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 29, 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 FEBRUARY 7, 2003, AN AGGREGATE OF 10,058,524 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 29, 2002 and December 23, 2001 (unaudited) 3
Consolidated Statements of Comprehensive Income for the three months and
six months ended December 29, 2002 and December 23, 2001 (unaudited) 3
Consolidated Balance Sheets at December 29, 2002 (unaudited) and June 30,
2002 4
Consolidated Statements of Cash Flows for the six months ended
December 29, 2002 and December 23, 2001 (unaudited) 5
Notes to Consolidated Financial Statements 7
Item 2.
-------
Management's Discussion and Analysis of
- -------------------------------------------
Financial Condition and Results of Operations 11
- ---------------------------------------------
Item 3.
-------
Quantitative and Qualitative Disclosures about Market Risk 15
- ----------------------------------------------------------------
Item 4. Controls and Procedures 15
- -------- -------------------------
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 18
Certifications 19
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -------------------------------
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- -----------------
DECEMBER 29, DECEMBER 23, DECEMBER 29, DECEMBER 23,
REVENUES: 2002 2001 2002 2001
-------------------- ----------------- -------------- --------------
Food and supply sales. . . . . . . . . . . . . $ 13,275 $ 14,020 $ 26,804 $ 29,183
Franchise revenue. . . . . . . . . . . . . . . 1,307 1,316 2,609 2,696
Restaurant sales . . . . . . . . . . . . . . . 453 517 920 1,091
Other income . . . . . . . . . . . . . . . . . 129 134 192 324
-------------------- ----------------- -------------- --------------
15,164 15,987 30,525 33,294
-------------------- ----------------- -------------- --------------
COSTS AND EXPENSES:
Cost of sales. . . . . . . . . . . . . . . . . 12,167 13,159 24,572 27,770
Franchise expenses . . . . . . . . . . . . . . 835 667 1,543 1,348
General and administrative expenses. . . . . . (910) 1,146 649 2,148
Interest expense . . . . . . . . . . . . . . . 205 156 434 275
-------------------- ----------------- -------------- --------------
12,297 15,128 27,198 31,541
-------------------- ----------------- -------------- --------------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . 2,867 859 3,327 1,753
Provision for income taxes . . . . . . . . . . 975 292 1,131 596
-------------------- ----------------- -------------- --------------
NET INCOME . . . . . . . . . . . . . . . . . . . $ 1,892 $ 567 $ 2,196 $ 1,157
==================== ================= ============== ==============
BASIC EARNINGS PER COMMON SHARE. . . . . . . . . $ 0.19 $ 0.06 $ 0.22 $ 0.11
==================== ================= ============== ==============
DILUTED EARNINGS PER COMMON SHARE. . . . . . . . $ 0.19 $ 0.06 $ 0.22 $ 0.11
==================== ================= ============== ==============
WEIGHTED AVERAGE COMMON SHARES . . . . . . . . . 10,058 10,067 10,058 10,127
==================== ================= ============== ==============
WEIGHTED AVERAGE COMMON AND
POTENTIAL DILUTIVE COMMON SHARES . . . . . . . 10,060 10,068 10,059 10,134
==================== ================= ============== ==============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
THREE MONTHS ENDED . . . . . . . . . SIX MONTHS ENDED
------------------------------ ---------------------
DECEMBER 29, . . . DECEMBER 23, DECEMBER 29, DECEMBER 23,
2002 2001 2002 2001
-------------------- ----------------- -------------- --------------
Net Income . . . . . . . . . . . . . . . . . . . $ 1,892 $ 567 $ 2,196 $ 1,157
Interest rate swap gain (loss) - (net of
tax (expense) benefit of $2 and ($48)
and $141 and $152. respectively). . . . . (4) 93 (281) (110)
-------------------- ----------------- -------------- --------------
Comprehensive Income . . . . . . . . . . . . . . $ 1,888 $ 660 $ 1,915 $ 1,047
==================== ================= ============== ==============
<FN>
See accompanying Notes to Consolidated Financial Statements.
