7
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 29, 2003.
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)
At September 10, 2003, there were 10,058,674 shares of the registrant's
Common Stock outstanding, and the aggregate Market value of registrant's Common
Stock held by non-affiliates was $25,096,392, based upon the average of the bid
and ask prices.
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]
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 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 No ___
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 2003, 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 10, 2003, the Pizza Inn system consisted of 414 units,
including two Company owned and operated units, a third that the Company is
currently in the process of relocating, and 411 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
224 buffet units, 57 delivery/carry-out units, and 73 Express units. The
international franchised units are comprised of 16 buffet units, 30
delivery/carry-out units and 14 Express units. Pizza Inn units are currently
located in 20 states and 10 foreign countries. Domestic units are located
predominantly in the southern half of the United States, with Texas, North
Carolina, and Mississippi accounting for approximately 34%, 15%, 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.
On August 21, 2002, C. Jeffrey Rogers, the Company's former Chief Executive
Officer, resigned his position with the Company. In October 1999, the Company
loaned Mr. Rogers approximately $1.9 million. Subsequent to his departure, the
entire outstanding indebtedness was paid in full. For additional information,
see "Transactions with Related Parties". In addition, pursuant to the terms of
that certain Severance Agreement and Release ("Agreement") dated August 21, 2002
between C. Jeffrey Rogers and Pizza Inn, Inc., the Company paid Mr. Rogers
$195,000 in lieu of salary and made certain other payments as described in the
Agreement which is Exhibit 10.13 of the Company's Form 10-K for the fiscal year
ended June 30, 2002.
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 arrangements, 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 Serve 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
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 $3,500 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) 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. While all
Pizza Inn restaurants opened in an area of a developer's territory enter into
franchise agreements with the Company, a master licensee may open restaurants
owned and operated by the master licensee, 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 10, 2003, 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 continued use. In addition, the Company has obtained
trademark registrations in several foreign countries and has 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 video tapes 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 10, 2003, the Company had approximately 191 employees,
including 65 in the Company's corporate office, 71 at its Norco division, and 18
full-time and 37 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 has
increased 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
In November 2001 the Company moved into a new 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 the Company purchased in The Colony, Texas in
December 2000. Refer to the notes to the consolidated financial statements for
information concerning financing terms and construction costs.
The Company currently operates two Pizza Inn restaurants, both of which are
in Texas. The Company-operated units range in size from approximately 2,500 to
3,600 square feet and incur annual minimum rental charges of between $12.50 and
$20.00 per foot. Both of the currently operated restaurants are at leased
locations, one of which is non-renewable and will expire in 2005 and the second
of which is renewable and will expire in 2007. In June 2003, the Company
acquired land north of Dallas, Texas in Little Elm on which a Delco unit will be
constructed and operated. Refer to the notes to the consolidated financial
statements for information concerning purchase and construction costs.
ITEM 3 - 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. An adverse resolution of this 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 2003.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On September 10, 2003, there were 2,097 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
-------------- ----
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
2002
First Quarter Ended 9/23/2001 . 2.27 1.84
Second Quarter Ended 12/23/2001 2.16 1.03
Third Quarter Ended 3/24/2002 . 1.67 1.20
Fourth Quarter Ended 6/30/2002. 1.55 1.09
Under the Company's bank loan agreement, the Company is limited in its
ability to pay dividends or make other distributions on the common stock. The
Company did not pay any dividends on its common stock during the fiscal years
ended June 29, 2003 and June 30, 2002. 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 . . 806,150 $ 3.68 1,462,467
security holders
Equity compensation
plans not approved by - - -
security holders
----------------------- -------------------- --------------------------
Total . . . . . . . . 806,150 $ 3.68 1,462,467
======================= ===================== =========================
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 29, 2003, and should
be read in conjunction with the financial statements and schedules in Item 8 of
this report. Earnings per share data for all periods presented have been
restated to reflect the computation of earnings per share in accordance with
Statement of Financial Accounting Standard ("SFAS") 128.
Year Ended
-----------
June 29, June 30, June 24, June 25, June 27,
2003 2002 2001 2000 1999
----------- --------- --------- --------- ----------
(In thousands, except per share amounts)
SELECTED INCOME STATEMENT DATA:
Total revenues . . . . . . . . . . . . $ 58,782 $ 66,642 $ 65,268 $ 67,640 $ 67,261
Income before taxes. . . . . . . . . . 4,643 1,723 3,921 4,389 4,096
Net income . . . . . . . . . . . . . . 3,093 1,137 2,480 2,884 2,752
Basic earnings per common share. . . . 0.31 0.11 0.23 .25 .24
Diluted earnings per common share. . . 0.31 0.11 0.23 .25 .23
Dividends declared per common share. . - - 0.12 .24 (2) .18 (1)
SELECTED BALANCE SHEET DATA:
Total assets, as restated (3). . . . . 20,796 24,318 19,576 17,395 18,290
Long-term debt and
capital lease obligations . . . . 9,676 15,227 11,161 10,655 6,944
(1) On June 18, 1999 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 9, 1999.
(2) 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.
(3) Total assets include a prior period adjustment of $296,000 to properly state 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 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, 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.
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 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, the Company opened for business a total of 24 new Pizza
Inn franchise units, 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.
FISCAL 2002 COMPARED TO FISCAL 2001
Diluted earnings per share decreased 52% to $0.11 from $0.23 in the
prior year. Net income decreased 54% to $1,137,000 from $2,480,000 in the prior
year, on revenues of $66,642,000 in the current year and $65,268,000 in the
prior year. Pre-tax income decreased 56% to $1,723,000 from $3,921,000. The
decrease in net income was primarily attributable to a pretax charge of
approximately $1.9 million to reserve for a note receivable owed to the Company
from C. Jeffrey Rogers, the Company's former Chief Executive Officer. Based on
a review of certain financial information provided by Mr. Rogers, the Board of
Directors of the Company determined the collection of the loan of approximately
$1.9 million from the Company to Mr. Rogers was doubtful. The Company recorded
the charge in the fourth quarter of fiscal 2002 to fully reserve for the
possible nonpayment by Mr. Rogers. The Company intended, to the extent legally
permissible, to enforce this obligation under the relevant terms of the
Promissory Note and the Pledge Agreement. On August 21, 2002, C. Jeffrey Rogers,
the Company's former Chief Executive Officer, resigned his position with the
Company. See "Transactions with Related Parties".
Results of operations for fiscal 2002 include fifty-three weeks versus
fifty-two weeks in fiscal 2001.
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 1% to $57.7 million from $57.0 million in
the prior year. Higher cheese prices, the additional week of operations, and
increased sales of marketing materials were partially offset by lower chainwide
retail sales.
Franchise revenue, which includes royalties, license fees and income from
area development and foreign master license (collectively, "Territory") sales,
increased 3% or $155,000 in fiscal 2002 primarily due to the sale of an
international master license.
Restaurant sales, which consist of revenue generated by Company-operated
stores, for the year decreased 9% or $212,000 compared to the same period of the
prior year. This is the result of the temporary closing of the Delco unit in
September 2001.
