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 25, 2000.
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 11, 2000, there were 10,740,753 shares of the registrant's
Common Stock outstanding, and the aggregate market value of registrant's Common
Stock held by non-affiliates was $20,624,859, 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" .
On September 11, 2000, the Pizza Inn system consisted of 484 units,
including three Company operated units (which are used for product testing and
franchisee training, in addition to serving customers) and 481 franchised units.
The domestic units are comprised of 261 full service units, 52
delivery/carry-out units and 94 Express units. The international units are
comprised of 19 full service units, 30 delivery/carry-out units and 28 Express
units. Pizza Inn units are currently located in 20 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 30%, 16% and 10% 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 3,000 and 5,000 square feet
in size and seat 130 to 185 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.
The Self-Serve Buffet restaurant ("Self-Serve") offers items from the full
dine-in menu, and features delivery and carryout and a self-serve buffet and
beverage station. The Self-Serve can be free-standing or located in a strip
center. Slightly larger than a Delco, it ranges in size from 1,500 to 2,000
square feet and seats between 50 to 60 customers.
A fourth version, Pizza Inn Express Serve 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 300 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, $15,000 for a Self-Serve,
$7,500 for a Delco and $3,500 for an Express unit, (ii) an initial franchise
term of 20 years for a Full- Service or Self-Serve 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,
Self-Serve or Delco and 6% of gross sales for an Express unit and (v) required
advertising expenditures of at least 5% of gross sales for a Full-Service,
Self-Serve and 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, Self-Serve or Delco unit,
including the Company, is entitled to membership in PIAP. Nearly all of the
Company's existing franchise agreements for Full-Service, Self-Serve 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 11, 2000, 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 11, 2000, the Company had approximately 217 employees,
including 57 in the Company's corporate office, 80 at its Norco division, and 35
full-time and 45 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 20,667 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.
The Company's current lease for its Distribution facility expires in
December 2000. The Company is currently in negotiations regarding a possible
extension of its lease and is also exploring the possibility of relocating its
distribution facility.
All three of the Company operated Pizza Inn restaurants (all located in
Texas) are 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 2004, 2005, 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 2000.
<PAGE>
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On September 11, 2000, there were 2,397 stockholders of record of the
Company's Common Stock.
The Company's Common Stock is listed on the Small-Cap Market of 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.
Actual Trade
Executed Price
High Low
---- ----
2000
First Quarter Ended 9/26/99 4 2 5/16
Second Quarter Ended 12/26/99 4 1/4 3 1/4
Third Quarter Ended 3/26/00 4 1/8 2 7/8
Fourth Quarter Ended 6/25/00 3 3/4 3 1/8
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
During fiscal 2000 the Board of Directors of the Company declared quarterly
cash dividends of $0.06 per share. For the year ended June 25, 2000 cash
dividends paid were approximately $2.8 million or $0.24 per share. On June 26,
2000, the Company's Board of Directors declared a cash dividend of approximately
$0.6 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 25, 2000, 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 25, June 27, June 28, June 29, June 30,
2000 1999 1998 1997 1996
----------- ---------- --------- ---------- ---------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT DATA:
Total revenues . . . . . . . . . . . . $ 66,304 $ 66,294 $ 68,640 $ 69,123 $ 69,441
Income before taxes. . . . . . . . . . 4,389 4,096 7,023 6,860 5,921
Net income . . . . . . . . . . . . . . 2,884 2,752 4,880 4,528 3,908
Basic earnings per common share. . . . .25 .24 .38 .35 .30
Diluted earnings per common share. . . .25 .23 .36 .33 .28
Dividends declared per common share. . .24 (2) .18 (1) .24 - -
SELECTED BALANCE SHEET DATA:
Total assets . . . . . . . . . . . . . 17,434 18,586 21,773 24,310 24,419
Long-term debt and
capital lease obligations . . . . 10,655 6,944 5,454 7,789 7,902
<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.
(2) On June 26, 2000 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 7, 2000.
</TABLE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL 2000 COMPARED TO FISCAL 1999
Diluted earnings per share increased 9% to $.25 from $0.23 in the
prior year. Net income increased 5% to $2,884,000 from $2,752,000 in the prior
year, on revenues of $66.3 million in each year. Pre-tax income increased 7% to
$4,389,000 from $4,096,000. 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 $6.6 million at June 25,
2000, reduce the income taxes paid by the Company from the 34% statutory rate to
the minimum tax rate of approximately 2%.
Food and supply sales of $58 million for the year decreased slightly as
compared to the same period last year due to higher overall cheese prices in the
prior year. Excluding the change in cheese prices, food and supply sales
increased approximately $2,000,000 reflecting greater chainwide sales.
Franchise revenue, which includes royalties, license fees and income from
area development and foreign master license (collectively, "Territory") sales,
increased 1% or $80,000 in fiscal 2000. Royalty revenue increased $191,000 or 4%
compared to last year, mainly resulting from an increase in domestic chainwide
sales. These increases were offset by $106,000 less of area development
territory sales in fiscal 2000.
Restaurant sales, which consist of revenue generated by Company-owned
stores, for the year increased 3% or $65,000 compared to the same period of the
prior year. Comparable store sales growth at Company-owned stores increased 5%
for the year, which offset the closing of one Delco unit in August 1998.
Other income consists of primarily interest income and non-recurring
revenue items. Other income decreased 22% or $64,000 due to higher vendor
incentives in the prior year, partially offset by increased interest income in
the current year.
