SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 27, 2004.
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____ to _____.
COMMISSION FILE NUMBER 0-12919
PIZZA INN, INC.
(Exact name of registrant as specified in its charter)
MISSOURI 47-0654575
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3551 PLANO PARKWAY
THE COLONY, TEXAS 75056
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (469) 384-5000
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 EACH
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No [X]
At December 26, 2003, the last business day of the Company's most recently
completed second fiscal quarter, there were 10,073,674 shares of the
registrant's Common Stock outstanding, and the aggregate Market value of
registrant's Common Stock held by non-affiliates was $ 16,335,292, based upon
the closing price as of that date.
On September 20, 2004, there were 10,133,674 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement, to be filed
pursuant to Section 14(a) of the Securities Exchange Act of 1934 in connection
with the registrant's annual meeting of shareholders in December 2004, have been
incorporated by reference in Part III of this report.
PART I
ITEM 1 - BUSINESS
GENERAL
Pizza Inn, Inc. (the "Company"), a Missouri corporation incorporated in
1983, is the successor to a Texas company of the same name that was incorporated
in 1961. The Company is the franchisor and food and supply distributor to a
system of restaurants operating under the trade name "Pizza Inn".
On September 20, 2004, the Pizza Inn system consisted of 407 units,
including two Company owned and operated units, and 405 franchised units. The
Company-operated units are used for product testing and franchisee training, in
addition to serving customers. The domestic franchised units are comprised of
211 buffet units, 53 delivery/carry-out units, and 73 Express units. The
international franchised units are comprised of 16 buffet units, 37
delivery/carry-out units and 15 Express units. Pizza Inn units are currently
located in 18 states and 11 foreign countries. Domestic units are located
predominantly in the southern half of the United States, with Texas, North
Carolina, and Arkansas accounting for approximately 34%, 14%, and 8% of the
total, respectively. Norco Restaurant Services ("Norco"), a division of the
Company, distributes food products, equipment, and other supplies to units in
the United States and, to the extent feasible, in other countries.
PIZZA INN RESTAURANTS
Buffet restaurants ("Buffet") offer dine-in and carry-out service and, in
most cases, also offer delivery service. These restaurants serve pizza on three
different crusts (Original Thin Crust, New York Pan, and Italian Crust), with
standard toppings and special combinations of toppings. They also offer pasta,
salad, sandwiches, desserts and beverages, including beer and wine in some
locations. They are generally located in free standing buildings in close
proximity to offices, shopping centers and residential areas. The Buffet concept
may be developed in one of two formats: full service, featuring a wait staff and
beverage table service, and self serve, allowing customers to serve themselves
from the buffet bar and beverage station. The current standard Buffet
restaurants are between 3,000 and 5,000 square feet in size and seat 120 to 185
customers. The interior decor is designed to promote a contemporary, family
style atmosphere.
Restaurants that offer delivery and carry-out service only ("Delcos") are
growing in popularity and number. Delcos typically are located in shopping
centers or other in-line structures, occupy approximately 1,000 square feet, and
offer limited or no seating. Delcos generally offer the same menu as Buffet
restaurants, but do not offer buffet service. The decor of these units is
designed to be bright and highly visible, featuring neon, lighted displays and
awnings.
Express units ("Express") are typically located in a convenience
store, college campus, airport terminal, or other commercial facility. They
have limited or no seating and offer quick carry-out service of a limited menu
of pizza and other foods and beverages. An Express unit typically occupies
approximately 200 to 400 square feet and is commonly operated by the same person
who owns the commercial facility or who is licensed at one or more locations
within the facility.
FRANCHISING
The Pizza Inn concept was first franchised in 1963. Since that time,
industry franchising concepts and development strategies have changed, and the
Company's present franchise relationships are evidenced by a variety of
contractual forms. Common to those forms are provisions that: (i) provide an
initial franchise term of 20 years (except as described below) and a renewal
term, (ii) require the franchisee to follow the Pizza Inn system of restaurant
operation and management, (iii) require the franchisee to pay a franchise fee
and continuing royalties, and (iv) except for Express units, prohibit the
development of one unit within a specified distance from another.
The Company's current form of franchise agreement provides for: (i) a
franchise fee of $20,000 for a Buffet, $7,500 for a Delco, and $5,000 for an
Express unit, (ii) an initial franchise term of 20 years for a Buffet, 10 years
for a Delco or Express, plus a renewal term of 10 years, (iii) required
contributions equal to 1% of gross sales to the Pizza Inn Advertising Plan or to
the Company, discussed below, (iv) royalties equal to 4% of gross sales for a
Buffet restaurant or Delco, and 6% of gross sales for an Express unit, and (v)
required advertising expenditures of at least 5% of gross sales for a Buffet and
a Delco, and 2% for an Express unit.
The Company has adopted a franchising strategy that has three major
components: continued development within existing Pizza Inn market areas,
development of new domestic territories, and continued growth in the
international arena. As a cornerstone of this approach, the Company offers, to
certain experienced restaurant operators, area developer rights in both new and
existing domestic markets. An area developer pays a negotiated fee to purchase
the right to operate or develop, along with the Company, Pizza Inn restaurants
within a defined territory, typically for a term of 20 years plus renewal
options for 10 years. The area developer agrees to a new store development
schedule and assists the Company in local franchise service and quality control.
In return, half of the franchise fees and royalties earned on all units within
the territory are retained by the area developer during the term of the
agreement.
Similarly, the Company offers master franchise rights to develop Pizza Inn
restaurants in certain foreign countries, with negotiated fees, development
schedules and ongoing royalties. As with developers, a master licensee for a
foreign country pays a negotiated fee to purchase the right to develop and
operate Pizza Inn restaurants within a defined foreign territory, typically for
a term of 20 years plus renewal options for 10 years. The master licensee
agrees to a new store development schedule and the Company trains the master
licensee to monitor and assist franchisees in their territory with local
franchise service and quality control, with support from the Company. In
return, the master licensee typically retains half the franchise fees and
approximately half the royalties on all units within the territory during the
term of the agreement. A master licensee may open restaurants owned and
operated by the master licensee through agreement with the Company, or they may
open sub-franchised restaurants owned and operated by third parties through
agreement with the master licensee.
FOOD AND SUPPLY DISTRIBUTION
The Company's Norco division offers substantially all of the food and paper
products, equipment and other supplies necessary to operate a Pizza Inn
restaurant. Franchisees are required to purchase from Norco certain food
products that are proprietary to the Pizza Inn system. In addition, the vast
majority of franchisees also purchase other supplies from Norco.
Norco operates its central distribution facility six days per week, and it
delivers to all domestic units on a weekly basis, utilizing a fleet of
refrigerated tractor-trailer units operated by Company drivers and independent
owner-operators. Norco also ships products and equipment to its international
franchisees. The food, equipment, and other supplies distributed by Norco are
generally available from several qualified sources, and the Company is not
dependent upon any one supplier or limited group of suppliers. The Company
contracts with established food processors for the production of its proprietary
products. The Company does not anticipate any difficulty in obtaining supplies
in the foreseeable future.
ADVERTISING
The Pizza Inn Advertising Plan ("PIAP") is a Texas non-profit corporation
that creates and produces print advertisements, television and radio
commercials, and in-store promotional materials along with related advertising
services for use by its members. Each operator of a Buffet or Delco unit,
including the Company, is entitled to membership in PIAP. Nearly all of the
Company's existing franchise agreements for Buffet and Delco units require the
franchisees to become members of PIAP. Members contribute 1% of their gross
sales to PIAP. PIAP is managed by a Board of Trustees comprised of franchisee
representatives who are elected by the members each year. The Company does not
have any ownership interest in PIAP. The Company provides certain
administrative, marketing and other services to PIAP and is paid by PIAP for
such services. On September 20, 2004, the Company-operated stores and
substantially all of its franchisees were members of PIAP. Operators of Express
units do not participate in PIAP; however, they contribute up to 1% of their
gross sales directly to the Company to help fund purchases of Express unit
marketing materials and similar expenditures.
Groups of franchisees in some of the Pizza Inn system's market areas have
formed local advertising cooperatives. These cooperatives, which may be formed
voluntarily or may be required by the Company under the franchise agreements,
establish contributions to be made by their members and direct the expenditure
of these contributions on local media advertising using materials developed by
PIAP and the Company.
The Company and its franchisees conduct independent marketing efforts in
addition to their participation in PIAP and local cooperatives.
TRADEMARKS AND QUALITY CONTROL
The Company owns various trademarks, including the name "Pizza Inn", which
are used in connection with the restaurants and have been registered with the
United States Patent and Trademark Office. The duration of such trademarks is
unlimited, subject to periodic renewal and continued use. In addition, the
Company has obtained trademark registrations in several foreign countries and
has periodically re-filed and applied for registration in others. The Company
believes that it holds the necessary rights for protection of the trademarks
essential to its business.
The Company requires all units to satisfy certain quality standards
governing the products and services offered through use of the Company's
trademarks. The Company maintains a staff of field representatives, whose
primary responsibilities include periodic visits to provide advice in
operational and marketing activities and to evaluate and enforce compliance with
the Company's quality standards.
TRAINING
The Company offers numerous training programs for the benefit of
franchisees and their restaurant crew managers. The training programs, taught
by experienced Company employees, focus on food preparation, service, cost
control, sanitation, safety, local store marketing, personnel management and
other aspects of restaurant operation. The training programs include group
classes, supervised work in Company-operated units and special field seminars.
Training programs are offered free of charge to franchisees, who pay their own
travel and lodging expenses. Restaurant managers train their staff through
on-the-job training, utilizing videotapes and printed materials produced by the
Company.
WORKING CAPITAL PRACTICES
The Company's Norco division maintains a sufficient inventory of food and
other consumable supplies that it typically distributes to Pizza Inn units on a
weekly basis. The Company's accounts receivable and notes receivable consist
primarily of receivables from food and supply sales, equipment sales and accrued
franchise royalties.
GOVERNMENT REGULATION
The Company is subject to registration and disclosure requirements and
other restrictions under federal and state franchise laws. The Company's Norco
division is subject to various federal and state regulations, including those
regarding transportation of goods, food labeling, safety, sanitation,
distribution, and vehicle licensing.
The development and operation of Pizza Inn units are subject to federal,
state and local regulations, including those pertaining to zoning, public health
and alcoholic beverages, where applicable. Many restaurant employees are paid
at rates related to the minimum wage established by federal and state law.
Increases in the federal minimum wage can result in higher labor costs for the
Company operated units, as well as its franchisees, which may be partially
offset by price increases or operational and equipment efficiencies.
EMPLOYEES
On September 20, 2004, the Company had approximately 151 employees,
including 55 in the Company's corporate office, 63 at its Norco division, and 12
full-time and 21 part-time employees at the Company-operated restaurants. None
of the Company's employees are currently covered by collective bargaining
agreements. The Company believes that its employee relations are excellent.
COMPETITION
The restaurant business is highly competitive. The Company and its
franchisees compete with other national and regional pizza chains, independent
pizza restaurants, and other restaurants that serve moderately priced foods.
The Company believes that Pizza Inn units compete primarily on the basis of the
quality, value and price of their food, the consistency and level of service,
and the location, attractiveness and cleanliness of their restaurant facilities.
Because of the importance of brand awareness, the Company continually increases
its development emphasis on individual market penetration and local cooperative
advertising by franchisees.
The Company's Norco division competes with both national and local
distributors of food, equipment and other restaurant supplies. The distribution
industry is very competitive. The Company believes that the principal
competitive factors in the distribution industry are product quality, customer
service and price. Norco is the sole authorized supplier of certain proprietary
products which are required to be used by all Pizza Inn units.
In the sale of franchises, the Company competes with franchisors of other
restaurant concepts and franchisors of a variety of other products and services.
The Company believes that the principal competitive factors affecting the sale
of franchises are product quality and value, consumer acceptance, franchisor
experience and support, and the quality relationship maintained between the
franchisor and its franchisees.
SEASONALITY
Historically, sales at Pizza Inn restaurants have been somewhat higher
during the warmer months and somewhat lower during the colder months of the
year.
AVAILABILITY
The Company files regular reports, including quarterly Forms 10-Q and
annual Form 10-K, with the Securities and Exchange Commission (SEC). These
reports are available to the public to read and copy at the SEC's Public
Reference Room at 450 Fifth Street, NW, Washington, DC 20549. Information on
the operation of the Public Reference Room can be obtained by calling the SEC at
1-800-SEC-0300.
