SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 23, 2001.
-------------------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO
_______________.
COMMISSION FILE NUMBER 0-12919
PIZZA INN, INC.
(EXACT NAME OF REGISTRANT IN ITS CHARTER)
MISSOURI 47-0654575
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3551 PLANO PARKWAY
THE COLONY, TEXAS 75056
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES,
INCLUDING ZIP CODE)
(469) 384-5000
(REGISTRANT'S TELEPHONE NUMBER,
INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR SUCH SHORTER PERIOD THAT THE REGISTRANT
WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTIONS 12, 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY A COURT. YES [X] NO
AT FEBRUARY 1, 2002, AN AGGREGATE OF 10,057,874 SHARES OF THE REGISTRANT'S
COMMON STOCK, PAR VALUE OF $.01 EACH (BEING THE REGISTRANT'S ONLY CLASS OF
COMMON STOCK), WERE OUTSTANDING.
PIZZA INN, INC.
Index
-----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
- -------- --------------------- ----
Consolidated Statements of Operations for the three months and six months
ended December 23, 2001 and December 24, 2000 3
Consolidated Balance Sheets at December 23, 2001 and June 24, 2001 4
Consolidated Statements of Cash Flows for the six months ended
December 23, 2001 and December 24, 2000 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
- ------- -------------------------------------------
Financial Condition and Results of Operations 11
---------------------------------------------
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
- -------- ------------------
Item 4. Submission of Matters to a Vote of Security Holders 14
- -------- -----------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K 14
- -------- -------------------------------------
Signatures 15
PART 1. FINANCIAL INFORMATION
1. Financial Statements
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- -----------------
DECEMBER 23, DECEMBER 24, DECEMBER 23, DECEMBER 24,
REVENUES: 2001 2000 2001 2000
------------------- ----------------- -------------- -------------
Food and supply sales. . . . . . . . . . . . . $ 13,637 $ 13,502 $ 28,368 $ 28,230
Franchise revenue. . . . . . . . . . . . . . . 1,316 1,338 2,696 2,739
Restaurant sales . . . . . . . . . . . . . . . 517 582 1,091 1,151
Other income . . . . . . . . . . . . . . . . . 119 98 274 216
------------------- ----------------- -------------- -------------
15,589 15,520 32,429 32,336
------------------- ----------------- -------------- -------------
COSTS AND EXPENSES:
Cost of sales. . . . . . . . . . . . . . . . . 12,903 12,710 27,186 26,635
Franchise expenses . . . . . . . . . . . . . . 525 597 1,067 1,181
General and administrative expenses. . . . . . 1,146 1,163 2,148 2,183
Interest expense . . . . . . . . . . . . . . . 156 248 275 503
------------------- ----------------- -------------- -------------
14,730 14,718 30,676 30,502
------------------- ----------------- -------------- -------------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . 859 802 1,753 1,834
Provision for income taxes . . . . . . . . . . 292 273 596 659
------------------- ----------------- -------------- -------------
NET INCOME . . . . . . . . . . . . . . . . . . . $ 567 $ 529 $ 1,157 $ 1,175
=================== ================= ============== =============
BASIC EARNINGS PER COMMON SHARE. . . . . . . . . $ 0.06 $ 0.05 $ 0.11 $ 0.11
=================== ================= ============== =============
DILUTED EARNINGS PER COMMON SHARE. . . . . . . . $ 0.06 $ 0.05 $ 0.11 $ 0.11
=================== ================= ============== =============
DIVIDENDS DECLARED PER COMMON SHARE. . . . . . . $ - $ 0.06 $ - $ 0.12
=================== ================= ============== =============
WEIGHTED AVERAGE COMMON SHARES . . . . . . . . . 10,067 10,723 10,127 10,729
=================== ================= ============== =============
WEIGHTED AVERAGE COMMON AND
POTENTIAL DILUTIVE COMMON SHARES . . . . . . . 10,068 10,725 10,134 10,735
=================== ================= ============== =============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED . . . . . . . . . SIX MONTHS ENDED
------------------------------------------------ -------------------
DECEMBER 23, . . . . DECEMBER 24, DECEMBER 23, DECEMBER 24,
2001 2000 2001 2000
------------------- ----------------- -------------- -------------
Net Income . . . . . . . . . . . . . . . . . . . $ 567 $ 529 $ 1,157 $ 1,175
Interest rate swap gain (loss)
(net of tax of ($48) and $57, respectively) . 93 - (110) -
------------------- ----------------- -------------- -------------
Comprehensive Income . . . . . . . . . . . . . . $ 660 $ 529 $ 1,047 $ 1,175
=================== ================= ============== =============
<FN>
See accompanying Notes to Consolidated Financial Statements.
