SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 24, 2002.
----------------
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 MAY 3, 2002, AN AGGREGATE OF 10,058,124 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 nine months
ended March 24, 2002 and March 25, 2001 3
Consolidated Balance Sheets at March 24, 2002 and June 24, 2001 4
Consolidated Statements of Cash Flows for the nine months ended
March 24, 2002 and March 25, 2001 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 16
- -------- ------------------
Item 4. Submission of Matters to a Vote of Security Holders 16
- -------- -----------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K 16
- -------- -------------------------------------
Signatures 17
PART 1. FINANCIAL INFORMATION
1. Financial Statements
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------- -------------------
MARCH 24, MARCH 25, MARCH 24, MARCH 25,
REVENUES: 2002 2001 2002 2001
------------------- ------------------- ----------- -----------
Food and supply sales . . . . . . . . . . . . . . . $ 13,292 $ 13,723 $ 42,475 $ 42,457
Franchise revenue . . . . . . . . . . . . . . . . . 1,361 1,311 4,057 4,052
Restaurant sales. . . . . . . . . . . . . . . . . . 507 609 1,598 1,760
Other income. . . . . . . . . . . . . . . . . . . . 126 99 450 416
------------------- ------------------- ----------- -----------
15,286 15,742 48,580 48,685
------------------- ------------------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales . . . . . . . . . . . . . . . . . . . 12,626 13,033 40,396 40,046
Franchise expenses. . . . . . . . . . . . . . . . . 660 655 2,008 2,065
General and administrative expenses . . . . . . . . 994 942 3,142 3,125
Interest expense. . . . . . . . . . . . . . . . . . 282 197 557 700
------------------- ------------------- ----------- -----------
14,562 14,827 46,103 45,936
------------------- ------------------- ----------- -----------
INCOME BEFORE INCOME TAXES. . . . . . . . . . . . . . 724 915 2,477 2,749
Provision for income taxes. . . . . . . . . . . . . 246 311 842 970
------------------- ------------------- ----------- -----------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . $ 478 $ 604 $ 1,635 $ 1,779
=================== =================== =========== ===========
BASIC EARNINGS PER COMMON SHARE . . . . . . . . . . . $ 0.05 $ 0.06 $ 0.16 $ 0.17
=================== =================== =========== ===========
DILUTED EARNINGS PER COMMON SHARE . . . . . . . . . . $ 0.05 $ 0.06 $ 0.16 $ 0.17
=================== =================== =========== ===========
DIVIDENDS DECLARED PER COMMON SHARE . . . . . . . . . $ - $ - $ - $ 0.12
=================== =================== =========== ===========
WEIGHTED AVERAGE COMMON SHARES. . . . . . . . . . . . 10,058 10,609 10,104 10,689
=================== =================== =========== ===========
WEIGHTED AVERAGE COMMON AND
POTENTIAL DILUTIVE COMMON SHARES. . . . . . . . . . 10,058 10,610 10,108 10,693
=================== =================== =========== ===========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED. . . . . . . . . . . . NINE MONTHS ENDED
----------------------------------------------------- -----------------
MARCH 24, . . MARCH 25, MARCH 24, MARCH 25,
2002 2001 2002 2001
------------------- ------------------- ----------- -----------
Net Income. . . . . . . . . . . . . . . . . . . . . . $ 478 $ 604 $ 1,635 $ 1,779
Interest rate swap gain (loss) - (net of tax
expense (benefit) of $25, ($54) and ($32), ($54),
respectively). . . . . . . . . . . . . . . . . . . 49 (104) (61) (104)
------------------- ------------------- ----------- -----------
Comprehensive Income. . . . . . . . . . . . . . . . . $ 527 $ 500 $ 1,574 $ 1,675
=================== =================== =========== ===========
<FN>
See accompanying Notes to Consolidated Financial Statements.