Other income primarily consists of interest income and non-recurring
revenue items. Other income increased 137% or $724,000 primarily due to the
non-cash reversal of a $700,000 reserve which was originally set up as the
Company emerged from bankruptcy, and is now deemed unnecessary.
Cost of sales increased less than 1% to $54.1 million from $53.8 million in
the prior year. As a percentage of sales, cost of sales decreased to 90.5% from
90.6% compared to the prior year. Higher cost of sales due to the additional
week of operations, as described above, were offset by lower fuel costs.
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 8% or $217,000 compared to
last year primarily due to the additional week of operations and increased
expenses for training materials.
General and administrative expenses increased 22% or $839,000 in fiscal
2002. 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. Additionally, property taxes and
insurance associated with the new facility, along with the extra week of
operations in fiscal 2002, all contributed to higher general and administrative
expenses.
Interest expense decreased less than 1% or $4,000 in the current year.
Lower interest rates and increased capitalized interest on funds used in
construction of the new corporate office and distribution facility were
partially offset by higher debt levels in the current year.
Provision for income taxes decreased 59% or $855,000 due to lower income.
The effective tax rate was 34% compared to 37% in the prior year. The decrease
in the effective tax rate is primarily due to a decrease in nondeductible
permanent differences, which were partially offset by a change in the valuation
allowance due to the potential expiration of certain foreign tax carryforwards.
During fiscal 2002, the Company opened for business a total of 37 new Pizza
Inn franchise units, including 29 domestic and 8 international units.
Domestically, 46 units were closed by franchisees or terminated by the Company
typically because of unsatisfactory standards of operation or performance.
Additionally, 8 international units were closed.
FINANCIAL CONDITION
Cash and cash equivalents decreased $371,000 in fiscal 2003. The Company
used the cash flow generated from operations plus the proceeds from an officer
loan repayment to pay down $5.6 million of debt.
At June 29, 2003 the net deferred tax asset balance was $967,000. At June 29,
2003, the Company had a valuation allowance of $153,000 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 $153,000 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 and expects
to realize a benefit in future years from the utilization of its temporary
differences, which currently total $967,000. 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 federal income tax expense on its statements of
operations at an effective corporate rate of 33%, 34%, and 37% for fiscal years
2003, 2002 and 2001, respectively. However, the actual amount of taxes paid at
the alternative minimum tax rate of approximately 0%, 0% and 0% for fiscal years
2003, 2002, and 2001, respectively, is significantly less than the corporate
rate reflected on the Company's statement of operations. As of June 29, 2003,
the net operating loss carryforwards have been fully utilized. Therefore, in
fiscal 2004, the Company will become a cash taxpayer. 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, deductions for accrued expenses and deferred
revenues, as well as permanent differences as a result of the exercise of stock
options deducted for income tax purposes but not for financial reporting
purposes.
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 2003, the company generated cash flows of $4,021,000 from
operating activities as compared to $5,560,000 in fiscal 2002 and $6,420,000 in
fiscal 2001. The decrease in cash flows generated in fiscal 2003 was primarily
the result of the reversal of the bad debt expense as described in Note J of the
Company's consolidated financial statements.
Cash flows from investing activities primarily reflect the Company's capital
expenditure strategy. In fiscal 2003, the Company used cash of $470,000 for
investing activities as compared to $8,928,000 in fiscal 2002 and $4,713,000 in
fiscal 2001. The cash flow during fiscal 2003 consisted primarily of bar code
software and related equipment, land for a future Company-owned store, and
equipment for the corporate office and the distribution facility. The decrease
in fiscal 2003 was primarily the result of the construction of the corporate
office and distribution facility that was completed during fiscal 2002.
Cash flows from financing activities generally reflect changes in the
Company's borrowings during the period, together with dividends paid on common
stock, treasury stock transactions, and exercise of stock options. Net cash
used for financing activities was $3,922,000 in fiscal 2003 as compared to cash
provided by financing activities of $3,598,000 in fiscal 2002 and cash used for
financing activities of $1,651,000 in fiscal 2001. The Company used cash flow
from operations and proceeds from an officer loan repayment to decrease its net
bank borrowings by $5,600,000 to $11,100,000 at June 29, 2003 from $16,700,000
at June 30, 2002. Cash provided by operations totaled $4,021,000 in fiscal 2003
and was used primarily, in conjunction with proceeds from an officer loan
repayment, to pay down debt. Net cash provided by financing activities in 2002
was used for the construction of the Company's new corporate office and
distribution facility.
The Company signed an agreement with it's current lender, Wells Fargo, to
refinance its debt under a $9.5 million revolving credit facility. This
agreement contains covenants which, among other things, require the Company to
satisfy certain financial ratios and restrict additional debt. The Company is
in compliance with all of the above financial ratios and restrictions on
additional debt as of June 29, 2003, and management believes that future
operations and cash flows will enable the Company to continue compliance with
these covenants.
The Company's future requirements for cash relate primarily to the
repayment of debt, capital expenditures, including information system upgrades
and miscellaneous equipment, and the possible periodic purchase of its 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.
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 29, 2003 the Company had approximately $11.1 million of variable
rate debt obligations outstanding with a weighted average interest rate of 3.14%
for the year ending June 29, 2003. A hypothetical 10% change in the effective
interest rate for these borrowings, assuming debt levels at June 29, 2003, would
change interest expense by approximately $35,000.
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 29, 2003 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.
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 29, 2003 (in thousands):
Less Than 1 . 1-3 4-5 After 5
Total .. Year Years Years Years
- ----------------------------------- ------- ------ -------- ------ -------
Bank debt . . . . . . . . . . . . . $11,091 $1,448 $ 3,313 $6,330 $ -
Operating lease obligations . . . . 3,366 1,090 1,712 564 -
Capital lease obligations (1) . . . 142 109 20 13 -
------- ------ -------- ------ - -
Total contractual cash obligations. $14,599 $2,647 $ 5,045 $6,907 $ -
======= ====== ======== ====== ==
(1) Does not include amount representing interest.
TRANSACTIONS WITH RELATED PARTIES
One of the individuals nominated by the Company and elected to serve on its
Board of Directors is a franchisee. This franchisee currently operates a total
of 11 restaurants located in Arkansas. Purchases by this franchisee comprised
6% and 6% of the Company's total food and supply sales in fiscal 2003 and fiscal
2002, respectively. Royalties and license fees and area development sales from
this franchisee comprised 4% and 3% of the Company's total franchise revenues in
fiscal 2003 and fiscal 2002, respectively. As franchised units, his restaurants
pay royalties to the Company and purchase a majority of their food and supplies
from the Company's distribution division. As of June 29, 2003 and June 30,
2002, his accounts and note payable to the Company were $854,780 and $685,669,
respectively.
The Company believes the above transactions were at the same prices and on the
same terms available to non-related third parties.
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, Newcastle Partners entered into a
transaction with Wells Fargo whereby Newcastle ultimately acquired the Company
stock pledged by Mr. Rogers and, in connection therewith, 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 bears interest at the same floating
interest rate the Company pays on its revolving credit line with Wells Fargo and
is collateralized by certain real property and existing Company stock owned by
Ronald W. Parker. The note is reflected as a reduction to shareholders' equity.