PIZZA INN, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 23, JUNE 24,
ASSETS 2001 2001
-------------- ----------
(UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . $ 264 $ 540
Accounts receivable, less allowance for doubtful
accounts of $724 and $729, respectively. . . . . . . . . . . 5,216 4,839
Notes receivable, current portion, less allowance
for doubtful accounts of $177 and $263, respectively . . . . 861 958
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . 2,102 2,063
Deferred taxes, net. . . . . . . . . . . . . . . . . . . . . . 1,223 1,285
Prepaid expenses and other . . . . . . . . . . . . . . . . . . 495 578
-------------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . 10,161 10,263
Property, plant and equipment, net . . . . . . . . . . . . . . . 13,717 6,594
Property under capital leases, net . . . . . . . . . . . . . . . 395 576
Deferred taxes, net. . . . . . . . . . . . . . . . . . . . . . . 1,455 1,897
Long-term notes receivable, less
allowance for doubtful accounts of $5 and $9,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . - 9
Deposits and other . . . . . . . . . . . . . . . . . . . . . . . 416 533
-------------- ----------
$ 26,144 $ 19,872
============== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade . . . . . . . . . . . . . . . . . . . $ 3,520 $ 3,245
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . 1,957 2,000
Current portion of long-term debt. . . . . . . . . . . . . . . 1,250 1,250
Current portion of capital lease obligations . . . . . . . . . 355 486
-------------- ----------
Total current liabilities. . . . . . . . . . . . . . . . . . 7,082 6,981
LONG-TERM LIABILITIES
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . 16,517 10,934
Long-term capital lease obligations. . . . . . . . . . . . . . 193 227
Other long-term liabilities. . . . . . . . . . . . . . . . . . 1,012 865
-------------- ----------
24,804 19,007
-------------- ----------
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value; authorized 26,000,000 shares;
issued 14,955,469 and 14,955,119 shares, respectively
outstanding 10,057,838 and 10,319,638 shares, respectively. 150 150
Additional paid-in capital . . . . . . . . . . . . . . . . . . 7,824 7,823
Loans to officers. . . . . . . . . . . . . . . . . . . . . . . (2,325) (2,325)
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . 15,358 14,201
Accumulated other comprehensive loss . . . . . . . . . . . . . (183) (73)
Treasury stock at cost
Shares in treasury: 4,897,631 and 4,635,481 respectively . . (19,484) (18,911)
-------------- ----------
Total shareholders' equity . . . . . . . . . . . . . . . . . 1,340 865
-------------- ----------
$ 26,144 $ 19,872
============== ==========
<FN>
See accompanying Notes to Consolidated Financial Statements.
