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 27, 1999.
[ ] 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, 1999, there were 11,102,738 shares of the registrant's
Common Stock outstanding, and the aggregate market value of registrant's Common
Stock held by non-affiliates was $27,914,586, 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 1999, have been
incorporated by reference in Part III of this report.
<PAGE>
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, 1999, the Pizza Inn system consisted of 518 units,
including three Company operated units (which are used for product testing and
franchisee training, in addition to serving customers) and 515 franchised units.
The domestic units are comprised of 276 full service units, 45
delivery/carry-out units and 132 Express units. The international units are
comprised of 20 full service units, 28 delivery/carry-out units and 17 Express
units. Pizza Inn units are currently located in 21 states and 13 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% of the total, respectively. 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.
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. 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.
<PAGE>
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 a 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.
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 that
creates and produces print advertisements, television and radio commercials, and
in-store promotional materials along with related 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, 1999, 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 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 crew managers. 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, 1999, the Company had approximately 214 employees,
including 57 in the Company's corporate office, 81 at its Norco division, and 26
full-time and 50 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.
<PAGE>
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 2000, 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, 1999, all three of the Company operated Pizza Inn
restaurants (all located in Texas) were leased. The Company operated units
range in size from approximately 1,500 to 3,600 square feet and incur annual
minimum rent between $12.50 and $22.00 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 are renewable and will expire in 2000, 2004, and 2007.
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 1999.
<PAGE>
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On September 9, 1999, there were 2,846 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 actual trade executed
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>
Actual Trade
Executed Price
----------------
<S> <C> <C>
High Low
-------- --------
1999
First Quarter Ended 9/27/98 . 5 13/16 4 3/4
Second Quarter Ended 12/27/98 .5 1/4 4 1/4
Third Quarter Ended 3/28/99 . 4 3/4 3
Fourth Quarter Ended 6/27/99. 4 1/8 2 29/32
1998
First Quarter Ended 9/28/97 . .. 4 7/8 3 3/4
Second Quarter Ended 12/28/97 5 15/16 4 9/16
Third Quarter Ended 3/29/98 . 6 5/16 5 1/4
Fourth Quarter Ended 6/28/98. 6 5/8 5 1/4
</TABLE>
During fiscal 1999 the Board of Directors of the Company declared quarterly cash
dividends of $0.06 per share. For the year ended June 27, 1999 cash dividends
declared were approximately $2.1 million or $0.18 per share. On June 28, 1999,
the Company's Board of Directors declared a cash dividend of approximately $0.7
million or $0.06 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.
<PAGE>
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 27, 1999, 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 27, June 28, June 29, June 30, June 25,
1999 1998 1997 1996 1995
------------ --------- --------- --------- ---------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT DATA:
Total revenues. . . . . . . . . . . . . . . . $ 66,294 $ 68,640 $ 69,123 $ 69,441 $ 62,044
Income before taxes . . . . . . . . . . . . . 4,096 7,023 6,860 5,921 4,845
Net income. . . . . . . . . . . . . . . . . . 2,752 4,880 4,528 3,908 3,198
Basic earnings per common share . . . . . . . .24 .38 .35 .30 .24
Diluted earnings per common share . . . . . . .23 .36 .33 .28 .22
Dividends declared per common share . (1) .18 .24 - - -
SELECTED BALANCE SHEET DATA:
Total assets. . . . . . . . . . . . . . . . . 18,586 21,773 24,310 24,419 25,803
Long-term debt and capital lease obligations. 6,944 5,454 7,789 7,902 11,039
<FN>
(1) On June 28, 1999 the Company's Board of Directors declared a
quarterly dividend of $.06 per share on the Company's common
stock, payable to shareholders of record on July 9, 1999.
</TABLE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL 1999 COMPARED TO FISCAL 1998
Diluted earnings per share dropped 36% from $0.36 to $0.23. Net
income decreased 44% to $2,752,000 from $4,880,000 in the prior year, on
revenues of $66.3 million versus $68.6 million the previous year. Net income
and earnings per share decreased because of lower revenues from area development
territory sales, fewer vendor incentives, a lower volume of food product sales
from slightly lower chainwide sales and higher cost of sales due to
extraordinarily higher cheese prices from July 1998 through January 1999.
Restaurant cost of sales, as a percentage of sales, throughout the Company's
franchise community was up approximately 3 percentage points, due to
extraordinarily higher cheese prices during these seven months. This increased
cost also caused an adverse effect on chainwide sales as the result of decreased
discretionary franchisee advertising as well as delayed new store openings and
remodelings. Foreign economic factors also continued to adversely affect
international sales and new store openings in foreign markets.
Food and supply sales by the Company's distribution division were down less
than 1% or $390,000 as compared to last year sales. The slight decrease in
volume was offset by a significant increase in cheese prices. International
sales decreased $182,000 in fiscal 1999 due to economic troubles in
international markets which resulted in fewer net store openings abroad than in
the prior fiscal year.
