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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 27, 2005.
----------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
COMMISSION FILE NUMBER 0-12919
PIZZA INN, INC.
(EXACT NAME OF REGISTRANT IN ITS CHARTER)
MISSOURI 47-0654575
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3551 PLANO PARKWAY
THE COLONY, TEXAS 75056
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES,
INCLUDING ZIP CODE)
(469) 384-5000
(REGISTRANT'S TELEPHONE NUMBER,
INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR SUCH SHORTER PERIOD THAT THE REGISTRANT
WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES[X] NO [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12 B-2 OF THE EXCHANGE ACT). YES [ ] NO [X]
AT MAY 1, 2005, AN AGGREGATE OF 10,091,294 SHARES OF THE REGISTRANT'S
COMMON STOCK, PAR VALUE OF $.01 EACH (BEING THE REGISTRANT'S ONLY CLASS OF
COMMON STOCK), WERE OUTSTANDING.
PIZZA INN, INC.
Index
-----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
- -------- --------------------- ----
Condensed Consolidated Statements of Operations for the
three months and nine months ended March 27, 2005 and
March 28, 2004 (unaudited) 3
Condensed Consolidated Statements of Comprehensive Income
for the three months and nine months ended March 27, 2005 and
March 28, 2004 (unaudited) 3
Condensed Consolidated Balance Sheets at March 27, 2005
(unaudited) and June 27, 2004 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended March 27, 2005 and March 28, 2004 (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of
------- -------------------------------------------
Financial Condition and Results of Operations 12
---------------------------------------------
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
------- ----------------------------------------------------------------
Item 4. Controls and Procedures 20
- -------- -------------------------
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
- -------- ------------------
Item 2. Unregistered Sales of Equity Securities and the Use of Proceeds 23
- -------- -------------------------------------------------------------------
Item 3. Defaults Upon Senior Securities 23
- -------- ----------------------------------
Item 4. Submission of Matters to a Vote of Security Holders 23
------- -----------------------------------------------------------
Item 5. Other Information 24
- -------- ------------------
Item 6. Exhibits 24
- -------- --------
Signatures 25
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -------------------------------
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------- ------------------
MARCH 27, MARCH 28, MARCH 27, MARCH 28,
REVENUES: 2005 2004 2005 2004
-------------------- ------------------ ----------- -----------
Food and supply sales. . . . . . . . . . . . . $ 11,859 $ 12,774 $ 36,981 $ 39,304
Franchise revenue. . . . . . . . . . . . . . . 1,319 1,323 3,884 4,038
Restaurant sales . . . . . . . . . . . . . . . 223 452 721 1,234
-------------------- ------------------ ----------- -----------
13,401 14,549 41,586 44,576
-------------------- ------------------ ----------- -----------
COSTS AND EXPENSES:
Cost of sales. . . . . . . . . . . . . . . . . 11,241 11,802 35,125 36,380
Franchise expenses . . . . . . . . . . . . . . 723 847 2,044 2,380
General and administrative expenses. . . . . . 1,311 814 3,497 2,572
Interest expense . . . . . . . . . . . . . . . 157 150 431 470
-------------------- ------------------ ----------- -----------
13,432 13,613 41,097 41,802
-------------------- ------------------ ----------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES. . . . . . . . . . . . . . . . . (31) 936 489 2,774
Provision for income taxes . . . . . . . . . . (11) 319 173 1,095
-------------------- ------------------ ----------- -----------
NET INCOME (LOSS). . . . . . . . . . . . . . . . $ (20) $ 617 $ 316 $ 1,679
==================== ================== =========== ===========
BASIC EARNINGS PER COMMON SHARE. . . . . . . . . $ - $ 0.06 $ 0.03 $ 0.17