PIZZA INN, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MARCH 24, JUNE 24,
ASSETS 2002 2001
----------- ----------
(UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . $ 246 $ 540
Accounts receivable, less allowance for doubtful
accounts of $722 and $729, respectively. . . . . . . . . . . 4,607 4,839
Notes receivable, current portion, less allowance
for doubtful accounts of $107 and $263, respectively . . . . 767 958
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . 1,870 2,063
Deferred taxes, net. . . . . . . . . . . . . . . . . . . . . . 1,297 1,285
Prepaid expenses and other . . . . . . . . . . . . . . . . . . 746 578
----------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . 9,533 10,263
Property, plant and equipment, net . . . . . . . . . . . . . . . 13,800 6,594
Property under capital leases, net . . . . . . . . . . . . . . . 292 576
Deferred taxes, net. . . . . . . . . . . . . . . . . . . . . . . 993 1,897
Long-term notes receivable, less
allowance for doubtful accounts of $5 and $9,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . 257 9
Deposits and other . . . . . . . . . . . . . . . . . . . . . . . 358 533
----------- ----------
$ 25,233 $ 19,872
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade . . . . . . . . . . . . . . . . . . . $ 1,497 $ 3,245
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . 2,016 2,000
Current portion of long-term debt. . . . . . . . . . . . . . . 1,656 1,250
Current portion of capital lease obligations . . . . . . . . . 301 486
----------- ----------
Total current liabilities. . . . . . . . . . . . . . . . . . 5,470 6,981
LONG-TERM LIABILITIES
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . 16,805 10,934
Long-term capital lease obligations. . . . . . . . . . . . . . 156 227
Other long-term liabilities. . . . . . . . . . . . . . . . . . 935 865
----------- ----------
23,366 19,007
----------- ----------
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value; authorized 26,000,000 shares;
issued 14,955,619 and 14,955,119 shares, respectively
outstanding 10,057,974 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. . . . . . . . . . . . . . . . . . . . . . . 15,836 14,201
Accumulated other comprehensive loss . . . . . . . . . . . . . (134) (73)
Treasury stock at cost
Shares in treasury: 4,897,645 and 4,635,481 respectively . . (19,484) (18,911)
----------- ----------
Total shareholders' equity . . . . . . . . . . . . . . . . . 1,867 865
----------- ----------
$ 25,233 $ 19,872
=========== ==========
<FN>
See accompanying Notes to Consolidated Financial Statements.
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
-------------------
MARCH 24, MARCH 25,
2002 2001
------------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,635 $ 1,779
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . 1,064 1,002
Provision for bad debt. . . . . . . . . . . . . . . . . . . . 135 160
Utilization of pre-reorganization net operating
loss carryforwards. . . . . . . . . . . . . . . . . . . . . 892 784
Changes in assets and liabilities:
Notes and accounts receivable . . . . . . . . . . . . . . . . 40 (455)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . 193 1,127
Accounts payable - trade. . . . . . . . . . . . . . . . . . . (855) (555)
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . (45) 565
Prepaid expenses and other. . . . . . . . . . . . . . . . . . (70) 171
------------------- -----------
CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . . . . . . . 2,989 4,578
------------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . (8,711) (2,482)
Proceeds from sale of assets. . . . . . . . . . . . . . . . . . 24 -
------------------- -----------
CASH USED FOR INVESTING ACTIVITIES. . . . . . . . . . . . . . (8,687) (2,482)
------------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term bank debt . . . . . . . . . . . . . . . 7,909 3,035
Repayments of long-term bank debt and capital lease obligations (1,932) (3,670)
Dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . - (1,243)
Proceeds from exercise of stock options . . . . . . . . . . . . - 298
Officer loan payment. . . . . . . . . . . . . . . . . . . . . . - 165
Purchases of treasury stock . . . . . . . . . . . . . . . . . . (573) (791)
------------------- -----------
CASH PROVIDED (USED) BY FINANCING ACTIVITIES. . . . . . . . . 5,404 (2,206)
------------------- -----------
Net decrease in cash and cash equivalents . . . . . . . . . . . . (294) (110)
Cash and cash equivalents, beginning of period. . . . . . . . . . 540 484
------------------- -----------
Cash and cash equivalents, end of period. . . . . . . . . . . . . $ 246 $ 374
------------------- -----------
<FN>
See accompanying Notes to Consolidated Financial Statements.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
------------------
MARCH 24, MARCH 25,
2002 2001
------------------ ----------
CASH PAYMENTS FOR:
Interest . . . . . . . . . . . . . . . . . . . $ 723 $ 736
Income taxes . . . . . . . . . . . . . . . . . 53 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 less 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 March 24, 2002, the revolving credit line had an
outstanding balance of $7.8 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 $2.6 million at
March 24, 2002 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. This
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 0.75% 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 by utilizing
an interest rate swap agreement as discussed below. The $8.125 million term
loan had an outstanding balance of $8.057 million at March 24, 2002.