The Company files these reports electronically, and the reports can also be
accessed by the public via an SEC-maintained internet site (http://www.sec.gov).
------------------
These reports can also be accessed by going to the Company's internet website
(http://www.pizzainn.com).
----------------------
ITEM 2 - PROPERTIES
The Company owns a 40,000 square foot facility housing its corporate office
and training center and a 100,000 square foot warehouse and distribution
facility. These buildings were constructed on approximately 11 acres of land in
The Colony, Texas in 2001.
The Company currently operates two Pizza Inn restaurants, both of which are
in Texas. One Company operated unit, a Buffet, is operated from a leased
location. Annual lease payments are approximately $14.00 per square foot. The
lease expires in 2007 but has a renewal option. The second Company-operated
unit, a Delco, was constructed on land the Company purchased north of Dallas, in
Little Elm, Texas, in June 2003. In August 2004 the Company purchased land just
north of Dallas on which it intends to construct and operate a Buffet
restaurant.
ITEM 3 - LEGAL PROCEEDINGS
On January 18, 2002, the Company was served with a lawsuit filed by
Blakely-Witt & Associates, Inc. alleging that the Company sent or caused to be
sent unsolicited facsimile advertisements. The Company has vigorously defended
its position in this litigation. In July 2004 the court preliminarily approved
a settlement agreement among all parties and certified the matter as a class
action for settlement purposes only. Under the settlement agreement the Company
would pay an amount that will not materially affect the Company's financial
performance. At a hearing on September 13, 2004 the court entered its final
order and judgment approving the settlement agreement and certifying the
settlement class. Pursuant to the settlement agreement the Company has agreed to
pay $90,000 in full and final settlement of all actual and potential claims of
the members and potential members of the certified settlement class. The final
order dismissed with prejudice all pending and potential claims against the
Company.
On July 7, 2004, B. Keith Clark resigned as Senior Vice
President-Corporate Development, Secretary and General Counsel of the Company.
Mr. Clark has notified the Company that he has reserved his right to assert that
the election of Ramon D. Phillips and Robert B. Page to the board of directors
of the Company at the February 2004 annual meeting of shareholders constituted a
"change of control" under his employment agreement and/or that he was entitled
to terminate his contract for "good reason". Pursuant to the terms of the
employment agreement, the Company has initiated an arbitration proceeding to
resolve this dispute. The arbitration proceeding is in the preliminary stages
and the Company is unable to predict the outcome of the proceeding at this time.
In the event the Company is unsuccessful in this proceeding, the Company could
be liable to Mr. Clark for up to $762,000. The employment agreements of each of
Ronald W. Parker, Ward T. Olgreen and Shawn M. Preator contain similar
provisions and the potential amounts payable to each of them are as follows:
$5.4 million to Mr. Parker, $630,000 to Mr. Olgreen and $597,000 to Mr. Preator.
The aggregate of these payments for which the Company would be obligated is
approximately $7.4 million. The Company disagrees with Mr. Clark's claim that a
"change of control" has occurred under his employment agreement or that he is
entitled to terminate his contract for "good reason". The Board obtained a
written legal opinion that the "change of control" provision was not triggered
by the results of its February 2004 annual meeting. The Company plans to
vigorously defend our position in the matter; however, we cannot assure that we
will prevail in this matter and our defense could be costly and consume the time
of our management. We are unable to predict the outcome of this matter, and no
accrual has been made as of June 27, 2004. An adverse resolution of the matter
could materially affect our financial position and results of operations.
Certain other pending legal proceedings exist against the Company that the
Company believes are not material or have arisen in the ordinary course of its
business.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the Company's fiscal year 2004.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On September 20, 2004, there were 2,086 stockholders of record of the
Company's Common Stock.
The Company's Common Stock is listed on the Small-Cap Market of the
National Association of Securities Dealers Automated Quotation ("NASDAQ") system
under the symbol "PZZI". The following table shows the highest and lowest actual
trade executed price per share of the Common Stock during each quarterly period
within the two most recent fiscal years, as reported by the National Association
of Securities Dealers. Such prices reflect inter-dealer quotations, without
adjustment for any retail markup, markdown or commission.
Actual Trade
Executed Price
High Low
-------------- ----
2004
First Quarter Ended 9/28/2003 . $ 3.95 $ 1.80
Second Quarter Ended 12/28/2003 3.06 2.50
Third Quarter Ended 3/28/2004 . 3.07 2.70
Fourth Quarter Ended 6/27/2004. 3.09 2.58
2003
First Quarter Ended 9/29/2002 . $ 1.75 $ 0.68
Second Quarter Ended 12/29/2002 2.99 1.60
Third Quarter Ended 3/30/2003 . 2.60 1.33
Fourth Quarter Ended 6/29/2003. 2.24 1.51
Under the Company's bank loan agreement, the Company is limited in its
ability to pay dividends or make other distributions on its common stock. The
Company did not pay any dividends on its common stock during the fiscal years
ended June 27, 2004 and June 29, 2003. Any determination to pay cash dividends
in the future will be at the discretion of the Company's Board of Directors and
will be dependent upon the Company's results of operations, financial condition,
capital requirements, contractual restrictions and other factors deemed
relevant.
EQUITY COMPENSATION PLAN INFORMATION
A summary of equity compensation under all of the Company's stock option plans
follows:
Number of Securities to Weighted-average Number of Securities
be issued upon exercise exercise price of remaining available for
Plan. . . . . . . . . of outstanding options, outstanding options, future issuance under
Category. . . . . . . warrants, and rights warrants, and rights equity compensation plans
- --------------------- ----------------------- --------------------- -------------------------
Equity Compensation
plans approved by
security holders. . . 480,700 $ 3.42 1,707,917
Equity compensation
plans not approved by - - -
security holders
----------------------- -------------------- --------------------------
Total . . . . . . . . 480,700 $ 3.42 1,707,917
======================= ===================== =========================
Additional information regarding equity compensation can be found in the notes
to the consolidated financial statements.
ITEM 6 - SELECTED FINANCIAL DATA
The following table contains certain selected financial data for the
Company for each of the last five fiscal years through June 27, 2004, and should
be read in conjunction with the financial statements and schedules in Item 8 of
this report.
Year Ended
----------
June 27, June 29, June 30, June 24, June 25,
2004 2003 2002 2001 2000
----------- --------- --------- ---------- ---------
(In thousands, except per share amounts)
SELECTED INCOME STATEMENT DATA:
Total revenues . . . . . . . . . . . . $ 60,212 $ 58,782 $ 66,642 $ 65,268 $ 67,640
Income before taxes. . . . . . . . . . 3,648 4,643 1,723 3,921 4,389
Net income . . . . . . . . . . . . . . 2,243 3,093 1,137 2,480 2,884
Basic earnings per common share. . . . 0.22 0.31 0.11 0.23 .25
Diluted earnings per common share. . . 0.22 0.31 0.11 0.23 .25
Dividends declared per common share. . - - - 0.12 .24 (1)
SELECTED BALANCE SHEET DATA:
Total assets . . . . . . . . . . . . . 20,906 20,796 24,318 (2) 19,576 (2) 17,395 (2)
Long-term debt and
capital lease obligations . . . . 7,960 9,676 15,227 11,161 10,655
<FN>
(1) On June 26, 2000 the Company's Board of Directors declared a quarterly dividend of $.06 per share
on the Company's common stock, payable to shareholders of record on July 7, 2000.
(2) Total assets include a prior period adjustment of $296,000 to properly reflect deferred tax asset
and liability balances. See Note A to the consolidated financial statements for further discussion.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 critical accounting policies used in the preparation of those
consolidated financial statements are discussed below.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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, intangible asset valuation, 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. The Company recognizes the fee to the extent
its obligations are fulfilled and of cash received.
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. After all attempts to collect a
receivable have failed, the receivable is written off against the allowance.
Notes receivable primarily consist of notes from franchisees for the
purchase of area development and master license territories, trade receivables
and equipment purchases. These notes generally have terms ranging from one to
five years and interest rates of 6% 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. After all attempts to collect a
receivable have failed, the receivable is written off against the allowance.
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.
The Company assesses its exposures to loss contingencies including legal
and income tax matters based upon factors such as the current status of the
cases and consultations with external counsel and provides for an exposure if it
is judged to be probable and estimable. If the actual loss from a contingency
differs from management's estimate, operating results could be impacted.
RESULTS OF OPERATIONS
FISCAL 2004 COMPARED TO FISCAL 2003
Diluted earnings per share decreased 29% to $0.22 from $0.31 in the
prior year. Net income decreased 27% to $2,243,000 from $3,093,000 in the prior
year, on revenues of $60,212,000 in the current year and $58,782,000 in the
prior year. Pre-tax income decreased 21% to $3,648,000 from $4,643,000. The
decrease in net income was primarily attributable to the reversal of a pretax
charge in the prior year of approximately $1.9 million, which was originally
recorded in June 2002, to reserve for a note receivable owed to the Company from
C. Jeffrey Rogers, the Company's former Chief Executive Officer. The Company
received payment in full for the note receivable in December 2002. See
"Transactions with Related Parties".
Results of operations for fiscal 2004 include fifty-two weeks versus
fifty-two weeks in fiscal 2003.
Food and supply sales by the Company's Norco division include food and
paper products, equipment, marketing material and other distribution revenues.
Total food and supply sales increased 3% to $53,072,000 from $51,556,000 in the
prior year due primarily to higher cheese prices.
Franchise revenue, which includes royalties, license fees and income from
area development and foreign master license (collectively, "Territory") sales,
increased 5% or $265,000 in fiscal 2004 primarily due to higher international
royalties, including the collection of previously unrecorded past due royalties
which were offset by lower international development fees.
Restaurant sales, which consist of revenue generated by Company-operated
stores, decreased 15% or $263,000 compared to the same period of the prior year.
The Company opened a new Delco unit on January 9, 2004. The Company also sold
an existing Buffet unit effective March 1, 2004. The year-to-date decrease is
primarily the result of lower comparable sales
Other income primarily consists of interest income and non-recurring
revenue items. Other income decreased 28% or $88,000 primarily due to lower
commissions and lower interest income.
Cost of sales increased 4% to $49.4 million from $47.6 million in the prior
year. The increase in cost of sales is the result of higher cheese prices.
Block cheese prices averaged $1.61 per pound in fiscal 2004 vs $1.13 per pound
in fiscal 2003. This increase in cheese cost was partially offset by lower
depreciation and amortization expenses and lower transportation costs. As a
percentage of sales, cost of sales increased to 90.4% from 89.2% compared to the
prior year.
Franchise expenses include selling, general and administrative expenses
(primarily wages and travel expenses) directly related to the sale and service
of franchises and Territories. These expenses decreased 4% or $119,000 compared
to last year primarily due to a departmental restructuring offset by added
amortization costs from the reacquisition of area development rights for certain
counties in Kentucky and Tennessee.
General and administrative expenses decreased 15% or $626,000 in fiscal
2004. This is primarily the result of lower legal fees due to settlement of
litigation for less than the previously accrued amount and lower amortization of
a leasehold property and computer system implementation. These savings were
partially offset by higher proxy solicitation expenses.
Interest expense decreased 22% or $176,000 in the current year due to lower
average interest rates and debt levels in the current year.
Provision for income taxes decreased 9% or $145,000 due to decrease income
as mentioned above. The effective tax rate was 39% compared to 33% in the
prior year. The increase in the effective tax rate is primarily due to a
provision made for state income tax and an increase in permanent differences.
During fiscal 2004 a total of 34 new Pizza Inn franchise units opened,
including 26 domestic and 8 international units. Domestically, 39 units were
closed by franchisees or terminated by the Company typically because of
unsatisfactory standards of operation or performance. No international units
were closed.
FISCAL 2003 COMPARED TO FISCAL 2002
Diluted earnings per share increased 182% to $0.31 from $0.11 in the
prior year. Net income increased 172% to $3,093,000 from $1,137,000 in the
prior year, on revenues of $58,782,000 in the current year and $66,642,000 in
the prior year. Pre-tax income increased 169% to $4,643,000 from $1,723,000.
The increase in net income was primarily attributable to the reversal of a
pretax charge of approximately $1.9 million, originally recorded in June 2002,
to reserve for a note receivable owed to the Company from C. Jeffrey Rogers, the
Company's former Chief Executive Officer. The Company received payment in full
for the note receivable in December 2002. See "Transactions with Related
Parties".
Results of operations for fiscal 2003 include fifty-two weeks versus
fifty-three weeks in fiscal 2002.
Food and supply sales by the Company's Norco division include food and
paper products, equipment, marketing material, and other distribution revenues.