==================== ================== =========== ===========
DILUTED EARNINGS PER COMMON SHARE. . . . . . . . $ - $ 0.06 $ 0.03 $ 0.17
==================== ================== =========== ===========
WEIGHTED AVERAGE COMMON SHARES . . . . . . . . . 10,089 10,079 10,109 10,070
==================== ================== =========== ===========
WEIGHTED AVERAGE COMMON AND
POTENTIAL DILUTIVE COMMON SHARES . . . . . . . 10,117 10,132 10,142 10,114
==================== ================== =========== ===========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ ----------------------
MARCH 27,. . MARCH 28, MARCH 27, MARCH 28,
2005 2004 2005 2004
-------------------- ------------------ ----------- -----------
Net Income (Loss). . . . . . . . . . . . . . . . $ (20) $ 617 $ 316 $ 1,679
Interest rate swap gain (loss) - (net
of tax benefit (loss) of $56 and ($20)
and $70 and $75, respectively). . . . . . . . (109) 38 (137) (145)
-------------------- ------------------ ----------- -----------
Comprehensive Income (Loss). . . . . . . . . . . $ (129) $ 655 $ 179 $ 1,534
==================== ================== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
PIZZA INN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
MARCH 27, JUNE 27,
2005 2004
------------ ----------
ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . $ 170 $ 617
Accounts receivable, less allowance for doubtful
accounts of $357 and $310, respectively . . . . . . . . . . 3,488 3,113
Accounts receivable - related parties . . . . . . . . . . . . 648 577
Notes receivable, current portion, less allowance
for doubtful accounts of $14 and $59, respectively. . . . . 1 50
Notes receivable - related parties. . . . . . . . . . . . . . - 54
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . 2,148 1,713
Deferred taxes, net . . . . . . . . . . . . . . . . . . . . . 194 183
Prepaid expenses and other. . . . . . . . . . . . . . . . . . 450 415
------------ ----------
Total current assets. . . . . . . . . . . . . . . . . . . 7,099 6,722
Property, plant and equipment, net. . . . . . . . . . . . . . . 12,649 12,756
Property under capital leases, net. . . . . . . . . . . . . . . 14 18
Deferred taxes, net . . . . . . . . . . . . . . . . . . . . . . 40 105
Long-term notes receivable, less allowance
for doubtful accounts of $0 and $3, respectively. . . . . . - -
Long-term receivable - related party . . . . . . . . . . . . . 320 335
Re-acquired development territory . . . . . . . . . . . . . . . 671 866
Deposits and other. . . . . . . . . . . . . . . . . . . . . . . 188 104
------------ ----------
$ 20,981 $ 20,906
============ ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade. . . . . . . . . . . . . . . . . . . $ 2,032 $ 1,246
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . 1,398 2,109
Current portion of long-term debt . . . . . . . . . . . . . . 1,817 406
Current portion of capital lease obligations. . . . . . . . . 10 10
------------ ----------
Total current liabilities . . . . . . . . . . . . . . . . . 5,257 3,771
LONG-TERM LIABILITIES
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . 6,432 7,937
Long-term capital lease obligations . . . . . . . . . . . . . 15 23
Other long-term liabilities . . . . . . . . . . . . . . . . . 251 458
------------ ----------
11,955 12,189
------------ ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value; authorized 26,000,000 shares;
issued 15,043,119 and 15,031,319 shares, respectively;
outstanding 10,091,294 and 10,133,674 shares, respectively 150 150
Additional paid-in capital. . . . . . . . . . . . . . . . . . 7,991 7,975
Retained earnings . . . . . . . . . . . . . . . . . . . . . . 20,694 20,378
Accumulated other comprehensive loss. . . . . . . . . . . . . (165) (302)
Treasury stock at cost,
Shares in treasury: 4,951,825 and 4,897,645, respectively . (19,644) (19,484)
------------ ----------
Total shareholders' equity. . . . . . . . . . . . . . . . . 9,026 8,717
------------ ----------
$ 20,981 $ 20,906
============ ==========
See accompanying Notes to Condensed Consolidated Financial Statements.