Franchise revenue, which include royalties, license fees and income from
area development and foreign master license (collectively, "Territory") sales,
decreased 13% or $849,000 in fiscal 1999. Area development income decreased
$560,000 in fiscal 1999 primarily due to economic troubles in international
markets. Royalty revenue was down $173,000 compared to last year, mainly
resulting from a 1.5% decrease in chainwide sales and a slightly lower average
royalty rate due to both more restaurants within area development territories
and a lower ratio of full service units to Delco/Express units. License fees
decreased $116,000 in fiscal 1999.
Restaurant sales, which consist of revenue generated by Company-owned
stores, for the year decreased 15% or $397,000 compared to the same period of
the prior year. This was due to the lease expiration and closing of one Delco
store in August 1998. Comparable store sales growth at Company-owned stores
increased 6% for the year.
Other income consists of primarily interest income and non-recurring
revenue items. Other income decreased 71% or $710,000 in fiscal 1999. Fiscal
1998 included vendor incentives, the gain on the sale of a Territory, and the
sale of a state liquor license.
Cost of sales increased 4% or $2,146,000 during fiscal 1999. As a
percentage of sales, cost of sales increased to 92% in fiscal 1999 from 87%
compared to last year. Cost of sales increased primarily due to significantly
higher cheese prices and an increase in allocation of corporate services
expenses related to the Company's distribution center, offset by a lower volume
of food product sold.
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 decreased 15% or $468,000 compared
to last year. This was due to an increase in corporate services expenses
allocation to the distribution center resulting in a corresponding decrease in
franchise expenses.
General and administrative expenses decreased 25% or $1,126,000 in fiscal
1999. This is the result of an increase in the corporate services overhead
allocation to the distribution center resulting in a corresponding decrease in
general and administrative expenses. This decrease was partially offset by
higher legal and tax expenses in fiscal 1999.
Interest expense increased 4% or $22,000 in the current year as a result of
slightly higher debt levels and capital lease interest expense on new computer
equipment.
During fiscal 1999, a total of 73 new Pizza Inn franchise units were opened
for business, 52 domestic, and 21 international. Domestically, 38 units were
closed by franchisees or terminated by the Company typically because of
unsatisfactory standards of operation or performance. Similarly, 26
international units were closed.
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.
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 income
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.
FINANCIAL CONDITION
Cash and cash equivalents decreased $1.8 million in fiscal 1999. Cash flow
generated from operations and additional borrowings were used to purchase shares
of the Company's own stock and pay cash dividends on its common stock. The
Company increased its borrowings by $1.0 million in fiscal 1999. The Company
used $5.8 million to reacquire 1.1 million shares of its own common stock at
prevailing prices on the open market. The Company also used $2.1 million to pay
cash dividends on its common stock in fiscal 1999.
At June 27, 1999 the net deferred tax asset balance was $5.6 million.
During 1999, the Company decreased the net deferred tax asset by $240,820 for
general business tax credits due to expire in 2000 through an addition to the
tax valuation allowance. The Company believes that it is more likely than not
that these credits will not be realized. In fiscal 1999, the valuation
allowance and corresponding asset were also decreased due to the expiration of
general business credits.
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 $204,000 related to the
potential expiration of certain tax credit carryforwards. Future taxable income
at the same level as fiscal 1999 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 $10.3
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, the
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 32%, 31%, and 34% for fiscal years
1999, 1998 and 1997, 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 losses
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 $5,841,000 in fiscal 1999 and was used
primarily to reacquire the Company's common stock, to pay dividends on its
common stock, and to fund capital expenditures.
The Company increased its borrowing by $1.0 million to $5.7 million at June
27, 1999 from $4.7 million at June 28, 1998.
During fiscal 1999 the Company purchased 1,132,900 shares of its own common
stock on the open market for a total price of $5.8 million and acquired an
additional 4,945 shares as a gift from a vendor. This brings the total number
of shares in treasury to 3,519,231 as of June 27, 1999. All reacquired shares
will be held as treasury stock until retired.
Capital Expenditures of $640,000 during fiscal 1999 included $414,000 for
upgrading the Company's computer system (including compliance with Year 2000
issues).
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 repayment of debt. The Company currently considers its
common stock to be undervalued and plans to aggressively purchase its own shares
on the open market during fiscal year 2000. For the period June 28, 1999
through September 9, 1999 the Company has purchased 317,600 shares for a total
amount of $1,076,711. Although the existing loan agreement does not require the
Company to make any scheduled debt reductions, the Company plans to reduce bank
debt in fiscal 2000. Anticipated capital expenditures include information
system upgrades, a partial company store remodel, and miscellaneous equipment
and improvements at the Corporate office, Norco, and the company-owned stores.