As of June 29, 2003, the current note balance is $557,056.
In July 2000, the Company also loaned $302,581 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 in
1995 by the Company. The note bears interest at the same floating interest rate
the Company pays on its revolving credit line with Wells Fargo and is
collateralized by certain real property and existing Company stock owned by
Ronald W. Parker. The note is reflected as a reduction to shareholders' equity.
As of June 29, 2003, the current note balance is $131,853.
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.
PIZZA INN, INC.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Schedule:
FINANCIAL STATEMENTS PAGE NO.
Report of Independent Auditors. 17
Consolidated Statements of Operations for the years ended
June 29, 2003, June 30, 2002, and June 24, 2001. 18
Consolidated Statements of Comprehensive Income for the years ended 18
June 29, 2003, June 30, 2002, and June 24, 2001.
Consolidated Balance Sheets at June 29, 2003 and June 30, 2002. 19
Consolidated Statements of Shareholders' Equity for the years
ended June 29, 2003, June 30, 2002, and June 24, 2001. 20
Consolidated Statements of Cash Flows for the years ended June 29, 2003,
June 30, 2002, and June 24, 2001. 21
Notes to Consolidated Financial Statements. 23
FINANCIAL STATEMENT SCHEDULE
Schedule II - Consolidated Valuation and Qualifying Accounts 38
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 43
REPORT OF INDEPENDENT AUDITORS
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 June 30, 2002, and the results of their
operations and their cash flows for each of the three 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 auditing standards generally accepted in the
United States of America, which 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.
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
September 25, 2003
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED
----------------------
JUNE 29, JUNE 30, JUNE 24,
2003 2002 2001
------------------------ ------------------------ ------------------------
REVENUES:
Food and supply sales . . . . . . . . . . . . . . $ 51,556 $ 57,727 $ 57,020
Franchise revenue . . . . . . . . . . . . . . . . 5,135 5,528 5,373
Restaurant sales. . . . . . . . . . . . . . . . . 1,780 2,134 2,346
Other income. . . . . . . . . . . . . . . . . . . 311 1,253 529
------------------------ ------------------------ ------------------------
58,782 66,642 65,268
------------------------ ------------------------ ------------------------
COSTS AND EXPENSES:
Cost of sales . . . . . . . . . . . . . . . . . . 47,583 54,146 53,783
Franchise expenses. . . . . . . . . . . . . . . . 3,311 2,865 2,648
General and administrative expenses . . . . . . . 4,251 4,709 3,870
Provision for (recovery of) bad debt (see Note J) (1,795) 2,367 210
Interest expense (net of capitalized interest of
$0, $178, and $102, respectively) . . . . . . . 789 832 836
------------------------ ------------------------ ------------------------
54,139 64,919 61,347
------------------------ ------------------------ ------------------------
INCOME BEFORE INCOME TAXES. . . . . . . . . . . . . 4,643 1,723 3,921
Provision for income taxes. . . . . . . . . . . . 1,550 586 1,441
------------------------ ------------------------ ------------------------
NET INCOME. . . . . . . . . . . . . . . . . . . . . 3,093 1,137 2,480
======================== ======================== ========================
BASIC EARNINGS PER COMMON SHARE . . . . . . . . . . 0.31 0.11 0.23
======================== ======================== ========================
DILUTED EARNINGS PER COMMON SHARE . . . . . . . . . 0.31 0.11 0.23
======================== ======================== ========================
DIVIDENDS DECLARED PER COMMON SHARE . . . . . . . . - - 0.12
======================== ======================== ========================
WEIGHTED AVERAGE COMMON SHARES. . . . . . . . . . . 10,058 10,092 10,635
======================== ======================== ========================
WEIGHTED AVERAGE COMMON AND
POTENTIALLY DILUTIVE COMMON SHARES. . . . . . . . 10,061 10,095 10,639
======================== ======================== ========================
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
YEAR ENDED
---------------------------------------------------
JUNE 29,. . . . . . . . JUNE 30, JUNE 24,
2003 2002 2001
------------------------ ------------------------ ------------------------
Net Income. . . . . . . . . . . . . . . . . . . $ 3,093 $ 1,137 $ 2,480
Interest rate swap loss (net of tax benefit of
$168, $129, and $38, respectively). . . . . (326) (251) (73)
----------------------- ----------------------- ------------------------
Comprehensive Income. . . . . . . . . . . . . . $ 2,767 $ 886 $ 2,407
======================== ======================== ========================
See accompanying Notes to Consolidated Financial Statements.
PIZZA INN, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 29, JUNE 30,
ASSETS 2003 2002
--------------------- ---------------------
(as restated)
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $ 399 $ 770
Accounts receivable, less allowance for doubtful
accounts of $722 and $829, respectively . . . . . . . . . . . . 3,730 3,867
Notes receivable, current portion, less allowance
for doubtful accounts of $175 and $354, respectively. . . . . . 260 332
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,511 1,526
Deferred tax assets, net. . . . . . . . . . . . . . . . . . . . . 585 1,307
Prepaid expenses and other. . . . . . . . . . . . . . . . . . . . 533 905
--------------------- ---------------------
Total current assets. . . . . . . . . . . . . . . . . . . . . 7,018 8,707
Property, plant and equipment, net. . . . . . . . . . . . . . . . . 13,126 13,567
Property under capital leases, net. . . . . . . . . . . . . . . . . 120 337
Deferred tax assets, net. . . . . . . . . . . . . . . . . . . . . . 382 1,041
Long-term notes receivable, less
allowance for doubtful accounts of $19 and $20, respectively. . 41 191
Deposits and other. . . . . . . . . . . . . . . . . . . . . . . . . 109 475
--------------------- ---------------------
$ 20,796 $ 24,318
===================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade. . . . . . . . . . . . . . . . . . . . . $ 1,217 $ 1,527
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . 1,950 2,529
Current portion of long-term debt . . . . . . . . . . . . . . . . 1,448 1,656
Current portion of capital lease obligations. . . . . . . . . . . 109 229
--------------------- ---------------------
Total current liabilities . . . . . . . . . . . . . . . . . . . 4,724 5,941
LONG-TERM LIABILITIES
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . 9,643 15,091
Long-term capital lease obligations . . . . . . . . . . . . . . . 33 136
Other long-term liabilities . . . . . . . . . . . . . . . . . . . 989 517
--------------------- ---------------------
15,389 21,685
--------------------- ---------------------
COMMITMENTS AND CONTINGENCIES (See Note I)
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value; authorized 26,000,000
shares; issued 14,956,319 and 14,955,819 shares, respectively;
outstanding 10,058,674 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 $0 and $1,750, respectively . . . . . . . . . . . . (569) (575)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . 18,135 15,042
Accumulated other comprehensive loss. . . . . . . . . . . . . . . (650) (324)
Treasury stock at cost
Shares in treasury: 4,897,645 and 4,897,645, respectively . . . (19,484) (19,484)
--------------------- ---------------------
Total shareholders' equity. . . . . . . . . . . . . . . . . . . 5,407 2,633
--------------------- ---------------------
$ 20,796 $ 24,318
===================== =====================
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 25, 2000, 10,645 $ 150 $ 7,708 $ (2,250) $ 12,867 $ - $(18,282) $ 193
------------ -------- --------- ---------- --------- ------ --------- ------
as restated
Stock options exercised 215 - 37 - (199) - 700 538
Loans to officers for
exercise of stock options - - - (240) - - - (240)
Principal repayment of loans
by officers - - - 165 - - - 165
Tax benefits associated
with stock options - - 77 - - - - 77
Employee incentive options
and shares 1 - 1 - - - - 1
Dividends paid - - - - (1,243) - - (1,243)
Acquisition of treasury
stock (see Note K) (541) - - - - - (1,329) (1,329)
Interest rate swap loss
(net of tax of $38) - - - - - (73) - (73)
Net income - - - - 2,480 - - 2,480
------- ------ ------- -------- ------- ------ ------ -----
BALANCE, JUNE 24, 2001 10,320 $ 150 $ 7,823 $(2,325) $ 13,905 $ (73) $(18,911) 569
------- ------ ------- -------- ------- ------ ------ -----
as restated
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
======= ====== ======= ======== ======= ===== ======= =====
See accompanying Notes to Consolidated Financial Statements.
