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 29, 2002.
--------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO
_______________.
COMMISSION FILE NUMBER 0-12919
PIZZA INN, INC.
(EXACT NAME OF REGISTRANT IN ITS CHARTER)
MISSOURI 47-0654575
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3551 PLANO PARKWAY
THE COLONY, TEXAS 75056
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES,
INCLUDING ZIP CODE)
(469) 384-5000
(REGISTRANT'S TELEPHONE NUMBER,
INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR SUCH SHORTER PERIOD THAT THE REGISTRANT
WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTIONS 12, 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY A COURT. YES [X] NO
AT NOVEMBER 4, 2002, AN AGGREGATE OF 10,058,374 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
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
- -------- --------------------- ----
Consolidated Statements of Operations for the three months ended
September 29, 2002 and September 23, 2001 (unaudited) 3
Consolidated Statements of Comprehensive Income for the three months ended
September 29, 2002 and September 23, 2001 (unaudited) 3
Consolidated Balance Sheets at September 29, 2002 (unaudited) and
June 30,2002 4
Consolidated Statements of Cash Flows for the three months ended
September 29, 2002 and September 23, 2001 (unaudited) 5
Notes to Consolidated Financial Statements 7
Item 2.
- -------
Management's Discussion and Analysis of
-------------------------------------------
Financial Condition and Results of Operations 11
--------------------------------------------
Item 3.
- -------
Quantitative and Qualitative Disclosures about Market Risk 15
----------------------------------------------------------------
Item 4. Controls and Procedures 15
- -------- -------------------------
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
- -------- ------------------
Item 4. Submission of Matters to a Vote of Security Holders 16
- -------- -----------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K 16
- -------- -------------------------------------
Signatures 17
Certifications 18
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -------------------------------
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
--------------------
SEPTEMBER 29, SEPTEMBER 23,
REVENUES: 2002 2001
-------------------- ---------------
Food and supply sales . . . . . . . . . . . . . . . . . . $ 13,530 $ 15,164
Franchise revenue . . . . . . . . . . . . . . . . . . . . 1,302 1,380
Restaurant sales. . . . . . . . . . . . . . . . . . . . . 467 574
Other income. . . . . . . . . . . . . . . . . . . . . . . 62 190
-------------------- ---------------
15,361 17,308
-------------------- ---------------
COSTS AND EXPENSES:
Cost of sales . . . . . . . . . . . . . . . . . . . . . . 12,405 14,612
Franchise expenses. . . . . . . . . . . . . . . . . . . . 709 681
General and administrative expenses . . . . . . . . . . . 1,558 1,002
Interest expense, net of capitalized
interest of $0 and $73, respectively. . . . . . . . . . 229 119
-------------------- ---------------
14,901 16,414
-------------------- ---------------
INCOME BEFORE INCOME TAXES. . . . . . . . . . . . . . . . . 460 894
Provision for income taxes. . . . . . . . . . . . . . . . 157 304
-------------------- ---------------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . $ 303 $ 590
==================== ===============
BASIC EARNINGS PER COMMON SHARE . . . . . . . . . . . . . . $ 0.03 $ 0.06
==================== ===============
DILUTED EARNINGS PER COMMON SHARE . . . . . . . . . . . . . $ 0.03 $ 0.06
==================== ===============
DIVIDENDS DECLARED PER COMMON SHARE . . . . . . . . . . . . $ - $ -
==================== ===============
WEIGHTED AVERAGE COMMON SHARES. . . . . . . . . . . . . . . 10,058 10,187
==================== ===============
WEIGHTED AVERAGE COMMON AND
POTENTIAL DILUTIVE COMMON SHARES. . . . . . . . . . . . . 10,058 10,199
==================== ===============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
THREE MONTHS ENDED
--------------------
SEPTEMBER 29, . SEPTEMBER 23,
2002 2001
-------------------- ---------------
Net Income. . . . . . . . . . . . . . . . . . . . . . . . $ 303 $ 590
Interest rate swap loss
(net of tax benefit of ($143) and ($104), respectively) (277) (203)
-------------------- ---------------
Comprehensive Income. . . . . . . . . . . . . . . . . . . $ 26 $ 387
==================== ===============
See accompanying Notes to Consolidated Financial Statements.
