unit,
including the Company, is entitled to membership in PIAP. Nearly all of the
Company's existing franchise agreements for Full-Service and Delco units require
the franchisees to become members of PIAP. Members contribute 1% of their gross
sales. PIAP is managed by a Board of Trustees, comprised of franchisee
representatives who are elected by the members each year. The Company does not
have any ownership interest in PIAP. The Company provides certain
administrative, marketing and other services to PIAP and is paid by PIAP for
such services. On September 9, 1998, the Company operated stores and
substantially all of its franchisees were members of PIAP. Operators of Express
units do not participate in PIAP; however, they contribute up to 1% of their
gross sales directly to the Company to help fund Express unit marketing
materials and similar expenditures.
Groups of franchisees in many of the Pizza Inn system's market areas have
formed local advertising cooperatives. These cooperatives, which may be formed
voluntarily or may be required by the Company under the franchise agreements,
establish contributions to be made by their members and direct the expenditure
of these contributions on local media advertising using materials developed by
PIAP and the Company.
The Company and its franchisees conduct independent marketing efforts in
addition to their participation in PIAP and local cooperatives.
TRADEMARKS AND QUALITY CONTROL
The Company owns various trademarks, including the name "Pizza Inn", which
are used in connection with the restaurants and have been registered with the
United States Patent and Trademark Office. The duration of such trademarks is
unlimited, subject to continued use. In addition, the Company has obtained
trademark registrations in several foreign countries and has applied for
registration in others. The Company believes that it holds the necessary rights
for protection of the trademarks essential to its business.
The Company requires all units to satisfy certain quality standards
governing the products and services offered through use of the Company's
trademarks. The Company maintains a staff of field representatives, whose
primary responsibilities include periodic visits to provide advice and
assistance in operational and marketing activities and to evaluate and enforce
compliance with the Company's quality standards.
TRAINING
The Company offers numerous training programs for the benefit of
franchisees and their restaurant management and crew members. The training
programs, taught by experienced Company employees, focus on food preparation,
service, cost control, sanitation, safety, local store marketing, personnel
management, and other aspects of restaurant operation. The training programs
include group classes, supervised work in Company operated units, and special
field seminars. Training programs are offered free of charge to franchisees,
who pay their own travel and lodging expenses. Restaurant managers train their
staff through on-the-job training, utilizing video tapes and printed materials
produced by the Company.
WORKING CAPITAL PRACTICES
The Company's Norco division maintains a sufficient inventory of food and
other consumable supplies which it distributes to Pizza Inn units typically on a
weekly basis. The Company's accounts receivable and notes receivable consist
primarily of receivables from food and supply sales, equipment sales, and
accrued franchise royalties.
GOVERNMENT REGULATION
The Company is subject to registration and disclosure requirements and
other restrictions under federal and state franchise laws. The Company's Norco
division is subject to various federal and state regulations, including those
regarding transportation of goods, food labeling, safety, sanitation,
distribution, and vehicle licensing.
The development and operation of Pizza Inn units are subject to federal,
state and local regulations, including those pertaining to zoning, public
health, and alcoholic beverages, where applicable. Many restaurant employees
are paid at rates related to the minimum wage established by federal and state
law. Increases in the federal minimum wage can result in higher labor costs for
the Company operated units, as well as its franchisees, which may be partially
offset by price increases or operational and equipment efficiencies.
EMPLOYEES
On September 9, 1998, the Company had approximately 249 employees,
including 66 in the Company's corporate office, 84 at its Norco division, and 37
full-time and 62 part-time employees at the Company operated restaurants. None
of the Company's employees are currently covered by collective bargaining
agreements. The Company believes that its employee relations are excellent.
COMPETITION
The restaurant business is highly competitive. The Company and its
franchisees compete with other national and regional pizza chains, independent
pizza restaurants, and other restaurants which serve moderately priced foods.
The Company believes that Pizza Inn units compete primarily on the basis of the
quality, value and price of their food, the consistency and level of service,
and the location, attractiveness and cleanliness of their restaurant facilities.
Because of the importance of brand awareness, the Company has increased its
development emphasis on individual market penetration and local cooperative
advertising by franchisees.
The Company's Norco division competes with both national and local
distributors of food, equipment and other restaurant supplies. The distribution
industry is very competitive. The Company believes that the principal
competitive factors in the distribution industry are product quality, customer
service and price. Norco is the sole authorized supplier of certain proprietary
products which are required to be used by all Pizza Inn units.
In the sale of franchises, the Company competes with franchisors of other
restaurant concepts and franchisors of a variety of other products and services.
The Company believes that the principal competitive factors affecting the sale
of franchises are product quality and value, consumer acceptance, franchisor
experience and support, and the quality relationship maintained between the
franchisor and its franchisees.
SEASONALITY
Historically, sales at Pizza Inn restaurants have been somewhat higher
during the warmer months and somewhat lower during the colder months of the
year. The Company believes that the increasing popularity of delivery service
and expansion into the high impulse purchase markets of Express units should
lessen the seasonal impact on future chainwide sales.
ITEM 2 - PROPERTIES
The Company leases 23,402 square feet in Dallas, Texas for its corporate
office and 76,700 square feet in Grand Prairie, Texas for its Norco warehouse
and office facilities. The leases expire in 2003 and 2001, respectively. The
Company also leases 2,736 square feet in Addison, Texas for its training
facility and test kitchen with a term expiring in 2001.
On September 9, 1998, all three of the Company operated Pizza Inn
restaurants (all located in Texas) were leased. The Company also owns one
restaurant property which it leases to a franchisee. The Company operated units
range in size from approximately 1,000 to 4,000 square feet and incur annual
minimum rent between $6.80 and $20.00 per square foot. Most of the leases
require payment of additional rent based upon a percentage of gross sales and
require the Company to pay for repairs, insurance and real estate taxes. The
leases will expire in 2000, 2004, and 2007 while all have renewal options
ranging from three to five years.
ITEM 3 - LEGAL PROCEEDINGS
On September 21, 1989, the Company, Pizza Inn, Inc. (a Delaware
corporation) and Memphis Pizza Inns, Inc. filed for protection under the United
States Bankruptcy Code in the United States Bankruptcy Court for the Northern
District of Texas, Dallas Division. The plan of reorganization, as confirmed by
the court, became effective on September 5, 1990. The court retained
jurisdiction to help ensure that the plan of reorganization was carried out and
to hear any disputes that arose during the five year term of the plan. In May
1996, the court issued its final order finding that the proceedings had been
completed and closed the bankruptcy cases.
Certain other pending legal proceedings exist against the Company which the
Company believes are not material or have arisen in the ordinary course of its
business.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the Company's fiscal year 1998.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On September 9, 1998, there were 2,902 stockholders of record of the
Company's Common Stock.
The Company's Common Stock is listed on the National Association of
Securities Dealers Automated Quotation ("NASDAQ") system under the symbol
"PZZI". The following table shows the highest and lowest bid price per share of
the Common Stock during each quarterly period within the two most recent fiscal
years, as reported by the National Association of Securities Dealers. Such
prices reflect inter-dealer quotations, without adjustment for any retail
markup, markdown or commission.
<TABLE>
<CAPTION>
Bid
------------------
High Low
-------- --------
<C> <S> <C> <C>
1998
First Quarter Ended 9/28/97 . 4 7/8 3 15/16
Second Quarter Ended 12/28/97 5 15/16 4 3/4
Third Quarter Ended 3/29/98 . 6 3/16 5 3/16
Fourth Quarter Ended 6/28/98. 6 7/16 5 3/16
1997
First Quarter Ended 9/29/96 . 4 13/16 3 11/16
Second Quarter Ended 12/29/96 5 4 1/4
Third Quarter Ended 3/30/97 . 4 7/8 3 7/8
Fourth Quarter Ended 6/29/97. 4 1/4 3 1/4
</TABLE>
During fiscal 1998 the Board of Directors of the Company declared
quarterly cash dividends of $0.06 per share. For the year ended June 28, 1998
cash dividends declared were approximately $3.1 million or $0.24 per share. Any
determination to pay cash dividends in the future will be at the discretion of
the Company's Board of Directors and will be dependent upon the Company's
results of operations, financial condition, capital requirements, contractual
restrictions and other factors deemed relevant.
ITEM 6 - SELECTED FINANCIAL DATA
The following table contains certain selected financial data for the Company
for each of the last five fiscal years through June 28, 1998, and should be read
in conjunction with the financial statements and schedules in Item 8 of this
report. Earnings per share data for all periods presented have been restated to
reflect the computation of earnings per share in accordance with SFAS 128.