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED
---------------------------------------------
JUNE 29, JUNE 30, JUNE 24,
2003 2002 2001
----------------------- ----------------------- -----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . $ 3,093 $ 1,137 $ 2,480
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization. . . . . . . . . . 1,403 1,337 1,343
Provision for (recovery of) bad debt . . . . . . (1,795) 2,367 210
Deferred income taxes. . . . . . . . . . . . . . 1,381 538 1,247
Changes in assets and liabilities:
Notes and accounts receivable. . . . . . . . . . 204 799 (263)
Inventories. . . . . . . . . . . . . . . . . . . 15 537 847
Accounts payable - trade . . . . . . . . . . . . (310) (825) 102
Accrued expenses . . . . . . . . . . . . . . . . (527) 240 102
Deferred franchise revenue . . . . . . . . . . . (52) 38 (10)
Prepaid expenses and other . . . . . . . . . . . 609 (608) 362
----------------------- ----------------------- -----------------------
CASH PROVIDED BY OPERATING ACTIVITIES. . . . . . 4,021 5,560 6,420
----------------------- ----------------------- -----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . . . . (476) (8,952) (4,713)
Proceeds from sale of assets . . . . . . . . . . . 6 24 -
----------------------- ----------------------- -----------------------
CASH USED FOR INVESTING ACTIVITIES . . . . . . . (470) (8,928) (4,713)
----------------------- ----------------------- -----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term bank debt and
capital lease obligations, net . . . . . . . . . (6,379) (3,738) (4,184)
Borrowings of long-term debt . . . . . . . . . . . 500 7,909 4,642
Dividends paid . . . . . . . . . . . . . . . . . . - - (1,243)
Proceeds from exercise of stock options. . . . . . - - 298
Officer loan payment . . . . . . . . . . . . . . . 1,957 - 165
Purchases of treasury stock. . . . . . . . . . . . - (573) (1,329)
----------------------- ----------------------- -----------------------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (3,922) 3,598 (1,651)
----------------------- ----------------------- -----------------------
Net increase (decrease) in cash and cash equivalents . (371) 230 56
Cash and cash equivalents, beginning of period . . . . 770 540 484
----------------------- ----------------------- -----------------------
Cash and cash equivalents, end of period . . . . . . . $ 399 $ 770 $ 540
----------------------- ----------------------- -----------------------
See accompanying Notes to Consolidated Financial Statements.
PIZZA INN, INC.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
(IN THOUSANDS)
YEAR ENDED
-----------
JUNE 29, JUNE 30, JUNE 24,
2003 2002 2001
----------- --------- ---------
CASH PAYMENTS FOR:
Interest . . . . . . . . . . . . . . . . . . . $ 810 $ 992 $ 876
Income taxes . . . . . . . . . . . . . . . . . - 53 65
NONCASH FINANCING AND INVESTING
ACTIVITIES:
Capital lease obligations incurred . . . . . . $ - $ 156 $ -
Stock issued to officers in exchange for loans - - 303
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 29, 2003 the Pizza Inn system consisted of 410 locations, including
three Company-operated units (one of which is temporarily closed) and 407
franchised units. On June 29, 2003 the Company had franchises in 20 states and
10 foreign countries. Domestic units are located predominantly in the southern
half of the United States, with Texas, North Carolina and Mississippi 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 intercompany 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. As of June 29, 2003, total interest of $280,000 has
been capitalized in connection with the construction of the Company's new
headquarters, training center, and distribution facility.
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 29, 2003.
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.
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.
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
DISTRIBUTION DIVISION OPERATIONS:
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:
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 29, 2003, June 30, 2002 and June 24, 2001, 92%, 93% and
96%, 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. 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. Territory fees recognized as income for the years ended
June 29, 2003, June 30, 2002 and June 24, 2001 were $180,000, $131,000 and $0,
respectively.
STOCK OPTIONS:
In December of 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation" to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation and amends the disclosure requirements of
SFAS No. 123 to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation. SFAS No. 148 also amends Accounting Principles Board
("APB") Opinion No. 28 "Interim Financial Report," to require disclosure about
those effects in interim financial information. SFAS No. 148 is effective for
the Company's interim periods after December 29, 2002.
SFAS No. 123 encourages but does not require a fair value based method of
accounting for employee stock options or similar equity instruments. SFAS No.
123 allows an entity to elect to continue to measure compensation costs under
APB No. 25, "Accounting for Stock Issued to Employees," but requires pro forma
disclosure of net earnings as if the fair value based method of accounting had
been applied.
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
No. 123 (see Note H - Stock Options).
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 2.8% to 6.3%, expected volatility of 39.4% to 42.2%,
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 29, 2003 June 30, 2002 June 24, 2001
------------------------------ -------------------------- ------------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
-------------- -------------- -------------- ---------- ------------ ----------
Net income . . . . . . . . $ 3,093 $ 3,075 $ 1,137 $ 1,079 $ 2,480 $ 2,288
Basic earnings per share . $ 0.31 $ 0.31 $ 0.11 $ 0.11 $ 0.23 $ 0.22
Diluted earnings per share $ 0.31 $ 0.31 $ 0.11 $ 0.11 $ 0.23 $ 0.22
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 generally accepted
accounting principles 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 29, 2003 and June 24, 2001 contained 52 weeks. Fiscal year ending June 30,
2002 contained 53 weeks.
NEW PRONOUNCEMENTS:
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
SFAS Nos. 4, 44 and 64, Amendment of SFAS No. 13, and Technical Corrections."
Among other provisions, SFAS No. 145 rescinds both SFAS No. 4, "Reporting Gains
and Losses from Extinguishment of Debt," and the amendment of SFAS No. 4, SFAS
No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements."