Cost of sales decreased slightly compared to the same period last year. As
a percentage of sales, cost of sales remained the same for both years at 91.5%.
Lower cheese prices in fiscal 2000 were offset by higher chainwide sales, as
noted above. These higher chainwide sales required additional distribution
miles resulting in higher fuel costs, compounded even further by higher fuel
prices.
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 27% or $738,000 compared
to last year. This was primarily due to lower marketing expenses and an
increase in allocation of corporate services expenses to the distribution center
resulting in a corresponding decrease in franchise expenses.
General and administrative expenses increased 7% or $251,000 in fiscal
2000. This is a result of higher insurance costs, higher franchise and property
taxes, and payroll costs that were capitalized as software development costs as
required by current accounting pronouncements in the prior year. These
increases were partially offset by lower legal and contract services expenses.
Interest expense increased 43% or $226,000 in the current year as a result
of higher debt levels, capital lease interest expense on new computer equipment,
and higher interest rates.
During fiscal 2000, the Company opened for business a total of 42 new Pizza
Inn franchise units, including 26 domestic and 16 international units.
Domestically, 27 units were closed by franchisees or terminated by the Company
typically because of unsatisfactory standards of operation or performance.
Similarly, 34 Kmart express units and 5 international units were closed.
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 less than 1% or $89,000 during fiscal 1999. As a
percentage of sales, cost of sales increased to 91.5% in fiscal 1999 from 90%
compared to last year. Cost of sales increased primarily due to significantly
higher cheese prices, 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 less than 1% or $4,000
compared to the prior year.
General and administrative expenses increased 16% or $467,000 in fiscal
1999. This is the result of an increase in 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.
FINANCIAL CONDITION
Cash and cash equivalents decreased $25,000 in fiscal 2000. 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 $5.4 million in fiscal 2000. The Company
used the proceeds from these borrowings plus cash from operations to fund the
$6.1 million used to reacquire 1.7 million shares of its own common stock at
prevailing prices on the open market. The Company also used $2.8 million to pay
cash dividends on its common stock in fiscal 2000.
At June 25, 2000 the net deferred tax asset balance was $4.4 million. At
June 25, 2000, the Company has a valuation allowance of $22,027 for general
business tax credits due to expire in 2001. The Company believes that it is
more likely than not that these credits will not be realized. In fiscal 2000,
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 $22,027 related to the
potential expiration of certain tax credit carryforwards. Future taxable income
at the same level as fiscal 2000 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 $6.6
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 34%, 32%, and 31% for fiscal years
2000, 1999 and 1998, 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 $4,578,000 in fiscal 2000 and was used,
in conjunction with additional borrowings, 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 $5.4 million to $11.1 million at
June 25, 2000 from $5.7 million at June 27, 1999.
During fiscal 2000 the Company purchased 1,710,698 shares of its own common
stock on the open market for a total price of $6.1 million. This brings the
total number of shares in treasury to 4,309,409 as of June 25, 2000.
Capital expenditures of $754,000 during fiscal 2000 consist primarily of
modifications and upgrades to the Company's computer system, as well as upgrades
and replacements of desk top computers.
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 continue purchasing its own shares
on the open market during fiscal year 2001. For the period June 26, 2000
through September 11, 2000 the Company has purchased 119,687 shares for a total
amount of $439,326. Anticipated capital expenditures include information system
upgrades and miscellaneous equipment. During fiscal 2000, the Board of
Directors of the Company paid cash dividends on the Company's common stock of
approximately $2.8 million or $0.24 per share. On June 26, 2000 the Company's
Board of Directors declared a quarterly cash dividend payable to shareholders of
record on July 7, 2000 of approximately $0.6 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.
MARKET RISK
The Company has market risk exposure arising from changes in interest
rates. The Company's earnings are affected by changes in short-term interest
rates as a result of borrowings under its Credit Facilities which bear interest
based on floating rates.
At June 25, 2000 the Company had approximately $11.1 million of variable
rate debt obligations outstanding with a weighted average interest rate of
7.26%. A hypothetical 10% change in the effective interest rate for these
borrowings, assuming debt levels at June 25, 2000 would change interest expense
by approximately $83,000.
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.
FORWARD-LOOKING STATEMENT
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>
PIZZA INN, INC.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Schedules:
FINANCIAL STATEMENTS PAGE NO.
Report of Independent Accountants. 14
Consolidated Statements of Operations for the years ended
June 25, 2000, June 27, 1999, and June 28, 1998. 15
Consolidated Balance Sheets at June 25, 2000 and June 27, 1999. 16
Consolidated Statements of Shareholders' Equity for the years
ended June 25, 2000, June 27, 1999, and June 28, 1998. 17
Consolidated Statements of Cash Flows for the years ended June 25, 2000,
June 27, 1999, and June 28, 1998. 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.
<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 25, 2000 and June 27, 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended June 25, 2000, in conformity with accounting principles
generally accepted in the United States of America. 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
auditing standards generally accepted in the United States of America, 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 our opinion.