<TABLE>
<CAPTION>
Year Ended
------------------------------------------------------
June 28, June 29, June 30, June 25, June 26,
1998 1997 1996 1995 1994
------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT DATA:
Total revenues. . . . . . . . . . . . . . . . $ 68,640 $ 69,123 $ 69,441 $ 62,044 $ 57,378
Income before income taxes. . . . . . . . . . 7,023 6,860 5,921 4,845 3,899
Net income. . . . . . . . . . . . . . . . . . 4,880 4,528 3,908 3,198 2,573
Basic earnings per common share . . . .. . . .38 .35 .30 .24 .19
Diluted earnings per common share .36 .33 .28 22 .18
Dividends declared per common share . . . . . .24 - - - -
SELECTED BALANCE SHEET DATA:
Total assets. . . . . . . . . . . . . . . . . 21,773 24,310 24,419 25,803 27,234
Long-term debt and capital lease obligations. 5,454 7,789 7,902 11,039 14,538
</TABLE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL 1998 COMPARED TO FISCAL 1997
Diluted earnings per share for fiscal year ended June 28, 1998 grew 9% to
$0.36 from $0.33. Net income increased 8% to $4.9 million from $4.5 million in
the prior year. Pre-tax income increased 2% to $7.0 million from $6.9 million.
The Company considers pre-tax income to be the best measure of its performance
due to the significant benefit of its net operating loss carryforwards. These
carryforwards, which total $14.9 million at June 28, 1998, reduce the income
taxes paid by the Company from the 34% statutory rate to approximately 2%
alternative minimum tax rate. Additionally, the Company was able to reduce its
effective tax rate from 34% to 31% primarily due to the recognition of business
tax credits in the amount of $263,000 for fiscal 1998.
Food and supply sales by the Company's distribution division were down 2%
or $1,066,000 as compared to last year. The decrease was primarily due to
reductions in international sales of equipment and food. Total international
sales declined $1.5 million primarily due to advance equipment purchases during
fiscal year 1997 for new store openings in fiscal year 1998. These decreases
were partially offset by an increase of $555,000 in domestic sales.
Franchise revenue, which includes royalties, license fees and income from
area development and foreign master license (collectively, "Territory") sales,
decreased 4% or $282,000 in fiscal 1998. This was primarily due to lower
revenue from international master license sales in the current year. Proceeds
from Territory sales vary depending on size, demographics and current market
development in the Territories. The timing and recognition of Territory sales
may vary significantly from year to year. Current year sales include partial
recognition of proceeds from the sale of new Territory rights for South
Carolina, Virginia, Puerto Rico, Brazil, the Palestinian territories and South
Korea. Current year royalties increased 3% or $159,000, primarily due to the
repurchase of area developer rights in Tennessee and portions of Kentucky, which
resulted in full royalties being paid directly to the Company through March 1998
when the rights were subsequently resold.
Restaurant sales, which consist of retail sales by Company operated
training restaurants, remained at the same level compared to the prior year,
despite the transfer of a unit in December 1997 to a franchisee. These
restaurants' sales on a comparable basis increased 12%.
Other income, which increased $877,000, consists primarily of interest
income and non-recurring revenue items. This was primarily the result of
vendors' incentives including the non-cash transfer of the Company's stock
valued at $602,000, the gain on the sale of a Territory and the sale of a state
liquor license.
Cost of sales decreased 1% or $515,000 during fiscal 1998 due to a decrease
in food and supply sales. As a percent of sales, cost of sales increased from
86% during fiscal 1997 to 87% in fiscal 1998 primarily due to increases in
transportation costs and an increase in allocation of corporate services
overhead.
Franchise expenses include selling, general and administrative expenses
(primarily wages and travel expenses), directly related to the sale and service
of franchises and Territories. These costs increased 8% or $231,000 from last
year primarily due to increases in number of field support employees and a
vacant executive position in fiscal 1997 which was filled in fiscal 1998.
General and administrative expenses decreased 7% or $322,000 in the current
year primarily due to the Company's reversal of previously established
contingent reserves for foreign litigation related to the Company's former
master licensee in Korea and an increase in the corporate services overhead
allocation to the distribution center resulting in a corresponding decrease in
general and administrative expenses.
Interest expense decreased 24% or $160,000 in fiscal 1998 as the result of
lower debt balances and lower average interest rates.
During fiscal 1998, a total of 82 new Pizza Inn franchise units were opened
for business, 66 domestic units and 16 international units. Domestically, 54
units were closed by franchisees or terminated by the Company typically because
of unsatisfactory standards of operation or performance. Similarly, 5
international units were closed.
FISCAL 1997 COMPARED TO FISCAL 1996
Diluted earnings per share for fiscal year ended June 29, 1997 grew 18% to
$0.33 from $0.28. Net income increased 16% to $4.5 million from $3.9 million in
the prior year. Pre-tax income also increased 16% to $6.9 million from $5.9
million. The Company considers pre-tax income to be the best measure of its
performance due to the significant benefit of its net operating loss
carryforwards. These carryforwards, which total $20.6 million at June 29, 1997,
reduce the income taxes paid by the Company from the 34% rate expensed on its
statements of operations to approximately 2%.
Results of operations for fiscal 1997 include 52 weeks versus 53 weeks for
fiscal 1996. The effect of the additional week on prior year revenues and net
income was an increase of approximately 2%.
Food and supply sales by the Company's distribution division were up
slightly from the previous year. Increased market share on the sale of
non-proprietary food, supplies and equipment offset the decrease resulting from
the additional week in the prior fiscal year.
Franchise revenue, which includes royalties, license fees and income from
area development and foreign master license (collectively, "Territory") sales,
decreased 9% or $662,000 in fiscal 1997. This was primarily due to lower income
from Territory sales in the current year. Proceeds from Territory sales vary
depending on size, demographics and current market development in the
Territories. The timing and recognition of Territory sales may vary
significantly from year to year. Current year sales include partial recognition
of proceeds from the sale of new Territory rights for South Korea, the
Philippines, Brazil, the Palestinian territories and Puerto Rico. Current year
royalties also decreased 5% or $270,000, primarily due to the effect of the
additional week of operations in fiscal 1996, as well as the closure during
fiscal 1996 of all 39 units in Korea upon termination of the Company's agreement
with its former master licensee.
Restaurant sales, which consist of sales from Company operated training
units, decreased 8% or $238,000 during the current year. This was primarily the
result of the closing during the third quarter of fiscal 1996 of one of the
Company operated units.
Cost of sales decreased 1% during fiscal 1997. While product purchases
increased as a result of slightly higher food and supply sales to the Company's
franchises, this was offset by cost efficiencies in other areas. Fleet
modernization and improvements in routing have reduced transportation costs,
warehouse productivity is up, and the Company continues to find opportunities to
improve the purchasing process.
Franchise expenses include selling, general and administrative expenses,
primarily wages and travel expenses, directly related to the sale and service of
franchises and Territories. These costs have remained at the same level as last
year.
General and administrative expenses decreased 9% or $474,000 in the current
year. In fiscal 1997 the Company incurred fewer legal fees related to
international litigation. In addition, fiscal 1996 included a one-time charge
of $95,000 to write down assets to market value at two Company operated units.
Interest expense decreased 24% or $213,000 in fiscal 1997, as the result of
lower debt balances and lower average interest rates.
During fiscal 1997, a total of 67 new Pizza Inn franchise units were opened
for business. Domestically, 31 units were closed by franchisees or terminated
by the Company typically because of unsatisfactory standards of operation or
performance. In addition, 20 international units were closed, including all 19
units operated by the Company's former licensee in Taiwan.
FINANCIAL CONDITION
Cash and cash equivalents remained the same in fiscal 1998 as cash flow
generated from operations was used to reduce debt, purchase shares of the
Company's own common stock, and pay cash dividends on its common stock. Current
year debt payments, totaling $2.2 million, reduced debt from $6.9 million to
$4.7 million at June 28, 1998. The Company used $2.6 million in working capital
to reacquire 496,641 shares of its own common stock, at prevailing prices on the
open market. The Company also used $2.3 million to pay cash dividends on its
common stock during 1998.
At June 28, 1998, the net deferred tax asset balance was $6.7 million.
During 1998, the Company increased the net deferred tax asset by $263,000 for
general business tax credits due to expire between 2000 and 2001 through a
reduction of the tax valuation allowance. The Company believes that it is more
likely than not that these credits will be realized prior to expiration due to
increased taxable income in recent years.
Management believes that future operations will generate sufficient taxable
income, along with the reversal of temporary differences, to fully realize the
deferred tax asset, net of a valuation allowance of $739,000 related to the
potential expiration of certain tax credit carryforwards. Future taxable income
at the same level as fiscal 1998 would be sufficient for full realization of the
net tax asset. Additionally, management believes that taxable income based on
recent growth trends of the Company's franchise base should be more than
sufficient to enable the Company to realize its deferred tax asset without
reliance on material, non-routine income.
While the Company expects to realize substantial benefit from the
utilization of its net operating loss carryforwards (which currently total $14.9
million and expire in 2005) to reduce its federal tax liability, current
accounting standards dictate that this benefit can not be reflected in the
Company's results of operations. In accordance with SFAS 109, these
carryforwards, when utilized, are reflected as a reduction of the deferred tax
asset rather than a reduction of income tax expense. This has caused the
Company to reflect an amount for federal income tax expense on its statements of
operations at an effective corporate rate of 31%, 34% and 34% for fiscal years
1998, 1997 and 1996, respectively. However, the actual amount of taxes paid at
the alternative minimum tax rate of approximately 2% is significantly less than
the corporate rate reflected on the Company's statement of operations.