PIZZA INN, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 29, JUNE 30,
ASSETS 2002 2002
--------------- ----------
(UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . $ 202 $ 770
Accounts receivable, less allowance for doubtful
accounts of $829 and $829, respectively. . . . . . . . . . . 3,882 3,867
Notes receivable, current portion, less allowance
for doubtful accounts of $404 and $354, respectively . . . . 224 332
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . 1,593 1,526
Deferred taxes, net. . . . . . . . . . . . . . . . . . . . . . 953 1,297
Prepaid expenses and other . . . . . . . . . . . . . . . . . . 513 905
--------------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . 7,367 8,697
Property, plant and equipment, net . . . . . . . . . . . . . . . 13,624 13,567
Property under capital leases, net . . . . . . . . . . . . . . . 270 337
Deferred taxes, net. . . . . . . . . . . . . . . . . . . . . . . 1,677 1,347
Long-term notes receivable, less allowance
for doubtful accounts of $20 and $20, respectively . . . . . 160 191
Deposits and other . . . . . . . . . . . . . . . . . . . . . . . 118 475
--------------- ----------
$ 23,216 $ 24,614
=============== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade . . . . . . . . . . . . . . . . . . . $ 1,759 $ 1,527
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . 2,262 2,529
Current portion of long-term debt. . . . . . . . . . . . . . . 1,656 1,656
Current portion of capital lease obligations . . . . . . . . . 252 229
--------------- ----------
Total current liabilities. . . . . . . . . . . . . . . . . . 5,929 5,941
LONG-TERM LIABILITIES
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . 13,377 15,091
Long-term capital lease obligations. . . . . . . . . . . . . . 39 136
Other long-term liabilities. . . . . . . . . . . . . . . . . . 915 517
--------------- ----------
20,260 21,685
--------------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value; authorized 26,000,000 shares;
issued 14,955,969 and 14,955,819 shares, respectively;
outstanding 10,058,324 and 10,058,174 shares, respectively. 150 150
Additional paid-in capital . . . . . . . . . . . . . . . . . . 7,825 7,824
Loans to officers, less allowance for doubtful
accounts of $1,750 and $1,750, respectively. . . . . . . . . (575) (575)
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . 15,641 15,338
Accumulated other comprehensive loss . . . . . . . . . . . . . (601) (324)
Treasury stock at cost
Shares in treasury: 4,897,645 and 4,897,645, respectively. . (19,484) (19,484)
--------------- ----------
Total shareholders' equity . . . . . . . . . . . . . . . . . 2,956 2,929
--------------- ----------
$ 23,216 $ 24,614
=============== ==========
See accompanying Notes to Consolidated Financial Statements.
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
--------------------
SEPTEMBER 29, SEPTEMBER 23,
2002 2001
-------------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 303 $ 590
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . 408 336
Provision for bad debt . . . . . . . . . . . . . . . . . . . . . . 50 50
Utilization of deferred taxes. . . . . . . . . . . . . . . . . . . 157 182
Changes in assets and liabilities:
Notes and accounts receivable. . . . . . . . . . . . . . . . . . . 74 (214)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . (67) -
Accounts payable - trade . . . . . . . . . . . . . . . . . . . . . 232 (318)
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . (267) (170)
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . 486 409
-------------------- ---------------
CASH PROVIDED BY OPERATING ACTIVITIES. . . . . . . . . . . . . . . 1,376 865
-------------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . (156) (2,501)
-------------------- ---------------
CASH USED FOR INVESTING ACTIVITIES . . . . . . . . . . . . . . . . (156) (2,501)
-------------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term bank debt. . . . . . . . . . . . . . . . . . - 2,784
Repayments of long-term bank debt and capital lease obligations, net (1,788) (756)
Purchases of treasury stock. . . . . . . . . . . . . . . . . . . . . - (496)
-------------------- ---------------
CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES . . . . . . . . . (1,788) 1,532
-------------------- ---------------
Net decrease in cash and cash equivalents. . . . . . . . . . . . . . . (568) (104)
Cash and cash equivalents, beginning of period . . . . . . . . . . . . 770 540
-------------------- ---------------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . $ 202 $ 436
==================== ===============
See accompanying Notes to Consolidated Financial Statements.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
------------------
SEPTEMBER 29, SEPTEMBER 23,
2002 2001
------------------- --------------
CASH PAYMENTS FOR:
Interest . . . . $ 211 $ 203
Income taxes . . - 25
See accompanying Notes to Consolidated Financial Statements.