PIZZA INN, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 29, JUNE 30,
ASSETS 2002 2002
-------------- ----------
(UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $ 199 $ 770
Accounts receivable, less allowance for doubtful
accounts of $789 and $829, respectively . . . . . . . . . . . . 4,304 3,867
Notes receivable, current portion, less allowance
for doubtful accounts of $154 and $354, respectively. . . . . . 295 332
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,755 1,526
Deferred taxes, net . . . . . . . . . . . . . . . . . . . . . . . 953 1,297
Property held for sale. . . . . . . . . . . . . . . . . . . . . . - 170
Prepaid expenses and other. . . . . . . . . . . . . . . . . . . . 356 735
-------------- ----------
Total current assets. . . . . . . . . . . . . . . . . . . . . 7,862 8,697
Property, plant and equipment, net. . . . . . . . . . . . . . . . . 13,434 13,567
Property under capital leases, net. . . . . . . . . . . . . . . . . 211 337
Deferred taxes, net . . . . . . . . . . . . . . . . . . . . . . . . 705 1,347
Long-term notes receivable, less
allowance for doubtful accounts of $20 and $20,
respectively. . . . . . . . . . . . . . . . . . . . . . . . . . . 93 191
Deposits and other. . . . . . . . . . . . . . . . . . . . . . . . . 176 475
-------------- ----------
$ 22,481 $ 24,614
============== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade. . . . . . . . . . . . . . . . . . . . . $ 2,303 $ 1,527
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . 2,364 2,529
Current portion of long-term debt . . . . . . . . . . . . . . . . 1,656 1,656
Current portion of capital lease obligations. . . . . . . . . . . 193 229
-------------- ----------
Total current liabilities . . . . . . . . . . . . . . . . . . . 6,516 5,941
LONG-TERM LIABILITIES
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . 10,163 15,091
Long-term capital lease obligations . . . . . . . . . . . . . . . 37 136
Other long-term liabilities . . . . . . . . . . . . . . . . . . . 920 517
-------------- ----------
17,636 21,685
-------------- ----------
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value; authorized 26,000,000 shares;
issued 14,956,119 and 14,955,819 shares, respectively;
outstanding 10,058,474 and 10,058,174 shares, respectively . . 150 150
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . 7,825 7,824
Loans to officers (less allowance of $0 and $1,750, respectively) (575) (575)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . 17,534 15,338
Accumulated other comprehensive loss. . . . . . . . . . . . . . . (605) (324)
Treasury stock at cost
Shares in treasury: 4,897,645 and 4,897,645 respectively. . . . (19,484) (19,484)
-------------- ----------
Total shareholders' equity. . . . . . . . . . . . . . . . . . . 4,845 2,929
-------------- ----------
$ 22,481 $ 24,614
============== ==========
<FN>
See accompanying Notes to Consolidated Financial Statements.
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
------------------
DECEMBER 29, DECEMBER 23,
2002 2001
------------------ --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,196 $ 1,157
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . 768 635
Provision (recovery) for bad debt, net. . . . . . . . . . . . (1,850) 100
Utilization of deferred taxes . . . . . . . . . . . . . . . . 1,131 -
Utilization of pre-reorganization net operating
loss carryforwards. . . . . . . . . . . . . . . . . . . . . - 504
Changes in assets and liabilities:
Notes and accounts receivable . . . . . . . . . . . . . . . . (402) (371)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . (229) (39)
Accounts payable - trade. . . . . . . . . . . . . . . . . . . 776 (314)
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . (165) (153)
Prepaid expenses and other. . . . . . . . . . . . . . . . . . 553 246
------------------ --------------
CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . . . . . . . 2,778 1,765
------------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . (236) (6,842)
------------------ --------------
CASH USED FOR INVESTING ACTIVITIES. . . . . . . . . . . . . . (236) (6,842)
------------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term bank debt . . . . . . . . . . . . . . . - 6,634
Repayments of long-term bank debt and capital lease obligations (5,063) (1,260)
Officer loan payment. . . . . . . . . . . . . . . . . . . . . . 1,950 -
Purchases of treasury stock . . . . . . . . . . . . . . . . . . - (573)
------------------ --------------
CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES. . . . . . . (3,113) 4,801