Historically, the differences between pre-tax earnings for financial reporting
purposes and taxable income for tax purposes have consisted of temporary
differences arising from the timing of depreciation, deductions for accrued
expenses and deferred revenues, as well as permanent differences as a result of
the exercise of stock options deducted for income tax purposes but not for
financial reporting purposes.
Under the Internal Revenue Code, the utilization of net operating loss and
credit carryforwards could be limited if certain changes in ownership of the
Company's Common Stock were to occur. The Company's Articles of Incorporation
contain certain restrictions which are intended to reduce the likelihood that
such changes in ownership would occur.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations totaled $6.4 million in fiscal 1998 and was
used primarily to service debt, to acquire the Company's common stock, to pay
cash dividends on its common stock and to fund capital expenditures.
The Company reduced its debt from $6.9 million at June 29, 1997 to $4.7
million at June 28, 1998. 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.
During fiscal 1998, the Company purchased 496,641 shares of its own common
stock on the open market for a total price of $2.6 million and acquired 102,478
shares valued at current market price of $602,000 in connection with the
entering into a new contract with a vendor, bringing the total number of shares
in treasury to 2,381,386 as of June 28, 1998. All reacquired shares will be
held as treasury stock until retired.
Capital expenditures of $362,000 during fiscal 1998 primarily consist of
build-out costs associated with the acquisition of new space at the corporate
offices and upgrading the Company's computer systems.
The Company's future requirements for cash relate primarily to the periodic
purchase of its own common stock, capital expenditures, payment of dividends on
its common stock and debt repayment. The Company currently considers its common
stock to be undervalued, and plans to aggressively purchase its own shares on
the open market during fiscal 1999. For the period June 28, 1998 through
September 9, 1998, the Company has purchased 758,600 shares for a total amount
of $4,057,735. Although the existing loan agreement does not require the
Company to make any scheduled debt reductions, the Company plans to further
reduce the bank debt during the second half of fiscal 1999. Anticipated capital
expenditures include information system upgrades and warehouse improvements.
During fiscal 1998, the Board of Directors of the Company declared cash
dividends on the Company's common stock of approximately $3.1 million or $0.24
per share. Declaration of future dividends will be at the discretion of the
Board of Directors.
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. 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 which
represented amortization of the asset for nine months. This transaction also
included the full collection of receivables from the original ownership of this
territory totaling an additional $341,000.
The Company's primary sources of cash are sales from the distribution
division, royalties, license fees and Territory sales. Existing area development
and master license agreements contain development commitments that should result
in future chainwide growth. Related growth in distribution sales and royalties
are expected to provide adequate working capital to supply the needs described
above. The signing of any new area development or master license agreements,
which cannot be predicted with certainty, would also provide significant
infusions of cash.
ECONOMIC FACTORS
The costs of operations, including labor, supplies, utilities, financing
and rental costs, to the Company and its franchisees, can be significantly
affected by inflation and other economic factors. Increases in any such costs
would result in higher costs to the Company and its franchisees, which may be
partially offset by price increases and increased efficiencies in operations.
The Company's revenues are also affected by local economic trends where units
are concentrated. The Company intends to pursue franchise development in new
markets in the United States and other countries, which would mitigate the
impact of local economic factors.
The Company has assessed 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 are scheduled to begin in October 1998. We anticipate that all
of our systems will be year 2000 compliant by June 1999. The Company's existing
software system has a carrying value of $183,000 at June 29, 1998 which will be
amortized over twelve months through June 1999.
Because third party computer failures could also have a material impact on
our ability to conduct business, confirmations are being requested from our
material vendors and suppliers to certify that plans are being developed to
address and become compliant with the year 2000 issues. The Company believes
that any year 2000 impact on its franchisee base will have no material effect on
the Company 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
plans based on these specific needs.
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 $86,000 had been incurred by year-end 1998. All the above
capital expenditures are expected to be funded through a 36-month 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.
PIZZA INN, INC.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Schedules:
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS PAGE NO.
<S> <C>
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . . . 15
Consolidated Statements of Operations for the years ended
June 28, 1998, June 29, 1997, and June 30, 1996. . . . . . . . . . . . . . . 16
Consolidated Balance Sheets at June 28, 1998 and June 29, 1997.. . . . . . . . 17
Consolidated Statements of Shareholders' Equity for the years
ended June 28, 1998, June 29, 1997, and June 30, 1996. . . . . . . . . . . . 18
Consolidated Statements of Cash Flows for the years ended June 28, 1998,
June 29,1997, and June 30, 1996. . . . . . . . . . . . . . . . . . . . . . . 19
Notes to Consolidated Financial Statements.. . . . . . . . . . . . . . . . . . 21
FINANCIAL STATEMENT SCHEDULES
Schedule II - Consolidated Valuation and Qualifying Accounts. . . . . . . 33
All other schedules are omitted because they are not applicable, not
required or because the required information is included in the consolidated
financial statements or notes thereto.
</TABLE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors
and Shareholders of Pizza Inn, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Pizza Inn, Inc. (the "Company") and its subsidiaries at June 28,
1998 and June 29, 1997, and the results of their operations and their cash flows
for each of the three years in the period ended June 28, 1998, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Dallas, Texas
August 17, 1998
<TABLE>
<CAPTION>
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED
-----------
JUNE 28, JUNE 29, JUNE 30,
REVENUES: 1998 1997 1996
----------- --------- ---------
<S> <C> <C> <C>
Food and supply sales . . . . . . . $ 58,491 $ 59,557 58,823
Franchise revenue . . . . . . . . . 6,468 6,750 7,412
Restaurant sales. . . . . . . . . . 2,684 2,696 2,934
Other income. . . . . . . . . . . . 997 120 272
----------- --------- ---------
68,640 69,123 69,441
----------- --------- ---------
COSTS AND EXPENSES:
Cost of sales . . . . . . . . . . . 53,119 53,634 54,273
Franchise expenses. . . . . . . . . 3,209 2,978 3,019
General and administrative expenses 4,557 4,879 5,353
Provision for bad debt. . . . . . . 230 110 -
Interest expense. . . . . . . . . . 502 662 875
----------- --------- ---------
61,617 62,263 63,520
----------- --------- ---------
INCOME BEFORE INCOME TAXES . . . . . . . 7,023 6,860 5,921
Provision for income taxes. . . . . 2,143 2,332 2,013
----------- --------- ---------
NET INCOME . . . . . . . . . . . . . . . $ 4,880 $ 4,528 $ 3,908
=========== ========= =========
BASIC EARNINGS PER COMMON SHARE. . . . . $ 0.38 $ 0.35 $ 0.30
=========== ========= =========
DILUTED EARNINGS PER COMMON SHARE. . . . $ 0.36 $ 0.33 $ 0.28
=========== ========= =========
DIVIDENDS DECLARED PER COMMON SHARE. . . $ 0.24 $ - $ -
=========== ========= =========
WEIGHTED AVERAGE COMMON SHARES . . . . . 12,692 12,873 13,209
=========== ========= =========
WEIGHTED AVERAGE COMMON AND
DILUTIVE POTENTIAL COMMON SHARES. . 13,468 13,707 13,872
=========== ========= =========
<FN>
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
PIZZA INN, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 28, JUNE 29,
ASSETS 1998 1997
--------- ---------
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents. . . . . . . . . . . . . . . $ 2,335 $ 2,332
Accounts receivable, less allowance for doubtful
accounts of $825 and $939, respectively. . . . . . . 6,021 6,711
Notes receivable, current portion, less allowance
for doubtful accounts of $174 and $60, respectively. 741 593
Inventories. . . . . . . . . . . . . . . . . . . . . . 1,953 2,224
Prepaid expenses and other . . . . . . . . . . . . . . 556 452
--------- ---------
Total current assets . . . . . . . . . . . . . . 11,606 12,312
Property, plant and equipment, net. . . . . . . . . . . . . 1,921 2,044
Property under capital leases, net. . . . . . . . . . . . . 761 934
Deferred taxes, net . . . . . . . . . . . . . . . . . . . . 6,705 8,492
OTHER ASSETS
Long-term notes receivable, less
allowance for doubtful accounts of $8 and $122,
respectively . . . . . . . . . . . . . . . . . . . . 436 149
Deposits and other . . . . . . . . . . . . . . . . . . 344 379
--------- ---------
$ 21,773 $ 24,310
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade . . . . . . . . . . . . . . . $ 2,014 $ 1,482
Accrued expenses . . . . . . . . . . . . . . . . . . . 2,507 2,917
Current portion of capital lease obligations . . . . . 125 115
--------- ---------
Total current liabilities. . . . . . . . . . . . 4,646 4,514
LONG-TERM LIABILITIES
Long-term debt . . . . . . . . . . . . . . . . . . . . 4,700 6,910
Long-term capital lease obligations. . . . . . . . . . 754 879