Total food and supply sales decreased 11% to $51.6 million from $57.7 million in
the prior year due to lower chainwide retail sales in the current year, lower
cheese prices, and an additional week of operations in the prior year.
Franchise revenue, which includes royalties, license fees and income from
area development and foreign master license (collectively, "Territory") sales,
decreased 7% or $393,000 in fiscal 2003 primarily due to lower retail sales in
the current year and an additional week of operations in the prior year.
Restaurant sales, which consist of revenue generated by Company-operated
stores, for the year decreased 17% or $354,000 compared to the same period of
the prior year. This is the result of lower comparable sales at the two
operating Company stores, the temporary closing of the Delco unit in September
2001, and an additional week of sales in the prior year.
Other income primarily consists of interest income and non-recurring
revenue items. Other income decreased 75% or $942,000 primarily due to the
non-cash reversal of a $700,000 reserve in the prior year, which was originally
set up as the Company emerged from bankruptcy and was subsequently deemed
unnecessary.
Cost of sales decreased 12% to $47.6 million from $54.1 million in the
prior year. As a percentage of sales, cost of sales decreased to 89.2% from
90.5% compared to the prior year. Lower cost of sales is due to the additional
week of operations in the prior year and lower cheese prices in the current
year, as described above.
Franchise expenses include selling, general and administrative expenses
(primarily wages and travel expenses) directly related to the sale and service
of franchises and Territories. These costs increased 16% or $446,000 compared
to last year primarily due to foreign tax on a master license agreement recorded
during the fiscal year, departmental restructuring, marketing research, and
additional staffing levels.
General and administrative expenses decreased 10% or $458,000 in fiscal
2003. This is primarily the result of the full provision for all remaining rent
expense at the Company's former corporate headquarters of approximately $304,000
and additional legal reserves of $165,000 in the prior year.
Interest expense decreased 5% or $43,000 in the current year due to lower
interest rates and lower debt levels in the current year.
Provision for income taxes increased 165% or $964,000 due to higher income,
primarily attributable to the reversal of the pre-tax charge discussed above.
The effective tax rate was 33% compared to 34% in the prior year. The decrease
in the effective tax rate is primarily due to an increase in nondeductible
permanent differences, which was offset by a change in the valuation allowance
related to foreign tax carryforwards.
During fiscal 2003 a total of 24 new Pizza Inn franchise units opened,
including 18 domestic and 6 international units. Domestically, 36 units were
closed by franchisees or terminated by the Company typically because of
unsatisfactory standards of operation or performance. Additionally, 7
international units were closed.
FINANCIAL CONDITION
Cash and cash equivalents increased $218,000 in fiscal 2004. The Company
used the cash flow generated from operations plus the proceeds from an officer
loan repayment to pay down $2,800,000 of debt, $682,000 to reacquire area
development rights, and $655,000 to fund capital expenditures relating to the
new Delco unit in Little Elm, TX.
At June 27, 2004 the net deferred tax asset balance was $288,000. At June 27,
2004, the Company had a valuation allowance of $137,000 which is provided for
foreign tax credit carryforwards that may expire before they can be utilized.
The Company believes that it is more likely than not that these credits will not
be realized.
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 $137,000 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.
During the fourth quarter of fiscal 2003, the Company determined that a
prior period adjustment was required to properly state its deferred tax asset
and liability balances. The Company identified approximately $296,000 in
adjustments to these balances, primarily relating to temporary differences for
fixed assets and the allowance for doubtful accounts, which related to fiscal
years ended 1997 and earlier. These adjustments are summarized as follows (in
thousands):
AS PRESENTED ADJUSTMENT RESTATED
------------- ------------ ---------
JUNE 30, 2002:
Deferred taxes, net - current asset . . $ 1,297 $ 10 $ 1,307
Deferred taxes, net - non-current asset 1,347 (306) 1,041
Total assets. . . . . . . . . . . . . . 24,614 (296) 24,318
Total shareholders' equity. . . . . . . 2,929 (296) 2,633
JUNE 25, 2000:
Beginning Retained earnings . . . . . . 13,163 (296) 12,867
The Company has realized substantial benefit from the utilization of its
net operating loss carryforwards to reduce its federal tax liability through
fiscal year 2003. In fiscal 2004, the Company became a cash taxpayer. The
Company expects to realize a benefit in future years from the utilization of its
temporary differences, which currently total $288,000. In accordance with SFAS
109, carryforwards, when utilized, are reflected as a reduction of the deferred
tax asset rather than a reduction of income tax expense. This has caused the
Company to reflect an amount for income tax expense on its statements of
operations at an effective corporate rate of 39%, 33%, and 34% for fiscal years
2004, 2003 and 2002, respectively. However, the actual amount of taxes paid at
the alternative minimum tax rate of approximately 2.6% and 0% for fiscal years
2003 and 2002, respectively, is significantly less than the corporate rate
reflected on the Company's statement of operations. In fiscal year 2004, the
Company paid $635,000 in cash taxes.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities are generally the result of net
income, deferred taxes, depreciation and amortization, and changes in working
capital. In fiscal 2004, the Company generated cash flows of $3,512,000 from
operating activities as compared to $4,021,000 in fiscal 2003 and $5,560,000 in
fiscal 2002. Cash provided by operations totaled $3,512,000 in fiscal 2004 and
was used primarily, in conjunction with proceeds from an officer loan repayment,
to pay down debt and capital expenditures as described below.
Cash flows from investing activities primarily reflect the Company's capital
expenditure strategy. In fiscal 2004, the Company used cash of $1,299,000 for
investing activities as compared to $470,000 in fiscal 2003 and $8,928,000 in
fiscal 2002. Cash flow used for investing activities during fiscal 2004
consisted primarily of the reacquisition of the area development rights and
capital expenditures relating to the new Delco unit in Little Elm, Texas.
Cash flows from financing activities generally reflect changes in the
Company's borrowings during the period, together with treasury stock
transactions, and exercise of stock options. Net cash used for financing
activities was $1,995,000 in fiscal 2004 as compared to cash provided by
financing activities of $3,922,000 in fiscal 2003 and cash provided for
financing activities of $3,598,000 in fiscal 2002. The Company used cash flow
from operations and proceeds from an officer loan repayment to decrease its net
bank borrowings by $2,748,000 to $8,343,000 at June 27, 2004 from $11,091,000 at
June 29, 2003. Net cash used in financing activities in 2004 was for the
re-acquisition of area development rights and for construction of the Company's
new company owned Delco unit in Little Elm, Texas.
The Company entered into an agreement effective March 28, 2004 with its
current lender to provide a $4.0 million revolving credit line that will expire
October 1, 2005, replacing a $7.0 million line that was due to expire 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 June 27, 2004 and June 29,
2003, the variable interest rates were 2.35% and 2.81%, respectively, using a
LIBOR rate basis. Amounts outstanding under the revolving credit line as of
June 27, 2004 and June 29, 2003 were $1.2 million and $2.5 million,
respectively.
On July 7, 2004, B. Keith Clark resigned as Senior Vice President-Corporate
Development, Secretary and General Counsel of the Company. Mr. Clark has
notified the Company that he has reserved his right to assert that the election
of Ramon D. Phillips and Robert B. Page to the board of directors of the Company
at the February 2004 annual meeting of shareholders constituted a "change of
control" under his employment agreement and/or that he was entitled to terminate
his contract for "good reason". Pursuant to the terms of the employment
agreement, the Company has initiated an arbitration proceeding to resolve this
dispute. The arbitration proceeding is in the preliminary stages and the
Company is unable to predict the outcome of the proceeding at this time. In the
event the Company is unsuccessful in this proceeding, the Company could be
liable to Mr. Clark for up to $762,000. The employment agreements of each of
Ronald W. Parker, Ward T. Olgreen and Shawn M. Preator contain similar
provisions and the potential amounts payable to each of them are as follows:
$5.4 million to Mr. Parker, $630,000 to Mr. Olgreen and $597,000 to Mr. Preator.
The aggregate of these payments for which the Company would be obligated is
approximately $7.4 million. The Company disagrees with Mr. Clark's claim that a
"change of control" has occurred under his employment agreement or that he is
entitled to terminate his contract for "good reason". The Board obtained a
written legal opinion that the "change of control" provision was not triggered
by the results of its February 2004 annual meeting. The Company plans to
vigorously defend our position in the matter; however, we cannot assure that we
will prevail in this matter and our defense could be costly and consume the time
of our management. We are unable to predict the outcome of this matter, and no
accrual has been made as of June 27, 2004. An adverse resolution of the matter
could materially affect our financial position and results of operations.
The Company's future known requirements for cash relate primarily to the
repayment of debt, capital expenditures, including information system upgrades
and a new company owned Buffet unit to be located north of Dallas and periodic
purchases of the Company's own common stock.
The Company's primary sources of cash are sales from the distribution
division, royalties, license fees and Territory sales. Existing area
development and master license agreements contain development commitments that
should result in future chainwide growth. Related growth in distribution sales
and royalties are expected to provide adequate working capital to supply the
needs described above. The signing of any new area development or master
license agreements, which cannot be predicted with certainty, could also provide
significant infusions of cash.
ECONOMIC FACTORS
The costs of operations, including labor, supplies, utilities, financing
and rental costs, to the Company and its franchisees, can be significantly
affected by inflation and other economic factors. Increases in any such costs
would result in higher costs to the Company and its franchisees, which may be
partially offset by price increases and increased efficiencies in operations.
The Company's revenues are also affected by local economic trends where units
are concentrated. The Company intends to pursue franchise development in new
markets in the United States and other countries, which would mitigate the
impact of local economic factors.
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 June 27, 2004 (in thousands):
Fiscal Year Fiscal Years Fiscal Years After Fiscal
Total 2005 2006 - 2007 2008 - 2009 Year 2009
- ----------------------------------- ------------ ------------- ------------- ------------- --------
Bank debt . . . . . . . . . . . . . $ 8,343 $ 406 $ 2,012 $ 5,925 $ -
Operating lease obligations . . . . 2,850 1,071 1,396 309 74
Capital lease obligations (1) . . . 33 10 22 1 -
------------ ------------- ------------- ------------- -------
Total contractual cash obligations. $ 11,226 $ 1,487 $ 3,430 $ 6,235 $74
============ ============= ============= ============= ========
(1) Does not include amount representing interest.
TRANSACTIONS WITH RELATED PARTIES
Two of the individuals nominated by the Company and elected to serve on its
Board of Directors are franchisees. One of the franchisees currently operates a
total of 11 restaurants located in Arkansas, the other currently operates one in
Oklahoma. Purchases by these franchisees comprised 6.5% and 6% of the Company's
total food and supply sales in fiscal 2004 and fiscal 2003, respectively.
Royalties and license fees and area development sales from these franchisees
comprised 3.9% and 4.2% of the Company's total franchise revenues in fiscal 2004
and fiscal 2003, respectively. As of June 27, 2004 and June 29, 2003, their
accounts and note payable to the Company were $965,838 and $876,326,
respectively. As franchised units, their restaurants pay royalties to the
Company and purchase a majority of their food and supplies from the Company's
distribution division.
The Company believes that the above transactions were at the same prices and on
the same payment terms available to non-related parties, with one exception.
This exception relates to the enforcement of the personal guarantee by a
director of the $323,000 debt of a franchisee of which he is the President and
sole shareholder. The debt relates to food and equipment purchases and royalty
payments for the franchisee during a period when the director had transferred
his interest in the franchisee, and prior to his later reacquisition of the
franchisee. The director has affirmed his guarantee and confirmed that the debt
will be paid in full.
In October 1999, the Company loaned $1,949,698 to C. Jeffrey Rogers in the form
of a promissory note due in June 2004 to acquire 700,000 shares of the Company's
common stock through the exercise of vested stock options previously granted to
him in 1995 by the Company. The note bore interest at the same floating
interest rate the Company pays on its revolving credit line with Wells Fargo and
was collateralized by a second lien in certain real property and existing
Company stock owned by C. Jeffrey Rogers. The first lien on both the real
property and Company stock pledged by Mr. Rogers was held by Wells Fargo, Mr.
Rogers' primary lender. The Board determined that doubt existed regarding the
collectibility of the note as of June 30, 2002, and recorded a pre-tax charge of
approximately $1.9 million to fully reserve for the expected non-payment of the
debt by Mr. Rogers. In December 2002, the Company's loan to Mr. Rogers was paid
in full. The reserve for the note receivable was reversed in the quarter ended
December 29, 2002.