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
-------------------
MARCH 27, MARCH 28,
2005 2004
------------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 316 $ 1,679
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . 861 827
Non cash settlement of accounts receivable. . . . . . . . . . - (281)
Provision for (recovery of) bad debt, net . . . . . . . . . . 30 (249)
Utilization of deferred taxes . . . . . . . . . . . . . . . . (20) 467
Changes in assets and liabilities:
Notes and accounts receivable . . . . . . . . . . . . . . . . (358) (236)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . (435) (300)
Accounts payable - trade. . . . . . . . . . . . . . . . . . . 786 923
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . (711) 279
Prepaid expenses and other. . . . . . . . . . . . . . . . . . 51 330
------------------- -----------
CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . . . . . . . 520 3,439
------------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets. . . . . . . . . . . . . . . . . . - 38
Acquisition of area development territory . . . . . . . . . . . - (682)
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . (721) (554)
------------------- -----------
CASH USED FOR INVESTING ACTIVITIES. . . . . . . . . . . . . . (721) (1,198)
------------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term bank debt and capital lease obligations (102) (2,487)
Officer loan payment. . . . . . . . . . . . . . . . . . . . . . - 9
Stock repurchase. . . . . . . . . . . . . . . . . . . . . . . . (160) -
Proceeds from exercise of stock options . . . . . . . . . . . . 16 50
------------------- -----------
CASH USED FOR FINANCING ACTIVITIES. . . . . . . . . . . . . . (246) (2,428)
------------------- -----------
Net decrease in cash and cash equivalents . . . . . . . . . . . . (447) (187)
Cash and cash equivalents, beginning of period. . . . . . . . . . 617 399
------------------- -----------
Cash and cash equivalents, end of period. . . . . . . . . . . . . $ 170 $ 212
------------------- -----------
See accompanying Notes to Consolidated Financial Statements.
PIZZA INN, INC.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
------------------
MARCH 27, MARCH 28,
2005 2004
------------------ ----------
CASH PAYMENTS FOR:
Interest . . . . . . . . . . . . . . . . . $ 433 $ 478
Income taxes . . . . . . . . . . . . . . . 420 309
NON-CASH FINANCING AND INVESTING
ACTIVITIES:
Non-cash settlement of accounts receivable $ - $ 281
See accompanying Notes to Consolidated Financial Statements.
PIZZA INN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) The accompanying condensed consolidated financial statements of Pizza
Inn, Inc. (the "Company") have been prepared without audit pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in the financial statements have been
omitted pursuant to such rules and regulations. The condensed consolidated
financial statements should be read in conjunction with the notes to the
Company's audited condensed consolidated financial statements in its Form 10-K
for the fiscal year ended June 27, 2004. Certain prior year amounts have been
reclassified to conform with current year presentation.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary to fairly present the
Company's financial position and results of operations for the interim periods.
All adjustments contained herein are of a normal recurring nature.
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. 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):
NINE MONTHS ENDED
------------------
MARCH 27, MARCH 28,
2005 2004
------------------ -----------
Net income, as reported. . . . . . . . . . . $ 316 $ 1,679
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects. . . . . . . . . . . . - (1)
------------------ -----------
Pro forma net income . . . . . . . . . . . . $ 316 $ 1,678
------------------ -----------
Earnings per share
Basic-as reported. . . . . . . . . . . . . $ 0.03 $ 0.17
Basic-pro forma. . . . . . . . . . . . . . $ 0.03 $ 0.17
Diluted-as reported. . . . . . . . . . . . $ 0.03 $ 0.17
Diluted-pro forma. . . . . . . . . . . . . $ 0.03 $ 0.17
The effects of applying SFAS No. 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.
(2)
The Company entered into an agreement on February 11, 2005, effective December
26, 2004 (the "Revolving Credit Agreement"), with Wells Fargo to provide a $3.0
million revolving credit line that will expire December 23, 2005, replacing a
$4.0 million line that was due to expire October 1, 2005. Interest on the
revolving credit line is payable monthly. Interest is provided for at a rate
equal to prime plus 0.50%, or, at the Company's option, at the LIBOR rate plus
2.75%. A 0.375% annual commitment fee is payable on any unused portion of the
revolving credit line. As of March 27, 2005 and March 28, 2004, the variable
interest rates were 6.00% and 2.59%, using a prime and LIBOR rate basis,
respectively. Amounts outstanding under the revolving credit line as of March
27, 2005 and March 28, 2004 were $1.4 million and $1.3 million, respectively.
The Company entered into an agreement effective December 28, 2000, as amended
(the "Term Loan Agreement"), 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. The term loan amortizes over a term of twenty years, with
principal payments of $34,000 due monthly. Interest on the term loan is also
payable monthly. Interest is provided for at a rate equal to prime or, at the
Company's option, at the LIBOR rate plus 2.25%. The Company, to fulfill the
requirements of Wells Fargo, fixed the interest rate on the term loan by
utilizing an interest rate swap agreement as discussed below. The $8.125
million term loan had an outstanding balance of $6.8 million at March 27, 2005
and $7.2 million at March 28, 2004.
Wells Fargo notified the Company on February 4, 2005 that it had not been given
proper notice of the Company's repurchase of shares of its common stock, and
that as a result an event of default existed under the Company's loan agreement.