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
------------------
DECEMBER 23, DECEMBER 24,
2001 2000
------------------ --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,157 $ 1,175
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . 635 676
Provision for bad debt. . . . . . . . . . . . . . . . . . . . 100 125
Utilization of pre-reorganization net operating . . . . . . . 504 544
loss carryforwards
Changes in assets and liabilities:
Notes and accounts receivable . . . . . . . . . . . . . . . . (371) (541)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . (39) 471
Accounts payable - trade. . . . . . . . . . . . . . . . . . . (314) 13
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . (153) 119
Prepaid expenses and other. . . . . . . . . . . . . . . . . . 246 311
------------------ --------------
CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . . . . . . . 1,765 2,893
------------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . (6,842) (2,067)
------------------ --------------
CASH USED FOR INVESTING ACTIVITIES. . . . . . . . . . . . . . (6,842) (2,067)
------------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term bank debt . . . . . . . . . . . . . . . 6,634 2,235
Repayments of long-term bank debt and capital lease obligations (1,260) (1,787)
Dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . - (1,243)
Proceeds from exercise of stock options . . . . . . . . . . . . - 298
Officer loan payment. . . . . . . . . . . . . . . . . . . . . . - 165
Purchases of treasury stock . . . . . . . . . . . . . . . . . . (573) (575)
------------------ --------------
CASH USED FOR FINANCING ACTIVITIES. . . . . . . . . . . . . . 4,801 (907)
------------------ --------------
Net decrease in cash and cash equivalents . . . . . . . . . . . . (276) (81)
Cash and cash equivalents, beginning of period. . . . . . . . . . 540 484
------------------ --------------
Cash and cash equivalents, end of period. . . . . . . . . . . . . $ 264 $ 403
------------------ --------------
<FN>
See accompanying Notes to Consolidated Financial Statements.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
-----------------
DECEMBER 23, DECEMBER 24,
2001 2000
----------------- -------------
CASH PAYMENTS FOR:
Interest . . . . . . . . . . . . . . . . . . . $ 445 $ 525
Income taxes . . . . . . . . . . . . . . . . . 50 25
NONCASH FINANCING AND INVESTING
ACTIVITIES:
Stock issued to officers in exchange for loans $ - $ 303
Capital lease obligations incurred . . . . . . 156 -
<FN>
See accompanying Notes to Consolidated Financial Statements.
PIZZA INN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) The accompanying consolidated financial statements of Pizza Inn, Inc.
(the "Company") have been prepared without audit pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in the financial statements have been
omitted pursuant to such rules and regulations. The consolidated financial
statements should be read in conjunction with the notes to the Company's audited
consolidated financial statements in its Form 10-K for the fiscal year ended
June 24, 2001. Certain prior year amounts have been reclassified to conform with
current year presentation.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary to fairly present the Company's
financial position and results of operations for the interim periods. All
adjustments contained herein are of a normal recurring nature.
(2) The Company entered into an agreement effective December 21, 2001 with
its current lender to extend the term of its existing $9.5 million revolving
credit line through December 31, 2003, and to modify certain financial
covenants. 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 LIBOR 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 December 23, 2001, the revolving credit line had
an outstanding balance of $8.0 million.
The Company entered into a term note effective March 31, 2000 with its current
lender. The $5,000,000 term note had an outstanding balance of $2.9 million at
December 23, 2001 and requires 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 0.75% or, at the Company's option, at the LIBOR rate plus 1.5%.
The Company entered into an agreement effective December 28, 2000, as amended,
with its current lender to provide up to $8.125 million of financing for the
construction of the Company's new headquarters, training center and distribution
facility. The construction loan converted to a term loan effective January 31,
2002 with the unpaid principal balance to mature on December 28, 2007. The term
loan will amortize over a term of twenty years, with principal and interest
payments due monthly. Interest is provided for at a rate equal to prime less an
interest rate margin of .75% or, at the Company's option, to the LIBOR rate plus
1.5%. The Company, to fulfill bank requirements, has caused the outstanding
principal amount to be subject to a fixed interest rate after the conversion
date. As of December 23, 2001, the Company had borrowed $6.8 million for the
construction in progress of its new headquarters. As of February 1, 2002 the
Company had borrowed $8.125 million for its new headquarters.