In October 1999, the Company loaned $557,056 to Ronald W. Parker in the form of
a promissory note due in June 2004 to acquire 200,000 shares of the Company's
common stock through the exercise of vested stock options previously granted to
him in 1995 by the Company. The note bore interest at the same floating
interest rate the Company pays on its revolving credit line with Wells Fargo and
was collateralized by certain real property and existing Company stock owned by
Ronald W. Parker. The note was reflected as a reduction to shareholders'
equity. As of June 27, 2004, the note balance was paid in full.
In July 2000, the Company also loaned $302,581 to Ronald W. Parker in the form
of a promissory note due in June 2004, in conjunction with a cash payment of
$260,000 from Mr. Parker, to acquire 200,000 shares of the Company's common
stock through the exercise of vested stock options previously granted in 1995 by
the Company. The note bore interest at the same floating interest rate the
Company pays on its revolving credit line with Wells Fargo and was
collateralized by certain real property and existing Company stock owned by
Ronald W. Parker. The note was reflected as a reduction to shareholders'
equity. As of June 27, 2004, the note balance was paid in full.
FORWARD-LOOKING STATEMENT
This report contains certain forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) relating to the
Company that are based on the beliefs of the management of the Company, as well
as assumptions and estimates made by and information currently available to the
Company's management. When used in the report, the words "anticipate,"
"believe," "estimate," "expect," "intend" and other similar expressions, as they
relate to the Company or the Company's management, identify forward-looking
statements. Such statements reflect the current views of the Company with
respect to future events and are subject to certain risks, uncertainties and
assumptions relating to the operations and results of operations of the Company
as well as its customers and suppliers, including as a result of competitive
factors and pricing pressures, shifts in market demand, general economic
conditions and other factors including but not limited to, changes in demand for
Pizza Inn products or franchises, the impact of competitors' actions, changes in
prices or supplies of food ingredients, and restrictions on international trade
and business. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions or estimates prove incorrect, actual results
may vary materially from those described herein as anticipated, believed,
estimated, expected or intended.
ITEM 7A - MARKET RISK
The Company has market risk exposure arising from changes in interest
rates. The Company's earnings are affected by changes in short-term interest
rates as a result of borrowings under its credit facilities, which bear interest
based on floating rates.
At June 27, 2004 the Company had approximately $8.3 million of variable
rate debt obligations outstanding with a weighted average interest rate of 2.61%
for the year ending June 27, 2004. A hypothetical 10% change in the effective
interest rate for these borrowings, assuming debt levels at June 27, 2004, would
change interest expense by approximately $22,000.
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. Statement of
Financial Accounting Standards ("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 June 27, 2004 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.
The Company is exposed to market risks from changes in commodity prices.
During the normal course of business, the Company purchases cheese and certain
other food products that are affected by changes in commodity prices and, as a
result, the Company is subject to volatility in our food sales and cost of
sales. Management actively monitors this exposure, however, we do not enter
into financial instruments to hedge commodity prices. The block price per pound
of cheese averaged $1.61 in fiscal 2004. The estimated change in sales from a
hypothetical $0.20 change in the average cheese block price per pound would have
been approximately $1.4 million in fiscal 2004.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement is effective for contracts entered into or modified after June 30,
2003, and for hedging relationships designated after June 30, 2003. The adoption
of this Statement did not have a material impact on our financial position and
results of operations.
In May 2003, the FASB issued SFAS No. 150, which establishes standards for
how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. Specifically, it requires that
financial instruments within the scope of the statement be classified as
liabilities because they embody an obligation of the issuer. Under previous
guidance, many of these instruments could be classified as equity or be
reflected as mezzanine equity between liabilities and equity on the balance
sheet. The Company's initial adoption of this statement on June 1, 2003 did not
have a material impact on its results of operations, financial position or cash
flows.
PIZZA INN, INC.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Schedule:
FINANCIAL STATEMENTS PAGE NO.
Report of Independent Registered Public Accounting Firm. 18
Report of Independent Registered Public Accounting Firm. 19
Consolidated Statements of Operations for the years ended
June 27, 2004, June 29, 2003, and June 30, 2002. 20
Consolidated Statements of Comprehensive Income for the years ended
June 27, 2004, June 29, 2003, and June 30, 2002. 20
Consolidated Balance Sheets at June 27, 2004 and June 29, 2003. 21
Consolidated Statements of Shareholders' Equity for the years
ended June 27, 2004, June 29, 2003, and June 30, 2002. 22
Consolidated Statements of Cash Flows for the years ended June 27,
2004, June 29, 2003, and June 30, 2002. 23
Notes to Consolidated Financial Statements. 25
FINANCIAL STATEMENT SCHEDULE
Schedule II - Consolidated Valuation and Qualifying Accounts 39
All other schedules are omitted because they are not applicable, not
required or because the required information is included in the
consolidated financial statements or notes thereto.
SIGNATURES 44
REPORT OF REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Pizza Inn, Inc.
We have audited the accompanying consolidated balance sheet of Pizza Inn, Inc.
June 27, 2004 and the related consolidated statements of operations and
comprehensive income, stockholders' equity, and cash flows for the year then
ended. We have also audited the schedule listed in the accompanying index.
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements and schedules are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements and schedules. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial
statements and schedules. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pizza Inn, Inc. at
June 27, 2004, and the results of its operations and its cash flows for the year
then ended, in conformity with accounting principles generally accepted in the
United States of America.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
/s/BDO Seidman, LLP
BDO SEIDMAN, LLP
Dallas, TX
August 23, 2004
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
and Shareholders of Pizza Inn, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index, after the restatement described in Note A, present fairly, in all
material respects, the financial position of Pizza Inn, Inc. and its
subsidiaries at June 29, 2003, and the results of their operations and their
cash flows for each of the two years in the period ended June 29, 2003 in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed
in the accompanying index presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As described in Note A to the consolidated financial statements, the Company has
restated its financial statements as of June 30, 2002 to adjust beginning
retained earnings and deferred tax assets.
/s/PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
September 25, 2003
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED
---------------------------------------------
JUNE 27, JUNE 29, JUNE 30,
2004 2003 2002
-------------- -------------- --------------
REVENUES:
Food and supply sales. . . . . . . . . . . . . . . . . $ 53,072 $ 51,556 $ 57,727
Franchise revenue. . . . . . . . . . . . . . . . . . . 5,400 5,135 5,528
Restaurant sales . . . . . . . . . . . . . . . . . . . 1,517 1,780 2,134
Other income . . . . . . . . . . . . . . . . . . . . . 223 311 1,253
-------------- -------------- --------------
60,212 58,782 66,642
-------------- -------------- --------------
COSTS AND EXPENSES:
Cost of sales. . . . . . . . . . . . . . . . . . . . . 49,363 47,583 54,146
Franchise expenses . . . . . . . . . . . . . . . . . . 3,192 3,311 2,865
General and administrative expenses. . . . . . . . . . 3,625 4,251 4,709
Provision for (recovery of) bad debt (see Note J). . . (229) (1,795) 2,367
Interest expense (net of capitalized interest of
$0, $0, and $178, respectively). . . . . . . . . . . 613 789 832
-------------- -------------- --------------
56,564 54,139 64,919
-------------- -------------- --------------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . 3,648 4,643 1,723
Provision for income taxes . . . . . . . . . . . . . . 1,405 1,550 586
-------------- -------------- --------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . $ 2,243 $ 3,093 $ 1,137
============== ============== ==============
BASIC EARNINGS PER COMMON SHARE. . . . . . . . . . . . . $ 0.22 $ 0.31 $ 0.11
============== ============== ==============
DILUTED EARNINGS PER COMMON SHARE. . . . . . . . . . . . $ 0.22 $ 0.31 $ 0.11
============== ============== ==============
WEIGHTED AVERAGE COMMON SHARES . . . . . . . . . . . . . 10,076 10,058 10,092
============== ============== ==============
WEIGHTED AVERAGE COMMON AND
POTENTIALLY DILUTIVE COMMON SHARES . . . . . . . . . . 10,117 10,061 10,095
============== ============== ==============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
YEAR ENDED
---------------------------------------------
JUNE 27, . . . JUNE 29, JUNE 30,
2004 2003 2002
-------------- -------------- --------------
Net Income . . . . . . . . . . . . . . . . . . . . . $ 2,243 $ 3,093 $ 1,137
Interest rate swap gain (loss) (net of tax (expense)
benefit of ($179), $168, and $129, respectively) 348 (326) (251)
-------------- -------------- --------------
Comprehensive Income . . . . . . . . . . . . . . . . $ 2,591 $ 2,767 $ 886
============== ============== ==============
<FN>
See accompanying Notes to Consolidated Financial Statements.
PIZZA INN, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 27, JUNE 29,
ASSETS 2004 2003
--------------------- ---------------------
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $ 617 $ 399
Accounts receivable, less allowance for doubtful
accounts of $310 and $722, respectively . . . . . . . . . . . . 3,113 2,908
Accounts receivable - related parties . . . . . . . . . . . . . . 912 822
Notes receivable, current portion, less allowance
for doubtful accounts of $59 and $175, respectively . . . . . . 50 206
Notes receivable - related parties. . . . . . . . . . . . . . . . 54 54
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,713 1,511
Deferred tax assets, net. . . . . . . . . . . . . . . . . . . . . 183 585
Prepaid expenses and other. . . . . . . . . . . . . . . . . . . . 415 533
--------------------- ---------------------
Total current assets. . . . . . . . . . . . . . . . . . . . . 7,057 7,018
Property, plant and equipment, net. . . . . . . . . . . . . . . . . 12,756 13,126
Property under capital leases, net. . . . . . . . . . . . . . . . . 18 120
Deferred tax assets, net. . . . . . . . . . . . . . . . . . . . . . 105 382
Long-term notes receivable, less
allowance for doubtful accounts of $3 and $19, respectively . . - 41
Re-acquired development territory . . . . . . . . . . . . . . . . . 866 -
Deposits and other. . . . . . . . . . . . . . . . . . . . . . . . . 104 109
--------------------- ---------------------
$ 20,906 $ 20,796
===================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade. . . . . . . . . . . . . . . . . . . . . $ 1,246 $ 1,217
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . 2,109 1,950
Current portion of long-term debt . . . . . . . . . . . . . . . . 406 1,448
Current portion of capital lease obligations. . . . . . . . . . . 10 109
--------------------- ---------------------
Total current liabilities . . . . . . . . . . . . . . . . . . . 3,771 4,724
LONG-TERM LIABILITIES
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . 7,937 9,643
Long-term capital lease obligations . . . . . . . . . . . . . . . 23 33
Other long-term liabilities . . . . . . . . . . . . . . . . . . . 458 989
--------------------- ---------------------
12,189 15,389
--------------------- ---------------------
COMMITMENTS AND CONTINGENCIES (See Notes D and I)
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value; authorized 26,000,000
shares; issued 15,031,319 and 14,956,319 shares, respectively;
outstanding 10,133,674 and 10,058,674 shares, respectively. . . 150 150
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . 7,975 7,825
Loans to officers . . . . . . . . . . . . . . . . . . . . . . . . - (569)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . 20,378 18,135
Accumulated other comprehensive loss. . . . . . . . . . . . . . . (302) (650)
Treasury stock at cost
Shares in treasury: 4,897,645 and 4,897,645, respectively . . . (19,484) (19,484)
--------------------- ---------------------
Total shareholders' equity. . . . . . . . . . . . . . . . . . . 8,717 5,407
--------------------- ---------------------
$ 20,906 $ 20,796
===================== =====================
<FN>
See accompanying Notes to Consolidated Financial Statements.
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
ACCUM.