PIZZA INN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) The accompanying consolidated financial statements of Pizza Inn, Inc.
(the "Company") have been prepared without audit pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in the financial statements have been
omitted pursuant to such rules and regulations. The consolidated financial
statements should be read in conjunction with the notes to the Company's audited
consolidated financial statements in its Form 10-K for the fiscal year ended
June 30, 2002. Certain prior year amounts have been reclassified to conform with
current year presentation.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary to fairly present the Company's
financial position and results of operations for the interim periods. All
adjustments contained herein are of a normal recurring nature.
(2) The Company entered into an agreement effective December 21, 2001 with
its current lender to extend the term of its existing $9.5 million revolving
credit line through December 31, 2003, and to modify certain financial
covenants. Interest on the revolving credit line is payable monthly. Interest
is provided for at a rate equal to prime less an interest rate margin from 1.0%
to 0.0% or, at the Company's option, at the LIBOR rate plus 1.25% to 2.25%. The
interest rate margin is based on the Company's performance under certain
financial ratio tests. A 0.375% to 0.5% annual commitment fee is payable on any
unused portion of the revolving credit line. As of September 29, 2002 and
September 23, 2001, the Company's interest rates were 3.57% and 4.75%,
respectively, using a LIBOR rate basis. Amounts outstanding under the revolving
credit line as of September 29, 2002 and September 23, 2001 were $5.2 million
and $7.9 million, respectively.
The Company entered into an agreement effective June 30, 2002 with its current
lender to modify certain debt covenants. On October 22, 2002 the Company
obtained a waiver letter from its current lender effective September 29, 2002
through December 1, 2002 addressing a breach of terms of the Company's current
ratio covenant with its lender. The breach resulted from a decrease in current
assets due to the utilization of the current portion of deferred taxes. The
Company was in compliance with all other of its debt covenants as of September
29, 2002. The Company and the bank have agreed to amend this covenant prior to
the end of its second quarter.
The Company entered into a term note effective March 31, 2000 with its current
lender. The $5,000,000 term note had outstanding balances of $2.0 million and
$3.2 million at September 29, 2002 and September 23, 2001, respectively, and
requires monthly principal payments of $104,000 with the balance maturing on
March 31, 2004. Interest on the term loan is also payable monthly. Interest is
provided for at a rate equal to prime less an interest rate margin of 0.75% or,
at the Company's option, at the LIBOR rate plus 1.5%. As of September 29, 2002
and September 23, 2001, the Company's interest rates were 3.3125% and 5.0%,
respectively.
The Company entered into an agreement effective December 28, 2000, as amended,
with its current lender to provide up to $8.125 million of financing for the
construction of the Company's new headquarters, training center and distribution
facility. The construction loan converted to a term loan effective January 31,
2002 with the unpaid principal balance to mature on December 28, 2007. This
term loan will amortize over a term of twenty years, with principal payments of
$34,000 due monthly. Interest on this term loan is also payable monthly.
Interest is provided for at a rate equal to prime less an interest rate margin
of 0.75% or, at the Company's option, to the LIBOR rate plus 1.5%. As of
September 29, 2002 and September 23, 2001, the Company's interest rates were
3.34% and 5.0%, 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 $7.9 million at September 29,
2002 and $3.2 million at September 23, 2001.