SFAS No. 145 also amends SFAS No. 13, "Accounting for Leases," to eliminate an
inconsistency between the accounting for sale-leaseback transactions and the
accounting for certain lease modifications that have economic effects similar to
sale-leaseback transactions. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The
provisions of SFAS No. 145 are applicable for fiscal years beginning after,
transactions entered into after and financial statements issued on or subsequent
to May 15, 2002. The adoption of SFAS No. 145 did not have a significant impact
on the Company's consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS 133. The new
guidance amends SFAS 133 for decisions made: (a) as part of the Derivatives
Implementation Group process that effectively required amendments to SFAS 133,
(b) in connection with other FASB projects dealing with financial instruments,
and (c) regarding implementation issues raised in relation to the application of
the definition of a derivative, particularly regarding the meaning of an
"underlying" and the characteristics of a derivative that contains financing
components. The amendments set forth in SFAS 149 improve financial reporting by
requiring that contracts with comparable characteristics be accounted for
similarly. SFAS 149 is generally effective for contracts entered into or
modified after June 30, 2003 (with a few exceptions) and for hedging
relationships designated after June 30, 2003. The guidance is to be applied
prospectively, and is not expected to have a significant impact on the Company's
consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 clarifies the requirements for a
guarantor's accounting for and disclosures of certain guarantees issued and
outstanding. It also specifies that a guarantor is required to recognize, at the
inception of the guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee, although it does not prescribe a specific
approach for subsequently measuring the guarantor's recognized liability over
the term of the guarantee. FIN 45 also specifies certain disclosures required to
be made in interim and annual financial statements related to guarantees. The
recognition and measurement provisions of FIN 45 are effective for guarantees
issued or modified after December 31, 2002. The accounting for guarantees issued
prior to this date is not affected. Disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company has adopted the disclosure requirements of FIN 45 (see Note I
- - Commitments and Contingencies) and will begin applying the recognition and
measurement provisions for all material guarantees entered into or modified
after December 31, 2002. The impact of FIN 45 on future consolidated financial
statements will depend upon whether the Company enters into or modifies any
material guarantees.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," which addresses the consolidation
of business enterprises (variable interest entities), to which the usual
condition of consolidation, a controlling financial interest, does not apply. As
defined in FIN 46, variable interests are contractual, ownership or other
interests in an entity that change with changes in the entity's net asset value.
Variable interests in an entity may arise from financial instruments, service
contracts, guarantees, leases or other arrangements with the variable interest
entity. An entity that will absorb a majority of the variable interest entity's
expected losses or expected residual returns, as defined in FIN 46, is
considered the primary beneficiary of the variable interest entity. The primary
beneficiary must include the variable interest entity's assets, liabilities and
results of operations in its consolidated financial statements. FIN 46 is
immediately effective for all variable interest entities created after January
31, 2003. For variable interest entities created prior to this date, the
provisions of FIN 46 must be applied no later than the beginning of the
Company's first quarter of fiscal 2004.
The Company currently has contracts, guarantees and other arrangements with
other entities to develop and operate Pizza Inn stores. The Company is currently
evaluating the classification of its franchisees and, as a result, has not
completed its assessment of whether or not the adoption of FIN 46 will have a
material impact on its consolidated financial statements.
On May 31, 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
improves the accounting for certain financial instruments that, under previous
guidance, issuers could account for as equity and requires that those
instruments be classified as liabilities (or assets in certain circumstances) in
statements of financial position. SFAS No. 150 affects the issuer's accounting
for three types of freestanding financial instruments: 1) Mandatorily redeemable
shares are required to be redeemed at a specified or determinable date or upon
an event certain to occur; 2) Put options and forward purchase contracts, which
involves financial instruments embodying an obligation that the issuer must or
could choose to settle by issuing a variable number of its shares or other
equity instruments based solely on something other than the issuer's own equity
shares; and 3) Certain obligations that can be settled with shares, the monetary
value of which is (i) fixed, tied solely or predominantly to a variable such as
a market index, or (ii) varies inversely with the value of the issuers' shares.
SFAS No. 150 also requires disclosures about alternative ways of settling the
instruments and the capital structure of entities-all of whose shares are
mandatorily redeemable. SFAS No. 150 is generally effective for all financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The guidance is to be applied prospectively, and is not expected to have
any impact on the Company's consolidated financial statements.
NOTE B - PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment and property under capital leases consist of the
following (in thousands):
USEFUL JUNE 29, JUNE 30,
LIVES . . .. 2003 2002
----------- -------------- --------
Property, plant and equipment:
Equipment, furniture and fixtures 3 - 7 yrs $ 5,559 $ 5,192
Building. . . . . . . . . . . . . 5 - 39 yrs 10,562 10,557
Land. . . . . . . . . . . . . . . - 2,072 1,945
Construction in progress. . . . . - 37 -
Leasehold improvements. . . . . . 7 yrs 668 1,646
----------------------- ----------------------
18,898 19,340
Less: accumulated depreciation . (5,772) (5,773)
----------- -----------------------
$ 13,126 $ 13,567
======================= ======================
Property under capital leases:
Real Estate . . . . . . . . . . . 20 yrs $ 118 $ 118
Equipment . . . . . . . . . . . . 3 - 7 yrs 480 1,635
----------------------- ----------------------
598 1,753
Less: accumulated amortization . (478) (1,416)
----------- -----------
120 337
======================= ======================
Depreciation and amortization expense was $1,403,000, $1,337,000, and $1,343,000
for the years ended June 29, 2003, June 30, 2002, and June 24, 2001,
respectively. In fiscal year 2003, fully depreciated assets of approximately
$1.2 million were removed from the books. These amounts related primarily to
leasehold improvements at the Company's previous locations for the corporate
office, distribution center, and a Company store that was closed.
NOTE C - ACCRUED EXPENSES:
Accrued expenses consist of the following (in thousands):
JUNE 29, JUNE 30,
2003 2002
--------------------- ---------------------
Compensation . . . . . . . . . . . . . . . $ 539 $ 968
Taxes. . . . . . . . . . . . . . . . . . . 437 405
Legal reserves and other professional fees 393 346
Accrued rent . . . . . . . . . . . . . . . 7 304
Other. . . . . . . . . . . . . . . . . . . 574 506
--------------------- ---------------------
1,950 2,529
===================== =====================
NOTE D - LONG-TERM DEBT:
In August 1997, the Company signed an agreement (the "Loan Agreement") with its
current lender, Wells Fargo, to refinance its debt under a $9.5 million
revolving credit facility. The revolving credit note is collateralized by
essentially all of the Company's assets. The Loan Agreement contains covenants
which, among other things, require the Company to satisfy certain financial
ratios and restrict additional debt.