(3) Effective February 27, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities". The Company entered into an interest rate swap on that
date, as amended, designated as a cash flow hedge, to manage interest rate risk
relating to the financing of the construction of the Company's new headquarters
and to fulfill bank requirements. The Company entered into an agreement
effective December 11, 2001 to modify the termination date and the fixed pay
rate of the interest rate swap. The swap agreement has a notional principal
amount of $8.125 million with a fixed pay rate of 5.84% which began November 1,
2001 and will end November 19, 2007. SFAS No. 133 requires that for cash flow
hedges, which hedge the exposure to variable cash flows of a forecasted
transaction, the effective portion of the derivative's gain or loss be initially
reported as a component of other comprehensive income in the equity section of
the balance sheet and subsequently reclassified into earnings when the
forecasted transaction affects earnings. Any ineffective portion of the
derivative's gain or loss is reported in earnings immediately. At December 23,
2001, the Company recorded its interest rate swap with a fair value of $278,000
in other liabilities, with the offset recorded in the other comprehensive income
component of stockholder's equity and in deferred income taxes. At December 23,
2001, there was no hedge ineffectiveness. The Company's expectation is that the
hedging relationship will be highly effective at achieving offsetting changes in
cash flows.
(4) 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.
(5) The Company capitalizes interest on borrowings during the active
construction period of major capital projects. Capitalized interest is added to
the cost of the underlying asset and will be amortized over the useful life of
the asset. For the six months ended December 23, 2001 interest of $179,000 was
capitalized in connection with the construction of the Company's new
headquarters, training center, and distribution facility.
(6) On January 18, 2002 the Company was served with a lawsuit filed by
Blakely-Witt & Associates, Inc. alleging Pizza Inn sent or caused to be sent
unsolicited facsimile advertisements. The plaintiff has requested this matter be
certified as a class action. We have referred this matter to our insurers and
plan to vigorously defend our position in this litigation. We cannot assure you
that we will prevail in this lawsuit and our defense could be costly and consume
the time of our management. We are unable to predict the outcome of this case.
However, an adverse resolution of this matter could materially affect our
financial position and results of operations.
(7) At December 23, 2001 interest payments on the Company's note receivable
from an officer of the Company were past due, therefore, the note receivable was
technically in default. The Company intends to enforce this obligation under
the relevant terms of the Promissory Note and the Pledge Agreement. The Company
acknowledges that the current collateral on this note receivable may not be
sufficient in the event of nonpayment of the note and can, to the extent legally
permissible, utilize future amounts owed to the officer as an offset for the
amounts due under this obligation. The Company believes that the note
receivable, including accrued but unpaid interest, is recoverable through the
terms and remedies specified in the Pledge Agreement. The note receivable is
reflected as reduction to stockholders' equity.
(8) The following table shows the reconciliation of the numerator and
denominator of the basic EPS calculation to the numerator and denominator of the
diluted EPS calculation (in thousands, except per share amounts).
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
THREE MONTHS ENDED DECEMBER 23, 2001
BASIC EPS
Income Available to Common Shareholders $ 567 10,067 $ 0.06
Effect of Dilutive Securities - Stock Options 1
DILUTED EPS --------
Income Available to Common Shareholders
& Assumed Conversions $ 567 10,068 $ 0.06
======== =========== ========
THREE MONTHS ENDED DECEMBER 24, 2000
BASIC EPS
Income Available to Common Shareholders $ 529 10,723 $ 0.05
Effect of Dilutive Securities - Stock Options 2
DILUTED EPS
Income Available to Common Shareholders -----------
& Assumed Conversions $ 529 10,725 $ 0.05
======= =========== =======
SIX MONTHS ENDED DECEMBER 23, 2001
BASIC EPS
Income Available to Common Shareholders $ 1,157 10,127 $ 0.11
Effect of Dilutive Securities - Stock Options 7
DILUTED EPS
Income Available to Common Shareholders ---------
& Assumed Conversions $ 1,157 10,134 $ 0.11
========= ========= =======
SIX MONTHS ENDED DECEMBER 24, 2000
BASIC EPS
Income Available to Common Shareholders $ 1,175 10,729 $ 0.11
Effect of Dilutive Securities - Stock Options 6
DILUTED EPS
Income Available to Common Shareholders -------
& Assumed Conversions $ 1,175 10,735 $ 0.11
======= ========= =======
(9) Summarized in the following tables are net sales and operating revenues,
operating profit (loss), and geographic information (revenues) for the Company's
reportable segments for the three months and six months ended December 23, 2001,
and December 24, 2000.