(3) The Company entered into an interest rate swap effective February 27,
2001, as amended, designated as a cash flow hedge, to manage interest rate risk
relating to the financing of the construction of the Company's new headquarters
and to fulfill bank requirements. The swap agreement has a notional principal
amount of $8.125 million with a fixed pay rate of 5.84% which began November 1,
2001 and will end November 19, 2007. The swap's notional amount amortizes over
a term of twenty years to parallel the terms of the term loan. SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" requires that for
cash flow hedges, which hedge the exposure to variable cash flow of a forecasted
transaction, the effective portion of the derivative's gain or loss be initially
reported as a component of other comprehensive income in the equity section of
the balance sheet and subsequently reclassified into earnings when the
forecasted transaction affects earnings. Any ineffective portion of the
derivative's gain or loss is reported in earnings immediately. At September 29,
2002 there was no hedge ineffectiveness. The Company's expectation is that the
hedging relationship will continue to be highly effective at achieving
offsetting changes in cash flows.
(4) On April 30, 1998, Mid-South Pizza Development, Inc., an area developer
of the Company ("Mid-South") entered into a promissory note whereby, among other
things, Mid-South borrowed $1,330,000 from a third party lender (the "Loan").
The proceeds of the Loan, less transaction costs, were used by Mid-South to
purchase area developer rights from the Company for certain counties in Kentucky
and Tennessee. As of September 29, 2002 the outstanding principal balance of
this loan was approximately $807,000. As part of the terms and conditions of
the Loan, the Company was required to guaranty the obligations of Mid-South
under the Loan. In the event such guaranty ever required payment, the Company
has personal guarantees from certain Mid-South principals and a security
interest in certain personal property. In the event the personal guarantees and
security interest pledged do not sufficiently fulfill the obligation, the
Company would assume the obligation. As of this date, the obligation could be
fully offset by the assumption of the area development rights which are
currently pledged to Mid-South's third party lender.
(5) On January 18, 2002 the Company was served with a lawsuit filed by
Blakely-Witt & Associates, Inc. alleging Pizza Inn sent or caused to be sent
unsolicited facsimile advertisements. The plaintiff has requested this matter be
certified as a class action. We plan to vigorously defend our position in this
litigation. We cannot assure you that we will prevail in this lawsuit and our
defense could be costly and consume the time of our management. We are unable to
predict the outcome of this case. However, an adverse resolution of this matter
could materially affect our financial position and results of operations.
(6) The following table shows the reconciliation of the numerator and
denominator of the basic EPS calculation to the numerator and denominator of the
diluted EPS calculation (in thousands, except per share amounts).
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------------------- ----------- ----------
THREE MONTHS ENDED SEPTEMBER 29, 2002
BASIC EPS
Income Available to Common Shareholders . . . $ 303 10,058 $ 0.03
Effect of Dilutive Securities - Stock Options -
---------------- ----------
DILUTED EPS
Income Available to Common Shareholders
& Assumed Conversions . . . . . . . . . . . . $ 303 10,058 $ 0.03
===================== ============= ==========
THREE MONTHS ENDED SEPTEMBER 23, 2001
BASIC EPS
Income Available to Common Shareholders . . . $ 590 10,187 $ 0.06
Effect of Dilutive Securities - Stock Options 12
-------------- --------
DILUTED EPS
Income Available to Common Shareholders
& Assumed Conversions . . . . . . . . . . . . $ 590 10,199 $ 0.06
=================== ============= ==========
(7) Summarized in the following tables are net sales and operating revenues,
operating profit, and geographic information (revenues) for the Company's
reportable segments for the three month periods ended September 29, 2002 and
September 23, 2001.
SEPTEMBER 29, SEPTEMBER 23,
2002 2001
------------------------- --------------------------
(In thousands)
NET SALES AND OPERATING REVENUES:
Food and Equipment Distribution . . $ 13,530 $ 15,164
Franchise and Other . . . . . . . . 1,769 1,954
Intersegment revenues . . . . . . . 175 224
------------------------- --------------------------
Combined. . . . . . . . . . . . . 15,474 17,342
Other revenues. . . . . . . . . . . 62 190
Less intersegment revenues. . . . . (175) (224)
------------------------- --------------------------
Consolidated revenues . . . . . . 15,361 17,308
========================= ==========================
OPERATING PROFIT:
Food and Equipment Distribution (1) $ 744 $ 483
Franchise and Other (1) . . . . . . 600 810
Intersegment profit . . . . . . . . 54 59
------------------------- --------------------------
Combined. . . . . . . . . . . . . 1,398 1,352
Other profit. . . . . . . . . . . . 62 155
Less intersegment profit. . . . . . (54) (59)
Corporate administration and other. (946) (554)
------------------------- --------------------------
Income before taxes . . . . . . . 460 894
========================= ==========================
GEOGRAPHIC INFORMATION (REVENUES):
United States . . . . . . . . . . . $ 15,168 $ 17,195
Foreign countries . . . . . . . . . 193 113
------------------------- --------------------------
Consolidated total. . . . . . . . 15,361 17,308
========================= ==========================
(1) Does not include full allocation of corporate administration
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- -----------------------
Quarter ended September 29, 2002 compared to the quarter ended September 23,
2001.