The Company entered into a new agreement effective December 29, 2002 with Wells
Fargo to provide a $7.0 million revolving credit line that will expire December
31, 2004, replacing a $9.5 million line that was due to expire December 31,
2003. The $7.0 million revolving credit line will reduce quarterly by $500,000
beginning March 31, 2003 through December 31, 2004. Interest on the revolving
credit line is payable monthly. Interest is provided for at a rate equal to
prime less an interest rate margin from 1.0% to 0.5% or, at the Company's
option, at the LIBOR rate plus 1.25% to 1.75%. The interest rate margin is
based on the Company's performance under certain financial ratio tests. A 0.375%
to 0.5% annual commitment fee is payable on any unused portion of the revolving
credit line. As of June 29, 2003 and June 30, 2002, the variable interest rates
were 2.82% and 3.59%, respectively, using a LIBOR rate basis. Amounts
outstanding under the revolving credit line as of June 29, 2003 and June 30,
2002 were $2.5 million and $6.5 million, respectively.
The Company entered into a term note effective March 31, 2000 with Wells Fargo.
The $5,000,000 term note had outstanding balances of $1.0 million and $2.3
million at June 29, 2003 and June 30, 2002, 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%. For the years ending June 29, 2003 and
June 30, 2002, the Company's interest rates were 2.81% and 3.38%, respectively.
Management believes that future operations will generate sufficient cash flow to
meet this obligation at the maturity date.
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
29, 2003 and June 30, 2002, the variable interest rates were 2.59% and 3.34%,
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 $7.5 million at June 29, 2003 and $8.0
million at June 30, 2002.
The Company entered into an interest rate swap effective February 27, 2001,
as amended, designated as a cash flow hedge, to manage interest rate risk
relating to the financing of the construction of the Company's new headquarters
and to fulfill bank requirements. The swap agreement has a notional principal
amount of $8.125 million with a fixed pay rate of 5.84% which began November 1,
2001 and will end November 19, 2007. The swap's notional amount amortizes over
a term of twenty years 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 29, 2003
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 29, 2003 and June 30,
2002 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 29, 2003 (in thousands):
JUNE 29,
2003
---------
2004. . . . . . . . . $ 1,448
2005. . . . . . . . . 2,907
2006. . . . . . . . . 406
2007. . . . . . . . . 406
2008. . . . . . . . . 5,924
--------------------
Total debt obligation $ 11,091
====================
NOTE E - INCOME TAXES:
Income tax expense consists of the following (in thousands):
JUNE 29, JUNE 30, JUNE 24,
2003 2002 2001
--------------------- ----------------------- ---------------------
Federal:
Current. . . . . . . . . $ - $ (81) $ 156
Deferred . . . . . . . . 1,550 667 1,285
--------------------- ----------------------- ---------------------
Provision for income taxes $ 1,550 $ 586 $ 1,441
===================== ======================= =====================
The effective federal income tax rate varied from the statutory rate for the
years ended June 29, 2003, and June 30, 2002 and June 24, 2001 as reflected
below (in thousands):
JUNE 29, JUNE 30, JUNE 24,
2003 2002 2001
----------------------- ----------------------- ---------------------
Federal income taxes based on 34%
of book income $1,579 $586 $1,333
Permanent adjustments 21 (187) 70
Change in valuation allowance (72) 187 16
Expired credits 22 - 22
----------------------- ----------------------- ---------------------
$ 1,550 $ 586 $ 1,441
======================= ======================= =====================
The tax effects of temporary differences which give rise to the net deferred tax
assets (liabilities) consisted of the following (in thousands):
JUNE 29, JUNE 30,
2003 2002
----------------------- ----------------------
(AS RESTATED)
Reserve for bad debt . . . . . . $ 312 $ 341
Reserve for bad debt - officers. - 663
Depreciable assets . . . . . . . (38) 428
Deferred fees. . . . . . . . . . 59 70
Other reserves . . . . . . . . . (80) 2
Interest rate swap loss. . . . . 335 167
Credit carryforwards . . . . . . 532 902
----------------------- ----------------------
Gross deferred tax asset . . . . $ 1,120 $ 2,573
Valuation allowance. . . . . . . (153) (225)
----------------------- ----------------------
Net deferred tax asset . . . . . $ 967 $ 2,348
======================= ======================
As of June 29, 2003, the Company had $232,000 of foreign tax credit
carryforwards expiring between 2004 and 2008 and $300,000 of minimum tax credits
that can be carried forward indefinitely. 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 occupied by the Company-operated restaurants is leased for
initial terms ranging from five to twenty-five years with renewal options
ranging from three to fifteen years. Some of the lease agreements contain
either provisions requiring additional rent if sales exceed specified amounts,
or escalation clauses based on changes in the Consumer Price Index.
The Company's distribution division currently leases a significant portion of
its transportation equipment under operating and capital 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 29, 2003 are as follows (in
thousands):
CAPITAL OPERATING
LEASES LEASES
------------------------ ----------
2004. . . . . . . . . . . . . . . . . . . $ 114 $ 1,090
2005. . . . . . . . . . . . . . . . . . . 12 944
2006. . . . . . . . . . . . . . . . . . . 12 768
2007. . . . . . . . . . . . . . . . . . . 12 463
2008. . . . . . . . . . . . . . . . . . . 1 101
Thereafter. . . . . . . . . . . . . . . . - -
------------------------ --------
$ 151. 3,366
========
Less amount representing interest . . . . (9)
------------------------
Present value of total obligations under
capital leases. . . . . . . . . . . . 142
Less current portion. . . . . . . . . . . (109)
------------------------
Long-term capital lease obligations . . . $ 33
========================
Rental expense consisted of the following (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 29, JUNE 30, JUNE 24,
2003 2002 2001
------------ ------------ ------------
Minimum rentals. . $ 1,143 $ 1,773 $ 1,566
Contingent rentals 14 21 19
Sublease rentals . (97) (99) (102)
------------ ------------ ------------
$ 1,060 $ 1,695 $ 1,483
============ ============ ============
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. From January 1, 1999 through July 31, 2000,
the Company contributed on behalf of each participating employee an amount equal
to 100% of the first 3% and 50% of the next 3% of the employee's contribution.
From August 1, 2000 through December 31, 2000, the Company contributed on behalf
of each participating employee an amount equal to 50% of up to 6% of the
employee's contribution. Effective January 1, 2001, 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 are invested in Common Stock of the Company.
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 29, 2003, June 30, 2002, and, June 24, 2001, total
matching contributions to the tax advantaged savings plan by the Company on
behalf of participating employees were $82,576, $88,770, and $77,000,
respectively.
NOTE H - STOCK OPTIONS:
On September 1, 1992, the Company adopted the 1992 Stock Award Plan (the "1992
Plan"). All officers, employees and elected outside directors are eligible to
participate. The Company's 1992 Plan is a combined nonqualified stock option
and stock appreciation rights arrangement. A total of two million shares of
Pizza Inn, Inc. Common Stock were originally authorized to be awarded under the
1992 Plan. A total of 973,073 options were actually granted under the 1992 Plan
through December 1993. 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 to the 1993 plan
increasing by 500,000 shares, in each year, the aggregate number of shares of
common stock issuable under the plan. In December, 2000, the Company's
Shareholders approved amendments to the 1993 plan increasing by 100,000 shares
the aggregate number of shares of common stock issuable under the plan.