During fiscal 1999, the Board of Directors of the Company declared cash
dividends on the Company's common stock of approximately $2.1 million or $0.18
per share. On June 28, 1999 the Company's Board of Directors declared a
quarterly cash dividend payable to shareholders of record on July 9, 1999 of
approximately $0.7 million or $0.06 per share. Declaration of future dividends
will be at the discretion of the Board of Directors.
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, installation of new software, conversion and testing of data are
completed. The Company fully implemented the new system in May 1999 and has
begun processing information.
Because third party computer failures could also have a material impact on
our ability to conduct business, confirmations were requested from our material
vendors and suppliers to certify that plans are being developed to address and
become compliant with the year 2000 issues. As of June 27, 1999, 80% have
replied and are comfortable with their preparations for the year 2000. 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. The Company
will continue to assess and develop contingency plans, if needed, throughout the
remainder of 1999.
New software, testing, and conversion of systems and applications have been
completed and implemented. Total system upgrades are expected to position the
Company for anticipated future growth and enhance corporate service
capabilities. The cost of these upgrades will total approximately $1.2
million. Of this cost, approximately $900,000 already has been incurred as of
June 27, 1999. All of the above capital expenditures are funded through a
36-month capitalized lease.
This report contains certain forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) relating to the
Company that are based on the beliefs of the management of the Company, as well
as assumptions and estimates made by and information currently available to the
Company's management. When used in the report, the words "anticipate,"
"believe," "estimate," "expect," "intend" and other 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.
<PAGE>
<TABLE>
<CAPTION>
PIZZA INN, INC.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Schedules:
FINANCIAL STATEMENTS PAGE NO.
<S> <C>
Report of Independent Accountants. 14
Consoldiated Statements of Operations for the years ended
June 27, 1999, June 28, 1998, and June 29, 1997. 15
Consolidated Balance Sheets at June 27, 1999 and June 28, 1998. 16
Consolidated Statements of Shareholders' Equity for the years
ended June 27, 1999, June 28, 1998 and June 29, 1997. 17
Consolidated Statements of Cash Flows for the years ended
June 27, 1999, June 28, 1998, and June 29, 1997. 18
Notes to Consolidated Financial Statements 20
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>
<PAGE>
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. and its subsidiaries at June 27, 1999 and June 28, 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended June 27, 1999, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
listed in the accompanying index presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and the financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and the
financial statement schedule 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 6, 1999
<TABLE>
<CAPTION>
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED
-----------
JUNE 27, JUNE 28, JUNE 29,
REVENUES: 1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
Food and supply sales $ 58,101 $ 58,491 $ 59,557
Franchise revenue 5,619 6,468 6,750
Restaurant sales 2,287 2,684 2,696
Other income 287 997 120
----------- --------- ---------
66,294 68,640 69,123
----------- --------- ---------
COSTS AND EXPENSES:
Cost of sales 55,265 53,119 53,634
Franchise expenses 2,741 3,209 2,978
General and administrative expenses 3,431 4,557 4,879
Provision for bad debt 237 230 110
Interest expense 524 502 662
----------- --------- ---------
62,198 61,617 62,263
----------- --------- ---------
INCOME BEFORE INCOME TAXES 4,096 7,023 6,860
Provision for income taxes 1,344 2,143 2,332
----------- --------- ---------
NET INCOME $ 2,752 $ 4,880 $ 4,528
=========== ========= =========
BASIC EARNINGS PER COMMON SHARE $ 0.24 $ 0.38 $ 0.35
=========== ========= =========
DILUTED EARNINGS PER COMMON SHARE $ 0.23 $ 0.36 $ 0.33
=========== ========= =========
DIVIDENDS DECLARED PER COMMON SHARE $ 0.18 $ 0.24 $ -
=========== ========= =========
WEIGHTED AVERAGE COMMON SHARES 11,678 12,692 12,873
=========== ========= =========
WEIGHTED AVERAGE COMMON AND
DILUTIVE POTENTIAL COMMON SHARES 12,154 13,468 13,707
=========== ========= =========
<FN>
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PIZZA INN, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 27, JUNE 28,
ASSETS 1999 1998
--------- ---------
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 509 $ 2,335
Accounts receivable, less allowance for doubtful
accounts of $808 and $825, respectively 4,588 6,021
Notes receivable, current portion, less allowance
for doubtful accounts of $144 and $174, respectively 814 741
Inventories 2,393 1,953
Prepaid expenses and other 591 556
--------- ---------
Total current assets 8,895 11,606
Property, plant and equipment, net 1,754 1,921
Property under capital leases, net 1,587 761
Deferred taxes, net 5,556 6,705
Long-term notes receivable, less
allowance for doubtful accounts of $80 and $8,
respectively 380 436
Deposits and other 414 344
--------- ---------
$ 18,586 $ 21,773
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade $ 2,641 $ 2,014
Accrued expenses 1,795 2,507