Diluted earnings per share for the quarter were $0.03 versus $0.06 for the
same period last year. Net income for the quarter decreased 49% to $303,000
from $590,000 for the same quarter last year. Severance-related charges of
approximately $415,000, in connection with the departure of the Company's former
Chief Executive Officer, C. Jeffery Rogers, including legal and accounting fees,
adversely affected earnings for the quarter. The above-described
severance-related charges had an after-tax effect of $0.03 cents per share.
Food and supply sales by the Company's Norco division include food and
paper products, equipment, marketing material, and other distribution revenues.
Food and supply sales for the quarter decreased 11% to $13,530,000 from
$15,164,000 compared to the same period last year. Overall lower retail sales
combined with a greater than 23% decrease in the sales price of cheese
contributed to the decrease in food and supply sales.
Franchise revenue, which includes income from royalties, license fees and
area development and foreign master license (collectively, "Territory") sales,
decreased 6% or $78,000 for the quarter compared to the same period last year.
This decrease is primarily due to lower domestic and international royalties as
a result of lower overall retail sales.
Restaurant sales, which consist of revenue generated by Company-owned
training stores decreased 19% or $107,000 for the quarter, compared to the same
period of the prior year. This is a result of the closing of the delco unit
during the first week of September in the prior year combined with lower
comparable sales at the two full service units.
Other income consists primarily of interest income and non-recurring
revenue items. Other income decreased 67% or $128,000 due to lower vendor
incentives.
Cost of sales decreased 15% or $2,207,000 for the quarter. Cost of sales,
as a percentage of sales, decreased to 89% from 93% for the same quarter last
year. The decrease is due primarily to lower cheese prices as compared to the
same period last year.
Franchise expenses include selling, general and administrative expenses
directly related to the sale and continuing service of franchises and
Territories. These costs increased 4% or $28,000 for the quarter compared to
the same period last year primarily due to increased advertising expenses.
General and administrative expenses increased 55% or $556,000 for the
quarter compared to the same period last year. This is primarily the result of
severance-related charges, including legal and accounting fees, of approximately
$415,000, in connection with the departure of the Company's former Chief
Executive Officer, C. Jeffery Rogers.
Interest expense increased 92% or $110,000 for the quarter compared to the
same period of the prior year. Lower interest rates in the current year were
offset by a higher debt balance in the current year and capitalized interest of
approximately $73,000 used in construction of the new corporate headquarters in
the prior year.
Provision for income taxes decreased 48% or $147,000 in the current year
due to lower income. The effective tax rate was 34% for both quarters.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations totaled $1,376,000 during the first three
months of fiscal 2003 and was utilized, in conjunction with a portion of its
cash balance, primarily to pay down debt.
Capital expenditures of $156,000 during the first three months consist
primarily of upgrading the distribution and inventory software.
Management believes that future operations will generate sufficient taxable
income, along with the reversal of temporary differences, to fully realize the
deferred tax asset, net of a valuation allowance of $225,000 primarily related
to the potential expiration of certain foreign tax credit carryforwards.
Additionally, management believes that taxable income based on the Company's
existing franchise base should be more than sufficient to enable the Company to
realize its net deferred tax asset without reliance on material, non-routine
income.
The Company entered into an agreement effective December 21, 2001 with its
current lender to extend the term of its existing $9.5 million revolving credit
line through December 31, 2003, and to modify certain financial covenants.