ADDITIONAL OTHER TREASURY
COMMON STOCK PAID-IN LOANS TO RETAINED COMP. STOCK
------------
SHARES AMOUNT CAPITAL OFFICERS EARNINGS LOSS AT COST TOTAL
------------------ --------- -------- --------- ------- ------- ------
BALANCE, JUNE 24, 2001, 10,320 $ 150 $ 7,823 $(2,325) $ 13,905 $ (73) $(18,911) $ 569
------- ----- ------ --------- -------- --------- ------- ------
as restated
<FN>
Employee incentive shares - - 1 - - - - 1
Acquisition of treasury
Stock (see Note K) (262) - - - - - (573) (573)
Allowance for
doubtful accounts - - - - 1,750 - - - 1,750
Interest rate swap loss
(net of tax of $129) - - - - - (251) - (251)
Net income - - - - - 1,137 - - 1,137
------- ----- ------ --------- -------- --------- ------- ------
BALANCE, JUNE 30, 2002, 10,058 $ 150 $7,824 $ (575) $ 15,042 $(324) $(19,484) $ 2,633
------- ----- ------ --------- -------- --------- ------- ------
as restated
Employee incentive shares 1 - 1 - - - - 1
Principal repayment of loans
by officers - - - 1,756 - - - 1,756
Reversal of allowance for
doubtful accounts - - - (1,750) - - - (1,750)
Interest rate swap loss
(net of tax of$168) - - - - - (326) - (326)
Net income - - - - 3,093 - - 3,093
------- ----- ------ --------- -------- --------- ------- ------
BALANCE, JUNE 29, 2003 10,059 $150 $7,825 $ (569) $ 18,135 $(650) $(19,484) $ 5,407
------- ----- ------ --------- -------- --------- ------- ------
Employee incentive shares 75 - 150 - - - - 150
Principal repayment of loans
by officers - - - 569 - - - 569
Interest rate swap loss - - - - - 348 - 348
(net of tax of $179)
Net income - - - - 2,243 - - 2,243
------- ----- ------ --------- -------- --------- ------- ------
BALANCE, JUNE 27, 2004 10,134 $150 $7,975 $ - $ 20,378 $(302) $(19,484) $ 8,717
======== ===== ======= ======= ========= ====== ======= ========
See accompanying Notes to Consolidated Financial Statements.
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED
-----------------------
JUNE 27, JUNE 29, JUNE 30,
2004 2003 2002
----------------------- ----------------------- -----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . $ 2,243 $ 3,093 $ 1,137
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization . . . . . . . . . 1,133 1,403 1,337
Non cash settlement of accounts receivable. . . (281) - -
Provision for (recovery of) bad debt, net . . . (229) (1,795) 2,367
Deferred income taxes . . . . . . . . . . . . . 500 1,381 538
Changes in assets and liabilities:
Notes and accounts receivable . . . . . . . . . (270) 204 799
Inventories . . . . . . . . . . . . . . . . . . (202) 15 537
Accounts payable - trade. . . . . . . . . . . . 29 (310) (825)
Accrued expenses. . . . . . . . . . . . . . . . 163 (527) 240
Deferred franchise revenue. . . . . . . . . . . (4) (52) 38
Prepaid expenses and other. . . . . . . . . . . 430 609 (608)
----------------------- ----------------------- -----------------------
CASH PROVIDED BY OPERATING ACTIVITIES . . . . . 3,512 4,021 5,560
----------------------- ----------------------- -----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets. . . . . . . . . . . 38 6 24
Capital expenditures. . . . . . . . . . . . . . . (655) (476) (8,952)
Re-acquisition of area development territory. . . (682) - -
----------------------- ----------------------- -----------------------
CASH USED IN INVESTING ACTIVITIES . . . . . . . (1,299) (470) (8,928)
----------------------- ----------------------- -----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term bank debt and
capital lease obligations . . . . . . . . . . . (1,534) (1,337) (3,738)
Borrowings of long-term debt. . . . . . . . . . . - 500 5,432
Line of credit, net . . . . . . . . . . . . . . . (1,300) (5,042) 2,477
Proceeds from exercise of stock options . . . . . 150 - -
Officer loan payment. . . . . . . . . . . . . . . 689 1,957 -
Purchases of treasury stock . . . . . . . . . . . - - (573)
----------------------- ----------------------- -----------------------
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (1,995) (3,922) 3,598
----------------------- ----------------------- -----------------------
Net increase (decrease) in cash and cash equivalents. 218 (371) 230
Cash and cash equivalents, beginning of period. . . . 399 770 540
----------------------- ----------------------- -----------------------
Cash and cash equivalents, end of period. . . . . . . $ 617 $ 399 $ 770
----------------------- ----------------------- -----------------------
<FN>
See accompanying Notes to Consolidated Financial Statements.
PIZZA INN, INC.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
(IN THOUSANDS)
YEAR ENDED
-----------
JUNE 27, JUNE 29, JUNE 30,
2004 2003 2002
----------- --------- ---------
CASH PAYMENTS FOR:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . $ 624 $ 810 $ 992
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 635 - 53
NONCASH FINANCING AND INVESTING
ACTIVITIES:
Capital lease obligations incurred . . . . . . . . . . . . $ - $ - $ 156
See accompanying Notes to Consolidated Financial Statements.
PIZZA INN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS:
Pizza Inn, Inc. (the "Company"), a Missouri corporation incorporated in 1983, is
the successor to a Texas company of the same name, which was incorporated in
1961. The Company is the franchisor and food and supply distributor to a system
of restaurants operating under the trade name "Pizza Inn".
On June 27, 2004 the Pizza Inn system consisted of 405 locations, including two
Company-operated units and 403 franchised units. On June 27, 2004 the Company
had franchises in 18 states and 10 foreign countries. Domestic units are
located predominantly in the southern half of the United States, with Texas,
North Carolina and Arkansas accounting for approximately 34%, 15%, and 8%,
respectively, of the total. Norco Restaurant Services ("Norco"), a division of
the Company, distributes food products, equipment, and other supplies to units
in the United States and, to the extent feasible, in other countries.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All appropriate inter-company balances and
transactions have been eliminated. Certain prior year amounts have been
reclassified to conform with current year presentation.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
INVENTORIES:
Inventories, which consist primarily of food, paper products, supplies and
equipment located at the Company's distribution center, are stated at the lower
of FIFO (first-in, first-out) cost or market. Provision is made for obsolete
inventories.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, including property under capital leases, are
stated at cost less accumulated depreciation and amortization. Repairs and
maintenance are charged to operations as incurred; major renewals and
betterments are capitalized. Internal and external costs incurred to develop or
purchase internal-use computer software during the application development
stage, including upgrades and enhancements, are capitalized. Upon the sale or
disposition of a fixed asset, the asset and the related accumulation
depreciation or amortization are removed from the accounts and the gain or loss
is included in operations. 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 amortized over the
useful life of the asset.
Depreciation and amortization is computed on the straight-line method over the
useful lives of the assets or, in the case of leasehold improvements, over the
term of the lease, if shorter. The useful lives of the assets range from three
to thirty- nine years. It is the Company's policy to periodically review the
net realizable value of its long-lived assets when certain indicators exist
through an assessment of the estimated gross future cash flows related to such
assets. In the event that assets are found to be carried at amounts which are
in excess of estimated gross future cash flows, then the assets will be adjusted
for impairment to a level commensurate with a discounted cash flow analysis of
the underlying assets. The Company believes no impairment of long-lived assets
exists at June 27, 2004.
ACCOUNTS RECEIVABLE:
Accounts receivable consist primarily of receivables from food and supply sales
and franchise royalties. The Company records a provision for doubtful
receivables to allow for any amounts which may be unrecoverable and is based
upon an analysis of the Company's prior collection experience, customer credit
worthiness, and current economic trends. After all attempts to collect a
receivable have failed, the receivable is written off against the allowance.
NOTES RECEIVABLE:
Notes receivable primarily consist of notes from franchisees for the purchase of
area development and master license territories and the refinancing of existing
trade receivables. These notes generally have terms ranging from one to five
years, with interest rates of 6% 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. After all attempts to collect a
receivable have failed, the receivable is written off against the allowance.
INCOME TAXES:
Income taxes are accounted for using the asset and liability method pursuant to
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). Deferred taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement and carrying amounts
and the tax bases of existing assets and liabilities. The effect on deferred
taxes for a change in tax rates is recognized in income in the period that
includes the enactment date. The Company recognizes future tax benefits to the
extent that realization of such benefits is more likely than not.
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.
During the fourth quarter of fiscal 2003, the Company determined that a prior
period adjustment was required to properly state its deferred tax asset and
liability balances. The Company identified approximately $296,000 in
adjustments to these balances, primarily relating to temporary differences for
fixed assets and the allowance for doubtful accounts, which related to fiscal
years ended 1997 and earlier. These adjustments are summarized as follows (in
thousands):
AS PRESENTED ADJUSTMENT RESTATED
------------- ------------ ---------
JUNE 30, 2002:
Deferred taxes, net - current asset . . $ 1,297 $ 10 $ 1,307
Deferred taxes, net - non-current asset 1,347 (306) 1,041
Total assets. . . . . . . . . . . . . . 24,614 (296) 24,318
Total shareholders' equity. . . . . . . 2,929 (296) 2,633
JUNE 25, 2000:
Beginning Retained earnings . . . . . . 13,163 (296) 12,867
REVENUE RECOGNITION:
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 area
development and foreign master license (collectively, "Territory") sales.
License fees are recognized as income when there has been substantial
performance of the agreement by both the franchisee and the Company, generally
at the time the unit is opened. Royalties are recognized as income when earned.
For the years ended June 27, 2004, June 29, 2003 and June 30, 2002, 95%, 92% and
93%, respectively, of franchise revenue was comprised of recurring royalties.
Territory sales are the fees paid by selected experienced restaurant operators
to the Company for the right to develop Pizza Inn restaurants in specific
geographical territories. The Company recognizes the fee to the extent its
obligations are fulfilled and of cash received. Territory fees recognized as
income for the years ended June 27, 2004, June 29, 2003 and June 30, 2002 were
$12,500, $180,000 and $131,000, respectively.
STOCK OPTIONS:
As allowed by SFAS 123, "Accounting for Stock-Based Compensation" (SFAS No.
123), the Company elected to follow APB No. 25, and related Interpretations in
accounting for employee stock options because the alternative fair value
accounting provided for under SFAS No. 123, "Accounting for Stock Based
Compensation," requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB No. 25, because the
exercise price of our employee stock options equals or exceeds the fair value of
the underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net income and earnings per share is required to
be determined as if the Company had accounted for its stock options granted
subsequent to June 25, 1995 under the fair value method of SFAS 123, "Accounting
for Stock-Based Compensation". The fair value of options granted in fiscal
2001, 2002 and 2003 was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions: risk-free
interest rates ranging from 1.4% to 6.3%, expected volatility of 39.4% to 42.5%,
expected dividend yield of 0% and expected lives of 2 to 3 years.
For purposes of pro forma disclosures, the estimated fair value of the stock
options is amortized over the option vesting periods. The Company's pro forma
information follows (in thousands, except for earnings per share information):
June 27, 2004 June 29, 2003 June 30, 2002
-------------- -------------- --------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
-------------- -------------- -------------- ---------- ------------ ----------
Net income . . . . . . . . $ 2,243 $ 2,241 $ 3,093 $ 3,075 $ 1,137 $ 1,079
Basic earnings per share . $ 0.22 $ 0.22 $ 0.31 $ 0.31 $ 0.11 $ 0.11
Diluted earnings per share $ 0.22 $ 0.22 $ 0.31 $ 0.31 $ 0.11 $ 0.11
The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts as the pro forma amounts above do not include the impact of
additional awards anticipated in future years.
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of short-term investments, accounts and notes receivable,
and debt approximate fair value. The fair value of the Company's interest rate
swap is based on pricing models using current market rates.
USE OF MANAGEMENT ESTIMATES:
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and related revenues and expenses and disclosure of gain and loss
contingencies at the date of the financial statements. Actual results could
differ from those estimates.
FISCAL YEAR:
The Company's fiscal year ends on the last Sunday in June. Fiscal years ending
June 27, 2004 and June 29, 2003 contained 52 weeks. Fiscal year ending June 30,
2002 contained 53 weeks.
NEW PRONOUNCEMENTS:
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement is effective for contracts entered into or modified after June 30,
2003, and for hedging relationships designated after June 30, 2003. The adoption
of this Statement did not have a material impact on our financial position and
results of operations.
In May 2003, the FASB issued SFAS No. 150, which establishes standards for how
an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. Specifically, it requires that
financial instruments within the scope of the statement be classified as
liabilities because they embody an obligation of the issuer. Under previous
guidance, many of these instruments could be classified as equity or be
reflected as mezzanine equity between liabilities and equity on the balance
sheet. The Company's initial adoption of this statement on June 1, 2003 did not
have a material impact on its results of operations, financial position or cash
flows.