Current portion of capital lease obligations 428 125
--------- ---------
Total current liabilities 4,864 4,646
LONG-TERM LIABILITIES
Long-term debt 5,700 4,700
Long-term capital lease obligations 1,244 754
Other long-term liabilities 719 756
--------- ---------
12,527 10,856
--------- ---------
COMMITMENTS AND CONTINGENCIES (See Note I)
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value; authorized 26,000,000
shares; outstanding 11,407,945 and 12,528,436
shares, respectively (after deducting shares in
treasury: 1999 - 3,519,231; 1998 -2,381,386) 114 125
Additional paid-in capital 4,765 4,911
Retained earnings 1,180 5,881
--------- ---------
Total shareholders' equity 6,059 10,917
--------- ---------
$ 18,586 $ 21,773
========= =========
<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 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 (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
Stock options exercised 17 - 52 - 52
Tax benefits associated
with stock options - - 233 - 233
Dividends declared - - - (2,092) (2,092)
Acquisition of treasury stock (see Note K) (1,137) (11) (431) (5,361) (5,803)
Net income - - - 2,752 2,752
------------- --------------- -------------- -------------- --------------
BALANCE, JUNE 27, 1999 11,408 $ 114 $ 4,765 $ 1,180 $ 6,059
============= =============== ============== ============== ==============
<FN>
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED
-------------------
JUNE 27, JUNE 28, JUNE 29,
1999 1998 1997
------------------- ------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 2,752 $ 4,880 $ 4,528
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 871 902 707
Provision for bad debt 237 230 110
Income from transfer of Pizza Inn stock (see Note K) (15) (602) -
Deferred Income Taxes 1,149 1,787 2,195
Changes in assets and liabilities:
Restricted cash and short-term investments - - 360
Notes and accounts receivable 1,179 25 (762)
Inventories (440) 271 (305)
Accounts payable - trade 627 532 (849)
Accrued expenses (717) (782) (94)
Deferred franchise revenue 5 (388) (147)
Prepaid expenses and other 193 (587) (23)
------------------- ------------------ ------------------
CASH PROVIDED BY OPERATING ACTIVITIES 5,841 6,268 5,720
------------------- ------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (640) (362) (628)
Acquisition of area development territory - (986) -
Proceeds from sale of re-acquired area development territory - 986 -
Proceeds from sales of assets - 65 -
------------------- ------------------ ------------------
CASH USED FOR INVESTING ACTIVITIES (640) (297) (628)
------------------- ------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term bank debt and
capital lease obligations (199) (2,325) (2,000)
Borrowings of long-term debt 1,000 - -
Dividends paid (2,092) (2,292) -
Proceeds from exercise of stock options 52 1,251 505
Purchases of treasury stock (5,788) (2,602) (1,918)
------------------- ------------------ ------------------
CASH USED FOR FINANCING ACTIVITIES (7,027) (5,968) (3,413)
------------------- ------------------ ------------------
Net increase (decrease) in cash and cash equivalents (1,826) 3 1,679
Cash and cash equivalents, beginning of period 2,335 2,332 653
------------------- ------------------ ------------------
Cash and cash equivalents, end of period $ 509 $ 2,335 $ 2,332
------------------- ------------------ ------------------
<FN>
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
(IN THOUSANDS)
YEAR ENDED
-----------
JUNE 27, JUNE 28, JUNE 29,
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
CASH PAYMENTS FOR:
Interest $ 551 $ 526 $ 612
Income taxes 20 160 150
NONCASH FINANCING AND INVESTING
ACTIVITIES:
Capital lease obligations incurred $ 992 $ - $ -
</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 27, 1999 the Pizza Inn system consisted of 516 locations, including
three Company operated units and 513 franchised units. The Company is currently
franchised in 21 states and 13 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 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. Provision is made for obsolete
inventories.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, including property under capital leases, are
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 three to eight years. It is the Company's policy
to periodically review the net realizable value when indicators exist 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. The Company believes no impairment
of long-lived assets exists at June 27, 1999.
ACCOUNTS RECEIVABLE:
Accounts receivable consist 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 27, 1999, June 28, 1998, and June 29, 1997 provisions of $237,000,
$230,000 and $110,000 were recorded, respectively.
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, the Company recognizes 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 27, 1999, June 28, 1998 and June 29, 1997, 93%, 84% and
78%, 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 27, 1999, June 28, 1998 and June 29, 1997 were $106,000, $666,000 and
$1,154,000 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 27, 1999, June 28, 1998 and June 29, 1997 all contained 52 weeks.
NEW PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133") effective for fiscal years beginning after June 15, 1999, which was
extended to June 15, 2000. SFAS 133 establishes accounting and reporting
standards for derivative instruments embedded in other contracts and for hedging
activities. The adoption of this statement in 2001 is not expected to have an
affect on the Company's financial statements.