(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. The swap's notional amount amortizes over a
term of twenty years. 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 March 24, 2002, the Company
recorded its interest rate swap with a fair value of $203,000 in other
liabilities, with the offset recorded in the other comprehensive income
component of stockholder's equity and in deferred income taxes. At March 24,
2002, 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 three months ended March 24, 2002 no interest was
capitalized and for the nine months ended March 24, 2002 interest of $179,000
was capitalized in connection with the construction of the Company's new
headquarters, training center, and distribution facility. For the three and
nine months ended March 25, 2001 total interest of $43,000 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 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 May 7, 2002 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 MARCH 24, 2002
BASIC EPS
Income Available to Common Shareholders . . . $ 478 10,058 $ 0.05
Effect of Dilutive Securities - Stock Options -
------------
DILUTED EPS
Income Available to Common Shareholders
& Assumed Conversions . . . . . . . . . . . . $ 478 10,058 $ 0.05
============ ============= =======
THREE MONTHS ENDED MARCH 25, 2001
BASIC EPS
Income Available to Common Shareholders . . . $ 604 10,609 $ 0.06
Effect of Dilutive Securities - Stock Options 1
------------
DILUTED EPS
Income Available to Common Shareholders
& Assumed Conversions . . . . . . . . . . . . $ 604 10,610 $ 0.06
============ ============= =======
NINE MONTHS ENDED MARCH 24, 2002
BASIC EPS
Income Available to Common Shareholders $ 1,635 10,104 $ 0.16
Effect of Dilutive Securities - Stock Options 4
------
DILUTED EPS
Income Available to Common Shareholders
& Assumed Conversions $ 1,635 10,108 $ 0.16
============== ======= =======
NINE MONTHS ENDED MARCH 25, 2001
BASIC EPS
Income Available to Common Shareholders $ 1,779 10,689 $ 0.17
Effect of Dilutive Securities - Stock Options 4
DILUTED EPS -----
Income Available to Common Shareholders
& Assumed Conversions $ 1,779 10,693 $ 0.17
============== ======== ======
(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 nine months ended March 24, 2002,
and March 25, 2001.