Other long-term liabilities. . . . . . . . . . . . . . 756 786
--------- ---------
10,856 13,089
--------- ---------
COMMITMENTS AND CONTINGENCIES (See Note I)
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value; authorized 26,000,000
shares; outstanding 12,528,436 and 12,713,562
shares, respectively (after deducting shares in
treasury: 1998 - 2,381,386; 1997 -1,790,416). . . . 125 127
Additional paid-in capital . . . . . . . . . . . . . . 4,911 4,061
Retained earnings. . . . . . . . . . . . . . . . . . . 5,881 7,033
--------- ---------
Total shareholders' equity . . . . . . . . . . . 10,917 11,221
--------- ---------
$ 21,773 $ 24,310
========= =========
<FN>
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
ADDITIONAL
COMMON STOCK PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------------- ---------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 25, 1995 . . . . . . . . . . 13,527 $ 135 $ 3,974 $ 3,293 $ 7,402
Stock options exercised. . . . . . . . . . 291 3 491 - 494
Acquisition of treasury stock. . . . . . . (941) (9) (781) (2,908) (3,698)
Net income . . . . . . . . . . . . . . . . - - - 3,908 3,908
------------- ---------------- --------------- --------------- --------------
BALANCE, JUNE 30, 1996 . . . . . . . . . . 12,877 $ 129 $ 3,684 $ 4,293 $ 8,106
Stock options exercised. . . . . . . . . . 267 2 503 - 505
Acquisition of treasury stock. . . . . . . (430) (4) (126) (1,788) (1,918)
Net income . . . . . . . . . . . . . . . . - - - 4,528 4,528
------------- ---------------- --------------- --------------- --------------
BALANCE, JUNE 29, 1997 . . . . . . . . . . 12,714 $ 127 $ 4,061 $ 7,033 $ 11,221
Stock options exercised. . . . . . . . . . 414 4 1,247 - 1,251
Tax benefits associated
with stock options . . . . . . . . . . - - (179) - (179)
Dividends declared . . . . . . . . . . . . - - - (3,052) (3,052)
Acquisition of treasury stock (see Note K) (600) (6) (218) (2,980) (3,204)
Net income . . . . . . . . . . . . . . . . - - - 4,880 4,880
------------- ---------------- --------------- --------------- --------------
BALANCE, JUNE 28, 1998 . . . . . . . . . . 12,528 $ 125 $ 4,911 $ 5,881 $ 10,917
============= ================ =============== =============== ==============
<FN>
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED
-----------------
JUNE 28, JUNE 29, JUNE 30,
1998 1997 1996
----------------- ---------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,880 $ 4,528 $ 3,908
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . 902 707 595
Provision for bad debt . . . . . . . . . . . . . . . . . . 230 110 -
Income from transfer of Pizza Inn stock (see Note K) . . . (602) - -
Utilization of pre-reorganization net operating
loss carryforwards . . . . . . . . . . . . . . . . . . . . 1,787 2,195 1,895
Changes in assets and liabilities:
Restricted cash and short-term investments . . . . . . . . - 360 (7)
Notes and accounts receivable. . . . . . . . . . . . . . . 25 (762) (1,002)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . 271 (305) (329)
Accounts payable - trade . . . . . . . . . . . . . . . . . 532 (849) 1,147
Accrued expenses . . . . . . . . . . . . . . . . . . . . . (1,170) (241) (183)
Prepaid expenses and other . . . . . . . . . . . . . . . . (408) (23) 195
----------------- ---------------- -----------------
CASH PROVIDED BY OPERATING ACTIVITIES. . . . . . . . . . . 6,447 5,720 6,219
----------------- ---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures. . . . . . . . . . . . . . . . . . . . . (362) (628) (639)
Acquisition of area development territory . . . . . . . . . . (986) - -
Proceeds from sale of re-acquired area development territory. 986 - -
Proceeds from sales of assets . . . . . . . . . . . . . . . . 65 - 84
----------------- ---------------- -----------------
CASH USED FOR INVESTING ACTIVITIES . . . . . . . . . . . . (297) (628) (555)
----------------- ---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term bank debt and
capital lease obligations. . . . . . . . . . . . . . . . . (2,325) (2,000) (3,479)
Dividends paid. . . . . . . . . . . . . . . . . . . . . . . . (2,292) - -
Proceeds from exercise of stock options . . . . . . . . . . . 1,072 505 494
Purchases of treasury stock . . . . . . . . . . . . . . . . . (2,602) (1,918) (3,698)
----------------- ---------------- -----------------
CASH USED FOR FINANCING ACTIVITIES . . . . . . . . . . . . (6,147) (3,413) (6,683)
----------------- ---------------- -----------------
Net increase (decrease) in cash and cash equivalents. . . . . . (12) 1,384 (1,019)
Cash and cash equivalents, beginning of period. . . . . . . . . 2,332 653 1,672
----------------- ---------------- -----------------
Cash and cash equivalents, end of period. . . . . . . . . . . . $ 2,335 $ 2,332 $ 653
----------------- ---------------- -----------------
<FN>
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
(IN THOUSANDS)
YEAR ENDED
-----------
JUNE 28, JUNE 29, JUNE 30,
1998 1997 1996
----------- --------- ---------
<S> <C> <C> <C>
CASH PAYMENTS FOR:
Interest . . . . . . . . . . . . . $ 526 $ 612 $ 880
Income taxes . . . . . . . . . . . 160 150 110
NONCASH FINANCING AND INVESTING
ACTIVITIES:
Capital lease obligations incurred $ - $ - $ 477
</TABLE>
PIZZA INN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS:
Pizza Inn, Inc. (the "Company"), a Missouri corporation incorporated in 1983, is
the successor to a Texas company of the same name which was incorporated in
1961. The Company is the franchisor and food and supply distributor to a system
of restaurants operating under the trade name "Pizza Inn" (R).
On June 28, 1998 the Pizza Inn system consisted of ----508 locations, including
four Company operated units and 504 franchised units. The Company is currently
franchised in 22 states and 18 foreign countries. Domestic units are located
predominantly in the southern half of the United States, with Texas, North
Carolina and Arkansas accounting for approximately 29%, 15%, and 11%,
respectively, of the total. Norco Distributing Company ("Norco"), a division of
the Company, distributes food products, equipment, and other supplies to units
in the United States and, to the extent feasible, in other countries.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All appropriate intercompany balances and
transactions have been eliminated. Certain prior year amounts have been
reclassified to conform with current year presentation.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
INVENTORIES:
Inventories, which consist primarily of food, paper products, supplies and
equipment located at the Company's distribution center, are stated at the lower
of FIFO (first-in, first-out) cost or market.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, including property under capital leases, is
stated at cost less accumulated depreciation. Depreciation is computed on the
straight-line method over the useful lives of the assets or, in the case of
leasehold improvements, over the term of the lease, if shorter. The useful
lives of the assets range from seven to eight years.
It is the Company's policy to periodically review the net realizable value of
its long-lived assets through an assessment of the estimated future cash flows
related to such assets. In the event that assets are found to be carried at
amounts which are in excess of estimated gross future cash flows, then the
assets will be adjusted for impairment to a level commensurate with a discounted
cash flow analysis of the underlying assets. Based upon its most recent
analysis, the Company believes no impairment of long-lived assets exists at June
28, 1998.
ACCOUNTS RECEIVABLE:
Accounts receivable consists primarily of receivables from food and supply sales
and franchise royalties. The Company records a provision for doubtful
receivables to allow for any amounts which may be unrecoverable. For the years
ended June 28, 1998 and June 29, 1997, provisions of $230,000 and $110,000 were
recorded, respectively. No provision was recorded for the year ended June 30,
1996.
NOTES RECEIVABLE:
Notes receivable primarily consist of notes from franchisees for the purchase of
area development and master license territories and the refinancing of existing
trade receivables. These notes generally have terms ranging from one to five
years, with interest rates of 8% to 12%. The Company records a provision for
doubtful receivables to allow for any amounts which may be unrecoverable.
INCOME TAXES:
Income taxes are accounted for using the asset and liability method pursuant to
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). Deferred taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement and carrying amounts
and the tax bases of existing assets and liabilities. The effect on deferred
taxes for a change in tax rates is recognized in income in the period that
includes the enactment date. In addition, FAS 109 requires the recognition of
future tax benefits to the extent that realization of such benefits are more
likely than not.
TREASURY STOCK:
The excess of the cost of shares acquired for the treasury over par value is
allocated to additional paid-in capital based on the per share amount of
additional capital for all shares in the same issue, with any difference charged
to retained earnings. All reacquired shares will be held in treasury until
retired.
DISTRIBUTION DIVISION OPERATIONS:
The Company's Norco division sells food, supplies and equipment to franchisees
on trade accounts under terms common in the industry. Revenue from such sales
is recognized upon shipment. Norco sales are reflected under the
caption "food and supply sales."
FRANCHISE REVENUE:
Franchise revenue consists of income from license fees, royalties, and area
development and foreign master license (collectively, "Territory") sales.
License fees are recognized as income when there has been substantial
performance of the agreement by both the franchisee and the Company, generally
at the time the unit is opened. Royalties are recognized as income when earned.
For the years ended June 28, 1998, June 29, 1997 and June 30, 1996, 84%, 78% and
75%, respectively, of franchise revenue was comprised of recurring royalties.