NOTE B - PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment and property under capital leases consist of the
following (in thousands):
USEFUL JUNE 27, JUNE 29,
LIVES . . . . 2004 2003
------- ----------- -----------
Property, plant and equipment:
Equipment, furniture and fixtures 3 - 7 yrs $ 5,504 $ 5,559
Building. . . . . . . . . . . . . 5 - 39 yrs 10,875 10,562
Land. . . . . . . . . . . . . . . - 2,087 2,072
Construction in progress. . . . . - 10 37
Leasehold improvements. . . . . . 7 yrs 670 668
------------------------ ----------------------
19,146 18,898
Less: accumulated depreciation . (6,390) (5,772)
----------- ---------------
$ 12,756 $ 13,126
======================== ======================
Property under capital leases:
Real Estate . . . . . . . . . . . 20 yrs $ 118 $ 118
Equipment . . . . . . . . . . . . 3 - 7 yrs 3 480
------------------------ ----------------------
121 598
Less: accumulated amortization . (103) (478)
----------- --------------
18 120
======================== ======================
Depreciation and amortization expense was $1,133,000, $1,403,000, and $1,337,000
for the years ended June 27, 2004, June 29, 2003, and June 30, 2002,
respectively.
NOTE C - ACCRUED EXPENSES:
Accrued expenses consist of the following (in thousands):
JUNE 27, JUNE 29,
2004 2003
--------------------- ---------------------
Compensation . . . . . . . . . . . . . . . $ 653 $ 539
Taxes. . . . . . . . . . . . . . . . . . . 713 437
Legal reserves and other professional fees 154 393
Accrued rent . . . . . . . . . . . . . . . - 7
Other. . . . . . . . . . . . . . . . . . . 589 574
--------------------- ---------------------
2,109 1,950
===================== =====================
NOTE D - LONG-TERM DEBT:
The Company entered into an agreement effective March 28, 2004 with Wells Fargo
to provide a $4.0 million revolving credit line that will expire October 1,
2005, replacing a $7.0 million line that was due to expire 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 June 27, 2004 and June 29, 2003, the
variable interest rates were 2.35% and 2.81%, respectively, using a LIBOR rate
basis. Amounts outstanding under the revolving credit line as of June 27, 2004
and June 29, 2003 were $1.2 million and $2.5 million, respectively.
The Company entered into a term note effective March 31, 2000 with Wells Fargo.
The $5,000,000 term note matured on March 31, 2004 and was paid in full. The
term note had an outstanding balance of $1.0 million at June 29, 2003. Interest
on the term loan was also payable monthly. Interest was 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 Wells Fargo 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 June
27, 2004 and June 29, 2003, the variable interest rates were 2.78% and 2.59%,
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 $7.1 million at June 27, 2004 and $7.5
million at June 29, 2003.
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 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 June 27, 2004
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.
PIBCO, Ltd., a wholly-owned insurance subsidiary of the Company, in the normal
course of operations, arranged for the issuance of a letter of credit for
$230,000 to reinsurers to secure loss reserves. At June 27, 2004 and June 29,
2003 this letter of credit was secured under the Company's revolving line of
credit. Loss reserves for approximately the same amount have been recorded by
PIBCO, Ltd. and are reflected as current liabilities in the Company's financial
statements.
The following chart summarizes all of the Company's debt obligations to make
future payments under debt agreements as of June 27, 2004 (in thousands):
JUNE 27,
2004
-------------
2005. . . . . . . . . $ 406
2006. . . . . . . . . 1,606
2007. . . . . . . . . 406
2008. . . . . . . . . 5,925
2009. . . . . . . . . -
-------
Total debt obligation $ 8,343
=====================
NOTE E - INCOME TAXES:
Provision for income taxes consists of the following (in thousands):
JUNE 27, JUNE 29, JUNE 30,
2004 2003 2002
--------------------- --------------------- -----------------------
Federal. . . . . . . . . $ 637 $ - $ (81)
State. . . . . . . . . . 246 - -
Deferred . . . . . . . . 522 1,550 667
--------------------- --------------------- -----------------------
Provision for income taxes $ 1,405 $ 1,550 $ 586
===================== ===================== =======================
The effective income tax rate varied from the statutory rate for the years ended
June 27, 2004, June 29, 2003 and June 30, 2002 as reflected below (in
thousands):
JUNE 27, JUNE 29, JUNE 30,
2004 2003 2002
----------------------- ---------------------- -----------------------
Federal income taxes based on 34%
of book income. . . . . . . . . $ 1,157 $ 1,579 $ 586
State income tax. . . . . . . . . 246 - -
Permanent adjustments . . . . . . 18 21 (187)
Change in valuation allowance . . (16) (72) 187
Expired credits . . . . . . . . . 22 -
--------------------- ---------------------- ------------------------
$ 1,405 $ 1,550 $ 586
======================= ====================== =======================
The tax effects of temporary differences which give rise to the net deferred tax
assets (liabilities) consisted of the following (in thousands):
JUNE 27, JUNE 29,
2004 2003
----------------------- -----------------------
Reserve for bad debt . . $ 126 $ 312
Depreciable assets . . . (128) (38)
Deferred fees. . . . . . 57 59
Other reserves . . . . . 7 (80)
Interest rate swap loss. 155 335
Credit carryforwards . . 208 532
----------------------- -----------------------
Gross deferred tax asset $ 425 $ 1,120
Valuation allowance. . . (137) (153)
----------------------- -----------------------
Net deferred tax asset . $ 288 $ 967
======================= =======================
As of June 27, 2004, the Company had $208,000 of foreign tax credit
carryforwards expiring between 2004 and 2008. The valuation allowance was
established under SFAS 109, since it is more likely than not that a portion of
the foreign tax credit carryforwards will expire before they can be utilized.
NOTE F - LEASES:
The real property and premises occupied by a Company-operated restaurant is
leased for an initial term of ten years with renewal options of three years
each. The lease agreement contains either provisions requiring additional rent
if sales exceed specified amounts, and an escalation clause based upon a
predetermined multiple.
The Company's distribution division currently leases a significant portion of
its transportation equipment under operating leases with terms from five to
seven years. Some of the leases include fair market value purchase options at
the end of the term.
Future minimum rental payments under non-cancelable leases with initial or
remaining terms of one year or more at June 27, 2004 are as follows (in
thousands):
CAPITAL OPERATING
LEASES LEASES
------------------------ ----------
2005. . . . . . . . . . . . . . . . . . . $ 12 $ 1,071
2006. . . . . . . . . . . . . . . . . . . 12 851
2007. . . . . . . . . . . . . . . . . . . 12 545
2008. . . . . . . . . . . . . . . . . . . 1 234
2009. . . . . . . . . . . . . . . . . . . - 75
Thereafter. . . . . . . . . . . . . . . . - 74
-------------- -------
37 . $ 2,850
=========
Less amount representing interest . . . . (4)
------------------------
Present value of total obligations under
capital leases. . . . . . . . . . . . 33
Less current portion. . . . . . . . . . . (10)
------------------------
Long-term capital lease obligations . . . $ 23
========================
Rental expense consisted of the following (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 27, JUNE 29, JUNE 30,
2004 2003 2002
------------ ------------ ------------
Minimum rentals. . $ 1,135 $ 1,143 $ 1,773
Contingent rentals 1 14 21
Sublease rentals . (94) (97) (99)
------------ ------------ ------------
$ 1,042 $ 1,060 $ 1,695
============ ============ ============
NOTE G - EMPLOYEE BENEFITS:
The Company has a tax advantaged savings plan which is designed to meet the
requirements of Section 401(k) of the Internal Revenue Code (the "Code"). The
current plan is a modified continuation of a similar savings plan established by
the Company in 1985. Employees who have completed six months of service and are
at least 21 years of age are eligible to participate in the plan. Effective
January 1, 2002, as amended by the Economic Growth and Tax Relief Reconciliation
Act (EGTRRA), the plan provides that participating employees may elect to have
between 1% - 15% of their compensation deferred and contributed to the plan
subject to certain IRS limitations. Effective January 1, 2001 through June 30,
2004, the Company contributes on behalf of each participating employee an amount
equal to 50% of up to 4% of the employee's contribution. Separate accounts are
maintained with respect to contributions made on behalf of each participating
employee. Employer matching contributions and earnings thereon were invested in
Common Stock of the Company. Effective July 1, 2004, the Company elected to
temporarily suspend its matching contribution portion to the plan. The plan is
subject to the provisions of the Employee Retirement Income Security Act, as
amended, and is a profit sharing plan as defined in Section 401 of the Code.
The Company is the administrator of the plan.
For the years ended June 27, 2004, June 29, 2003 and June 30, 2002, total
matching contributions to the tax advantaged savings plan by the Company on
behalf of participating employees were $94,200, $82,576 and $88,770,
respectively.
NOTE H - STOCK OPTIONS:
In January 1994, the 1993 Stock Award Plan ("the 1993 Plan") was approved by the
Company's shareholders with a plan effective date of October 13, 1993. Officers
and employees of the Company are eligible to receive stock options under the
1993 Plan. Options are granted at market value of the stock on the date of
grant, are subject to various vesting periods ranging from six months to three
years with exercise periods up to eight years, and may be designated as
incentive options (permitting the participant to defer resulting federal income
taxes). Originally, a total of two million shares of Common Stock were
authorized to be issued under the 1993 Plan. In December 1996, 1997 and 1998,
the Company's shareholders approved amendments that increased the 1993 Plan by
500,000 shares in each year. In December 2000, the Company's shareholders
approved amendments that increased the 1993 Plan by 100,000 shares. The 1993
Plan expired on October 13, 2003 and no further options may be granted pursuant
to it.
The 1993 Outside Directors Stock Award Plan (the "1993 Directors Plan") was also
adopted by the Company effective as of October 13, 1993 as approved by the
shareholders. Elected directors not employed by the Company were eligible to
receive stock options under the 1993 Directors Plan. Options for common stock
equal to twice the number of shares of common stock acquired during the previous
fiscal year were granted, up to 20,000 shares per year, to each outside
director. Options were granted at market value of the stock on the first day of
each fiscal year, which was also the date of grant, and with various vesting
periods ranging from one to four years with exercise periods up to nine years.
A total of 200,000 shares of Company Common Stock were authorized to be issued
pursuant to the 1993 Directors Plan. The 1993 Directors Plan expired on October
13, 2003 and no further options may be granted pursuant to it.
A summary of stock option transactions under all of the Company's stock option
plans and information about fixed-price stock options follows:
SUMMARY OF STOCK OPTION TRANSACTIONS
June 27, 2004 June 29, 2003 June 30, 2002
--------------- -------------- ---------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------- -------------- --------------- ------ ---------- ------
Outstanding at beginning of year 806,150 $ 3.68 1,591,233 $ 3.76 2,210,033 $ 3.82
Granted. . . . . . . . . . . . . 5,000 $ 2.15 10,000 $ 1.28 4,000 $ 2.12
Exercised. . . . . . . . . . . . (75,000) $ 2.00 - $ 0.00 - $ 0.00
Canceled/Expired . . . . . . . . (250,450) $ 4.69 (795,083) $ 3.81 (622,800) $ 3.96
--------------- -------------- --------------- ------ ---------- ------
Outstanding at end of year . . . 485,700 $ 3.40 806,150 $ 3.68 1,591,233 $ 3.76
=============== ============== =============== ====== ========== ======
Exercisable at end of year . . . 480,700 $ 3.42 792,150 $ 3.72 1,358,233 $ 4.02
Weighted-average fair value of
options granted during the year. $ 0.53 $ 0.33 $ 0.68
FIXED PRICE STOCK OPTIONS
The following table provides information on options outstanding and options
exercisable at June 27, 2004:
Options Outstanding Options Exercisable
------------------- --------------------
Weighted-
Average
Shares Remaining Weighted- Shares Weighted-
Range of Outstanding Contractual Average Exercisable Average
Exercise Prices at June 27, 2004 Life (Years) Exercise Price at June 29, 2003 Exercise Price
- ---------------- ------------------- -------------------- --------------- ---------------- ---------------
1.28 - 3.25 . . 154,700 2.83 $ 2.22 149,700 $ 2.22
3.30 - 4.25 . . 240,500 1.69 $ 3.59 240,500 $ 3.59
4.38 - 5.50 . . 90,500 1.56 $ 4.94 90,500 $ 4.94
------------------- ----------------
1.28 - 5.50 . . 485,700 2.03 $ 3.40 480,700 $ 3.42
=================== ================
NOTE I - COMMITMENTS AND CONTINGENCIES:
On January 18, 2002, the Company was served with a lawsuit filed by Blakely-Witt
& Associates, Inc. alleging that the Company sent or caused to be sent
unsolicited facsimile advertisements. The Company has vigorously defended its
position in this litigation. In July 2004 the court preliminarily approved a
settlement agreement among all parties and certified the matter as a class
action for settlement purposes only. Under the settlement agreement the Company
would pay an amount that will not materially affect the Company's financial
performance. At a hearing on September 13, 2004 the court entered its final
order and judgment approving the settlement agreement and certifying the
settlement class. Pursuant to the settlement agreement the Company has agreed to
pay $90,000 in full and final settlement of all actual and potential claims of
the members and potential members of the certified settlement class. The final
order dismissed with prejudice all pending and potential claims against the
Company.