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- -----------------
DECEMBER 23, DECEMBER 24, DECEMBER 23, DECEMBER 24,
2001 2000 2001 2000
--------------- -------------- -------------- --------------
(In thousands). . . . . . . . . (In thousands)
NET SALES AND OPERATING REVENUES:
Food and Equipment Distribution . . $ 13,637 $ 13,502 $ 28,368 $ 28,230
Franchise and Other . . . . . . . . 1,833 1,920 3,787 3,890
Intersegment revenues . . . . . . . 192 213 416 419
--------------- -------------- -------------- --------------
Combined. . . . . . . . . . . . . 15,662 15,635 32,571 32,539
Other revenues. . . . . . . . . . . 119 98 274 216
Less intersegment revenues. . . . . (192) (213) (416) (419)
--------------- -------------- -------------- --------------
Consolidated revenues . . . . . . $ 15,589 $ 15,520 $ 32,429 $ 32,336
=============== ============== ============== ==============
OPERATING PROFIT:
Food and Equipment Distribution (1) $ 690 $ 756 $ 1,173 $ 1,563
Franchise and Other (1) . . . . . . 830 629 1,640 1,321
Intersegment profit . . . . . . . . 50 66 109 127
--------------- -------------- -------------- --------------
Combined. . . . . . . . . . . . . 1,570 1,451 2,922 3,011
Other profit or loss. . . . . . . . 119 98 274 216
Less intersegment profit. . . . . . (50) (66) (109) (127)
Corporate administration and other. (780) (681) (1,334) (1,266)
--------------- -------------- -------------- --------------
Income before taxes . . . . . . . $ 859 $ 802 $ 1,753 $ 1,834
=============== ============== ============== ==============
GEOGRAPHIC INFORMATION (REVENUES):
United States . . . . . . . . . . . $ 15,446 $ 15,382 $ 32,173 $ 31,973
Foreign countries . . . . . . . . . 143 138 256 363
--------------- -------------- -------------- --------------
Consolidated total. . . . . . . . $ 15,589 $ 15,520 $ 32,429 $ 32,336
=============== ============== ============== ==============
<FN>
(1) Does not include full allocation of corporate administration.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- -----------------------
Quarter and six months ended December 23, 2001 compared to the quarter and six
months ended December 24, 2000.
Diluted earnings per share for the second quarter of the current fiscal
year were $0.06 versus $0.05 for the same period last year. For the six months
ended December 23, 2001, diluted earnings per share were $0.11 versus $0.11 for
the same period last year. Net income for the quarter increased 7% to $567,000
from $529,000 for the same quarter last year. For the six months ended December
23, 2001, net income decreased 2% to $1,157,000 from $1,175,000 compared to the
same period last year.
Food and supply sales for the quarter increased 1% to $13,637,000 from
$13,502,000 compared to the same period last year. For the six month period,
food and supply sales increased slightly to $28,368,000 from $28,230,000 for the
same period last year.
Franchise revenue, which includes income from royalties, license fees and
area development and foreign master license (collectively, "Territory") sales,
decreased 2% or $22,000 for the quarter and 2% or $43,000 for the six month
period, compared to the same periods last year. These decreases are the result
of lower royalties in the first and second quarters of the current year which
were offset by higher franchise fees in the current year.
Restaurant sales, which consists of revenue generated by Company-owned
training stores, decreased 11% or $65,000 for the quarter compared to the same
period of the prior year. For the six month period, restaurant sales decreased
5% or $60,000. Higher comparable sales at the two full service units were
offset by the temporary closing of the delco unit during the first week of
September.