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
September 18, 2000
<TABLE>
<CAPTION>
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED
----------------------
JUNE 25, JUNE 27, JUNE 28,
REVENUES: 2000 1999 1998
---------------------- ---------------------- -----------------------
<S> <C> <C> <C>
Food and supply sales . . . . . . . $ 58,030 $ 58,101 $ 58,491
Franchise revenue . . . . . . . . . 5,699 5,619 6,468
Restaurant sales. . . . . . . . . . 2,352 2,287 2,684
Other income. . . . . . . . . . . . 223 287 997
---------------------- ---------------------- -----------------------
66,304 66,294 68,640
---------------------- ---------------------- -----------------------
COSTS AND EXPENSES:
Cost of sales . . . . . . . . . . . 55,255 55,265 55,176
Franchise expenses. . . . . . . . . 2,003 2,741 2,745
General and administrative expenses 3,682 3,431 2,964
Provision for bad debt. . . . . . . 225 237 230
Interest expense. . . . . . . . . . 750 524 502
---------------------- ---------------------- -----------------------
61,915 62,198 61,617
---------------------- ---------------------- -----------------------
INCOME BEFORE INCOME TAXES. . . . . . 4,389 4,096 7,023
Provision for income taxes. . . . . 1,505 1,344 2,143
---------------------- ---------------------- -----------------------
NET INCOME. . . . . . . . . . . . . . $ 2,884 $ 2,752 $ 4,880
====================== ====================== =======================
BASIC EARNINGS PER COMMON SHARE . . . 0.25 0.24 0.38
====================== ====================== =======================
DILUTED EARNINGS PER COMMON SHARE . . 0.25 0.23 0.36
====================== ====================== =======================
DIVIDENDS DECLARED PER COMMON SHARE . 0.24 0.18 0.24
====================== ====================== =======================
WEIGHTED AVERAGE COMMON SHARES. . . . 11,316 11,678 12,692
====================== ====================== =======================
WEIGHTED AVERAGE COMMON AND
POTENTIAL DILUTIVE COMMON SHARES. . 11,441 12,154 13,468
====================== ====================== =======================
<FN>
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
PIZZA INN, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 25, JUNE 27,
ASSETS 2000 1999
--------------------- ---------------------
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $ 484 $ 509
Accounts receivable, less allowance for doubtful
accounts of $776 and $808, respectively . . . . . . . . . . . . 4,681 4,588
Notes receivable, current portion, less allowance
for doubtful accounts of $260 and $144, respectively. . . . . . 810 814
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,910 2,393
Deferred taxes, net . . . . . . . . . . . . . . . . . . . . . . . 1,117 1,149
Prepaid expenses and other. . . . . . . . . . . . . . . . . . . . 566 591
--------------------- ---------------------
Total current assets. . . . . . . . . . . . . . . . . . . . . 10,568 10,044
Property, plant and equipment, net. . . . . . . . . . . . . . . . . 1,650 1,754
Property under capital leases, net. . . . . . . . . . . . . . . . . 1,165 1,587
Deferred taxes, net . . . . . . . . . . . . . . . . . . . . . . . . 3,312 4,407
Long-term notes receivable, less
allowance for doubtful accounts of $66 and $80, respectively. . . 262 380
Deposits and other. . . . . . . . . . . . . . . . . . . . . . . . . 734 414
--------------------- ---------------------
$ 17,691 $ 18,586
===================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade. . . . . . . . . . . . . . . . . . . . . $ 2,251 $ 2,641
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . 1,797 1,795
Current portion of long-term debt . . . . . . . . . . . . . . . . 1,250 -
Current portion of capital lease obligations. . . . . . . . . . . 534 428
--------------------- ---------------------
Total current liabilities . . . . . . . . . . . . . . . . . . . 5,832 4,864
LONG-TERM LIABILITIES
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . 9,842 5,700
Long-term capital lease obligations . . . . . . . . . . . . . . . 813 1,244
Other long-term liabilities . . . . . . . . . . . . . . . . . . . 715 719
--------------------- ---------------------
17,202 12,527
--------------------- ---------------------
COMMITMENTS AND CONTINGENCIES (See Note I)
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value; authorized 26,000,000
shares; issued 14,954,789 and 14,927,176 shares, respectively;
outstanding 10,645,380 and 11,407,945 shares, respectively. . . 150 149
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . 7,708 7,321
Loans to officers . . . . . . . . . . . . . . . . . . . . . . . . (2,250) -
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . 13,163 14,375
Treasury stock at cost
Shares in treasury: 4,309,409 and 3,519,231 respectively. . . . (18,282) (15,786)
--------------------- ---------------------
Total shareholders' equity. . . . . . . . . . . . . . . . . . . 489 6,059
--------------------- ---------------------
$ 17,691 $ 18,586
===================== =====================
<FN>
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
ADDITIONAL TREASURY
COMMON STOCK PAID-IN LOANS TO RETAINED STOCK
SHARES AMOUNT CAPITAL OFFICERS EARNINGS AT COST TOTAL
------------- --------- ---------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 29, 1997. . . . . 12,714 $ 145 $ 5,968 $ - $ 11,887 $ (6,779) $11,221
Stock options exercised . . . . 414 4 1,247 - - - 1,251
Tax benefits associated
with stock options. . . . . - - (179) - - - (179)
Dividends paid. . . . . . . . . - - - - (3,052) - (3,052)
Acquisition of treasury stock . (600) - - - - (3,204) (3,204)