Territory sales are the fees paid by selected experienced restaurant operators
to the Company for the right to develop Pizza Inn restaurants in specific
geographical territories. When the Company has no continuing substantive
obligations of performance to the area developer or master licensee regarding
the fee, the Company recognizes the fee to the extent of cash received. If
continuing obligations exist, fees are recognized ratably during the performance
of those obligations. Territory fees recognized as income for the years ended
June 28, 1998, June 29, 1997 and June 30, 1996 were $666,000, $1,154,000 and
$1,630,000 respectively.
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of short-term investments, accounts and notes receivable,
and debt approximate fair value.
USE OF MANAGEMENT ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and related revenues and
expenses and disclosure of gain and loss contingencies at the date of the
financial statements. Actual results could differ from those estimates.
FISCAL YEAR:
The Company's fiscal year ends on the last Sunday in June. Fiscal years ended
June 28, 1998 and June 29, 1997 contained 52 weeks, and fiscal year ended June
30, 1996 contained 53 weeks.
NEW PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
No. 130, "Reporting Comprehensive Income" ("SFAS 130") effective for fiscal
years beginning after December 15, 1997. SFAS 130 establishes standards for the
reporting and display of comprehensive income and its components in a full set
of financial statements. The adoption of this statement in fiscal 1999 is not
expected to have an affect on the Company's financial statements.
In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS 131") effective for fiscal years
beginning after December 31, 1997. SFAS 131 requires companies to disclose
certain information about their operating segments, their products and services,
their major customers and the geographic areas in which they operate. The
determination of reportable segments under SFAS 131 is based on material
segments of a company whose operating results are regularly reviewed by the
Company's chief operating decision maker in determining allocation of resources
between the segments and assessing their performance. The Company is presently
evaluating its reporting requirements under this standard.
NOTE B - PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment and property under capital leases consist of the
following (in thousands):
<TABLE>
<CAPTION>
JUNE 28, JUNE 29,
1998 1997
---------- ----------
<S> <C> <C>
Property, plant and equipment:
Equipment, furniture and fixtures $ 3,992 $ 3,732
Leasehold improvements. . . . . . 1,326 1,224
---------- ----------
5,318 4,956
Less: accumulated depreciation. . (3,397) (2,912)
---------- ----------
$ 1,921 $ 2,044
========== ==========
Assets under capital leases:
Real Estate . . . . . . . . . . . $ 118 $ 118
Equipment . . . . . . . . . . . . 1,396 1,396
---------- ----------
1,514 1,514
Less: accumulated amortization. . (753) (580)
---------- ----------
$ 761 $ 934
========== ==========
</TABLE>
Depreciation and amortization expense was $902,000, $707,000, and $595,000 for
the years ended June 28, 1998, June 29, 1997, and June 30, 1996, respectively.
NOTE C - ACCRUED EXPENSES:
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 28, JUNE 29,
1998 1997
--------- ---------
<S> <C> <C>
Compensation. . . . . . . . . . . $ 824 $ 1,145
Legal and other professional fees 35 309
Deferred franchise revenue. . . . 237 624
Accrued dividends payable . . . . 760 -
Other
651 839
--------- ---------
$ 2,507 $ 2,917
========= =========
</TABLE>
NOTE D - LONG-TERM DEBT:
In December 1994, the Company entered into a loan agreement (the "Loan
Agreement") with two banks, in which the Company refinanced its existing
indebtedness of $14 million under a term loan facility which was to mature in
November 1998. The Loan Agreement also provided for a $1 million revolving
credit line, which was renewable in November 1997. Interest on both the term
loan and the revolving credit line was payable monthly. Interest was provided
for at a rate equal to prime plus an interest rate margin from 0.5% to 1.25% or,
at the Company's option, at the Eurodollar rate plus 1.25% to 2.25%. The
interest rate margin was based on the Company's performance under certain
financial ratio tests. A 0.5% annual commitment fee was payable on any unused
portion of the revolving credit line.
Principal payments on the term loan were payable quarterly, with a balloon
payment due at the end of the term. The Loan Agreement contained covenants
which, among other things, required the Company to satisfy certain financial
ratios and restricted additional debt and payment of dividends. The
indebtedness was secured by essentially all of the Company's assets.
In August 1997, the Company signed a new agreement (the "New Loan Agreement")
with its current lender, Wells Fargo, to refinance its debt under a new
revolving credit facility. The new $9.5 million revolving credit line replaced
the Company's $6.9 million term loan and its $1 million revolving credit line.
The revolving credit note matures in August 1999 and is secured by essentially
all of the Company's assets. Amounts outstanding under the New Loan Agreement
were $4.7 million and $6.9 million at fiscal year end 1998 and 1997,
respectively.
Interest on the revolving credit line is payable monthly. Interest is provided
for at a rate equal to prime plus an interest rate 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. As of June 28, 1998, the Company was in compliance with
all of its debt covenants. A 0.5% annual commitment fee is payable on any
unused portion of the revolving credit line. As of June 28, 1998 and June 29,
1997, the Company's effective interest rates were 6.91% and 6.94%, respectively
(with a Eurodollar rate basis).
The New Loan Agreement contains covenants which, among other things, require the
Company to satisfy certain financial ratios and restrict additional debt. In
accordance with SFAS 6, "Classification of Short-Term Obligations Expected to be
Refinanced", the entire balance outstanding under the Loan Agreement at June 29,
1997 was classified as long-term to reflect the provisions of the New Loan
Agreement.
PIBCO, Ltd., a wholly owned insurance subsidiary of the Company, in the normal
course of operations, arranged for the issuance of a letter of credit to
reinsurers to secure loss reserves. At June 28, 1998 and June 29, 1997 this
letter of credit was secured under the Company's revolving line of credit. Loss
reserves for approximately the same amount have been recorded by PIBCO, Ltd. and
are reflected as current liabilities in the Company's financial statements.
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.
NOTE E - INCOME TAXES:
The effective federal income tax rate did not vary from the statutory rate of
34% for the years ended June 29, 1997 and June 30, 1996. However, the effective
federal income tax rate varied from the statutory rate for the year ended June
28, 1998 as follows:
<TABLE>
<CAPTION>
June 28,
1998
-------------------
(in thousands)
<S> <C>
Federal income taxes based on 34%
of book income . . . . . . . . $ 2,388
Permanent adjustments . . . . . . (102)
Change in valuation allowance . . (638)
Expired credits . . . . . . . . . 375
Other . . . . . . . . . . . . . . 120
-------------------
$ 2,143
===================
</TABLE>
Income tax expense consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 28, JUNE 29, JUNE 30,
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Federal:
Current . . . . . . . $ 356 $ 137 $ 118
Deferred. . . . . . . 1,787 2,195 1,895
--------- --------- ---------
Provision for income taxes $ 2,143 $ 2,332 $ 2,013
========= ========= =========
</TABLE>
The tax effects of temporary differences which give rise to the net deferred tax
assets (liabilities) consisted of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 28, JUNE 29,
1998 1997
---------- ----------
<S> <C> <C>
Reserve for bad debt . . $ 382 $ 422
Depreciable assets . . . 507 423
Deferred fees. . . . . . 70 204
Other reserves . . . . . (212) (137)
NOL carryforwards. . . . 5,100 7,013
Credit carryforwards . . 1,597 1,944
---------- ----------
Gross deferred tax asset $ 7,444 $ 9,869
Valuation allowance. . . (739) (1,377)
---------- ----------
Net deferred tax asset . $ 6,705 $ 8,492
========== ==========
</TABLE>
As of June 28, 1998, the Company had $14.9 million of net operating loss
carryforwards that expire in 2005. The Company also had $1.0 million of general
business credit carryforwards expiring between 1999 and 2001 and $558,000 of
minimum tax credits that can be carried forward indefinitely. The valuation
allowance was established upon adoption of SFAS 109, since it is more likely
than not that a portion of certain of the general business credit carryforwards
will expire before they can be utilized.
In fiscal 1998, the Company increased the net deferred tax asset by $263,000
for general business tax credits due to expire between 2000 and 2001 through a
reduction of the tax valuation allowance. The Company believes that it is more
likely than not that these credits will be realized prior to expiration due to
increased taxable income in recent years.
Under the Internal Revenue Code, the utilization of net operating loss and
credit carryforwards could be limited if certain changes in ownership of the
Company's Common Stock were to occur. The Company's Articles of Incorporation
contain certain restrictions which are intended to reduce the likelihood that
such changes in ownership would occur.
NOTE F - LEASES:
All of the real property occupied by the Company operated restaurants is leased
for initial terms ranging from five to twenty-five years with renewal options
ranging from five to fifteen years. Most of the lease agreements contain either
provisions requiring additional rent if sales exceed specified amounts, or
escalation clauses based on changes in the Consumer Price
Index.
The Company leases 23,402 square feet in Dallas, Texas for its corporate office
and 76,700 square feet in Grand Prairie, Texas for its Norco warehouse and
office facilities under operating leases. The leases expire in 2003 and 2001,
respectively. The Company also leases 2,736 square feet in Addison, Texas for
its training facility with a term expiring in 2001.