Other income consists primarily of interest income and non-recurring
revenue items. Other income for the quarter increased 21% or $21,000 and 27% or
$58,000 year to date compared to the prior year. This is the result of
increased vendor incentives, which were offset by lower interest income.
Cost of sales increased 2% or $193,000 for the quarter and increased 2% or
$551,000 for the six month period. As a percentage of sales for the quarter,
cost of sales increased to 91% from 90% compared to the same period of the prior
year. For the six months, cost of sales, as a percentage of sales, increased to
92% from 91%. Higher rent costs were partially offset by lower fuel costs.
Franchise expenses include selling, general and administrative expenses
directly related to the sale and continuing service of franchises and
Territories. These costs decreased 12% or $72,000 for the quarter and 10% or
$114,000 for the six month period compared to the same periods last year. This
decrease was primarily due to lower marketing costs.
General and administrative expenses decreased 1% or $17,000 for the quarter
and decreased 2% or $35,000 for the first six months, compared to the same
periods last year. This is primarily a result of lower bad debt expense and
lower insurance costs, which were partially offset by higher property taxes and
moving expenses.
Interest expense decreased 37% or $92,000 for the quarter and 45% or
$228,000 for the first six months, compared to the same period of the prior
year. Capitalized interest on funds used in construction of the new corporate
headquarters and lower interest rates were partially offset by higher debt
levels in the current year.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations totaled $1,765,000 during the first six months
of fiscal 2002 and was utilized, in conjunction with additional borrowings and a
portion of its cash balance, primarily to fund capital expenditures and to
reacquire 262,100 shares of its own common stock for $572,724.
Capital expenditures of $6,842,000 during the first six months included the
new Corporate headquarters construction and equipment, vehicles, and the
remodeling of one Company store.
The Company continues to realize substantial benefit from the
utilization of its net operating loss carryforwards (which currently total $2.8
million and expire in 2005 and 2006) to reduce its federal tax liability from
the 34% tax rate reflected on its statement of operations to an actual payment
of approximately 2% of taxable income. Management believes that future
operations will generate sufficient taxable income, along with the reversal of
temporary differences, to fully realize its net deferred tax asset balance ($2.7
million as of December 23, 2001) without reliance on material, non-routine
income. Taxable income in future years at the current level would be sufficient
for full realization of the net tax asset.
The Company entered into an agreement effective December 21, 2001 with its
current lender to extend the term of its existing $9.5 million revolving credit
line through December 31, 2003, and to modify certain financial covenants.
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 LIBOR 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 December 23, 2001, the revolving credit line had an outstanding
balance of $8.0 million.
The Company entered into a term note effective March 31, 2000 with
its current lender. The $5,000,000 term note had an outstanding balance of $2.9
million at December 23, 2001 and requires 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 0.75% or, at the Company's option, at the LIBOR rate
plus 1.5%.
The Company entered into an agreement effective December 28, 2000,
as amended, with its current lender to provide up to $8.125 million of financing
for the construction of the Company's new headquarters, training center and
distribution facility. The construction loan converted to a term loan effective
January 31, 2002 with the unpaid principal balance to mature on December 28,
2007. The term loan will amortize over a term of twenty years, with principal
and interest payments due monthly. Interest is provided for at a rate equal to
prime less an interest rate margin of .75% or, at the Company's option, to the
LIBOR rate plus 1.5%. The Company, to fulfill bank requirements, has caused the
outstanding principal amount to be subject to a fixed interest rate after the
conversion date. As of December 23, 2001, the Company had borrowed $6.8 million
for the construction in progress of its new headquarters. As of February 1,
2002 the Company had borrowed $8.125 million for the construction in progress of
its new headquarters.