Net income. . . . . . . . . . . - - - - 4,880 - 4,880
------------- --------- ---------- ---------- ---------- --------- --------
BALANCE, JUNE 28, 1998. . . . . 12,528 $ 149 $ 7,036 $ - $ 13,715 $ (9,983) $10,917
Stock options exercised . . . . 17 - 52 - - - 52
Tax benefits associated
with stock options. . . . . - - 233 - - - 233
Dividends paid. . . . . . . . . - - - - (2,092) - (2,092)
Acquisition of treasury stock
stock (see Note K) . . . . (1,137) - - - - (5,803) (5,803)
Net income. . . . . . . . . . . - - - - 2,752 - 2,752
------------- --------- ---------- ---------- ---------- --------- --------
BALANCE, JUNE 27, 1999. . . . . 11,408 $ 149 $ 7,321 $ - $ 14,375 $(15,786) $ 6,059
Stock options exercised . . . . 47 1 83 - (1) 61 144
Loans to officers for exercise
of stock options . . . . . 900 - - (2,250) (1,296) 3,546 -
Tax benefits associated
with stock options. . . . . - 303 - - - 303
Employee incentive options. . . - - 1 - - - 1
Dividends paid. . . . . . . . . - - - - (2,799) - (2,799)
Acquisition of treasury stock
stock (see Note K) . . . . (1,710) - - - - (6,103) (6,103)
Net income. . . . . . . . . . . - - - - 2,884 - 2,884
------------- --------- ---------- ---------- ---------- --------- --------
BALANCE, JUNE 25, 2000. . . . . 10,645 $ 150 $ 7,708 $ (2,250) $ 13,163 $(18,282) $ 489
============= ========= ========== ========== ========== ========= ========
<FN>
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED
--------------
JUNE 25, JUNE 27, JUNE 28,
2000 1999 1998
-------------- -------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,884 $ 2,752 $ 4,880
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . 1,210 871 902
Provision for bad debt. . . . . . . . . . . . . . . . . . . 225 237 230
Income from transfer of Pizza Inn stock (see Note K). . . . - (15) (602)
Deferred income taxes . . . . . . . . . . . . . . . . . . . 1,127 1,149 1,787
Changes in assets and liabilities:
Notes and accounts receivable . . . . . . . . . . . . . . . (196) 1,179 25
Inventories . . . . . . . . . . . . . . . . . . . . . . . . (517) (440) 271
Accounts payable - trade. . . . . . . . . . . . . . . . . . (390) 627 532
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . 111 (717) (782)
Deferred franchise revenue. . . . . . . . . . . . . . . . . (109) 5 (388)
Prepaid expenses and other. . . . . . . . . . . . . . . . . 233 193 (587)
-------------- -------------- -------------
CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . . . . . . 4,578 5,841 6,268
-------------- -------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures. . . . . . . . . . . . . . . . . . . . . (754) (640) (362)
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. . . . . . . . . . . . . (754) (640) (297)
-------------- -------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term bank debt and
capital lease obligations . . . . . . . . . . . . . . . . . (5,391) (199) (2,325)
Borrowings of long-term debt. . . . . . . . . . . . . . . . . 10,300 1,000 -
Dividends paid. . . . . . . . . . . . . . . . . . . . . . . . (2,799) (2,092) (2,292)
Proceeds from exercise of stock options . . . . . . . . . . . 144 52 1,251
Purchases of treasury stock . . . . . . . . . . . . . . . . . (6,103) (5,788) (2,602)
-------------- -------------- -------------
CASH USED FOR FINANCING ACTIVITIES. . . . . . . . . . . . . (3,849) (7,027) (5,968)
-------------- -------------- -------------
Net increase (decrease) in cash and cash equivalents. . . . . . . (25) (1,826) 3
Cash and cash equivalents, beginning of period. . . . . . . . . . 509 2,335 2,332
-------------- -------------- -------------
Cash and cash equivalents, end of period. . . . . . . . . . . . . $ 484 $ 509 $ 2,335
-------------- -------------- -------------
<FN>
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
(IN THOUSANDS)
YEAR ENDED
-----------
JUNE 25, JUNE 27, JUNE 28,
2000 1999 1998
----------- --------- ---------
<S> <C> <C> <C>
CASH PAYMENTS FOR:
Interest . . . . . . . . . . . . . . . . . . . $ 582 $ 551 $ 526
Income taxes . . . . . . . . . . . . . . . . . 75 20 160
NONCASH FINANCING AND INVESTING
ACTIVITIES:
Capital lease obligations incurred . . . . . . $ 158 $ 992 $ -
Stock issued to officers in exchange for loans 2,507 - -
</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 25, 2000 the Pizza Inn system consisted of 492 locations, including
three Company operated units and 489 franchised units. On June 25, 2000 the
Company was franchised in 22 states and 14 foreign countries. Domestic units
are located predominantly in the southern half of the United States, with Texas,
North Carolina and Arkansas accounting for approximately 30%, 16%, and 10%,
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 25, 2000.
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 25, 2000, June 27, 1999, and June 28, 1998 provisions of $225,000,
$237,000 and $230,000 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.
SHAREHOLDERS EQUITY:
On June 26, 2000 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 7, 2000.
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 25, 2000, June 27, 1999 and June 28, 1998, 96%, 93% and
84%, 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 25, 2000, June 27, 1999 and June 28, 1998 were $0, $106,000 and $666,000
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 25, 2000, June 27, 1999 and June 28, 1998 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.
During June 2000, the FASB issued Statement No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" ("SFAS 138"), an
amendment of SFAS 133. SFAS 138 is to be adopted concurrently with SFAS 133.