Interest on the revolving credit line is payable monthly. Interest is provided
for at a rate equal to prime less an interest rate margin from 1.0% to 0.0% or,
at the Company's option, at the LIBOR rate plus 1.25% to 2.25%. The interest
rate margin is based on the Company's performance under certain financial ratio
tests. A 0.375% to 0.5% annual commitment fee is payable on any unused portion
of the revolving credit line. As of September 29, 2002 and September 23, 2001,
the Company's interest rates were 3.57% and 4.75%, respectively, using a LIBOR
rate basis. Amounts outstanding under the revolving credit line for the periods
ending September 29, 2002 and September 23, 2001 were $5.2 million and $7.9
million, respectively.
The Company entered into an agreement effective June 30, 2002 with its
current lender to modify certain debt covenants. On October 22, 2002 the
Company obtained a waiver letter from its current lender effective September 29,
2002 through December 1, 2002 addressing a breach of terms of the Company's
current ratio covenant with its lender. The breach resulted from a decrease in
current assets due to the utilization of the current portion of deferred taxes.
The Company was in compliance with all other of its debt covenants as of
September 29, 2002. The Company and the bank have agreed to amend this covenant
prior to the end of its second quarter.
The Company entered into a term note effective March 31, 2000 with its
current lender. The $5,000,000 term note had outstanding balances of $2.0
million and $3.2 million at September 29, 2002 and September 23, 2001,
respectively, and requires monthly principal payments of $104,000 with the
balance maturing on March 31, 2004. Interest on the term loan is also payable
monthly. Interest is provided for at a rate equal to prime less an interest
rate margin of 0.75% or, at the Company's option, at the LIBOR rate plus 1.5%.
As of September 29, 2002 and September 23, 2001, the Company's interest rates
were 3.3125% and 5.0%, respectively.
The Company entered into an agreement effective December 28, 2000, as
amended, with its current lender to provide up to $8.125 million of financing
for the construction of the Company's new headquarters, training center and
distribution facility. The construction loan converted to a term loan effective
January 31, 2002 with the unpaid principal balance to mature on December 28,
2007. This term loan will amortize over a term of twenty years, with principal
payments of $34,000 due monthly. Interest on this term loan is also payable
monthly. Interest is provided for at a rate equal to prime less an interest
rate margin of 0.75% or, at the Company's option, to the LIBOR rate plus 1.5%.
As of September 29, 2002 and September 23, 2001, the Company's interest rates
were 3.34% and 5.0%, 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 $7.9 million September
29, 2002and $3.2 at September 23, 2001.
The Company entered into an interest rate swap effective February 27,
2001, as amended, designated as a cash flow hedge, to manage interest rate risk
relating to the financing of the construction of the Company's new headquarters
and to fulfill bank requirements. The swap agreement has a notional principal
amount of $8.125 million with a fixed pay rate of 5.84% which began November 1,
2001 and will end November 19, 2007. The swap's notional amount amortizes over
a term of twenty years to parallel the terms of the term loan. SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" requires that for
cash flow hedges, which hedge the exposure to variable cash flow of a forecasted
transaction, the effective portion of the derivative's gain or loss be initially
reported as a component of other comprehensive income in the equity section of
the balance sheet and subsequently reclassified into earnings when the
forecasted transaction affects earnings. Any ineffective portion of the
derivative's gain or loss is reported in earnings immediately. At September 29,
2002 there was no hedge ineffectiveness. The Company's expectation is that the
hedging relationship will continue to be highly effective at achieving
offsetting changes in cash flows.
On January 18, 2002, the Company was served with a lawsuit filed by
Blakely-Witt & Associates, Inc. alleging Pizza Inn sent or caused to be sent
unsolicited facsimile advertisements. The plaintiff has requested this matter be
certified as a class action. We plan to vigorously defend our position in this
litigation. We cannot assure you that we will prevail in this lawsuit and our
defense could be costly and consume the time of our management. We are unable to
predict the outcome of this case. However, an adverse resolution of this matter
could materially affect our financial position and results of operations.