The Company entered into an interest rate swap effective February 27,
2001, as amended, designated as a cash flow hedge, to manage interest rate risk
relating to the financing of the construction of the Company's new headquarters
and to fulfill bank requirements. The swap agreement has a notional principal
amount of $8.125 million with a fixed pay rate of 5.84% which began November 1,
2001 and will end November 19, 2007. The Company's expectation is that the
hedging relationship will be highly effective at achieving offsetting changes in
cash flows.
On January 18, 2002, the Company was served with a lawsuit filed by
Blakely-Witt & Associates, Inc. alleging Pizza Inn sent or caused to be sent
unsolicited facsimile advertisements. The plaintiff has requested this matter be
certified as a class action. We have referred this matter to our insurers and
plan to vigorously defend our position in this litigation. We cannot assure you
that we will prevail in this lawsuit and our defense could be costly and consume
the time of our management. We are unable to predict the outcome of this case.
However, an adverse resolution of this matter could materially affect our
financial position and results of operations.
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 December 23, 2001 the Company has approximately $17.8 million of
variable rate debt obligations outstanding with a weighted average interest rate
of 4.90%. A hypothetical 10% change in the effective interest rate for these
borrowings, assuming debt levels at December 23, 2001 would change interest
expense by approximately $36,000.
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 this report, the words "anticipate,"
"believe," "estimate," "expect," "intend" and similar expressions, as they
relate to the Company or the Company's management, identify forward-looking
statements. Such statements reflect the current views of the Company with
respect to future events and are subject to certain risks, uncertainties and
assumptions relating to the operations and results of operations of the Company
as well as its customers and suppliers, including as a result of competitive
factors and pricing pressures, shifts in market demand, general economic
conditions and other factors including but not limited to, changes in demand for
Pizza Inn products or franchises, the impact of competitors' actions, changes in
prices or supplies of food ingredients, and restrictions on international trade
and business. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions or estimates prove incorrect, actual results
may vary materially from those described herein as anticipated, believed,
estimated, expected or intended.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- ----------------------------
On January 18, 2002, the Company was served with a lawsuit filed by
Blakely-Witt & Associates, Inc. in the District Court, L-193rd Judicial
District, Dallas County, Texas (Cause No. 01-11043). The suit alleges Pizza Inn
sent or caused to be sent unsolicited facsimile advertisements to plaintiff and
others in violation of (i) 47 U.S.C. Section 227(b)(1)(C) and (b)(3), the
Telephone Consumer Protection Act, and (ii) Texas Business and Commerce Code
Section 35.47. The plaintiff has requested this matter be certified as a class
action. We have referred this matter to our insurers and plan to vigorously
defend our position in this litigation. We cannot assure you that we will
prevail in this lawsuit and our defense could be costly and consume the time of
our management. We are unable to predict the outcome of this case. However, an
adverse resolution of this matter could materially affect our financial position
and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ---------------------------------------------------------------------
At the Annual Meeting of Shareholders on December 19, 2001, the Company's
shareholders elected all three nominees to the Board of Directors. The results
of the voting were as follows:
NOMINEE FOR VOTES WITHHELD
------- --- ---------------
C. Jeffery Rogers 8,166,112 372,029
F. Jay Taylor 8,233,665 394,477
Steve A. Ungerman 8,235,410 302,731
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------------
Exhibits:
10.1 Second Amendment to the Second Amended and Restated Loan Agreement
between the Company and Wells Fargo Bank (Texas), N.A. dated January 31, 2002,
but effective December 23, 2001.
10.2 Promissory Note between the Company and Wells Fargo Bank (Texas), N.A.
dated January 31, 2002.
No reports on Form 8-k were filed in the quarter for which this report is
filed.
------
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PIZZA INN, INC.
Registrant
By: /s/Ronald W. Parker
---------------------
Ronald W. Parker
President and
Principal Financial Officer
By: /s/Shawn M. Preator
---------------------
Shawn M. Preator
Vice President
Principal Accounting Officer
Dated: February 5, 2002
- ------