Management is currently evaluating the effects of the adoption of these
statements.
NOTE B - PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment and property under capital leases consist of the
following (in thousands):
<TABLE>
<CAPTION>
JUNE 25, JUNE 27,
<S> <C> <C>
2000 1999
---------------------- ----------------------
Property, plant and equipment:
Equipment, furniture and fixtures $ 4,522 $ 4,259
Leasehold improvements. . . . . . 1,482 1,336
---------------------- ----------------------
6,004 5,595
Less: accumulated depreciation . (4,354) (3,841)
---------------------- ----------------------
1,650 1,754
====================== ======================
Property under capital leases:
Real Estate . . . . . . . . . . . $ 118 $ 118
Equipment . . . . . . . . . . . . 2,421 2,393
---------------------- ----------------------
2,539 2,511
Less: accumulated amortization . (1,374) (924)
---------------------- ----------------------
1,165 1,587
====================== ======================
</TABLE>
Depreciation and amortization expense was $1,210,000, $871,000, and $902,000 for
the years ended June 25, 2000, June 27, 1999, and June 28, 1998, respectively.
NOTE C - ACCRUED EXPENSES:
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 25, JUNE 27,
<S> <C> <C>
2000 1999
--------------------- ---------------------
Compensation. . . . . . . . . . . $ 1,018 $ 944
Legal and other professional fees 100 116
Deferred franchise revenue. . . . 71 242
Other . . . . . . . . . . . . . . 608 493
--------------------- ---------------------
1,797 1,795
===================== =====================
</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 is collateralized by essentially all of the
Company's assets.
In March 2000, the Company amended the agreement with its current lender to
extend the term of its existing $9.5 million revolving credit line through March
2002, to modify certain financial covenants, and to enter into a $5,000,000 term
note (described below). Amounts outstanding under the revolving credit line were
$6.3 million and $5.7 million at fiscal year end 2000 and 1999, 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 25, 2000, the Company was in compliance with
all of its debt covenants. A 0.375% to 0.5% annual commitment fee is payable on
any unused portion of the revolving credit line. For the year ending June 25,
2000 and June 27, 1999, the Company's interest rates were 7.625% and 6.1675%,
respectively (using a Eurodollar rate basis).
The $5,000,000 term note had an outstanding balance of $4.8 million at June 25,
2000 and required monthly principal payments of $104,000 with the balance
maturing on March 31, 2004. Interest on the term loan is also payable monthly.
Interest is provided for at a rate equal to prime less an interest rate margin
of .75%, or, at the Company's option, of the Eurodollar rate plus 1.5%. In
accordance with the agreement, the Company is obligated in fiscal year 2001 to
cause at least 50% of the outstanding principal amount to be subject to a fixed
interest rate. At June 25, 2000, the Company's interest rate was 7.625 % (using
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 for
$230,000 to reinsurers to secure loss reserves. At June 25, 2000 and June 27,
1999 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.
NOTE E - INCOME TAXES:
Income tax expense consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 25, JUNE 27, JUNE 28,
<S> <C> <C> <C>
2000 1999 1998
--------------------- --------------------- ---------------------
Federal:
Current. . . . . . . . . $ 378 $ 195 $ 356
Deferred . . . . . . . . 1,127 1,149 1,787
--------------------- --------------------- ---------------------
Provision for income taxes 1,505 1,344 2,143
===================== ===================== =====================
</TABLE>
The effective federal income tax rate did not vary from the statutory rate of
34% for the year ended June 25, 2000. However, the effective federal income tax
rate varied from the statutory rate for the years ended June 25, 2000, June 27,
1999, and June 28, 1998 as follows:
<TABLE>
<CAPTION>
JUNE 25, JUNE 27, JUNE 28,
2000 1999 1998
---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
(in thousands)
Federal income taxes based on 34%
of book income. . . . . . . . . $ 1,492 $ 1,393 $ 2,388
Permanent adjustments . . . . . . (46) (290) (102)
Change in valuation allowance . . (182) (535) (638)
Expired credits . . . . . . . . . 241 776 375
Other . . . . . . . . . . . . . . - - 120
---------------------- ---------------------- ----------------------
1,505 1,344 2,143
====================== ====================== ======================
</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 25, JUNE 27,
2000 1999
---------------------- ----------------------
<S> <C> <C>
Reserve for bad debt . . $ 415 $ 391
Depreciable assets . . . 631 610
Deferred fees. . . . . . 55 72
Other reserves . . . . . 94 88
NOL carryforwards. . . . 2,246 3,510
Credit carryforwards . . 1,010 1,089
---------------------- ----------------------
Gross deferred tax asset $ 4,451 $ 5,760
Valuation allowance. . . (22) (204)
---------------------- ----------------------
Net deferred tax asset . 4,429 5,556
====================== ======================
</TABLE>
As of June 25, 2000, the Company had $6.6 million of net operating loss
carryforwards that expire in 2005. The Company also had $22,000 of general
business credit carryforwards expiring in 2001, $263,000 of foreign tax credit
carryforwards expiring between 2003 and 2005, and $725,000 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 2000, $241,000 of general business
credits expired before they could be utilized.
Under the Internal Revenue Code, the utilization of net operating loss and
credit carryforwards could be limited if certain changes in ownership of the
Company's Common Stock were to occur. The Company's Articles of Incorporation
contain certain restrictions which are intended to reduce the likelihood that
such changes in ownership would occur.