Such event of default was waived by Wells Fargo upon execution of the Revolving
Credit Agreement.
(3) The Company entered into an interest rate swap effective February 27,
2001, as amended, designated as a cash flow hedge, to manage interest rate risk
relating to the financing of the construction of the Company's 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 March 27,
2005 there was no hedge ineffectiveness.
(4) On December 11, 2004, the Board of Directors of the Company terminated
the Executive Compensation Agreement dated December 16, 2002 between the Company
and its then Chief Executive Officer, Ronald W. Parker ("Parker Agreement").
Mr. Parker's employment was terminated following ten days written notice to Mr.
Parker of the Company's intent to discharge him for cause as a result of
violations of the Parker Agreement. Written notice of termination was
communicated to Mr. Parker on December 13, 2004. The nature of the cause
alleged was set forth in the notice of intent to discharge and based upon
Section 2.01(c) of the Parker Agreement, which provides for discharge for "any
intentional act of fraud against the Company, any of its subsidiaries or any of
their employees or properties, which is not cured, or with respect to which
Executive is not diligently pursuing a cure, within ten (10) business days of
the Company giving notice to Executive to do so." Mr. Parker was provided with
an opportunity to cure as provided in the Parker Agreement as well as the
opportunity to be heard by the Board of Directors prior to the termination.
On January 12, 2005, the Company instituted an arbitration proceeding against
Mr. Parker with the American Arbitration Association in Dallas, Texas pursuant
to the Parker Agreement seeking declaratory relief that Mr. Parker is not
entitled to severance payments or any other further compensation from the
Company. In addition, the Company is seeking compensatory damages,
consequential damages, and disgorgement of compensation paid to Mr. Parker under
the Parker Agreement. On January 31, 2005, Mr. Parker filed claims against the
Company for breach of the Parker Agreement, seeking the severance payment
provided for in the Parker Agreement for a termination of Mr. Parker by the
Company for reason other than for cause (as defined in the Parker Agreement),
plus interest, attorney's fees and costs. No arbitrator has been appointed and
no date for an arbitration hearing has been set.
Due to the preliminary stages of the arbitration proceeding and the general
uncertainty surrounding the outcome of this type of legal proceeding, it is not
possible for the Company to provide any certain or meaningful analysis,
projections, or expectations at this time regarding the outcome of this matter.
Although the ultimate outcome of the arbitration proceeding cannot be projected
with certainty at this time, the Company believes that its claims against Mr.
Parker are well founded and intends to vigorously pursue all relief to which it
may be entitled. An adverse outcome to the proceeding could materially affect
the Company's financial position and results of operations. In the event the
Company is unsuccessful, it could be liable to Mr. Parker for approximately $5.4
million under the Parker Agreement plus accrued interest and legal expenses. No
accrual for any amount has been made as of March 27, 2005.
(5) On June 15, 2004, B. Keith Clark provided the Company with notice of his
intent to resign as Senior Vice President - Corporate Development, Secretary and
General Counsel of the Company effective as of July 7, 2004. By letter dated
June 24, 2004, Mr. Clark notified the Company that he reserved his right to
assert that the election of Ramon D. Phillips and Robert B. Page to the board of
directors of the Company at the February 11, 2004 annual meeting of shareholders
constituted a "change of control" of the Company under his executive
compensation agreement (the "Clark Agreement"). As a result of the alleged
change of control under the Clark Agreement, Clark claims that he was entitled
to terminate the Clark Agreement within twelve (12) months of February 11, 2004
for "good reason" (as defined in the Clark Agreement) and is entitled to
severance. On August 6, 2004, the Company instituted an arbitration proceeding
against Mr. Clark with the American Arbitration Association in Dallas, Texas
pursuant to the Clark Agreement seeking declaratory relief that Mr. Clark is not
entitled to severance payments or any other further compensation from the
Company. On January 18, 2005, the Company amended its claims against Mr. Clark
to include claims for compensatory damages, consequential damages and
disgorgement of compensation paid to Mr. Clark under the Clark Agreement. On
January 18, 2005, Mr. Clark filed claims against the Company for breach of the
Clark Agreement, seeking the severance payment provided for in the Clark
Agreement if a termination occurs following a change of control plus a bonus
payment for 2003 of approximately $12,500. The arbitration hearing is scheduled
to begin on August 8, 2005.