The Company's distribution division currently leases a significant portion of
its transportation equipment under leases with terms from five to seven years
under operating and capital leases. Some of the leases include fair market
value purchase options at the end of the term.
Future minimum rental payments under non-cancelable leases with initial or
remaining terms of one year or more at June 28, 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
Capital Leases Operating Leases
---------------- ---------------------
<S> <C> <C>
1999. . . . . . . . . . . . . . . . . . . . . . . $ 193 $ 838
2000. . . . . . . . . . . . . . . . . . . . . . . 193 763
2001. . . . . . . . . . . . . . . . . . . . . . . 193 613
2002. . . . . . . . . . . . . . . . . . . . . . . 310 497
2003. . . . . . . . . . . . . . . . . . . . . . . 91 310
Thereafter. . . . . . . . . . . . . . . . . . . . 131 331
---------------- ---------------------
$ 1,111 $ 3,352
================
Less amount representing interest . . . . . . . . (232)
----------------
Present value of total obligations under capital
leases . . . . . . . . . . . . . . . . . . . 879
Less current portion. . . . . . . . . . . . . . . (125)
----------------
Long-term capital lease obligations . . . . . . . $ 754
================
</TABLE>
Rental expense consisted of the following (in thousands):
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
June 28, June 29, June 30,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Minimum rentals. . $ 1,193 $ 1,117 $ 1,068
Contingent rentals 15 11 11
Sublease rentals . (87) (90) (127)
------------ ------------ ------------
$ 1,121 $ 1,038 $ 952
============ ============ ============
</TABLE>
In August 1998, the Company entered into a new lease agreement for computer
software and hardware equipment. The term of this agreement is 36 months and
future minimum lease payments under this agreement total approximately $827,000.
In September 1998, the Company's distribution division entered into a new lease
agreement for transportation equipment. The agreement will extend through
August 2002 and provide a modernized fleet for distribution of goods. Future
minimum lease payments under this agreement total $1,754,000.
NOTE G - EMPLOYEE BENEFITS:
The Company has a tax advantaged savings plan which is designed to meet the
requirements of Section 401(k) of the Internal Revenue Code (the "Code"). The
current plan is a modified continuation of a similar savings plan established by
the Company in 1985. Employees who have completed six months of service and are
at least 21 years of age are eligible to participate in the plan. The plan
provides that participating employees may elect to have between 1% and 15% of
their compensation deferred and contributed to the plan. From January 1, 1993
through January 1, 1998, the Company contributed on behalf of each participating
employee an amount equal to 50% of the first 3% and 25% of next 3% of the
employee's contribution. Effective January 1, 1998, the Company contributes on
behalf of each participating employee an amount equal to 100% up to 6% of the
employee's contribution. Separate accounts are maintained with respect to
contributions made on behalf of each participating employee. The plan is
subject to the provisions of the Employee Retirement Income Security Act and is
a profit sharing plan as defined in Section 401 of the Code. The Company is the
administrator of the plan. Participants may direct elective deferrals and
earnings thereon and employer matching contributions and earnings thereon prior
to January 1, 1998. Effective January 1, 1998, employer matching contributions
and earnings thereon are invested in Common Stock of the Company.
For the years ended June 28, 1998, June 29, 1997, and June 30, 1996, total
matching contributions to the tax advantaged savings plan by the Company on
behalf of participating employees were $116,862, $58,774, and $60,394,
respectively.
NOTE H - STOCK OPTIONS:
On September 1, 1992, the Company adopted the 1992 Stock Award Plan (the "1992
Plan"). All officers, employees and elected outside directors are eligible to
participate. The Company's 1992 Plan is a combined nonqualified stock option
and stock appreciation rights arrangement. A total of two million shares of
Pizza Inn, Inc. Common Stock were originally authorized to be awarded under the
1992 Plan. A total of 973,073 options were actually granted under the 1992 Plan
through December 1993. In January 1994, the 1993 Stock Award Plan ("the 1993
Plan") was approved by the Company's shareholders with a plan effective date of
October 13, 1993. Officers and employees of the Company are eligible to receive
stock options under the 1993 Plan. Options are granted at market value of the
stock on the date of grant, are subject to various vesting and exercise periods
ranging from six months to three years, and may be designated as incentive
options (permitting the participant to defer resulting federal income taxes).
Originally, a total of two million shares of Common Stock were authorized to be
issued under the 1993 Plan. In December 1996 and 1997, the Company's
shareholders approved amendments to the 1993 plan increasing by 500,000 shares,
in each year, the aggregate number of shares of common stock issuable under the
plan.
The 1993 Outside Directors Stock Award Plan (the "1993 Directors Plan") was also
adopted by the Company effective as of October 13, 1993. Directors who are not
employed by the Company are eligible to receive stock options under the 1993
Directors Plan. Options are granted, up to 20,000 shares per year, to each
outside director who purchased a matching number of shares of Common Stock of
the Company during the preceding year. Options are granted at market value of
the stock on the first day of the fiscal year, which is also the date of grant,
and vesting and exercise periods begin after one year. A total of 200,000
shares of Company Common Stock are authorized to be issued pursuant to the 1993
Directors Plan.
A summary of stock option transactions under all of the Company's stock option
plans and information about fixed-price stock options follows:
SUMMARY OF STOCK OPTION TRANSACTIONS
<TABLE>
<CAPTION>
June 28, 1998 June 29, 1997 June 30, 1996
--------------- -------------- ---------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------- -------------- --------------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 3,143,639 $ 3.08 2,608,356 $ 2.82 2,181,073 $ 2.22
Granted. . . . . . . . . . . . . 110,000 $ 4.85 876,783 $ 3.56 781,283 $ 4.06
Exercised. . . . . . . . . . . . (413,773) $ 2.14 (266,500) $ 1.90 (291,500) $ 1.70
Canceled . . . . . . . . . . . . (164,500) $ 3.58 (75,000) $ 3.74 (62,500) $ 2.50
--------------- -------------- --------------- ------------- ---------- ----------
Outstanding at end of year . . . 2,675,366 $ 3.27 3,143,639 $ 3.08 2,608,356 $ 2.82
=============== ============== =============== ============= =========== ===========
Exercisable at end of year . . . 2,274,916 $ 3.15 2,076,856 $ 2.84 1,625,856 $ 2.27
Weighted-average fair value of
options granted during the year. $ 1.25 $ 0.89 $ 1.21
</TABLE>
The following table provides information on options outstanding and options
exercisable at June 28, 1998.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- --------------------
Weighted-
Average
Shares Remaining Weighted- Shares Weighted-
Range of Outstanding Contractural Average Exercisable Average
Exercise Prices at June 28, 1998 Life (Years) Exercise Price at June 28, 1998 Exercise Price
- ---------------- ------------------- -------------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
2.25 - 3.25 . . 1,182,750 1.79 $ 2.50 1,138,750 $ 2.50
3.44 - 4.25 . . 1,362,616 5.00 $ 3.78 1,132,833 $ 3.81
4.38 - 5.25 . . 130,000 6.97 $ 4.79 3,333 $ 4.63
------------------- ----------------
2.25 - 5.25 . . 2,675,366 3.70 $ 3.27 2,274,916 $ 3.15
=================== ================
</TABLE>
Pro forma information regarding net income and earnings per share is required
to be determined as if the Company had accounted for its stock options granted
subsequent to June 25, 1995 under the fair value method of SFAS 123, "Accounting
for Stock-Based Compensation". The fair value of options granted in fiscal
1996, 1997 and 1998 was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions: risk-free
interest rates ranging from 5.5% to 6.5%, expected volatility of 43.3% to 50.8%,
expected dividend yield of 4.6% to 8.9% and expected lives of 2 to 6 years.
For purposes of pro forma disclosures, the estimated fair value of the stock
options is amortized over the option vesting periods. The Company's pro forma
information follows (in thousands, except for earnings per share information):
<TABLE>
<CAPTION>
June 28, 1998 June 29, 1997 June 30, 1996
------------- ------------- -------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
------------ ---------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Net income. . . . . . $ 4,880 $ 4,460 $ 4,528 $ 3,981 $ 3,908 $ 3,891
Basic earning per share$ $ 0.38 $ 0.35 $ 0.35 $ 0.31 $ 0.30 $ 0.29
Diluted earnings per share$ 0.36 $ 0.33 $ 0.33 $ 0.29 $ 0.28 $ 0.28
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts as the pro forma amounts above do not include the impact of
additional awards anticipated in future years.
NOTE I - COMMITMENTS AND CONTINGENCIES:
The Company is subject to various claims and contingencies related to employment
agreements, lawsuits, taxes, food product purchase contracts and other matters
arising out of the normal course of business. Management believes that any
liabilities arising from these claims and contingencies are either covered by
insurance or would not have a material adverse effect on the Company's annual
results of operations or financial condition.