NOTE F - LEASES:
All of the real property occupied by the Company operated restaurants is leased
for initial terms ranging from five to twenty-five years with renewal options
ranging from three 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 20,677 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.
Future minimum rental payments under non-cancelable leases with initial or
remaining terms of one year or more at June 25, 2000 are as follows (in
thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
<S> <C> <C>
LEASES LEASES
--------- ----------
2001. . . . . . . . . . . . . . . . . . . $ 625 $ 1,259
2002. . . . . . . . . . . . . . . . . . . 632 1,145
2003. . . . . . . . . . . . . . . . . . . 107 745
2004. . . . . . . . . . . . . . . . . . . 108 345
2005. . . . . . . . . . . . . . . . . . . 12 166
Thereafter. . . . . . . . . . . . . . . . 26 161
--------- ------
$ 1,510. . .$ 3,821
=========
Less amount representing interest . . . . (163)
---------
Present value of total obligations under
capital leases. . . . . . . . . . . . 1,347
Less current portion. . . . . . . . . . . (534)
---------
Long-term capital lease obligations . . . $ 813
=========
</TABLE>
Rental expense consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 25, JUNE 27, JUNE 28,
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Minimum rentals. . $ 1,438 $ 1,339 $ 1,193
Contingent rentals 15 13 15
Sublease rentals . (96) (99) (87)
------------ ------------ ------------
$ 1,357 1,253 1,121
============ ============ ============
</TABLE>
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 the 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% of up to 6% of the employee's contribution. From January 1, 1999 through
July 31, 2000, the Company contributed 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. Effective August 1, 2000, the Company contributes on behalf of
each participating employee an amount equal to 50% of up to 6% of the employee's
contribution. Separate accounts are maintained with respect to contributions
made on behalf of each participating employee. The plan is subject to the
provisions of the Employee Retirement Income Security Act and is a profit
sharing plan as defined in Section 401 of the Code. The Company is the
administrator of the plan. Participants may direct elective deferrals and
earnings thereon and employer matching contributions and earnings thereon prior
to January 1, 1998. Effective January 1, 1998, employer matching contributions
and earnings thereon are invested in Common Stock of the Company.
For the years ended June 25, 2000, June 27, 1999, and June 28, 1998, total
matching contributions to the tax advantaged savings plan by the Company on
behalf of participating employees were $185,591, $205,922, and $116,862,
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 periods ranging from
six months to three years with exercise periods up to eight 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. Elected Directors who
are not employed by the Company are eligible to receive stock options under the
1993 Directors Plan. Options for common stock equal to twice the number of
shares of common stock acquired during the previous fiscal year are granted, up
to 20,000 shares per year, to each outside director. 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 various vesting periods ranging from one to four years with
exercise periods up to nine years. A total of 200,000 shares of Company Common
Stock are authorized to be issued pursuant to the 1993 Directors Plan.
A summary of stock option transactions under all of the Company's stock option
plans and information about fixed-price stock options follows:
SUMMARY OF STOCK OPTION TRANSACTIONS
<TABLE>
<CAPTION>
June 25, 2000 June 27, 1999 June 28, 1998
--------------- -------------- ---------------
Weighted- Weighted- Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------- -------------- --------------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 3,247,972 $ 3.50 2,675,366 $ 3.27 3,143,639 $ 3.08
Granted. . . . . . . . . . . . . 94,000 $ 3.57 655,290 $ 4.79 110,000 $ 4.85
Exercised. . . . . . . . . . . . (947,913) $ 2.53 (17,084) $ 2.97 (413,773) $ 2.14
Canceled . . . . . . . . . . . . (270,753) $ 4.38 (65,600) $ 4.68 (164,500) $ 3.58
--------------- -------------- --------------- ------ ---------- ------
Outstanding at end of year . . . 2,123,306 $ 3.91 3,247,972 $ 3.50 2,675,366 $ 3.27
=============== ============== =============== ====== ========== ======
Exercisable at end of year . . . 1,872,616 $ 3.88 2,745,448 $ 3.42 2,274,916 $ 3.15
Weighted-average fair value of
options granted during the year. $ 0.75 $ 1.30 $ 1.25
</TABLE>
FIXED PRICE STOCK OPTIONS
The following table provides information on options outstanding and options
exercisable at June 25, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- --------------------
Weighted-
Average
Shares Remaining Weighted- Shares Weighted-
Range of Outstanding Contractual Average Exercisable Average
Exercise Prices at June 25, 2000 Life (Years) Exercise Price at June 25, 2000 Exercise Price
---------------- ------------------- -------------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
2.25 - 3.25 . . 302,533 1.05 $ 2.63 264,833 $ 2.56
3.33 - 4.25 . . 1,279,783 3.00 $ 3.77 1,177,783 $ 3.78
4.38 - 5.25 . . 540,990 4.08 $ 4.96 430,000 $ 4.94
------------------- ----------------
2.25 - 5.25 . . 2,123,306 2.99 $ 3.91 1,872,616 $ 3.88
=================== ================
</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
1998, 1999 and 2000 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 5.6% to 6.6%, 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.
