5
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 1997.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO_____________.
COMMISSION FILE NUMBER 0-12919
PIZZA INN, INC.
(EXACT NAME OF REGISTRANT IN ITS CHARTER)
MISSOURI 47-0654575
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5050 QUORUM DRIVE
SUITE 500
DALLAS, TEXAS 75240
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES,
INCLUDING ZIP CODE)
(972) 701-9955
(REGISTRANT'S TELEPHONE NUMBER,
INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTIONS 12, 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY A COURT. YES X NO
AT SEPTEMBER 28, 1997, AN AGGREGATE OF 12,749,705 SHARES OF THE
REGISTRANT'S COMMON STOCK, PAR VALUE OF $.01 EACH (BEING THE REGISTRANT'S ONLY
CLASS OF COMMON STOCK), WERE OUTSTANDING.
PIZZA INN, INC.
Index
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
Condensed Consolidated Statements of Operations
for the three months ended September 28, 1997
and September 29, 1996 3
Condensed Consolidated Balance Sheets at
September 28, 1997 and June 29, 1997 4
Condensed Consolidated Statements of Cash Flows
for the three months ended September 28, 1997
and September 29, 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PIZZA INN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
---------------------------------
September 28, September 29,
1997 1996
------------ ------------
REVENUES:
Food and supply sales $ 14,461 $ 15,421
Franchise revenue 1,794 1,600
Restaurant sales 697 685
Other income 98 28
------------ ------------
17,050 17,734
------------ ------------
COSTS AND EXPENSES:
Cost of sales 13,054 13,966
Franchise expenses 903 742
General and administrative
expenses 1,300 1,325
Interest expense 140 192
------------ ------------
15,397 16,225
------------ ------------
INCOME BEFORE INCOME TAXES 1,653 1,509
Provision for income taxes 562 513
------------ ------------
NET INCOME $ 1,091 $ 996
============ ============
NET INCOME PER COMMON SHARE $ 0.08 $ 0.07
============ ============
DIVIDENDS PER COMMON SHARE $ 0.06 $ -
============ ============
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements
</FN>
PIZZA INN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 28, June 29,
1997 1997
----------- --------
(Unaudited)
ASSETS
- ----------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 1,267 $ 2,037
Restricted cash and short-term investments 295 295
Accounts receivable, less allowance
for doubtful accounts of $759 and $939,
respectively 7,284 6,711
Notes receivable, less allowance
for doubtful accounts of $57 and $60,
respectively 597 593
Inventories 1,863 2,224
Prepaid expenses and other 456 452
--------- ---------
Total current assets 11,762 12,312
PROPERTY, PLANT AND EQUIPMENT, net 2,130 2,044
PROPERTY UNDER CAPITAL LEASES, net 891 934
DEFERRED TAXES, net 7,963 8,492
OTHER ASSETS
Long-term notes, less
allowance for doubtful accounts of $125
and $122, respectively 151 149
Other long-term assets 1,307 379
--------- ---------
$ 24,204 $ 24,310
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ----------------------------------------------------
CURRENT LIABILITIES
Current portion of capital lease obligations $ 118 $ 115
Accounts payable - trade 1,505 1,482
Accrued expenses 3,323 2,917
--------- ---------
Total current liabilities 4,946 4,514
LONG-TERM LIABILITIES
Long-term debt 6,685 6,910
Long-term capital lease obligations 849 879
Other long-term liabilities 764 786
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value; 26,000,000
shares authorized; outstanding 12,749,705
and 12,713,562 shares, respectively (after
deducting shares in treasury:
1998 - 1,976,116; 1997 - 1,790,416) 127 127
Additional paid-in capital 4,278 4,061
Retained earnings 6,555 7,033
--------- ---------
Total shareholders' equity 10,960 11,221
--------- ---------
$ 24,204 $ 24,310
========= =========
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements
</FN>
PIZZA INN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
------------------------------
September 28, September 29,
1997 1996
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,091 $ 996
Add non-cash items 754 656
Changes in assets and liabilities:
Accounts and notes receivable (577) (270)
Inventories 361 (229)
Accounts payable - trade 23 (968)
Accrued expenses (370) 211
Other - net (18) 55
---------- ------------
Cash provided by operating activities 1,264 451
---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (220) (73)
Reacquisition of area development territory (986) -
---------- ------------
Cash used for investing activities (1,206) (73)
---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt and capital
lease obligations (252) (500)
Proceeds from exercise of stock options 284 162
Purchases of treasury stock (860) (43)
---------- ------------
Cash used for financing activities (828) (381)
---------- ------------
Net decrease in cash and cash equivalents (770) (3)
Cash and cash equivalents, beginning of period 2,037 653
---------- ------------
Cash and cash equivalents, end of period $ 1,267 $ 650
========== ============
- --------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAYMENTS FOR:
Interest $ 152 $ 141
Income taxes - -
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements
</FN>
PIZZA INN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) The accompanying condensed consolidated financial statements of Pizza
Inn, Inc. (the "Company") have been prepared without audit pursuant to
the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in the
financial statements have been condensed or omitted pursuant to such
rules and regulations. The condensed consolidated financial
statements should be read in conjunction with the notes to the
Company's audited consolidated financial statements in its Form 10-K
for the fiscal year ended June 29, 1997.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to
fairly present the Company's financial position and results of
operations for the interim periods. All adjustments contained herein
are of a normal recurring nature.