------------------ --------------
Net decrease in cash and cash equivalents . . . . . . . . . . . . (571) (276)
Cash and cash equivalents, beginning of period. . . . . . . . . . 770 540
------------------ --------------
Cash and cash equivalents, end of period. . . . . . . . . . . . . $ 199 $ 264
------------------ --------------
<FN>
See accompanying Notes to Consolidated Financial Statements.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
-----------------
DECEMBER 29, DECEMBER 23,
2002 2001
----------------- -------------
CASH PAYMENTS FOR:
Interest . . . . $ 432 $ 445
Income taxes . . - 50
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 30, 2002. 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 29, 2002 with
its current lender to provide a $7.0 million revolving credit line that will
expire December 31, 2004, replacing a $9.5 million line that was due to expire
December 31, 2003. The $7.0 million revolving credit line will reduce quarterly
by $500,000 beginning March 31, 2003 through December 31, 2004. 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 0.5% or, at the
Company's option, at the LIBOR rate plus 1.25% to 1.75%. The interest rate
margin is based on the Company's performance under certain financial ratio
tests. A 0.375% annual commitment fee is payable on any unused portion of the
revolving credit line. As of December 29, 2002 and December 23, 2001, the
variable interest rates were 3.4622% and 3.1875%, respectively, using a LIBOR
rate basis. Amounts outstanding under the revolving credit line for the periods
ending December 29, 2002 and December 23, 2001 were $2.4 million and $8.0
million, respectively.
The Company entered into a term note effective March 31, 2000 with its current
lender. The $5,000,000 term note had outstanding balances of $1.7 million and
$2.9 million at December 29, 2002 and December 23, 2001, respectively. The term
note 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%. As of December 29,
2002 and December 23, 2001, the variable interest rates were 2.9375% and
3.4375%, respectively.
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 payments of
$34,000 due monthly. Interest on this 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, to the LIBOR rate plus 1.5%. As of
December 29, 2002 and December 23, 2001, the variable interest rates were 2.89%
and 3.4375%, respectively. 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 $7.7 million at December 29,
2002 and $6.8 million at December 23, 2001.
(3) 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 to parallel the terms of the term loan. SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" requires that for
cash flow hedges, which hedge the exposure to variable cash flow 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 29,
2002 there was no hedge ineffectiveness. The Company's expectation is that the
hedging relationship will continue to 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 of December 29, 2002 the outstanding principal balance of
this loan was approximately $764,000 and matures on May 17, 2006. 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. In the event
the personal guarantees and security interest pledged do not sufficiently
fulfill the obligation, the Company would assume the obligation. As of this
date, the obligation could be fully offset by the assumption of the area
development rights which are currently pledged to Mid-South's third party
lender.
(5) 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.
(6) 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 29, 2002
BASIC EPS
Income Available to Common Shareholders $ 1,892 10,058 $ 0.19
Effect of Dilutive Securities - Stock Options 2
-------
DILUTED EPS
Income Available to Common Shareholders
& Assumed Conversions $ 1,892 10,060 $ 0.19
============ =========== ==========
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
============ ======== ============
SIX MONTHS ENDED DECEMBER 29, 2002
BASIC EPS
Income Available to Common Shareholders $ 2,196 10,058 $ 0.22
Effect of Dilutive Securities - Stock Options 1
-------
DILUTED EPS
Icome Available to Common Shareholders
& Assumed Conversions $ 2,196 10,059 $ 0.22
======== ============ =============
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
========= =========== =============
(7) Summarized in the following tables are net sales and operating revenues,
operating profit, and geographic information (revenues) for the Company's
reportable segments for the three month and six month periods ended December 29,
2002 and December 23, 2001.