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 25, 2000 June 27, 1999 June 28, 1998
-------------- -------------- --------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
-------------- -------------- -------------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Net income . . . . . . . . $ 2,884 $ 2,872 $ 2,752 $ 2,291 $ 4,880 $ 4,460
Basic earnings per share . $ 0.25 $ 0.25 $ 0.24 $ 0.20 $ 0.38 $ 0.35
Diluted earnings per share $ 0.25 $ 0.25 $ 0.23 $ 0.19 $ 0.36 $ 0.33
</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.
On April 30, 1998, Mid-South Pizza Development, Inc., an area developer of the
Company ("Mid-South") entered into a promissory note whereby, among other
things, Mid-South borrowed $1,330,000 from a third party lender (the "Loan").
The proceeds of the Loan, less transaction costs, were used by Mid-South to
purchase area developer rights from the Company for certain counties in Kentucky
and Tennessee. As part of the terms and conditions of the Loan, the Company was
required to guaranty the obligations of Mid-South under the Loan. In the event
such guaranty ever required payment, the Company has personal guarantees from
certain Mid-South principals and a security interest in certain personal
property.
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 14 restaurants located in Arkansas. Purchases by this franchisee comprised
5% of the Company's total food and supply sales in fiscal 2000. Royalties and
license fees and area development sales from this franchisee comprised 3% of the
Company's total franchise revenues in fiscal 2000. 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 25, 2000, his
accounts and note payable to the Company were $777,575.
The Company believes the above transactions were at the same prices and on the
same terms available to non-related third parties.
In October 1999, the Company loaned $2,506,754 to certain officers of the
Company in the form of promissory notes due in June 2004 to acquire 900,000
shares of the Company's common stock through the exercise of vested stock
options previously granted to them in 1995 by the Company. The notes bear
interest at the same floating interest rate the Company pays on its revolving
credit line with Wells Fargo and are collaterized by certain real property and
existing Company stock owned by the officers. The notes are reflected as a
reduction to stockholders' equity.
In July 2000, the Company loaned $302,581 to an officer of the Company in the
form of a promissory note due in June 2004 to acquire 200,000 shares of the
Company's common stock through the exercise of vested stock options previously
granted in 1995 by the Company. The note bears interest at the same floating
interest rate the Company pays on its revolving credit line with Wells Fargo and
is collaterized by certain real property and existing Company stock owned by the
officer. The note will be reflected as a reduction to stockholders' equity.
NOTE K - TREASURY STOCK:
For the period of September 1995 through June 2000, the Company purchased
4,440,939 shares of its own Common Stock from time to time on the open market at
a total cost of $19.5 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 29%.
In June 1995, the Company adopted the par value method of accounting for
treasury share purchases with the intent to retire the shares purchased. In
December 1999, the Company changed its method of accounting for treasury shares
purchased to the cost method because it is now the Company's intent to reissue a
portion of the shares held in treasury. Accordingly, retained earnings and
additional paid in capital as of June 27, 1999, June 28, 1998, and June 29, 1997
were adjusted by $5,361,115 and $431,166, $2,975,817 and $211,940, and
$1,787,320 and $131,516, respectively.
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.
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
<S> <C> <C> <C>
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- ----------
YEAR ENDED JUNE 25, 2000
BASIC EPS
Income Available to Common Shareholders . . . $ 2,884 11,316 $ 0.25
Effect of Dilutive Securities - Stock Options 125
------------
DILUTED EPS
Income Available to Common Shareholders
& Assumed Conversions . . . . . . . . . . . . $ 2,884 11,441 $ 0.25
============ ============= ==========
YEAR ENDED JUNE 27, 1999
BASIC EPS
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
============ ============= ==========
</TABLE>
Options to purchase 1,194,773 shares of common stock at exercise prices ranging
from $3.56 to $5.50 per share were outstanding at June 25, 2000 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. Options to
purchase 2,002,106 shares of common stock during fiscal year 1999 were excluded
from the computation of EPS in 1999 because their inclusion would result in an
anti-dilutive effect on EPS. No options were excluded from the calculation of
diluted EPS during fiscal year 1998.
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 nonrecurring
items.