<PAGE>
NOTE B - PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment and property under capital leases consist of the
following (in thousands):
<TABLE>
<CAPTION>
JUNE 27, JUNE 28,
<S> <C> <C>
1999 1998
---------------------- -----------------------
Property, plant and equipment:
Equipment, furniture and fixtures $ 4,259 $ 3,992
Leasehold improvements 1,336 1,326
---------------------- -----------------------
5,595 5,318
Less: accumulated depreciation (3,841) (3,397)
---------------------- -----------------------
1,754 1,921
====================== =======================
Property under capital leases:
Real Estate $ 118 $ 118
Equipment 2,393 1,396
---------------------- -----------------------
2,511 1,514
Less: accumulated amortization (924) (753)
---------------------- -----------------------
1,587 761
====================== =======================
</TABLE>
Depreciation and amortization expense was $871,000, $902,000, and $707,000 for
the years ended June 26, 1999, June 28, 1998, and June 29, 1997, respectively.
NOTE C - ACCRUED EXPENSES:
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 27, JUNE 28,
<S> <C> <C>
1999 1998
--------------------- ---------------------
Compensation $ 944 $ 824
Legal and other professional fees 116 35
Deferred franchise revenue 242 237
Accrued dividends payable - 760
Other 493 651
--------------------- ---------------------
1,795 2,507
===================== =====================
</TABLE>
NOTE D - LONG-TERM DEBT:
In August 1997, the Company signed an agreement (the "Loan Agreement") with its
current lender, Wells Fargo, to refinance its debt under a new revolving credit
facility. The revolving credit note was scheduled to mature in August 1999 and
was secured by essentially all of the Company's assets. Amounts outstanding
under the Loan Agreement were $5.7 million and $4.7 million at fiscal year end
1999 and 1998, 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 27, 1999, 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 27, 1999 and June 28,
1998, the Company's effective interest rates were 6.17% and 6.91%, respectively
(with a Eurodollar rate basis).
The Loan Agreement contains covenants which, among other things, require the
Company to satisfy certain financial ratios and restrict additional debt.
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 27, 1999 and June 28, 1998 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. In accordance with SFAS
6, "Classification of Short-Term Obligations Expected to be Refinanced", the
entire balance outstanding under the Loan Agreement at June 27, 1999 was
classified as long-term to reflect the provisions of the Loan Agreement.
NOTE E - INCOME TAXES:
The effective federal income tax rate did not vary from the statutory rate of
34% for the year ended June 29,1997. However, the effective federal income tax
rate varied from the statutory rate for the years ended June 27, 1999 and June
28, 1998 as follows:
<TABLE>
<CAPTION>
JUNE 27, JUNE 28,
1999 1998
-------------------- --------------------
(in thousands)
<S> <C> <C>
Federal income taxes based on 34%
of book income $ 1,393 $ 2,388
Permanent adjustments (290) (102)
Change in valuation allowance (535) (638)
Expired credits 776 375
Other - 120
-------------------- --------------------
$ 1,344 $ 2,143
==================== ====================
</TABLE>
Income tax expense consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 27, JUNE 28, JUNE 29,
1999 1998 1997
------------------- ------------------- -------------------
<S> <C> <C> <C>
Federal:
Current $ 195 $ 356 $ 137
Deferred 1,149 1,787 2,195
------------------- ------------------- -------------------
Provision for income taxes $ 1,344 $ 2,143 $ 2,332
=================== =================== ===================
</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 27, JUNE 28,
1999 1998
-------------------- --------------------
<S> <C> <C>
Reserve for bad debt $ 391 $ 382
Depreciable assets 610 507
Deferred fees 72 70
Other reserves 88 (212)
NOL carryforwards 3,510 5,100
Credit carryforwards 1,089 1,597
-------------------- --------------------
Gross deferred tax asset $ 5,760 $ 7,444
Valuation allowance (204) (739)
-------------------- --------------------
Net deferred tax asset $ 5,556 $ 6,705
==================== ====================
</TABLE>
As of June 27, 1999, the Company had $10.3 million of net operating loss
carryforwards that expire in 2005. The Company also had $263,000 of general
business credit carryforwards expiring between 2000 and 2001, $177,000 of
foreign tax credit carryforwards expiring between 2003 and 2004, and $649,000 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 1999, the Company decreased the net deferred tax asset by $240,820 for
general business tax credits that are not expected to be utilized through an
addition to the tax valuation allowance. These general business tax credits are
due to expire in 2000 and will not be utilized prior to their expiration. The
Company believes that it is more likely than not that these credits will not be
realized. This reduction is included in the provision for income tax.
Additionally, the valuation allowance and corresponding asset were decreased due
to the expiration of general business credits.
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.
<PAGE>
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. The leases expire in 2003 and 2000, 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.
In August 1998, the Company entered into a new 36 month capital lease agreement
for computer software and hardware equipment.