(2) For the three months ended September 28, 1997 and September 29, 1996,
common stock equivalents were 786,174 and 798,795, respectively, and
the total weighted average number of shares considered to be
outstanding were 13,466,216 and 13,721,024, respectively.
(3) In July 1997, the Company reacquired the area development rights for
the majority of Tennessee and portions of Kentucky. The Company paid
$986,000 in cash for these rights, and recorded a long-term asset 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 approximately five
years, based on the expected cash flow from the territory.
(4) In August 1997, the Company's Board of Directors declared a quarterly
dividend of $0.06 per share on the Company's common stock, payable
October 24, 1997 to shareholders of record on October 10, 1997.
The Company's balance sheet as of September 28, 1997 includes
a current liability of $776,000 for dividends declared but not yet
paid.
(5) In August 1997, the Company signed a new agreement (the "New Loan
Agreement") with its current lender, Wells Fargo, to refinance its
existing debt under a new revolving credit facility. The new $9.5
million revolving credit line combines the Company's existing $6.9
million term loan with its $1 million revolving credit line, plus an
additional $1.6 million revolving credit commitment. The revolving
credit note matures in August 1999 and is secured by essentially all
of the Company's assets.
Interest on the revolving credit line is payable monthly. Interest is
provided for at a rate equal to prime plus an interest margin from
-1.0% to 0.0% or, at the Company's option, at the Eurodollar rate plus
1.25% to 2.25%. The interest rate margin is based on the Company's
performance under certain financial ratio tests. A 0.5% annual
commitment fee is payable on any unused portion of the revolving
credit line.
The New Loan Agreement contains covenants which, among other things,
require the Company to satisfy certain financial ratios and
restrict additional debt.
(6) In February 1997, the FASB issued FAS No. 128, Earnings per Share
("FAS 128"), which is effective for financial statements issued for
periods ending after December 15, 1997, including iterim periods.
Effective December 28, 1997, the Company will adopt FAS 128, which
establishes standards for computing and presenting earnings per share
(EPS). The statement requires dual presentation of basic and diluted
EPS on the face of the income statement for entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation, to the numerator and
denominator of the diluted EPS calculation. 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 into or
resulted in the issuance of common stock that then shared in the
earnings of the entity. The pro forma EPS amounts shown below have
been calculated assuming the Company had already adopted the
provisions of this statement.
Three Months Ended
----------------------------------------------
September 28, 1997 September 29, 1996
------------------ ------------------
Basic EPS $ .09 $ .08
Diluted EPS .08 .07
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Quarter ended September 28, 1997 compared to the quarter ended September 29,
1996.
Net income for the current quarter increased 10% to $1,091,000 or $0.08
per share, from $996,000 or $0.07 per share for the same quarter last year.
Food and supply sales from the Company's distribution division decreased
6% or $960,000 in the current year. This was primarily the result of slightly
lower domestic retail sales, decreases in the market price of certain
commodities, and a $471,000 decrease in international food and supply sales.
This decrease in international food and supply sales was the result of a
large initial shipment to a new international location in the prior year.
Franchise revenue, which includes income from royalties, license fees,
and area development and foreign master license (collectively, "Territory")
sales, increased 12% or $194,000 compared to the prior year. This was
primarily due to an increase in income recognized from Territory sales in the
current year. The timing and amount of proceeds from Territory sales may vary
significantly from year to year. Current year sales include partial
recognition of proceeds from the sale of Territory rights for Korea, the
Palestinian Territories, Brazil, South Carolina and Virginia. Royalties
increased slightly due to the reacquisition of the area development rights
for the majority of Tennessee and portions of Kentucky during the quarter.