On April 30, 1998, Mid-South Pizza Development, Inc., an area developer of the
Company ("Mid-South") entered into a promissory note whereby, among other
things, Mid-South borrowed $1,330,000 from a third party lender (the "Loan").
The proceeds of the Loan, less transaction costs, were used by Mid-South to
purchase area developer rights from the Company for certain counties in Kentucky
and Tennessee. As of September 29, 2002 the outstanding principal balance of
this loan was approximately $807,000. As part of the terms and conditions of
the Loan, the Company was required to guaranty the obligations of Mid-South
under the Loan. In the event such guaranty ever required payment, the Company
has personal guarantees from certain Mid-South principals and a security
interest in certain personal property. In the event the personal guarantees and
security interest pledged do not sufficiently fulfill the obligation, the
Company would assume the obligation. As of this date, the obligation could be
fully offset by the assumption of the area development rights which are
currently pledged to Mid-South's third party lender.
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 September 29, 2002 (in thousands):
Less Than 1 1-3 4-5 After 5
Total . Year Years Years Years
- ----------------------------------- ------- ------ -------- ------
Long-term debt. . . . . . . . . . . $15,033 $1,656 $ 6,742 $ 812 $5,823
Operating lease obligations (1) . . 4,291 1,237 2,630 424 -
Capital lease obligations (2) . . . 291 252 29 10 -
------- ------ -------- ------ ------
Total contractual cash obligations. $19,615 $3,145 $ 9,401 $1,246 $5,823
======= ====== ======== ====== ======
(1) Includes a lease dated March 21, 2002 the Company entered into for new
tractors. Per the terms of the lease the obligations begin upon receipt of the
tractors which is estimated to be October 2002. The above table reflects the
obligations beginning at that time.
(2) Does not include amount representing interest.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis is based on the Company's consolidated
financial statements and related footnotes contained within this report. The
Company's more critical accounting policies used in the preparation of those
consolidated financial statements are discussed below.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Significant estimates made by management include the
allowance for doubtful accounts, inventory valuation, deferred tax asset
valuation allowances, and legal accruals. Actual results could differ from
those estimates.
The Company's Norco division sells food, supplies and equipment to
franchisees on trade accounts under terms common in the industry. Revenue from
such sales is recognized upon shipment. Norco sales are reflected under the
caption "food and supply sales." Shipping and handling costs billed to customers
are recognized as revenue.
Franchise revenue consists of income from license fees, royalties, and
Territory sales. License fees are recognized as income when there has been
substantial performance of the agreement by both the franchisee and the Company,
generally at the time the unit is opened. Royalties are recognized as income
when earned.
Territory sales are the fees paid by selected experienced restaurant
operators to the Company for the right to develop Pizza Inn restaurants in
specific geographical territories. When the Company has no continuing
substantive obligations of performance to the area developer or master licensee
regarding the fee, the Company recognizes the fee to the extent of cash
received. If continuing obligations exist, fees are recognized ratably during
the performance of those obligations.
Inventories, which consist primarily of food, paper products, supplies and
equipment located at the Company's distribution center, are stated at the lower
of FIFO (first-in, first-out) cost or market. Provision is made for obsolete
inventories and is based upon management's assessment of the market conditions
for its products.
Accounts receivable consist primarily of receivables from food and supply
sales and franchise royalties. The Company records a provision for doubtful
receivables to allow for any amounts which may be unrecoverable and is based
upon an analysis of the Company's prior collection experience, customer
creditworthiness, and current economic trends.
Notes receivable primarily consist of notes from franchisees for the
purchase of area development and master license territories and trade
receivables. These notes generally have terms ranging from one to five years
and interest rates of 8% to 12%. The Company records a provision for doubtful
receivables to allow for any amounts which may be unrecoverable and is based
upon an analysis of the Company's prior collection experience, customer
creditworthiness, and current economic trends.
The Company has recorded a valuation allowance to reflect the
estimated amount of deferred tax assets that may not be realized based upon the
Company's analysis of existing tax credits by jurisdiction and expectations of
the Company's ability to utilize these tax attributes through a review of
estimated future taxable income and establishment of tax strategies. These
estimates could be impacted by changes in future taxable income and the results
of tax strategies.