On July 7, 2004, B. Keith Clark resigned as Senior Vice President-Corporate
Development, Secretary and General Counsel of the Company. Mr. Clark has
notified the Company that he has reserved his right to assert that the election
of Ramon D. Phillips and Robert B. Page to the board of directors of the Company
at the February 2004 annual meeting of shareholders constituted a "change of
control" under his employment agreement and/or that he was entitled to terminate
his contract for "good reason". Pursuant to the terms of the employment
agreement, the Company has initiated an arbitration proceeding to resolve this
dispute. The arbitration proceeding is in the preliminary stages and the
Company is unable to predict the outcome of the proceeding at this time. In the
event the Company is unsuccessful in this proceeding, the Company could be
liable to Mr. Clark for up to $762,000. The employment agreements of each of
Ronald W. Parker, Ward T. Olgreen and Shawn M. Preator contain similar
provisions and the potential amounts payable to each of them are as follows:
$5.4 million to Mr. Parker, $630,000 to Mr. Olgreen and $597,000 to Mr. Preator.
The aggregate of these payments for which the Company would be obligated is
approximately $7.4 million. The Company disagrees with Mr. Clark's claim that a
"change of control" has occurred under his employment agreement or that he is
entitled to terminate his contract for "good reason". The Board obtained a
written legal opinion that the "change of control" provision was not triggered
by the results of its February 2004 annual meeting. The Company plans to
vigorously defend our position in the matter; however, we cannot assure that we
will prevail in this matter and our defense could be costly and consume the time
of our management. We are unable to predict the outcome of this matter, and no
accrual has been made as of June 27, 2004. An adverse resolution of the matter
could materially affect our financial position and results of operations.
The Company is also subject to other various claims and contingencies related to
employment agreements, lawsuits, taxes, food product purchase contracts and
other matters arising out of the normal course of business. Management believes
that any liabilities arising from these claims and contingencies are either
covered by insurance or would not have a material adverse effect on the
Company's annual results of operations or financial condition.
On April 30, 1998, Mid-South Pizza Development, Inc. ("Mid-South") entered into
a promissory note whereby, among other things, Mid-South borrowed $1,330,000
from a third party lender (the "Loan") with the Company acting as the guarantor.
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. Effective December 28, 2003, the Company reacquired all such
area development rights from Mid-South. The Company paid approximately $963,000
for these rights of which $682,000 was a cash payment, and a non-cash settlement
of accounts receivable of approximately $281,000. A long-term asset was
recorded for the same amount. Restaurants operating or developed in the
reacquired territory will now pay all royalties and franchise fees directly to
Pizza Inn, Inc. The asset will be amortized over the life of the asset, which
is estimated to be approximately five years.
NOTE J - RELATED PARTIES:
Two of the individuals nominated by the Company and elected to serve on its
Board of Directors are franchisees. One of the franchisees currently operates a
total of 11 restaurants located in Arkansas, the other currently operates one in
Oklahoma. Purchases by these franchisees comprised 6.5% and 6.0% of the
Company's total food and supply sales in fiscal 2004 and fiscal 2003,
respectively. Royalties and license fees and area development sales from these
franchisees comprised 3.9% and 4.2% of the Company's total franchise revenues in
fiscal 2004 and fiscal 2003, respectively. As of June 27, 2004 and June 29,
2003, their accounts and note payable to the Company were $965,838 and $876,326,
respectively.
The Company believes that the above transactions were at the same prices and on
the same payment terms available to non-related parties, with one exception.
This exception relates to the enforcement of the personal guarantee by a
director of the $323,000 debt of a franchisee of which he is the President and
sole shareholder. The debt relates to food and equipment purchases and royalty
payments for the franchisee during a period when the director had transferred
his interest in the franchisee, and prior to his later reacquisition of the
franchisee. The director has affirmed his guarantee and confirmed that the debt
will be paid in full.
In October 1999, the Company loaned $1,949,698 to C. Jeffrey Rogers in the form
of a promissory note due in June 2004 to acquire 700,000 shares of the Company's
common stock through the exercise of vested stock options previously granted to
him in 1995 by the Company. The note bore interest at the same floating
interest rate the Company pays on its revolving credit line with Wells Fargo and
was collateralized by a second lien in certain real property and existing
Company stock owned by C. Jeffrey Rogers. The first lien on both the real
property and Company stock pledged by Mr. Rogers was held by Wells Fargo, Mr.
Rogers' primary lender. The Board determined that doubt existed regarding the
collectibility of the note as of June 30, 2002, and recorded a pre-tax charge of
approximately $1.9 million to fully reserve for the expected non-payment of the
debt by Mr. Rogers. In December, 2002, the Company's loan to Mr. Rogers was paid
in full. The reserve for the note receivable was reversed in the quarter ending
December 29, 2002.
In October 1999, the Company also loaned $557,056 to Ronald W. Parker in the
form of a promissory note due in June 2004 to acquire 200,000 shares of the
Company's common stock through the exercise of vested stock options previously
granted to him in 1995 by the Company. The note bore interest at the same
floating interest rate the Company pays on its revolving credit line with Wells
Fargo and was collateralized by certain real property and existing Company stock
owned by Ronald W. Parker. The note was reflected as a reduction to
shareholders' equity. As of June 27, 2004, the note balance is paid in full.
In July 2000, the Company loaned $302,581 to Ronald W. Parker in the form of a
promissory note due in June 2004, in conjunction with a cash payment of $260,000
from Mr. Parker, to acquire 200,000 shares of the Company's common stock through
the exercise of vested stock options previously granted in 1995 by the Company.
The note bore interest at the same floating interest rate the Company pays on
its revolving credit line with Wells Fargo and was collateralized by certain
real property and existing Company stock owned by Ronald W. Parker. The note
was reflected as a reduction to shareholders' equity. As of June 27, 2004, the
note balance is paid in full.
NOTE K - TREASURY STOCK:
For the period of September 1995 through June 2002, the Company purchased
5,244,161 shares of its own Common Stock from time to time on the open market at
a total cost of $21.4 million. The Company did not purchase any shares of its
own Common Stock in fiscal 2004. The purchases of common shares described above
were funded from working capital, and reduced the Company's outstanding shares
by approximately 34%.
NOTE L - EARNINGS PER SHARE:
The Company computes and presents earnings per share ("EPS") in accordance with
SFAS 128, "Earnings Per Share". Basic EPS excludes the effect of potentially
dilutive securities while diluted EPS reflects the potential dilution that would
occur if securities or other contracts to issue common stock were exercised,
converted or resulted in the issuance of common stock that then shared in the
earnings of the entity.
The following table 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
------------ ------------- ----------
YEAR ENDED JUNE 27, 2004
BASIC EPS
Income Available to Common Shareholders . . . $ 2,243 10,076 $ 0.22
Effect of Dilutive Securities - Stock Options 41
------------
DILUTED EPS
Income Available to Common Shareholders
& Potentially Dilutive Securities . . . . . . $ 2,243 10,117 $ 0.22
============ ============= ==========
YEAR ENDED JUNE 29, 2003
BASIC EPS
Income Available to Common Shareholders . . . $ 3,093 10,058 $ 0.31
Effect of Dilutive Securities - Stock Options 3
------------
DILUTED EPS
Income Available to Common Shareholders
& Potentially Dilutive Securities . . . . . . $ 3,093 10,061 $ 0.31
============ ============= ==========
YEAR ENDED JUNE 30, 2002
BASIC EPS
Income Available to Common Shareholders . . . $ 1,137 10,092 $ 0.11
Effect of Dilutive Securities - Stock Options 3
------------
DILUTED EPS
Income Available to Common Shareholders
& Potentially Dilutive Securities . . . . . . $ 1,137 10,095 $ 0.11
============ ============= ==========
Options to purchase 366,700 shares of common stock at exercise prices ranging
from $3.00 to $5.50 per share were outstanding at June 27, 2004 but were not
included in the computation of diluted EPS because the option's exercise price
was greater than the average market price of the common shares. Options to
purchase 796,150 and 1,591,233 shares of common stock during fiscal years 2003
and 2002, respectively, were excluded from the computation of EPS in those years
because their inclusion would result in an anti-dilutive effect on EPS.
NOTE M - SEGMENT REPORTING:
The Company has two reportable operating segments as determined by management
using the "management" approach as defined in SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". (1) Food and Equipment
Distribution, and (2) Franchise and Other. These segments are a result of
differences in the nature of the products and services sold. Corporate
administration costs, which include, but are not limited to, general accounting,
human resources, legal and credit and collections, are partially allocated to
the two operating segments. Other revenue consists of nonrecurring items.
The Food and Equipment Distribution segment sells and distributes proprietary
and non-proprietary items to franchisees and to two company-owned and operated
stores. Inter-segment revenues consist of sales to the company-owned stores.
Assets for this segment include tractor/trailers, equipment, furniture and
fixtures.
The Franchise and Other segment includes income from royalties, license fees and
area development and foreign master license sales. The Franchise and Other
segment includes the two company-owned stores, which are used as prototype and
training facilities. Assets for this segment include equipment, furniture and
fixtures for the company stores.
Corporate administration and other assets primarily include the deferred tax
asset, cash and short term investments, as well as furniture and fixtures
located at the corporate office.