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- -----------------
DECEMBER 29, DECEMBER 23, DECEMBER 29, DECEMBER 23,
2002 2001 2002 2001
--------------- -------------- -------------- --------------
(In thousands). . . . . . . . . (In thousands)
NET SALES AND OPERATING REVENUES:
Food and Equipment Distribution . . $ 13,275 $ 14,020 $ 26,804 $ 29,183
Franchise and Other . . . . . . . . 1,760 1,833 3,529 3,787
Intersegment revenues . . . . . . . 176 184 351 408
--------------- -------------- -------------- --------------
Combined. . . . . . . . . . . . . 15,211 16,037 30,684 33,378
Other revenues. . . . . . . . . . . 129 134 192 324
Less intersegment revenues. . . . . (176) (184) (351) (408)
--------------- -------------- -------------- --------------
Consolidated revenues . . . . . . $ 15,164 $ 15,987 $ 30,525 $ 33,294
=============== ============== ============== ==============
OPERATING PROFIT:
Food and Equipment Distribution (1) $ 652 $ 690 $ 1,396 $ 1,173
Franchise and Other (1) . . . . . . 800 781 1,400 1,591
Intersegment profit . . . . . . . . 42 53 96 112
--------------- -------------- -------------- --------------
Combined. . . . . . . . . . . . . 1,494 1,524 2,892 2,876
Other profit or loss. . . . . . . . 130 169 192 324
Less intersegment profit. . . . . . (42) (53) (96) (112)
Corporate administration and other. 1,285 (781) 339 (1,335)
--------------- -------------- -------------- --------------
Income before taxes . . . . . . . $ 2,867 $ 859 $ 3,327 $ 1,753
=============== ============== ============== ==============
GEOGRAPHIC INFORMATION (REVENUES):
United States . . . . . . . . . . . $ 14,860 $ 15,843 $ 30,028 $ 33,038
Foreign countries . . . . . . . . . 304 144 497 256
--------------- -------------- -------------- --------------
Consolidated total. . . . . . . . $ 15,164 $ 15,987 $ 30,525 $ 33,294
=============== ============== ============== ==============
<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 29, 2002 compared to the quarter and six
months ended December 23, 2001.
Earnings per share for the quarter were $0.19 versus $0.06 for the same
period last year. Net income was $1,892,000 versus $567,000, on revenues of
$15.2 million versus $16.0 million in the previous year. For the six-month
period, earnings per share were $0.22 versus $0.11 last year. Net income was
$2,196,000 compared to $1,157,000 on revenues of $30.5 million versus $33.3
million last year. The current quarter includes the reversal of a previously
recorded pre-tax charge of approximately $1.9 million. The reserve was
previously recorded in the fourth quarter of fiscal 2002 to fully reserve for
the expected nonpayment of a note receivable owed to the Company from the
Company's former Chief Executive Officer. The Company received payment in full
for the note receivable in December 2002.
Food and supply sales by the Company's Norco division include food and
paper products, equipment, marketing material, and other distribution revenues.
Food and supply sales for the quarter decreased 5% to $13,275,000 from
$14,020,000 compared to the same period last year. For the six month period,
food and supply sales decreased 8% to $26,804,000 from $29,183,000. Lower
retail sales combined with a decrease in the sales price of cheese contributed
to the decrease in food and supply sales.
Franchise revenue, which includes income from royalties, license fees and
area development and foreign master license (collectively, "Territory") sales,
decreased 1% or $9,000 for the quarter compared to the same period last year and
3% or $87,000 for the six month period. Lower royalties, resulting from lower
retail sales, were partially offset by higher foreign master license fees.
Restaurant sales, which consist of revenue generated by Company-owned
training stores decreased 12% or $64,000 for the quarter, compared to the same
period of the prior year. For the six month period, restaurant sales decreased
16% or $171,000. These decreases are a result of the closing of the Delco unit
during September of the prior year combined with lower comparable sales at the
remaining stores.
Other income consists primarily of interest income and non-recurring
revenue items. Other income decreased 4% or $5,000 for the quarter, compared to
the same period of the prior year. For the six month period, other income
decreased 41% or $132,000, due to lower vendor incentives.