Future minimum rental payments under non-cancelable leases with initial or
remaining terms of one year or more at June 27, 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ----------
<S> <C> <C>
2000 $ 565 $ 1,255
2001 565 1,121
2002 572 1,006
2003 90 607
2004 108 191
Thereafter 39 175
---------
1,939 $ 4,355
=========
Less amount representing interest (267)
---------
Present value of total obligations under
capital leases 1,672
Less current portion (428)
---------
Long-term capital lease obligations $ 1,244
=========
</TABLE>
Rental expense consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 27, JUNE 28, JUNE 29,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Minimum rentals $ 1,339 $ 1,193 $ 1,117
Contingent rentals 13 15 11
Sublease rentals (99) (87) (90)
------------ ------------ ------------
$ 1,253 1,121 1,038
============ ============ ============
</TABLE>
<PAGE>
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. From January 1, 1998 through January 1, 1999, the
Company contributed on behalf of each participating employee an amount equal to
100% up to 6% of the employee's contribution. Effective January 1, 1999, the
Company contributes on behalf of each participating employee an amount equal to
100% of the first 3% and 50% of the next 3% 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 27, 1999, June 28, 1998, and June 29, 1997, total
matching contributions to the tax advantaged savings plan by the Company on
behalf of participating employees were $205,922, $116,862, and $58,774,
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 , 1997 and 1998, 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.
<PAGE>
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 27, 1999 June 28, 1998 June 29, 1997
--------------- -------------- ---------------
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 2,675,366 $ 3.27 3,143,639 $ 3.08 2,608,356 $ 2.82
Granted 655,290 $ 4.79 110,000 $ 4.85 876,783 $ 3.56
Exercised (17,084) $ 2.97 (413,773) $ 2.14 (266,500) $ 1.90
Canceled (65,600) $ 4.68 (164,500) $ 3.58 (75,000) $ 3.74
--------------- -------------- --------------- ------ ---------- ------
Outstanding at end of year 3,247,972 $ 3.50 2,675,366 $ 3.27 3,143,639 $ 3.08
=============== ============== =============== ====== ========== ======
Exercisable at end of year 2,745,448 $ 3.42 2,274,916 $ 3.15 2,076,856 $ 2.84
Weighted-average fair value of
options granted during the year $ 1.30 $ 1.25 $ 0.89
</TABLE>
FIXED PRICE STOCK OPTIONS
The following table provides information on options outstanding and options
exercisable at June 27, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- --------------------
Weighted-
Average
Shares Remaining Weighted- Shares Weighted-
Range of Outstanding Contractural Average Exercisable Average
Exercise Prices at June 27, 1999 Life (Years) Exercise Price at June 27, 1999 Exercise Price
- ---------------- ------------------- -------------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
2.25 - 3.25 1,245,766 1.12 $ 2.54 1,162,666 $ 2.51
3.44 - 4.25 1,320,116 3.91 $ 3.91 1,173,616 $ 3.79
4.38 - 5.25 682,090 5.47 $ 4.46 409,166 $ 4.95
------------------- ----------------
2.25 - 5.25 3,247,972 3.17 $ 3.50 2,745,448 $ 3.42
=================== ================
</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
1997, 1998 and 1999 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 5.0% to 6.5%, expected volatility of 40.3% to 50.8%,
expected dividend yield of 4.4% to 8.9% and expected lives of 2 to 6 years.
<PAGE>
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 27, 1999 June 28, 1998 June 29, 1997
-------------- -------------- --------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
-------------- -------------- -------------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 2,752 $ 2,291 $ 4,880 $ 4,460 $ 4,528 $ 3,981
Basic earnings per share $ 0.24 $ 0.20 $ 0.38 $ 0.35 $ 0.35 $ 0.31
Diluted earnings per share $ 0.23 $ 0.19 $ 0.36 $ 0.33 $ 0.33 $ 0.29
</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 15 restaurants located in Arkansas, Texas and Missouri. Purchases by this
franchisee comprised 5% of the Company's total food and supply sales in fiscal
1999. Royalties and license fees and area development sales from this
franchisee comprised 3% of the Company's total franchise revenues in fiscal
1999. 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 27, 1999, his accounts and note payable to the Company
were $860,464.
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:
For the period of September 1995 through June 1999, the Company purchased
2,730,241 shares of its own Common Stock from time to time on the open market at
a total cost of $13.4 million. 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 was recorded in other income at current market value
in the amount of $602,000. In April 1999, the Company received a gift of 4,945
shares from a vendor which was recorded at current market value in the amount of
$15,000.
The purchases of common shares described above were funded from working capital,
and reduced the Company's outstanding shares by approximately 19%. 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). 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.
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
------------ ------------- ----------
YEAR ENDED JUNE 27, 1999
BASIC EPS
<S> <C> <C> <C>
Income Available to Common Shareholders $ 2,752 11,678 $ 0.24
Effect of Dilutive Securities - Stock Options 476
------------
DILUTED EPS
Income Available to Common Shareholders
& Assumed Conversions $ 2,752 12,154 $ 0.23
============ ============= ==========
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
============ ============= ==========
</TABLE>
Options to purchase 2,002,106 shares of common stock at exercise prices ranging
from $3.44 to $5.50 per share were outstanding at June 27, 1999 but were not
included in the computation of diluted EPS because the option's exercise price
was greater than the average market price of the common shares. No options were
excluded from the calculation of diluted EPS during fiscal year 1998. Options
to purchase 812,633 shares of common stock during fiscal year 1997 were excluded
from the computation of diluted EPS in 1997 because their inclusion would result
in an antidilutive effect on EPS.