Summarized in the following tables are net sales and operating revenues,
depreciation and amortization expense, interest expense, interest income,
operating profit, income tax expense, capital expenditures, and assets for the
Company's reportable segments for the years ended June 27, 2004, June 29, 2003,
and June 30, 2002 (in thousands):
JUNE 27, JUNE 29, JUNE 30,
2004 2003 2002
---------- ---------- ----------
NET SALES AND OPERATING REVENUES:
Food and Equipment Distribution . . $ 53,072 $ 51,556 $ 57,727
Franchise and Other . . . . . . . . 6,917 6,915 7,662
Intersegment revenues . . . . . . . 640 664 806
---------- ---------- ----------
Combined. . . . . . . . . . . . . 60,629 59,135 66,195
Other revenues. . . . . . . . . . . 223 311 1,253
Less intersegment revenues. . . . . (640) (664) (806)
---------- ---------- ----------
Consolidated revenues . . . . . . $ 60,212 $ 58,782 $ 66,642
========== ========== ==========
DEPRECIATION AND AMORTIZATION:
Food and Equipment Distribution . . $ 575 $ 806 $ 854
Franchise and Other . . . . . . . . 181 101 120
---------- ---------- ----------
Combined. . . . . . . . . . . . . 756 907 974
Corporate administration and other. 377 496 363
---------- ---------- ----------
Depreciation and amortization . . $ 1,133 $ 1,403 $ 1,337
========== ========== ==========
INTEREST EXPENSE:
Food and Equipment Distribution . . $ 365 $ 464 $ 520
Franchise and Other . . . . . . . . 4 5 5
---------- ---------- ----------
Combined. . . . . . . . . . . . . 369 469 525
Corporate administration and other. 244 320 307
---------- ---------- ----------
Interest Expense. . . . . . . . . $ 613 $ 789 $ 832
========== ========== ==========
INTEREST INCOME:
Food and Equipment Distribution . . $ 11 $ 24 $ 34
Franchise and Other . . . . . . . . - - -
---------- ---------- ----------
Combined. . . . . . . . . . . . . 11 24 34
Corporate administration and other. 18 55 99
---------- ---------- ----------
Interest Income . . . . . . . . . $ 29 $ 79 $ 133
========== ========== ==========
OPERATING PROFIT:
Food and Equipment Distribution (1) $ 2,897 $ 2,686 $ 2,772
Franchise and Other (1) . . . . . . 2,298 2,419 3,306
Intersegment profit . . . . . . . . 170 197 235
---------- ---------- ----------
Combined. . . . . . . . . . . . . 5,365 5,302 6,313
Other revenue . . . . . . . . . . . 223 311 1,253
Less intersegment profit. . . . . . (170) (197) (235)
Corporate administration and other. (1,770) (773) (5,608)
---------- ---------- ----------
Income before taxes . . . . . . . $ 3,648 $ 4,643 $ 1,723
========== ========== ==========
INCOME TAX EXPENSE:
Food and Equipment Distribution . . $ 1,231 $ 896 $ 943
Franchise and Other . . . . . . . . 781 808 1,124
---------- ---------- ----------
Combined. . . . . . . . . . . . . 2,012 1,704 2,067
Corporate administration and other. (607) (154) (1,481)
---------- ---------- ----------
Income tax expense. . . . . . . . $ 1,405 $ 1,550 $ 586
========== ========== ==========
<FN>
(1) Does not include full allocation of corporate administration
JUNE 27, JUNE 29, JUNE 30,
2004 2003 2002
--------- --------- ---------
CAPITAL EXPENDITURES:
Food and Equipment Distribution. . . . . $ 161 $ 62 $ 8,499
Franchise and Other. . . . . . . . . . . 1,159 76 82
--------- --------- ---------
Combined . . . . . . . . . . . . . . . 1,320 138 8,581
Corporate administration and other . . . 17 338 371
-------- ---------- ---------
Consolidated capital expenditures. . . $ 1,337 $ 476 $ 8,952
========= ========= =========
ASSETS:
Food and Equipment Distribution. . . . . $ 12,186 $ 10,963 $ 12,908
Franchise and Other. . . . . . . . . . . 1,280 1,049 1,079
--------- --------- ---------
Combined . . . . . . . . . . . . . . . . 13,466 12,012 13,987
Corporate administration and other . . . 7,440 8,784 10,331
-------- ---------- ---------
Consolidated assets. . . . . . . . . . . $ 20,906 $ 20,796 $ 24,318
========= ========= =========
GEOGRAPHIC INFORMATION (REVENUES):
United States. . . . . . . . . . . . . . $ 58,793 $ 57,714 $ 66,124
Foreign countries. . . . . . . . . . . . 1,419 1,068 518
-------- ---------- ---------
Consolidated total . . . . . . . . . . $ 60,212 $ 58,782 $ 66,642
========= ========= =========
GEOGRAPHIC INFORMATION (PRE-TAX INCOME):
United States. . . . . . . . . . . . . . $ 2,901 $ 4,030 $ 1,282
Foreign countries. . . . . . . . . . . . 747 613 441
-------- ---------- ---------
Consolidated total . . . . . . . . . . $ 3,648 $ 4,643 $ 1,723
========= ========= =========
NOTE N - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
The following summarizes the unaudited quarterly results of operations for the
fiscal years ended June 27, 2004 and June 29, 2003 (in thousands, except per
share amounts):
QUARTER ENDED
--------------
SEPTEMBER 28, DECEMBER 28, MARCH 28, JUNE 27,
2003 2003 2004 2004
-------------- ------------- ---------- ---------
FISCAL YEAR 2004
Revenues . . . . . . . . . . . . . . . . $ 15,376 $ 14,769 $ 14,643 $ 15,424
Gross Profit . . . . . . . . . . . . . . 1,307 1,334 1,349 1,236
Net Income . . . . . . . . . . . . . . . 504 558 617 564
Basic earnings per share on net income . 0.05 0.06 0.06 0.06
Diluted earnings per share on net income 0.05 0.06 0.06 0.06
QUARTER ENDED
-------------------
SEPTEMBER 29,. . . . . . . . . . . . . DECEMBER 29, MARCH 30, JUNE 29,
2002 2002 2003 2003
-------------- ------------- ---------- ---------
FISCAL YEAR 2003
Revenues . . . . . . . . . . . . . . . . $ 15,361 $ 15,164 $ 14,198 $ 14,059
Gross Profit . . . . . . . . . . . . . . 1,592 1,561 1,195 1,405
Net Income . . . . . . . . . . . . . . . 303 1,892 376 522
Basic earnings per share on net income . 0.03 0.19 0.04 0.05
Diluted earnings per share on net income 0.03 0.19 0.04 0.05
SCHEDULE II
PIZZA INN, INC.
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
ADDITIONS
------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COST AND OTHER AT END
OF PERIOD EXPENSE ACCOUNTS DEDUCTIONS OF PERIOD
------------ ----------- ----------- ------------ -----------
ALLOWANCE FOR DOUBTFUL
ACCOUNTS AND NOTES RECEIVABLE
Year Ended June 27, 2004. . . . . . . . . . . . $ 916 $ 35 $ - $ (579) (1) $ 372
Year Ended June 29, 2003. . . . . . . . . . . . $ 2,953 $ 155 $ - $ (2,192) (1) $ 916
Year Ended June 30, 2002. . . . . . . . . . . . $ 1,001 $ 2,367 $ - $ (415) (1) $2,953
<FN>
(1) Write-off of receivables, net of recoveries. For additional information related to the recovery in fiscal year
2002, refer to Note J in the Company's consolidated financial statements.
VALUATION ALLOWANCE FOR
DEFERRED TAX ASSET
Year Ended June 27, 2004 $ 153 $ - $ - $ (16) $137
Year Ended June 29, 2003 $ 225 $ - $ - $ (72) $153
Year Ended June 30, 2002 $ 38 $ 187 $ - $ - $225
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are no events to report under this item.
ITEM 9A - CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, we
have evaluated the effectiveness of our disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15(b) as of the end of the period covered by
this report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that these disclosure controls and procedures
are effective. There were no changes in our internal control over financial
reporting during the year ended June 27, 2004 that have materially affected, or
are reasonably likely to materially affect our internal control over financial
reporting.
ITEM 9B - FORM 8-K FILED UNDER ITEM 5 - OTHER EVENTS
On June 16, 2004 the Company filed a report on Form 8-K, reporting the
resignation of the Company's Senior Vice President - Corporate Development and
General Counsel.
On June 14, 2004 the Company filed a report on Form 8-K, reporting the repayment
of the remaining balance on a note by the Company's Chief Executive Officer.
On June 8, 2004 the Company filed a report on Form 8-K, reporting a letter to
Pizza Inn Shareholders from the Company's President and Chief Executive
Officer, Ronald W. Parker.
On May 24, 2004 the Company filed a report on Form 8-K, reporting the
announcement of reduction in staff and expenses of more than $1 million to
benefit the Company's franchisees.
On April 23, 2004 the Company filed a report on Form 8-K, reporting a press
release with respect to earnings for the third quarter ended March 28, 2004.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is included in the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14a in connection
with the Company's annual meeting of shareholders to be held in December 2004
(the "Proxy Statement"), and is incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this Item is included in the Proxy Statement
and is incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is included in the Proxy Statement
and is incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is included in the Proxy Statement
and is incorporated herein by reference.
ITEM 14- PRINCIPAL ACCOUNTANTS FEES AND SERVICES
The information required by this Item is included in the Proxy Statement
and is incorporated herein by reference.
PART IV
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON 8-K
(a) 1. The financial statements filed as part of this report are listed
in the Index to
Financial Statements and Schedules under Part II, Item 8 of this Form
10-K.
2. The financial statement schedules filed as part of this report are
listed in the Index
to Financial Statements and Schedules under Part II, Item 8 of this Form
10-K.
3. Exhibits:
3.1 Restated Articles of Incorporation as filed on September 5, 1990 and
amended on February 16,1993 (filed as Exhibit 3.1 to the Company's Annual Report
on Form 10-K for the fiscal year ended June 27, 1993 and incorporated herein by
reference).
3.2 Amended and Restated By-Laws as adopted by the Board of Directors on
July 11, 2000. (filed as Exhibit 3.2 to the Company's Annual Report on Form
10-K for the fiscal year ended June 24, 2001 and incorporated herein by
reference).
3.3 Amended and Restated By-Laws as adopted by the Board of Directors on
October 8, 2002. (filed as Item 9 on Form 8-K on October 9, 2002 and
incorporated herein by reference).
3.4 Amended and Restated By-Laws as adopted by the Board of Directors on
December 18, 2002. (filed as Item 5 on Form 8-K on December 23, 2002 and
incorporated herein by reference).
3.5 Amended and Restated By-Laws as adopted by the Board of Directors on
February 11, 2004 (filed as Item 5 on 8-K on February 11, 2004 and
incorporated herein by reference).
4.1 Provisions regarding Common Stock in Article IV of the
Restated Articles of Incorporation, as amended (filed as Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended June 27, 1999 and
incorporated herein by reference).
4.2 Provisions regarding Redeemable Preferred Stock in Article V of the
Restated Articles of Incorporation, as amended (filed as Exhibit 3.1 to this
Report and incorporated herein by reference).
10.1 Second amended and Restated Loan Agreement between the Company and
Wells Fargo Bank (Texas), N.A. dated March 31, 2000 (filed as Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March
26, 2000 and incorporated herein by reference).
10.2 First Amendment to the Second Amendment and Restated Loan Agreement
between the Company and Wells Fargo Bank (Texas), N.A. dated December 28, 2000
(filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended December 24, 2000 and incorporated herein by reference).
10.3 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 (filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended December 23, 2001 and
incorporated herein by reference).
10.4 Third Amendment to the Second Amended and Restated Loan Agreement
between the Company and Wells Fargo Bank (Texas), N.A. dated September 26, 2002,
but effective June 30, 2002. (filed as Exhibit 10.4 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 2002 and incorporated
herein by reference).
10.5 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.
(filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended December 29, 2002 and incorporated herein by reference).
10.6 Construction Loan Agreement between the Company and Wells Fargo Bank
(Texas) N.A. dated December 28, 2000 (filed as Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended December 24, 2000 and
incorporated herein by reference).
10.7 Promissory Note between the Company and Wells Fargo Bank (Texas) N.A.
dated December 28, 2000 (filed as Exhibit 10.3 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended December 24, 2000 and incorporated
herein by reference).
10.8 Promissory Note between the Company and Wells Fargo Bank (Texas), N.A.
dated January 31, 2002 (filed as Exhibit 10.2 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended December 23, 2001 and incorporated
herein by reference).
10.9 Stock Purchase Agreement between the Company and Kleinwort Benson
Limited dated April 28, 1995 (filed as Exhibit 10.14 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 26, 1995 and
incorporated herein by reference).
10.10 Redemption Agreement between the Company and Kleinwort Benson Limited
dated June 24, 1994 (filed as Exhibit 10.4 to the Company's Annual Report on
Form 10-K for the fiscal year ended June 26, 1994 and incorporated herein by
reference.)
10.11 Form of Executive Employment Contract (filed as Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December
29, 2002 and incorporated herein by reference).*
10.12 Employment Agreement between the Company and Ronald W. Parker dated
December 16, 2002 (filed as Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended December 29, 2002 and incorporated herein
by reference).*
10.13 Severance agreement between the Company and C. Jeffrey Rogers dated
August 21, 2002. (filed as Exhibit 10.12 to the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 2002 and incorporated herein by
reference).
10.14 1993 Stock Award Plan of the Company (filed as Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the fiscal year ended June 26, 1994 and
incorporated herein by reference).*
10.15 1993 Outside Directors Stock Award Plan of the Company (filed as
Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year
ended June 26, 1994 and incorporated herein by reference).*
10.16 1992 Stock Award Plan of the Company (filed as Exhibit 10.6 to the
Company's Annual Report on Form 10-K for the fiscal year ended June 27, 1993 and
incorporated herein by reference).*
21.0 List of Subsidiaries of the Company (filed as Exhibit 21.0 to
the Company's Annual Report on Form 10-K for the fiscal year ended June 26, 1994
and incorporated herein by reference).
23.1 Consent of Independent Registered Public Accounting Firm.
23.2 Consent of Independent Registered Public Accounting Firm.
31.1 Certification of Chief Executive Officer as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
* Denotes a management contract or compensatory plan or arrangement filed
pursuant to Item 15 (a) of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date: September 24, 2004 By: /s/ Shawn M. Preator
Shawn M. Preator
Chief Financial Officer
Treasurer
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Name and Position Date
- ------------------- ----
/s/ Bobby L. Clairday September 24, 2004
- ------------------------
Bobby L. Clairday
Director
/s/Robert B. Page September 24, 2004
- ---------------
Robert B. Page
Director
/s/ Ronald W. Parker September 24, 2004
- -----------------------
Ronald W. Parker
President and Chief Executive Officer
(Principal Executive Officer)
Director
/s/Ramon D. Phillips September 24, 2004
- ----------------------
Ramon D. Phillips
Director and Vice Chairman of the Board
/s/ Butler E. Powell September 24, 2004
- -----------------------
Butler E. Powell
Director
/s/ Steven J. Pully September 24, 2004
- ----------------------
Steven J. Pully
Director
/s/Mark E. Schwarz September 24, 2004
- --------------------
Mark E. Schwarz
Director and Chairman of the Board