Royalties from all restaurants operating in this territory, including the
portion of royalties formerly retained by the area developer, are now paid
directly to the Company.
Other income consists primarily of interest and non-recurring revenue
items. The current year includes a gain on the sale of a liquor license in
New Mexico.
Cost of sales decreased 7% or $912,000 for the quarter, primarily
reflecting the decrease in food and supply sales noted above. As a percentage
of sales, cost of sales was slightly lower in the current quarter due to
increased purchasing efficiencies.
Franchise expenses increased 22% or $161,000 compared to the same quarter
last year, reflecting increases in expenditures for sales, marketing, training
and field service personnel, as well as increased travel for new store
openings and new product roll-out. Franchise expenses for the current year
also include the amortization of the reacquired area development Territory.
The Company paid $986,000 in cash for this Territory, and recorded a long-term
asset for the same amount. The asset will be amortized over approximately
five years, based on the expected cash flow from the territory.
General and administrative expenses remained at approximately the same
amount as last year, as the Company continues to hold down costs not directly
related to the franchise and distribution areas of the business.
Interest expense decreased 27% or $52,000 in the current quarter as a
result of lower average debt balances and slightly lower interest rates.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations totaled $1,264,000 for the first quarter of
fiscal 1998, and consisted primarily of net income plus the benefit of the
Company's net operating loss carryforwards which significantly reduce the
amount of federal income tax actually paid. The Company utilized cash
primarily to pay down debt, making a $225,000 voluntary principal payment
during the quarter, to reacquire an area development territory for $986,000,
and to repurchase 185,700 shares of its own common stock for $860,000.
During the quarter, the Company signed an agreement for the sale of an
area development territory covering certain counties in Virginia and South
Carolina to an existing area developer for a cash price of $240,000. The cash
proceeds from the sale, which were received on October 1, 1997, are recorded
as a receivable at September 28, 1997. This area development agreement, along
with other agreements signed during the last four years, contain development
commitments for significant unit growth over the next five years. Related
growth in royalties and distribution sales are expected to provide adequate
working capital. The occurrence of any additional area development sales,
which cannot be predicted with any certainty, may also provide significant
infusions of cash. External sources of cash are not expected to be required
in the foreseeable future.
In August 1997, the Company signed a new agreement (the "New Loan
Agreement") with its current lender, Wells Fargo, to refinance its existing
debt under a new revolving credit facility. The new $9.5 million revolving
credit line combines the Company's existing $6.9 million term loan with its $1
million revolving credit line, plus an additional $1.6 million revolving
credit commitment. The revolving credit note matures in August 1999 and is
secured by essentially all of the Company's assets.
In August 1997, the Company's Board of Directors declared a quarterly
dividend of $0.06 per share on the Company's common stock, payable October 24,
1997 to shareholders of record on October 10, 1997. The Company's balance
sheet as of September 28, 1997 includes a current liability of $776,000 for
dividends declared but not paid.
The Company continues to realize substantial benefit from the utilization
of its net operating loss carryforwards (which currently total $18.9 million
and expire in 2005) to reduce its federal tax liability from the 34% tax
reflected on its statement of operations to an actual payment of approximately
2% of taxable income. Management believes that future operations will
generate sufficient taxable income, along with the reversal of temporary
differences, to fully realize its net deferred tax asset balance ($8.0 million
as of September 28, 1997). Taxable income in future years at the same level
as fiscal 1997 would be sufficient for full realization of the net tax asset.
Management believes that, based on recent growth trends and future
projections, maintaining current levels of taxable income is achievable and
that the Company will be able to realize its net deferred tax asset without
reliance on material, non-routine income.
Historically, the differences between pre-tax earnings for financial
reporting purposes and taxable income for tax purposes have consisted of
temporary differences arising from the timing of depreciation and deductions
for accrued expenses and deferred revenues.
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" contains certain projections and other forward-looking
statements that are not historical facts and are subject to various risks and
uncertainties, including but not limited to, changes in demand for Pizza Inn
products and franchises, the impact of competitors' actions, changes in prices
or supplies of food ingredients, and restrictions on international trade and
business.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
3. Exhibits:
10.1 Employment Agreement between the Company and C. Jeffrey Rogers
dated October 23, 1997.
10.2 Executive Compensation Agreement between the Company and Ronald
W. Parker dated October 23, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PIZZA INN, INC.
Registrant
By: /s/C. Jeffrey Rogers
C. Jeffrey Rogers
President and
Principal Executive Officer
By: /s/Elizabeth D. Reimer
Elizabeth D. Reimer
Controller and
Principal Accounting Officer
Dated: November 12, 1997