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 25, 2000, June 27, 1999, and June
28, 1998:
<TABLE>
<CAPTION>
JUNE 25, JUNE 27, JUNE 28,
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
(In thousands)
NET SALES AND OPERATING REVENUES:
Food and Equipment Distribution . . $ 58,030 $ 58,101 $ 58,491
Franchise and Other . . . . . . . . 8,051 7,906 9,152
Intersegment revenues . . . . . . . 828 847 1,015
---------- ---------- ----------
Combined. . . . . . . . . . . . . 66,909 66,854 68,658
Other revenues. . . . . . . . . . . 223 287 997
Less intersegment revenues. . . . . (828) (847) (1,015)
---------- ---------- ----------
Consolidated revenues . . . . . . $ 66,304 $ 66,294 $ 68,640
========== ========== ==========
DEPRECIATION AND AMORTIZATION:
Food and Equipment Distribution . . $ 874 $ 579 $ 491
Franchise and Other . . . . . . . . 120 129 272
---------- ---------- ----------
Combined. . . . . . . . . . . . . 994 708 763
Corporate administration and other. 216 163 139
---------- ---------- ----------
Depreciation and amortization . . $ 1,210 $ 871 $ 902
========== ========== ==========
INTEREST EXPENSE:
Food and Equipment Distribution . . $ 495 $ 344 $ 325
Franchise and Other . . . . . . . . 6 8 8
---------- ---------- ----------
Combined. . . . . . . . . . . . . 501 352 333
Corporate administration and other. 249 172 169
---------- ---------- ----------
Interest Expense. . . . . . . . . $ 750 $ 524 $ 502
========== ========== ==========
INTEREST INCOME:
Food and Equipment Distribution . . $ 66 $ 72 $ 90
Franchise and Other . . . . . . . . - - -
---------- ---------- ----------
Combined. . . . . . . . . . . . . 66 72 90
Corporate administration and other. 126 11 38
---------- ---------- ----------
Interest Income . . . . . . . . . $ 192 $ 83 $ 128
========== ========== ==========
OPERATING PROFIT:
Food and Equipment Distribution (1) $ 2,709 $ 3,071 $ 4,597
Franchise and Other (1) . . . . . . 3,790 2,813 3,442
Intersegment profit . . . . . . . . 225 216 266
---------- ---------- ----------
Combined. . . . . . . . . . . . . 6,724 6,100 8,305
Other revenue . . . . . . . . . . . 223 287 997
Less intersegment profit. . . . . . (225) (216) (266)
Corporate administration and other. (2,333) (2,075) (2,013)
---------- ---------- ----------
Income before taxes . . . . . . . $ 4,389 $ 4,096 $ 7,023
========== ========== ==========
<FN>
(1) Does not include full allocation of corporate administration
</TABLE>
<TABLE>
<CAPTION>
JUNE 25, JUNE 27, JUNE 28,
<S> <C> <C> <C>
2000 1999 1998
--------- --------- ---------
(In thousands)
CAPITAL EXPENDITURES:
Food and Equipment Distribution. . . $ 413 $ 391 $ 116
Franchise and Other. . . . . . . . . 138 66 36
--------- --------- ---------
Combined . . . . . . . . . . . . . 551 457 152
Corporate administration and other . 203 183 210
--------- --------- ---------
Consolidated capital expenditures. $ 754 $ 640 $ 362
========= ========= =========
ASSETS:
Food and Equipment Distribution. . . $ 10,022 $ 10,402 $ 9,963
Franchise and Other. . . . . . . . . 1,361 999 1,700
--------- --------- ---------
Combined . . . . . . . . . . . . . . 11,383 11,401 11,663
Corporate administration and other . 6,051 7,185 10,110
--------- --------- ---------
Consolidated assets. . . . . . . . . $ 17,434 $ 18,586 $ 21,773
========= ========= =========
GEOGRAPHIC INFORMATION (REVENUES):
United States. . . . . . . . . . . . $ 65,047 $ 64,990 $ 66,692
Foreign countries. . . . . . . . . . 1,257 1,304 1,948
--------- --------- ---------
Consolidated total . . . . . . . . $ 66,304 $ 66,294 $ 68,640
========= ========= =========
</TABLE>
NOTE N - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
The following summarizes the unaudited quarterly results of operations for the
fiscal years ended June 25, 2000 and June 27, 1999 (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Quarter Ended
--------------
<S> <C> <C> <C> <C>
September 26, December 26, March 26, June 25,
1999 1999 2000 2000
-------------- ------------- ---------- ---------
FISCAL YEAR 2000
Revenues . . . . . . . . . . . . . . . . $ 17,394 $ 16,331 $ 15,967 $ 16,612
Gross Profit . . . . . . . . . . . . . . 1,276 1,308 1,207 1,348
Net Income . . . . . . . . . . . . . . . 747 745 673 719
Basic earnings per share on net income . 0.07 0.06 0.06 0.07
Diluted earnings per share on net income 0.07 0.06 0.06 0.07
Quarter Ended
----------------------------------------
September 27,. . . . . . . . . . . . . December 27, March 28, June 27,
1998 1998 1999 1999
-------------- ------------- ---------- ---------
FISCAL YEAR 1999
Revenues . . . . . . . . . . . . . . . . $ 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
</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 25, 2000
Allowance for doubtful. . . . . . . . . . . . . $ 1,032 $ 225 $ - $ (155) $ 1,102
accounts and notes receivable
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
<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 2000
(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 11, 2000.
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 Second amended and Restated Loan Agreement between the
Company and Wells Fargo Bank (Texas), N.A. dated March 31, 2000 (filed as
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 26, 2000 and incorporated herein by reference).
10.2 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).
10.3 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.)
10.4 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).*
10.5 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).*
10.6 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).*
10.7 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).*
10.8 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 2000.
<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 21, 2000 By: /s/ Shawn Preator
Shawn Preator
Vice President
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 21, 2000
---------------------- --------------------
Steve A. Ungerman
Director and Chairman of the Board
/s/C. Jeffrey Rogers September 21, 2000
---------------------- --------------------
C. Jeffrey Rogers
Director, Vice Chairman
Chief Executive Officer
(Principal Executive Officer)
/s/Butler E. Powell September 21, 2000
--------------------- --------------------
Butler E. Powell
Director
/s/Ramon D. Phillips September 21, 2000
---------------------- --------------------
Ramon D. Phillips
Director
/s/F. Jay Taylor September 21, 2000
------------------ --------------------
F. Jay Taylor
Director
/s/Bobby L. Clairday September 21, 2000
---------------------- --------------------
Bobby L. Clairday
Director
/s/Ronald W. Parker September 21, 2000
--------------------- --------------------
Ronald W. Parker
Director, President and
Chief Operating Officer
(Principal Financial Officer)
<PAGE>