NOTE J - RELATED PARTIES:
One of the individuals nominated by the Company and elected to serve on its
Board of Directors is a franchisee. This franchisee currently operates a total
of 20 restaurants located in Arkansas, Texas and Missouri. Purchases by this
franchisee comprised 8% of the Company's total food and supply sales in fiscal
1998. Royalties and license fees and area development sales from this
franchisee comprised 3% of the Company's total franchise revenues in fiscal
1998. As franchised units, his restaurants pay royalties to the Company and
purchase a majority of their food and supplies from the Company's distribution
division. As of June 28, 1998, his accounts and note payable to the Company
were $1,242,011.
The Company believes the above transactions were at the same prices and on the
same terms available to non-related third parties.
NOTE K - TREASURY STOCK:
In July 1996, in order to further reduce future administrative costs related to
small shareholder accounts, the Company implemented an odd lot buy-back program
to purchase Common Stock for $5.25 per share from shareholders who own less than
100 shares. Under this program, the Company purchased 8,149 shares at a total
cost of $42,782.
For the period of September 1995 through June 1998, the Company purchased
1,597,341 shares of its own Common Stock from time to time on the open market at
a total cost of $7.6 million. Additionally, in May 1998, the Company acquired
102,478 shares in connection with entering into a new contract with a vendor.
This non-cash treasury share acquisition is recorded in other income at current
market value in the amount of $602,000. The purchases of common shares
described above were funded from working capital, and reduced the Company's
outstanding shares by approximately 13%.
As of August 17, 1998 the Company had purchased 333,200 shares for a total
amount of $1,859,671. All reacquired shares will be held as treasury until
retired.
NOTE L - EARNINGS PER SHARE:
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 show 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>
YEAR ENDED JUNE 28, 1998
BASIC EPS
Income Available to Common Shareholders . . . $ 4,880 12,692 $ 0.38
Effect of Dilutive Securities - Stock Options 776
------------
DILUTED EPS
Income Available to Common Shareholders
& Assumed Conversions . . . . . . . . . . . . $ 4,880 13,468 $ 0.36
============ ============= ==========
YEAR ENDED JUNE 29, 1997
BASIC EPS
Income Available to Common Shareholders . . . $ 4,528 12,873 $ 0.35
Effect of Dilutive Securities - Stock Options 834
------------
DILUTED EPS
Income Available to Common Shareholders
& Assumed Conversions . . . . . . . . . . . . $ 4,528 13,707 $ 0.33
============ ============= ==========
YEAR ENDED JUNE 30, 1996
BASIC EPS
Income Available to Common Shareholders . . . $ 3,908 13,209 $ 0.30
Effect of Dilutive Securities - Stock Options 663
------------
DILUTED EPS
Income Available to Common Shareholders
& Assumed Conversions . . . . . . . . . . . . $ 3,908 13,872 $ 0.28
============ ============= ==========
</TABLE>
NOTE M - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
The following summarizes the unaudited quarterly results of operations for the
fiscal years ended June 28, 1998 and June 29, 1997 (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Quarter Ended
-------------
September 28, December 28, March 29, June 28,
1997 1997 1998 1998
-----------------------------------------------------
<S> <C> <C> <C> <C>
FISCAL YEAR 1998
Revenues
$ 17,050 $ 17,070 $ 16,864 $ 17,656
Gross Profit
1,793 1,914 1,505 2,313
Net Income . . . . . . . . . . . . . . 1,091 1,185 1,179 1,424
Basic earnings per share on net income 0.09 0.09 0.09 0.11
Diluted earnings per share on net income 0.08 0.09 0.09 0.11
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
-------------
September 29, December 29, March 30, June 29,
1996 1996 1997 1997
-----------------------------------------------------
<S> <C> <C> <C> <C>
FISCAL YEAR 1997
Revenues . . . . . . . . . . . . . . . $ 17,734 $ 17,559 $ 16,503 $ 17,327
Gross Profit . . . . . . . . . . . . . 1,701 1,933 1,784 2,104
Net Income . . . . . . . . . . . . . . 996 1,165 1,076 1,291
Basic earnings per share on net income 0.08 0.09 0.08 0.10
Diluted earnings per share on net income 0.07 0.08 0.08 0.10
</TABLE>
SCHEDULE II
<TABLE>
<CAPTION>
PIZZA INN, INC.
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
ADDITIONS
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COST AND OTHER END
OF PERIOD EXPENSE ACCOUNTS DEDUCTIONS (1) OF PERIOD
----------- ----------- ----------- --------------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 28, 1998
Allowance for doubtful
accounts and notes . . . $ 1,121 $ 230 $ - $ (344) $ 1,007
YEAR ENDED JUNE 29, 1997
Allowance for doubtful
accounts and notes . . . 963 110 - 48 $ 1,121
YEAR ENDED JUNE 30, 1996
Allowance for doubtful
accounts and notes . . . 1,318 - - (355) $ 963
</TABLE>
(1) Write-off of receivables, net of recoveries.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are no events to report under this item.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is included in the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A in connection
with the Company's annual meeting of shareholders to be held in December 1998
(the "Proxy Statement"), and is incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this Item is included in the Proxy Statement
and is incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is included in the Proxy Statement
and is incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is included in the Proxy Statement
and is incorporated herein by reference.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON 8-K
(a) 1. The financial statements filed as part of this report are listed
in the Index to
Financial Statements and Schedules under Part II, Item 8 of this Form 10-K.
2. The financial statement schedules filed as part of this report are
listed in the Index to Financial Statements and Schedules under Part II,
Item 8 of this Form10-K.
3. Exhibits:
3.1 Restated Articles of Incorporation as filed on September 5, 1990 and
amended on February 16,1993 (filed as Exhibit 3.1 to the Company's Annual Report
on Form 10-K for the fiscal year ended June 27, 1993 and incorporated herein by
reference).
3.2 Amended and Restated By-Laws as adopted by the Board of
Directors on July 30, 1993 (filed as Exhibit 3.2 to the Company's Annual Report
on Form 10-K for the fiscal year ended June 27, 1993 and incorporated herein by
reference).
4.1 Provisions regarding Common Stock in Article IV of the
Restated Articles of Incorporation, as amended (filed as Exhibit 3.1 to this
Report and incorporated herein by reference).
4.2 Provisions regarding Redeemable Preferred Stock in Article V
of the Restated Articles of Incorporation, as amended (filed as Exhibit 3.1 to
this Report and incorporated herein by reference).
10.1 Amended and Restated Loan Agreement between the Company and
Wells Fargo Bank (Texas), N.A. dated August 28, 1997 (filed as Exhibit 10.1 to
the Company's Annual Report on Form 10-K for the fiscal year ended June 29, 1997
and incorporated herein by reference).
10.2 First Amendment to Amended and Restated Loan Agreement
between the Company and Wells Faro Bank (Texas), N.A. dated September 14, 1998.
10.3 Stock Purchase Agreement between the Company and Kleinwort
Benson Limited dated April 28, 1995 (filed as Exhibit 10.14 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 26, 1995 and
incorporated herein by reference).
10.4 Redemption Agreement between the Company and Kleinwort Benson
Limited dated June 24, 1994 (filed as Exhibit 10.4 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 26, 1994 and incorporated
herein by reference.)
10.5 Employment Agreement between the Company and C. Jeffrey
Rogers dated October 23, 1997 (filed as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended September 28, 1997 and
incorporated herein by reference).*
10.6 Employment Agreement between the Company and Ronald W. Parker
dated October 23, 1997 (filed as Exhibit 10.2 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended September 28, 1997 and incorporated
herein by reference).*
10.7 1993 Stock Award Plan of the Company (filed as Exhibit 10.9
to the Company's Annual Report on Form 10-K for the fiscal year ended June 26,
1994 and incorporated herein by reference).*
10.8 1993 Outside Directors Stock Award Plan of the Company (filed
as Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year
ended June 26, 1994 and incorporated herein by reference).*
10.9 1992 Stock Award Plan of the Company (filed as Exhibit 10.6
to the Company's Annual Report on Form 10-K for the fiscal year ended June 27,
1993 and incorporated herein by reference).*
11.0 Computation of Net Income Per Share.
21.0 List of Subsidiaries of the Company (filed as Exhibit 21.0 to
the Company's Annual Report on Form 10-K for the fiscal year ended June 26, 1994
and incorporated herein by reference).
23.0 Consent of Independent Accountants.
27.0 Financial Data Schedule.
* Denotes a management contract or compensatory plan or arrangement filed
pursuant to Item 14 (c) of this report.