THREE MONTHS ENDED NINE MONTHS ENDED
------------------- ------------------
MARCH 24, MARCH 25, MARCH 24, MARCH 25,
2002 2001 2002 2001
--------------- ----------- ----------- -----------
(In thousands). . . . . . . . . (In thousands)
NET SALES AND OPERATING REVENUES:
Food and Equipment Distribution . . $ 13,292 $ 13,723 $ 42,475 $ 42,457
Franchise and Other . . . . . . . . 1,868 1,920 5,655 5,812
Intersegment revenues . . . . . . . 181 224 589 635
--------------- ----------- ----------- -----------
Combined. . . . . . . . . . . . . 15,341 15,867 48,719 48,904
Other revenues. . . . . . . . . . . 126 99 450 416
Less intersegment revenues. . . . . (181) (224) (589) (635)
--------------- ----------- ----------- -----------
Consolidated revenues . . . . . . $ 15,286 $ 15,742 $ 48,580 $ 48,685
=============== =========== =========== ===========
OPERATING PROFIT:
Food and Equipment Distribution (1) $ 648 $ 797 $ 2,053 $ 2,504
Franchise and Other (1) . . . . . . 757 661 2,117 2,008
Intersegment profit . . . . . . . . 56 68 167 196
--------------- ----------- ----------- -----------
Combined. . . . . . . . . . . . . 1,461 1,526 4,337 4,708
Other profit or loss. . . . . . . . 126 99 450 416
Less intersegment profit. . . . . . (56) (68) (167) (196)
Corporate administration and other. (807) (642) (2,143) (2,179)
--------------- ----------- ----------- -----------
Income before taxes . . . . . . . $ 724 $ 915 $ 2,477 $ 2,749
=============== =========== =========== ===========
GEOGRAPHIC INFORMATION (REVENUES):
United States . . . . . . . . . . . $ 15,129 $ 15,678 $ 48,201 $ 48,424
Foreign countries . . . . . . . . . 157 64 379 261
--------------- ----------- ----------- -----------
Consolidated total. . . . . . . . $ 15,286 $ 15,742 $ 48,580 $ 48,685
=============== =========== =========== ===========
<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 nine months ended March 24, 2002 compared to the quarter and nine
months ended March 25, 2001.
Diluted earnings per share for the third quarter of the current fiscal year
were $0.05 versus $0.06 for the same period last year. For the nine months
ended March 24, 2002, diluted earnings per share were $0.16 versus $0.17 for the
same period last year. Net income for the quarter decreased 21% to $478,000
from $604,000 for the same quarter last year. For the nine months ended March
24, 2002, net income decreased 8% to $1,635,000 from $1,779,000 compared to the
same period last year.
Food and supply sales for the quarter decreased 3% to $13,292,000 from
$13,723,000 compared to the same period last year. This decrease is the result
of lower chainwide sales which is partially offset by higher cheese prices. For
the nine month period, food and supply sales increased slightly to $42,475,000
from $42,457,000 for the same period last year. During the first nine months,
lower chainwide sales were offset by higher cheese prices.
Franchise revenue, which includes income from royalties, license fees and
area development and foreign master license (collectively, "Territory") sales,
increased 4% or $50,000 for the quarter and $5,000 for the nine month period,
compared to the same periods last year. These increases are primarily the result
of higher international area development fees.
Restaurant sales, which consists of revenue generated by Company-owned
training stores, decreased 17% or $102,000 for the quarter compared to the same
period of the prior year. For the nine month period, restaurant sales decreased
9% or $162,000. The temporary closing of the delco unit during the first week of
September 2001 was partially offset by higher comparable sales at the two full
service units.
Other income consists primarily of interest income and non-recurring
revenue items. Other income for the quarter increased 27% or $27,000 and 8% or
$34,000 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 decreased 3% or $407,000 for the quarter and increased 1% or
$350,000 for the nine month period. As a percentage of sales for the quarter,
cost of sales remained at 91% compared to the same period of the prior year.
For the nine months, cost of sales, as a percentage of sales, increased to 92%
from 91%. Higher rent expense in the first five months of the fiscal year 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 increased 1% or $5,000 for the quarter and decreased
3% or $57,000 for the nine month period compared to the same periods last year.
General and administrative expenses increased 6% or $52,000 for the quarter
and increased 1% or $17,000 for the first nine months, compared to the same
periods last year. This is primarily a result of increased building expenses
associated with the Company's relocation to its new corporate headquarters,
including the continuation of lease expenses at the Company's previous
headquarters facility.