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 who are not employed by the Company are
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 are granted, up to 20,000 shares per year, to each
outside director. Options are granted at market value of the stock on the first
day of the fiscal year, which is also the date of grant, and 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 are authorized to be issued
pursuant to the 1993 Directors Plan.
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 29, 2003 June 30, 2002 June 24, 2001
--------------- -------------- ---------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------- -------------- --------------- ------ ---------- ------
Outstanding at beginning of year 1,591,233 $ 3.76 2,210,033 $ 3.82 2,123,306 $ 3.91
Granted. . . . . . . . . . . . . 10,000 $ 1.28 4,000 $ 2.12 464,160 $ 2.83
Exercised. . . . . . . . . . . . - $ 0.00 - $ 0.00 (215,000) $ 2.50
Canceled/Expired . . . . . . . . (795,083) $ 3.81 (622,800) $ 3.96 (162,433) $ 3.82
--------------- -------------- --------------- ------ ---------- ------
Outstanding at end of year . . . 806,150 $ 3.68 1,591,233 $ 3.76 2,210,033 $ 3.82
=============== ============== =============== ====== ========== ======
Exercisable at end of year . . . 792,150 $ 3.72 1,358,233 $ 4.02 1,696,873 $ 4.07
Weighted-average fair value of
options granted during the year. $ 0.33 $ 0.68 $ 0.93
FIXED PRICE STOCK OPTIONS
The following table provides information on options outstanding and options
exercisable at June 29, 2003:
Options Outstanding Options Exercisable
------------------- --------------------
Weighted-
Average
Shares Remaining Weighted- Shares Weighted-
Range of Outstanding Contractual Average Exercisable Average
Exercise Prices at June 29, 2003 Life (Years) Exercise Price at June 29, 2003 Exercise Price
- ---------------- ------------------- -------------------- --------------- --------------- ---------------
1.28 - 3.25 . . 228,500 3.82 $ 2.16 214,500 $ 2.21
3.30 - 4.25 . . 281,660 2.84 $ 3.58 281,660 $ 3.58
4.38 - 5.50 . . 295,990 1.15 $ 4.95 295,990 $ 4.95
------------------- ----------------
1.28 - 5.50 . . 806,150 2.50 $ 3.68 792,150 $ 3.72
=================== ================
NOTE I - COMMITMENTS AND CONTINGENCIES:
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. An adverse resolution of this 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., 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 June 29, 2003 the outstanding principal balance of this
loan was approximately $674,000. 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.
NOTE J - RELATED PARTIES:
One of the individuals nominated by the Company and elected to serve on its
Board of Directors is a franchisee. This franchisee currently operates a total
of 11 restaurants located in Arkansas. Purchases by this franchisee comprised
6% and 6% of the Company's total food and supply sales in fiscal 2003 and fiscal
2002, respectively. Royalties and license fees and area development sales from
this franchisee comprised 4% and 3% of the Company's total franchise revenues in
fiscal 2003 and fiscal 2002, respectively. As franchised units, his restaurants
pay royalties to the Company and purchase a majority of their food and supplies
from the Company's distribution division. As of June 29, 2003 and June 30,
2002, his accounts and note payable to the Company were $854,780 and $685,669,
respectively.
The Company believes the above transactions were at the same prices and on the
same terms available to non-related third parties.
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, Newcastle Partners entered into a
transaction with Wells Fargo whereby Newcastle ultimately acquired the Company
stock pledged by Mr. Rogers and, in connection therewith, 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 bears interest at the same
floating interest rate the Company pays on its revolving credit line with Wells
Fargo and is collateralized by certain real property and existing Company stock
owned by Ronald W. Parker. The note is reflected as a reduction to
shareholders' equity. As of June 29, 2003, the current note balance is
$557,056.
In July 2000, the Company loaned $302,581 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 in
1995 by the Company. The note bears interest at the same floating interest rate
the Company pays on its revolving credit line with Wells Fargo and is
collateralized by certain real property and existing Company stock owned by
Ronald W. Parker. The note is reflected as a reduction to shareholders' equity.
As of June 29, 2003, the current note balance is $131,853.
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 2003. 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 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
============ ============= ==========
YEAR ENDED JUNE 24, 2001
BASIC EPS
Income Available to Common Shareholders . . . $ 2,480 10,635 $ 0.23
Effect of Dilutive Securities - Stock Options 4
------------
DILUTED EPS
Income Available to Common Shareholders
& Potentially Dilutive Securities . . . . . . $ 2,480 10,639 $ 0.23
============ ============= ==========
Options to purchase 796,150 shares of common stock at exercise prices ranging
from $2.00 to $5.50 per share were outstanding at June 29, 2003 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 1,591,233 and 2,195,033 shares of common stock during fiscal years 2002
and 2001, 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 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 29, 2003, June 30, 2002,
and June 24, 2001 (in thousands):
JUNE 29, JUNE 30, JUNE 24,
2003 2002 2001
---------- ---------- --------
NET SALES AND OPERATING REVENUES:
Food and Equipment Distribution . . $ 51,556 $ 57,727 $ 57,020
Franchise and Other . . . . . . . . 6,915 7,662 7,719
Intersegment revenues . . . . . . . 664 806 861
---------- --------- ----------
Combined. . . . . . . . . . . . . 59,135 66,195 65,600
Other revenues. . . . . . . . . . . 311 1,253 529
Less intersegment revenues. . . . . (664) (806) (861)
---------- --------- ----------
Consolidated revenues . . . . . . $ 58,782 $ 66,642 $ 65,268
========== ======== ==========
DEPRECIATION AND AMORTIZATION:
Food and Equipment Distribution . . $ 806 $ 854 $ 992
Franchise and Other . . . . . . . . 101 120 227
---------- -------- ---------
Combined. . . . . . . . . . . . . 907 974 1,219
Corporate administration and other. 496 363 124
---------- --------- ----------
Depreciation and amortization . . $ 1,403 $ 1,337 $ 1,343
========== ======== ==========
INTEREST EXPENSE:
Food and Equipment Distribution . . $ 464 $ 520 $ 533
Franchise and Other . . . . . . . . 5 5 6
---------- -------- ---------
Combined. . . . . . . . . . . . . 469 525 539
Corporate administration and other. 320 307 297
---------- -------- ---------
Interest Expense. . . . . . . . . $ 789 $ 832 $ 836
========== ======= ==========
INTEREST INCOME:
Food and Equipment Distribution . . $ 24 $ 34 $ 25
Franchise and Other . . . . . . . . - - -
---------- -------- ---------
Combined. . . . . . . . . . . . . 24 34 25
Corporate administration and other. 55 99 208
---------- -------- ---------
Interest Income . . . . . . . . . $ 79 $ 133 $ 233
========== ======== =========
OPERATING PROFIT:
Food and Equipment Distribution (1) $ 2,686 $ 2,772 $ 3,190
Franchise and Other (1) . . . . . . 2,419 3,306 2,685
Intersegment profit . . . . . . . . 197 235 256
---------- -------- -------
Combined. . . . . . . . . . . . . 5,302 6,313 6,131
Other revenue . . . . . . . . . . . 311 1,253 376
Less intersegment profit. . . . . . (197) (235) (256)