Cost of sales decreased 8% or $992,000 for the quarter and decreased 12% or
$3,198,000 for the six month period. As a percentage of sales for the quarter,
cost of sales decreased to 89% from 91% compared to the same period last year.
For the six month period, cost of sales, as a percentage of sales, decreased to
89% from 92% compared to the same period of the prior year. The decreases are
due primarily to lower cheese prices as compared to the same period last year.
Franchise expenses include selling, general and administrative expenses
directly related to the sale and continuing service of franchises and
Territories. These costs increased 25% or $168,000 for the quarter and 14% or
$195,000 for the six month period compared to the same periods last year. These
increases are primarily due to additional staffing levels, increased advertising
expenses, and marketing research.
General and administrative expenses decreased 179% or $2,056,000 for the
quarter and 70% or $1,499,000 for the six months, compared to the same periods
last year. This is primarily the result of the reversal of a previously
recorded pre-tax charge of approximately $1.9 million for bad debt as described
above.
Interest expense increased 31% or $49,000 for the quarter and 58% or
$159,000 for the six months, compared to the same periods of the prior year.
Lower interest rates and debt balances in the current year were offset by
capitalized interest of approximately $179,000 used in construction of the new
corporate headquarters in the prior year.
Provision for income taxes increased 234% or $683,000 for the quarter, and
90% or $535,000 for the six months compared to the same periods in the prior
year. The effective tax rate was 34% for both the current and prior quarters
and six months.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations totaled $2,778,000 during the first six months
of fiscal 2003 and was utilized, in conjunction with a portion of its cash
balance, primarily to pay down debt. Management believes that current cash and
cash equivalents, projected cash flows from operations, and its existing debt
capacity should be sufficient during fiscal 2003 and for the foreseeable future
to fund planned capital expenditures, working capital needs, and other cash
requirements.
Capital expenditures of $236,000 during the first six months consist
primarily of the Company's implementation of a bar code system for its warehouse
operations, computer system upgrades, and office equipment.
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 $225,000 primarily related
to the potential expiration of certain foreign tax credit carryforwards.
Additionally, management believes that taxable income based on the Company's
existing franchise base should be more than sufficient to enable the Company to
realize its net deferred tax asset without reliance on material, non-routine
income.
The Company entered into an agreement effective December 29, 2002 with its
current lender to provide a $7.0 million revolving credit line that will expire
December 31, 2004, replacing a $9.5 million line that was due to expire December
31, 2003. The $7.0 million revolving credit line will reduce quarterly by
$500,000 beginning March 31, 2003 through December 31, 2004. 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 0.5% or, at the
Company's option, at the LIBOR rate plus 1.25% to 1.75%. The interest rate
margin is based on the Company's performance under certain financial ratio
tests. A 0.375% to 0.5% annual commitment fee is payable on any unused portion
of the revolving credit line. As of December 29, 2002 and December 23, 2001,
the variable interest rates were 2.9375% and 3.1875%, respectively, using a
LIBOR rate basis. Amounts outstanding under the revolving credit line for the
periods ending December 29, 2002 and December 23, 2001 were $2.4 million and
$8.0 million, respectively.
The Company entered into a term note effective March 31, 2000 with its
current lender. The $5,000,000 term note had outstanding balances of $1.7
million and $2.9 million at December 29, 2002 and December 23, 2001,
respectively. The term note 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%. As of December 29, 2002 and December 23, 2001, the variable interest
rates were 2.9375% and 3.4375%, respectively.
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
payments of $34,000 due monthly. Interest on this 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, to the LIBOR rate plus 1.5%.
As of December 29, 2002 and December 23, 2001, the variable interest rates were
2.89% and 3.4375%, respectively. 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 $7.7 million at December 29,
2002 and $6.8 million at December 23, 2001.
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 to parallel the terms of the term loan. SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" requires that for
cash flow hedges, which hedge the exposure to variable cash flow 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 29,
2002 there was no hedge ineffectiveness. The Company's expectation is that the
hedging relationship will continue to be highly effective at achieving
offsetting changes in cash flows.