Interest expense increased 43% or $85,000 for the quarter compared to the
same period last year due to higher debt levels, which were partially offset by
lower interest rates. Interest expense decreased 20% or $143,000 for the first
nine months, compared to the same period last year due to lower interest rates
and capitalized interest on funds used in construction of the new corporate
headquarters, which were partially offset by higher average debt levels.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations totaled $2,989,000 during the first nine 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 $8,711,000 during the first nine months consist
primarily of development and construction costs for the new corporate
headquarters.
The Company continues to realize substantial benefit from the utilization
of its net operating loss carry forwards (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 no actual cash payment.
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 ($2.3 million as of March 24, 2002) 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 less 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 March 24, 2002, the revolving credit line had an outstanding
balance of $7.8 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 $2.6
million at March 24, 2002 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. This 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 0.75% 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 by utilizing
an interest rate swap agreement as discussed below. The $8.125 million term
loan had an outstanding balance of $8.057 million at March 24, 2002.
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 swap's notional amount amortizes over
a term of twenty years. 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 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.
At May 7, 2002 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.
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.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The following chart summarizes all of The Company's material obligations
and commitments to make future payments under contracts such as debt and lease
agreements as of March 24, 2002 (in thousands):
Less Than 1 1-3 4-5 After 5
Total Year Years Years Years
------- ------ ------- ------ ------
Long-term debt. . . . . . . . . . . $18,461 $1,656 $ 9,967 $ 812 $6,026
Operating lease obligations (1) . . 4,856 1,387 2,062 1,258 149
Capital lease obligations (2) . . . 397 314 54 25 4
------- ------ ------- ------ ------
Total contractual cash obligations. $23,714 $3,357 $12,083 $2,095 $6,179
======= ====== ======= ====== ======
(1)Includes a lease dated March 21, 2002 the Company entered into for new
tractors. Per the terms of the lease the obligations begin upon receipt of the
tractors which is estimated to be October 2002. The above table reflects the
obligations beginning at that time.
(2) Does not include amount representing interest.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis is based on the Company's consolidated
financial statements and related footnotes contained within this report. The
Company's more critical accounting policies used in the preparation of those
consolidated financial statements are discussed below.
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." Shipping and handling costs billed to customers
are recognized as revenue.
Franchise revenue consists of income from license fees, royalties, and
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.
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.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Significant estimates made by management include the
allowance for doubtful accounts, inventory valuation, deferred tax asset
valuation allowances, and legal accruals. Actual results could differ from
those estimates.
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 and is based upon management's assessment of the market conditions
for its products.
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 and is based
upon an analysis of the Company's prior collection experience, customer
creditworthiness, and current economic trends.
Notes receivable primarily consist of notes from franchisees for the
purchase of area development and master license territories and trade
receivables. These notes generally have terms ranging from one to five years
and interest rates of 6.5% to 11.5%. The Company records a provision for
doubtful receivables to allow for any amounts which may be unrecoverable.
The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets that may not be realized based upon the Company's
analysis of existing net operating losses and tax credits by jurisdiction and
expectations of the Company's ability to utilize these tax attributes through a
review of estimated future taxable income and establishment of tax strategies.
These estimates could be impacted by changes in future taxable income and the
results of tax strategies. The Company has net deferred tax assets totaling
$2.3 million related primarily to net operating loss carryforwards at March 24,
2002.
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 March 24, 2002 the Company has approximately $18.5 million of variable
rate debt obligations outstanding with a weighted average interest rate of
4.51%. A hypothetical 10% change in the effective interest rate for these
borrowings, assuming debt levels at March 24, 2002 would change interest expense
by approximately $54,000 for the nine months.
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 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
- ---------------------------------------------------------------------
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------------
There are no exhibits with this report. No reports on Form 8-k were filed
in the quarter for which this report is filed.
------
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PIZZA INN, INC.
Registrant
By: /s/Ronald W. Parker
---------------------
Ronald W. Parker
President and
Principal Financial Officer
By: /s/Shawn M. Preator
---------------------
Shawn M. Preator
Vice President
Principal Accounting Officer
Dated: May 7, 2002