Corporate administration and other. (773) (5,608) (2,330)
---------- ---------- -------
Income before taxes . . . . . . . $ 4,643 $ 1,723 $ 3,921
========== ========= =========
INCOME TAX EXPENSE:
Food and Equipment Distribution . . $ 896 $ 943 $ 1,172
Franchise and Other . . . . . . . . 808 1,124 987
---------- -------- ---------
Combined. . . . . . . . . . . . . 1,704 2,067 2,159
Corporate administration and other. (154) (1,481) (718)
---------- ---------- --------
Income tax expense. . . . . . . . $ 1,550 $ 586 $ 1,441
========== ========= =========
(1) Does not include full allocation of corporate administration
JUNE 29, JUNE 30, JUNE 24,
2003 2002 2001
--------- --------- ---------
CAPITAL EXPENDITURES:
Food and Equipment Distribution . . $ 62 $ 8,499 $ 4,438
Franchise and Other . . . . . . . . 76 82 227
--------- --------- ---------
Combined. . . . . . . . . . . . . 138 8,581 4,665
Corporate administration and other. 338 371 48
---------- --------- ----------
Consolidated capital expenditures $ 476 $ 8,952 $ 4,713
========= ========= =========
ASSETS:
Food and Equipment Distribution . . $ 10,963 $ 12,908 $ 13,575
Franchise and Other . . . . . . . . 1,049 1,079 1,193
--------- --------- ---------
Combined. . . . . . . . . . . . . . 12,012 13,987 14,768
Corporate administration and other. 8,784 10,331 4,808
---------- --------- ----------
Consolidated assets . . . . . . . . $ 20,796 $ 24,318 $ 19,576
========= ========= =========
GEOGRAPHIC INFORMATION (REVENUES):
United States . . . . . . . . . . . $ 57,714 $ 66,124 $ 64,666
Foreign countries . . . . . . . . . 1,068 518 602
---------- --------- ----------
Consolidated total. . . . . . . . $ 58,782 $ 66,642 $ 65,268
========= ========= =========
NOTE N - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
The following summarizes the unaudited quarterly results of operations for the
fiscal years ended June 29, 2003 and June 30, 2002 (in thousands, except per
share amounts):
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
Quarter Ended
-----------------
September 23,.. December 23, March 24, June 30,
2001 2001 2002 2002
-------------- ------------- ---------- ----------
FISCAL YEAR 2002
Revenues . . . . . . . . . . . . . . . . . . . . $ 17,308 $ 15,987 $ 15,286 $ 18,061
Gross Profit . . . . . . . . . . . . . . . . . . 1,126 1,380 1,173 2,036
Net Income (Loss). . . . . . . . . . . . . . . . 590 567 478 (498)
Basic earnings (loss) per share on net income. . 0.06 0.06 0.05 (0.05)
Diluted earnings (loss) per share on net income. 0.06 0.06 0.05 (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 29, 2003. . . . . . . . . . . . $ 2,953 $ 155 $ - $ (2,192) (1) $ 916
Year Ended June 30, 2002. . . . . . . . . . . . $ 1,001 $ 2,367 $ - $ (415) (1) $2,953
Year Ended June 24, 2001. . . . . . . . . . . . $ 1,102 $ 210 $ - $ (311) (1) $1,001
(1) Write-off of receivables, net of recoveries. For additional information related to the recovery in fiscal year
2003, refer to Note J in the Company's consolidated financial statements.
VALUATION ALLOWANCE FOR
DEFERRED TAX ASSET
Year Ended June 29, 2003 $ 225 $ - $ - $ (72) $ 153
Year Ended June 30, 2002 $ 38 $ 187 $ - $ - $ 225
Year Ended June 24, 2001 $ 22 $ 16 $ - $ - $ 38
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are no events to report under this item.
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 2003
(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- CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The term "disclosure controls and procedures" is defined in Rule 13a-14(c)
of the Securities Exchange Act of 1934, or the Exchange Act. This term refers to
the controls and procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files
under the Exchange Act is recorded, processed, summarized and reported within
required time periods. Our Chief Executive Officer and our Chief Financial
Officer have evaluated the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this Annual Report, and they
have concluded that as of that date, except as disclosed below, our disclosure
controls and procedures were effective at ensuring that required information
will be disclosed on a timely basis in our reports filed under the Exchange Act.
CHANGES IN INTERNAL CONTROLS
As further discussed in Note A to the financial statements, the Company
completed a project to review its deferred tax asset and liability balances and
determined a prior period adjustment, which related to fiscal years ended 1997
and earlier, was necessary. The Company has established controls to prepare and
reconcile the tax balance sheet to the deferred tax assets and liabilities on a
quarterly basis. There were no other significant changes to our internal
controls or in other factors that could significantly affect our internal
controls subsequent to the date of their evaluation by our Chief Executive
Officer and our Chief Financial Officer.
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).
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).
23.0 Consent of Independent Accountants.
99.1 Certification of Chief Executive Officer as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Principal Financial Officer as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
99.3 Certification of Chief Executive Officer as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
99.4 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.
(b) Form 8-K filed under Item 5 - Other Events
On September 4, 2003 the Company filed a report on Form 8-K, reporting a press
release with respect to earnings for the fourth quarter ended June 29, 2003.
On April 18, 2003 the Company filed a report on Form 8-K, reporting a press
release with respect to earnings for the third quarter ended March 30, 2003.
On January 22, 2003 the Company filed a report on Form 8-K, reporting a press
release with respect to earnings for the second quarter ended December 29, 2002.
On December 23, 2002 the Company filed a report on Form 8-K, amending the
Company's Amended and Restated By-Laws limiting the business that can be
conducted at any meeting of the shareholders, and detailing proper procedures
for nominations to the Board of Directors.
On December 20, 2002 the Company filed a report on Form 8-K announcing the
resignation of two Directors and the appointment of two new Directors, and
publishing the agreement between the Company and Newcastle Partners, L.P.
On December 9, 2002 the Company filed a report on Form 8-K, announcing that the
Company had received full payment on a note receivable owed to the Company by
the Company's former Chief Executive Officer.
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.
On August 22, 2002, the Company filed a report on Form 8-K that C. Jeffrey
Rogers, the Company's Chief Executive Officer, had resigned his position with
the Company.
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 25, 2003 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 25, 2003
- ------------------------
Bobby L. Clairday
Director
/s/ Ronald W. Parker September 25, 2003
- -----------------------
President and Chief Executive Officer
(Principal Executive Officer)
Director
/s/ Butler E. Powell September 25, 2003
- -----------------------
Butler E. Powell
Director
/s/ Steven J. Pully September 25, 2003
- ----------------------
Steven J. Pully
Director
/s/Mark E. Schwarz September 25, 2003
- --------------------
Mark E. Schwarz
Director
/s/F. Jay Taylor September 25, 2003
- ------------------
F. Jay Taylor
Director
/s/Steve A. Ungerman September 25, 2003
- ----------------------
Steve A. Ungerman
Director and Chairman of the Board