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 of December 29, 2002 the outstanding principal balance of
this loan was approximately $764,000 and matures on May 17, 2006. 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. In the event
the personal guarantees and security interest pledged do not sufficiently
fulfill the obligation, the Company would assume the obligation. As of this
date, the obligation could be fully offset by the assumption of the area
development rights which are currently pledged to Mid-South's third party
lender.
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.
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 December 29, 2002 (in thousands):
Less Than 1 1-3 4-5 After 5
Total . Year Years Years Years
- ----------------------------------- ------- ------ -------- ------
Bank debt . . . . . . . . . . . . . $11,819 $1,656 $ 3,629 $ 813 $5,721
Operating lease obligations . . . . 4,024 1,247 2,565 212 -
Capital lease obligations (1) . . . 230 193 30 7 -
------- ------ -------- ------ ------
Total contractual cash obligations. $16,073 $3,096 $ 6,224 $1,032 $5,721
======= ====== ======== ====== ======
(1) 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 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.
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.
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 8% to 12%. 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.
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 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.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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 29, 2002 the Company has approximately $11.8 million of
variable rate debt obligations outstanding with a weighted average interest rate
of 3.3591%. A hypothetical 10% change in the effective interest rate for these
borrowings, assuming debt levels at December 29, 2002, would change interest
expense by approximately $25,000 for the six months ended December 29, 2002.
ITEM 4. CONTROLS AND PROCEDURES
- ------------------------------------
a) Evaluation of disclosure controls and procedures. Based on their
evaluation as of a date within 90 days of the filing date of this Quarterly
Report on Form 10-Q, the Company's principal executive officer and principal
financial officer have concluded that the Company's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934 (the "Exchange Act")) are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
b) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation. There were no
significant deficiencies or material weaknesses, and therefore there were no
corrective actions taken.
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
- ---------------------------------------------------------------------
At the Annual Meeting of Shareholders on December 18, 2002, the Company's
shareholders elected all four nominees to the Board of Director. The results
of the voting were as follows:
Nominee For Votes Withheld
------- --- --------------
Ronald W. Parker 7,548,259 161,820
Bobby L. Clairday 7,551,259 159,225
Raymond D. Phillips 7,551,717 158,767
Butler E. Powell 7,551,737 158,747
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------------
(a) Exhibits:
10.1 Third amended and restated loan agreement between the Company and Wells
Fargo Bank (Texas), N.A. dated January 22, 2003 but effective December 29, 2002.
10.2 Amended Employment Agreement between the Company and Ronald W. Parker
dated December 16, 2002.
10.3 Form of Executive Employment Contract.
99.1 Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Form 8-K filed under Item 5 - other events
On December 23, 2002 the Company filed a report on Form 8-K, amending the
Company's Amended and Restated By-Laws limiting the business that can be
conducted at any meeting of the shareholders, and detailing proper procedures
for nominations to the Board of Directors.
On December 20, 2002 the Company filed a report on Form 8-K, announcing the
resignation of two Directors and the appointment of two new Directors, and
publishing an agreement between the Company and Newcastle Partners, L.P.
On December 9, 2002 the Company filed a report on Form 8-K, announcing that the
Company had received full payment on a note receivable owed to the Company by
the Company's former Chief Executive Officer.
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 Chief Executive Officer
By: /s/Shawn M. Preator
---------------------
Shawn M. Preator
Chief Financial Officer
Dated: February 11, 2003
CERTIFICATION
-------------
I, Ronald W. Parker, Chief Executive Officer of Pizza Inn, Inc. certify that:
1. I have reviewed the quarterly report on Form 10-Q of Pizza Inn, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
February 11, 2003
By: /s/Ronald W. Parker
---------------------
Ronald W. Parker
President and Chief Executive Officer
CERTIFICATION
-------------
I, Shawn M. Preator, Chief Financial Officer of Pizza Inn, Inc. certify that:
1. I have reviewed the quarterly report on Form 10-Q of Pizza Inn, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
February 11, 2003
By: /s/Shawn M. Preator
---------------------
Shawn M. Preator
Chief Financial
Officer