NOTE M - SEGMENT REPORTING:
Effective June 27, 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information".
The Company has two reportable operating segments as determined by management
using the "management" approach as defined in SFAS No. 131: (1) Food and
Equipment Distribution, and (2) Franchise and Other. These segments are a
result of differences in the nature of the products and services sold.
Corporate administration costs, which include, but are not limited to, general
accounting, human resources, legal and credit and collections, are partially
allocated to the two operating segments. Other revenue consists of
non-recurring events.
The Food and Equipment Distribution segment sells and distributes proprietary
and non-proprietary items to franchisees and to three company-owned and operated
stores. Inter-segment revenues consist of sales to the company owned stores.
Assets for this segment include tractor/trailers, equipment, furniture and
fixtures.
The Franchise and Other segment includes income from royalties, license fees and
area development and foreign master license sales. The Franchise segment
includes the three company-owned stores, which are used as prototype and
training facilities. Assets for this segment include equipment, furniture and
fixtures for the company stores.
Corporate administration and other assets include primarily the deferred tax
asset, cash and short term investments, as well as furniture and fixtures
located at the corporate office.
Summarized in the following tables are net sales and operating revenues,
depreciation and amortization expense, interest expense, interest income,
operating profit (loss), capital expenditures, and assets for the Company's
reportable segments for the years ended June 27, 1999, June 28, 1998, and June
29, 1997:
<TABLE>
<CAPTION>
JUNE 27, JUNE 28, JUNE 29,
1999 1998 1997
--------------------------- -------------------------- --------------------------
(In thousands)
NET SALES AND OPERATING REVENUES:
<S> <C> <C> <C>
Food and Equipment Distribution $ 58,101 $ 58,491 $ 59,557
Franchise and Other 7,906 9,152 9,446
Intersegment revenues 847 1,015 1,015
--------------------------- -------------------------- --------------------------
Combined 66,854 68,658 70,018
Other revenues 287 997 120
Less intersegment revenues (847) (1,015) (1,015)
--------------------------- -------------------------- --------------------------
Consolidated revenues 66,294 68,640 69,123
=========================== ========================== ==========================
DEPRECIATION AND AMORTIZATION:
Food and Equipment Distribution $ 579 $ 491 $ 482
Franchise and Other 129 272 132
--------------------------- -------------------------- --------------------------
Combined 708 763 614
Corporate administration and other 163 139 93
--------------------------- -------------------------- --------------------------
Depreciation and amortization 871 902 707
=========================== ========================== ==========================
INTEREST EXPENSE:
Food and Equipment Distribution $ 344 $ 325 $ 424
Franchise and Other 8 8 8
--------------------------- -------------------------- --------------------------
Combined 352 333 432
Corporate administration and other 172 169 230
--------------------------- -------------------------- --------------------------
Interest Expense 524 502 662
=========================== ========================== ==========================
INTEREST INCOME:
Food and Equipment Distribution $ 72 $ 90 $ 67
Franchise and Other - - -
--------------------------- -------------------------- --------------------------
Combined 72 90 67
Corporate administration and other 11 38 54
--------------------------- -------------------------- --------------------------
Interest Income 83 128 121
=========================== ========================== ==========================
OPERATING PROFIT :
Food and Equipment Distribution (1) $ 3,071 $ 4,597 $ 4,571
Franchise and Other (1) 2,813 3,442 4,061
Intersegment profit 216 266 224
--------------------------- -------------------------- --------------------------
Combined 6,100 8,305 8,856
Other profit or loss 287 997 120
Less intersegment profit (216) (266) (224)
Corporate administration and other (2,075) (2,013) (1,892)
--------------------------- -------------------------- --------------------------
Income before taxes 4,096 7,023 6,860
=========================== ========================== ==========================
<FN>
(1) Does not include full allocation of corporate administration
</TABLE>
<TABLE>
<CAPTION>
JUNE 27, JUNE 28, JUNE 29,
1999 1998 1997
------------------------- ------------------------- -------------------------
<S> <C> <C> <C>
(In thousands)
CAPITAL EXPENDITURES:
Food and Equipment Distribution $ 391 $ 116 $ 173
Franchise and Other 66 36 179
------------------------- ------------------------- -------------------------
Combined 457 152 352
Corporate administration and other 183 210 276
------------------------- ------------------------- -------------------------
Consolidated capital expenditures 640 362 628
========================= ========================= =========================