FORWARD-LOOKING STATEMENT
This report contains certain forward-looking statements (as such term
is defined in the Private Securities Litigation Reform Act of 1995) relating to
the Company that are based on the beliefs of the management of the Company, as
well as assumptions and estimates made by and information currently available to
the Company's management. When used in this report, the words "anticipate,"
"believe," "estimate," "expect," "intend" and similar expressions, as they
relate to the Company or the Company's management, identify forward-looking
statements. Such statements reflect the current views of the Company with
respect to future events and are subject to certain risks, uncertainties and
assumptions relating to the operations and results of operations of the Company
as well as its customers and suppliers, including as a result of competitive
factors and pricing pressures, shifts in market demand, general economic
conditions and other factors including but not limited to, changes in demand for
Pizza Inn products or franchises, the impact of competitors' actions, changes in
prices or supplies of food ingredients, and restrictions on international trade
and business. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions or estimates prove incorrect, actual results
may vary materially from those described herein as anticipated, believed,
estimated, expected or intended.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------
The Company has market risk exposure arising from changes in interest
rates. The Company's earnings are affected by changes in short-term interest
rates as a result of borrowings under its credit facilities which bear interest
based on floating rates.
At September 29, 2002 the Company has approximately $15 million of variable
rate debt obligations outstanding with a weighted average interest rate of
3.41%. A hypothetical 10% change in the effective interest rate for these
borrowings, assuming debt levels at September 29, 2002, would change interest
expense by approximately $14,000.
ITEM 4. CONTROLS AND PROCEDURES
- ------------------------------------
a) Evaluation of disclosure controls and procedures. Based on their
evaluation as of a date within 90 days of the filing date of this Quarterly
Report on Form 10-Q, the Company's principal executive officer and principal
financial officer have concluded that the Company's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934 (the "Exchange Act") are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
b) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation. There were no
significant deficiencies or material weaknesses, and therefore there were no
corrective actions taken.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- ----------------------------
On January 18, 2002, the Company was served with a lawsuit filed by
Blakely-Witt & Associates, Inc. in the District Court, L-193rd Judicial
District, Dallas County, Texas (Cause No. 01-11043). The suit alleges Pizza Inn
sent or caused to be sent unsolicited facsimile advertisements to plaintiff and
others in violation of (i) 47 U.S.C. Section 227(b)(1)(C) and (b)(3), the
Telephone Consumer Protection Act, and (ii) Texas Business and Commerce Code
Section 35.47. The plaintiff has requested this matter be certified as a class
action. We plan to vigorously defend our position in this litigation. We cannot
assure you that we will prevail in this lawsuit and our defense could be costly
and consume the time of our management. We are unable to predict the outcome of
this case. However, an adverse resolution of this matter could materially affect
our financial position and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ---------------------------------------------------------------------
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------------
(a) Exhibits:
10.1 Waiver letter from Wells Fargo Bank (Texas), N.A. dated October 22,
2002 but effective September 29, 2002.
99.1 Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Form 8-K filed under Item 5 - other events
On October 9, 2002 the Company filed a report on Form 8-K, amending the
Company's Amended and Restated By-Laws eliminating cumulative voting for the
election of directors.
- ------
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PIZZA INN, INC.
Registrant
By: /s/Ronald W. Parker
---------------------
Ronald W. Parker
President and Chief Executive Officer
By: /s/Shawn M. Preator
---------------------
Shawn M. Preator
Chief Financial Officer
Dated: November 12, 2002
CERTIFICATION
-------------
I, Ronald W. Parker, Chief Executive Officer of Pizza Inn, Inc. certify that:
1. I have reviewed the quarterly report on Form 10-Q of Pizza Inn, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
November 12, 2002
By: /s/Ronald W. Parker
---------------------
Ronald W. Parker
President and Chief Executive Officer
CERTIFICATION
-------------
I, Shawn M. Preator, Chief Financial Officer of Pizza Inn, Inc. certify that:
1. I have reviewed the quarterly report on Form 10-Q of Pizza Inn, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
November 12, 2002
By: /s/Shawn M. Preator
---------------------
Shawn M. Preator
Chief Financial Officer