(b) No reports were filed on Form 8-K during the fourth quarter of the
Company's fiscal year 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date: September 25, 1998 By: /s/ Nancy Deemer
Nancy Deemer
Controller and Treasurer
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
NAME AND POSITION DATE
---------------------
/s/Steve A. Ungerman September 25, 1998
- ---------------------- -------------------
Steve A. Ungerman
Director and Chairman of the Board
/s/C. Jeffrey Rogers September 25, 1998
- ---------------------- -------------------
C. Jeffrey Rogers
Director, Vice Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
/s/Butler E. Powell September 25, 1998
- --------------------- -------------------
Butler E. Powell
Director
/s/Ramon D. Phillips September 25, 1998
- ---------------------- -------------------
Ramon D. Phillips
Director
/s/F. Jay Taylor September 25, 1998
- ------------------ -------------------
F. Jay Taylor
Director
/s/Bobby L. Clairday September 25, 1998
- ---------------------- -------------------
Bobby L. Clairday
Director
/s/Ronald W. Parker September 25, 1998
- --------------------- -------------------
Ronald W. Parker
Director, Executive Vice President and
Chief Operating Officer
(Principal Financial Officer)
FIRST AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT
-------------------------------------------------------------
This First Amendment to Amended and Restated Loan Agreement (this
"Amendment") is dated as of September 14, 1998 by and among PIZZA INN, INC., a
Missouri corporation (the "Borrower"), and WELLS FARGO BANK (TEXAS), NATIONAL
ASSOCIATION (the "Lender").
R E C I T A L S:
WHEREAS, Borrower and Lender have entered into that certain Amended and
Restated Loan Agreement dated as of August 28, 1997 (as amended, modified or
supplemented from time to time, the "Agreement"), pursuant to which Lender made
revolving credit loans available to Borrower under the terms and provisions
stated therein; and
WHEREAS, Borrower has requested Lender to (a) amend certain provisions of
the Agreement relating to financial covenants, and (c) extend the Termination
Date; and
WHEREAS, Lender is willing to amend the Agreement as hereinafter provided;
and
WHEREAS, Borrower and Lender now desire to amend the Agreement as herein
set forth.
NOW, THEREFORE, in consideration of the premises herein contained and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
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Section I.1 Definitions. Capitalized terms used in this Amendment, to
-----------
the extent not otherwise defined herein, shall have the same meaning as in the
Agreement, as amended hereby.
ARTICLE II
AMENDMENTS
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Section II.1 Amendments to Section 1.1. Effective as of the date
----------------------------
hereof, Section 1.1 of the Agreement is hereby amended as follows:
(a) The definition of "Funded Debt Ratio" in Section 1.1 of the
Agreement is amended by deleting the phrase "less the amount of any purchases by
the Borrower of its common stock in excess of $800,000 during said period"
appearing at the end of such definition.
(b) The definition of "Termination Date" in Section 1.1 of the
Agreement is amended by deleting the reference to "August 30, 1999" and
substituting therefor "August 30, 2000".
Section II.2 Amendment to Section 10.2. Effective as of the date
----------------------------
hereof, Section 10.2 of the Agreement is amended in its entirety to read as
follows:
Section 10.2 Leverage Ratio. The Borrower will at all times maintain a
--------------
Leverage Ratio of not greater than (a) 3.25 to 1.00 for the fiscal quarter
ending September 25, 1998, (b) 3.00 to 1.00 for the fiscal quarter ending
December 25, 1998, and (c) 2.75 to 1.00 for the fiscal quarter ending March 26,
1999 and thereafter.
Section II.3 Amendment to Section 10.5. Effective as of the date
----------------------------
hereof, Section 10.5 of the Agreement is amended and restated in its entirety as
follows:
Section 10.5 Operating Leases. The Borrower will not incur, create,
-----------------
assume, or permit to exist, and will not permit any Subsidiary to incur, create,
assume, or permit to exist, any liabilities for payments under any Operating
Leases without the prior written approval of the Bank, which approval shall not
be unreasonably withheld, provided that (i) the Borrower and the Subsidiaries
may incur, create, or assume liabilities for payments under Operating Leases in
an aggregate amount (including taxes, insurance, maintenance, and similar
expenses which the Borrower or any Subsidiary is obligated to pay under any such
Operating Lease) not to exceed Six Million Dollars ($6,000,000) on a
consolidated basis, plus One Million Five Hundred Thousand Dollars ($1,500,000)
per fiscal year commencing with the fiscal year ending in June of 1999, (ii) the
amount of any permitted increase in liabilities under Operating Leases not
incurred in any fiscal year may be carried forward to the next succeeding fiscal
year but not thereafter, and (iii) the aggregate payments of the Borrower and
the Subsidiaries with respect to Operating Leases shall not exceed Two Million
Dollars ($2,000,000) during any fiscal year commencing with the fiscal year
ending in June of 1999.
ARTICLE III
CONDITIONS PRECEDENT
---------------------
Section III.1 Conditions. The effectiveness of this Amendment is
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subject to the satisfaction of the following conditions precedent:
(a) Lender shall have received all of the following, each dated (unless
otherwise indicated) the date of this Amendment, in form and substance
satisfactory to Lender:
(i) Amendment. This Amendment, duly executed by Borrower and each
---------
Guarantor;
-
(ii) Second Amended and Restated Revolving Credit Note. A Second Amended
----------------------------------------------------
and Restated Revolving Credit Note in the form of Annex I attached hereto, duly
-------
executed by Borrower;
(iii) Additional Information. Such additional documents, instruments and
-----------------------
information as Lender or its legal counsel, Winstead Sechrest & Minick P.C., may
reasonably request.
(b) The representations and warranties contained herein and in all
other Loan Documents, as amended hereby, shall be true and correct as of the
date hereof as if made on the date hereof.
(c) No Event of Default shall have occurred and be continuing and no
event or condition shall have occurred that with the giving of notice or lapse
of time or both would be an Event of Default.
(d) All corporate proceedings taken in connection with the transactions
contemplated by this Amendment and all documents, instruments, and other legal
matters incident thereto shall be satisfactory to Lender and its legal counsel,
Winstead Sechrest & Minick P.C.
ARTICLE IV
MISCELLANEOUS
-------------
Section IV.1 Ratifications, Representations and Warranties. Except as
------------------------------------------------
expressly modified and superseded by this Amendment, the terms and provisions of
the Agreement and the other Loan Documents are ratified and confirmed and shall
continue in full force and effect. Borrower and Guarantors agree that the
representations and warranties contained herein and in all other Loan Documents,
as amended hereby, are true and correct as of, and as if made on, the date
hereof. Borrower, Lender and Guarantors agree that the Agreement as amended
hereby and all other documents executed in connection with the Agreement or this
Amendment to which Borrower or such Guarantor is a party shall continue to be
legal, valid, binding and enforceable in accordance with their respective terms
Section IV.2 Reference to the Agreement. Each of the Loan Documents,
-----------------------------
including the Agreement and any and all other agreements, documents or
instruments now or hereafter executed and delivered pursuant to the terms hereof
or pursuant to the terms of the Agreement as amended hereby, are hereby amended
so that any reference in such Loan Documents to the Agreement shall mean a
reference to the Agreement as amended hereby.
Section IV.3 Expenses of Lender. As provided for in the Agreement,
--------------------
Borrower agrees to pay on demand all reasonable cost and expenses incurred by
Lender in connection with the preparation, negotiation, execution of this
Amendment, and the other Loan Documents executed pursuant hereto and any and all
amendments, modifications and supplements thereto including, without limitation,
the reasonable cost of Lender's legal counsel, and all reasonable costs and
expenses incurred by Lender in connection with the enforcement or preservation
of any rights under the Agreement, as amended hereby, or any other Loan
Documents.
Section IV.4 Severability. Any provisions of this Amendment held by court
------------
of competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provisions so held to be invalid or unenforceable.
Section IV.5 Applicable Law. This Amendment and all other Loan Documents
--------------
executed pursuant hereto shall be governed by and construed in accordance with
the laws of the State of Texas.
Section IV.6 Successors and Assigns. This Amendment is binding upon and
-----------------------
shall enure to the benefit of Lender and Borrowers and their respective
successors and assigns.
Section IV.7 Counterparts. This Amendment may be executed in one or more
------------
counterparts, each of which when so executed shall be deemed to be an original
but all of which when taken together shall constitute one and the same
instrument.
Section IV.8 Headings. The headings, captions, and arrangements used in
--------
this Amendment are for convenience only and shall not affect the interpretation
of this Amendment.
Section IV.9 NO ORAL AGREEMENTS. THIS AMENDMENT AND ALL OTHER
--------------------
INSTRUMENTS, DOCUMENTS AND AGREEMENTS EXECUTED AND DELIVERED IN CONNECTION
HEREWITH REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES, AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
BETWEEN THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
EXECUTED as of the day and year first above written.
BORROWER:
PIZZA INN, INC.
By: /s/Ronald W. Parker
---------------------
Name: Ronald W. Parker
Title: Executive Vice President & Chief Operating Officer
LENDER:
WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION
By: /s/Kyle G. Hranicky
---------------------
Name: Kyle G. Hranicky
Title: Vice President
GUARANTORS:
BARKO REALTY, INC.
By: /s/Ronald W. Parker
---------------------
Name: Ronald W. Parker
Title: President
R-CHECK, INC.
By: /s/Ronald W. Parker
---------------------
Name: Ronald W. Parker
Title: President
PIZZA INN OF DELAWARE, INC.
By: /s/Ronald W. Parker
---------------------
Name: Ronald W. Parker
Title: President
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-56590 and 33-71700), the latter as amended by
Post-Effective Amendment No. 1, of Pizza Inn, Inc. of our report dated August
17, 1998 appearing on page 15 of this Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Dallas, TX
September 25, 1998
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