ASSETS:
Food and Equipment Distribution $ 10,402 $ 9,963 $ 10,207
Franchise and Other 999 1,700 2,379
------------------------- ------------------------- -------------------------
Combined 11,401 11,663 12,586
Corporate administration and other 7,185 10,110 11,724
------------------------- ------------------------- -------------------------
Consolidated assets 18,586 21,773 24,310
========================= ========================= =========================
GEOGRAPHIC INFORMATION (REVENUES):
United States $ 64,990 $ 66,692 $ 64,922
Foreign countries 1,304 1,948 4,201
------------------------- ------------------------- -------------------------
Consolidated total 66,294 68,640 69,123
========================= ========================= =========================
</TABLE>
NOTE N - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
The following summarizes the unaudited quarterly results of operations for the
fiscal years ended June 27, 1999 and June 28, 1998 (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Quarter Ended
--------------
September 27, December 27, March 28, June 27,
1998 1998 1999 1999
-------------- ------------- ---------- ---------
FISCAL YEAR 1999
REVENUES
<S> <C> <C> <C> <C>
$ 16,584 $ 17,363 $ 16,017 $ 16,330
Gross Profit 793 1,162 1,313 1,352
Net Income 470 705 800 777
Basic earnings per share on net income 0.04 0.06 0.07 0.07
Diluted earnings per share on net income 0.04 0.06 0.07 0.07
Quarter Ended
---------------
September 28, December 28, March 29, June 28,
FISCAL YEAR 1998 1997 1997 1998 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 1,425
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>
SCHEDULE II
PIZZA INN, INC.
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
ADDITIONS
------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COST AND OTHER AT END
OF PERIOD EXPENSE ACCOUNTS DEDUCTIONS (1) OF PERIOD
------------ ----------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 27, 1999
Allowance for doubtful $ 1,007 $ 237 $ - $ (212) $ 1,032
accounts and notes receivable
YEAR ENDED JUNE 28, 1998
Allowance for doubtful $ 1,121 $ 230 $ - $ (344) $ 1,007
accounts and notes receivable
YEAR ENDED JUNE 29, 1997
Allowance for doubtful $ 963 $ 110 $ - $ 48 $ 1,121
accounts and notes receivable
<FN>
(1) Write-off of receivables, net of recoveries.
</TABLE>
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 1999
(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.
<PAGE>
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 Form
10-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 the
Company's Annual Report on Form 10-K for the fiscal year ended June 28, 1998 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 Fargo Bank (Texas), N.A. dated September 14, 1998
(filed as Exhibit 10.2 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 28, 1998 and incorporated herein by reference).
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).*
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 1999.
<PAGE>
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 22 , 1999 By: /s/ Shawn Preator
Shawn Preator
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 22 , 1999
- ---------------------- -------------------------
Steve A. Ungerman
Director and Chairman of the Board
/s/C. Jeffrey Rogers September 22 , 1999
- ---------------------- -------------------------
C. Jeffrey Rogers
Director, Vice Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
/s/Butler E. Powell September 22, 1999
- --------------------- -------------------------
Butler E. Powell
Director
/s/Ramon D. Phillips September 22 , 1999
- ---------------------- -------------------------
Ramon D. Phillips
Director
/s/F. Jay Taylor September 22 , 1999
- ------------------ -------------------------
F. Jay Taylor
Director
/s/Bobby L. Clairday September 22 , 1999
- ---------------------- -------------------------
Bobby L. Clairday
Director
/s/Ronald W. Parker September 22 , 1999
- --------------------- -------------------------
Ronald W. Parker
Director, Executive Vice President and
Chief Operating Officer
(Principal Financial Officer)
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (Nos. 33-56590, 33-71700, as amended by Post-Effective
Amendments No. One and Two, and 33-77617) of Pizza Inn, Inc. of our report dated
August 6, 1999 relating to the financial statements and financial statement
schedule, which appears in this Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Dallas, TX
September 22, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-27-1999
<PERIOD-START> JUN-29-1998
<PERIOD-END> JUN-27-1999
<CASH> 509
<SECURITIES> 0
<RECEIVABLES> 5402
<ALLOWANCES> 952
<INVENTORY> 2393
<CURRENT-ASSETS> 8895
<PP&E> 1754
<DEPRECIATION> 3841
<TOTAL-ASSETS> 18586
<CURRENT-LIABILITIES> 4864
<BONDS> 0
<COMMON> 114
0
0
<OTHER-SE> 5945
<TOTAL-LIABILITY-AND-EQUITY> 18586
<SALES> 60388
<TOTAL-REVENUES> 66294
<CGS> 55265
<TOTAL-COSTS> 55265
<OTHER-EXPENSES> 2741
<LOSS-PROVISION> 237
<INTEREST-EXPENSE> 524
<INCOME-PRETAX> 4096
<INCOME-TAX> 1344
<INCOME-CONTINUING> 2752
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2752
<EPS-BASIC> .24
<EPS-DILUTED> .23
</TABLE>