The Company disagrees with Mr. Clark's claim that a "change of control" has
occurred under the Clark Agreement or that he is entitled to terminate the Clark
Agreement for "good reason". On May 4, 2004, the board of directors obtained a
written legal opinion that the "change of control" provision in the Clark
Agreement was not triggered by the results of the February 11, 2004 annual
meeting. Due to the nature of the preliminary stages of the arbitration
proceeding and the general uncertainty surrounding the outcome of this type of
legal proceeding, it is not possible for the Company to provide any certain or
meaningful analysis, projections, or expectations at this time regarding the
outcome of this matter. Although the ultimate outcome of the arbitration
proceeding cannot be projected with certainty, the Company believes that its
claims against Mr. Clark are well founded and intends to vigorously pursue all
relief to which it may be entitled. An adverse outcome to the proceeding could
materially affect the Company's financial position and results of operations. In
the event the Company is unsuccessful, it could be liable to Mr. Clark for the
severance payment of approximately $762,000, the $12,500 bonus payment, and
costs and fees. No accrual for any such amounts has been made as of March 27,
2005.
(6) The following table shows the reconciliation of the numerator and
denominator of the basic EPS calculation to the numerator and denominator of the
diluted EPS calculation (in thousands, except per share amounts).
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
THREE MONTHS ENDED MARCH 27, 2005
BASIC EPS
Income Available to Common Shareholders $ (20) 10,089 $ -
Effect of Dilutive Securities - Stock Options 28
--
DILUTED EPS
Income Available to Common Shareholders
& Assumed Conversions $ (20) 10,117 $ -
========= ========= ========
THREE MONTHS ENDED MARCH 28, 2004
BASIC EPS
Income Available to Common Shareholders $ 617 10,079 $ 0.06
Effect of Dilutive Securities - Stock Options 53
--
DILUTED EPS
Income Available to Common Shareholders
& Assumed Conversions $ 617 10,132 $ 0.06
========= ========= ========
NINE MONTHS ENDED MARCH 27, 2005
BASIC EPS
Income Available to Common Shareholders $ 316 10,109 $ 0.03
Effect of Dilutive Securities - Stock Options 33
--
DILUTED EPS
Income Available to Common Shareholders
& Assumed Conversions $ 316 10,142 $ 0.03
========= ========= ========
NINE MONTHS ENDED MARCH 28, 2004
BASIC EPS
Income Available to Common Shareholders $ 1,679 10,070 $ 0.17
Effect of Dilutive Securities - Stock Options 44
--
DILUTED EPS
Income Available to Common Shareholders
& Assumed Conversions $ 1,679 10,114 $ 0.17
========= ========= ========
(7) Summarized in the following tables are net sales and operating revenues,
operating profit and geographic information (revenues) for the Company's
reportable segments for the three months and nine month periods ended March 27,
2005 and March 28, 2004 (in thousands).
THREE MONTHS ENDED NINE MONTHS ENDED
------------------- ------------------
MARCH 27, MARCH 28, MARCH 27, MARCH 28,
2005 2004 2005 2004
----------- ----------- ----------- -----------
NET SALES AND OPERATING REVENUES:
Food and Equipment Distribution . . $ 11,859 $ 12,774 $ 36,981 $ 39,304
Franchise and Other . . . . . . . . 1,542 1,775 4,605 5,272
Intersegment revenues . . . . . . . 80 173 255 537
----------- ----------- ----------- -----------
Combined. . . . . . . . . . . . . 13,481 14,722 41,841 45,113
Less intersegment revenues. . . . . (80) (173) (255) (537)
----------- ----------- ----------- -----------
Consolidated revenues . . . . . . $ 13,401 $ 14,549 $ 41,586 $ 44,576
=========== =========== =========== ===========
OPERATING PROFIT:
Food and Equipment Distribution (1) 41 846 576 1,964
Franchise and Other (1) . . . . . . 563 567 1,754 2,075
Intersegment profit . . . . . . . . 24 51 70 142
----------- ----------- ----------- -----------
Combined. . . . . . . . . . . . . 628 1,464 2,400 4,181
Less intersegment profit. . . . . . (24) (51) (70) (142)
Corporate administration and other. (635) (477) (1,841) (1,265)
----------- ----------- ----------- -----------
Income before taxes . . . . . . . $ (31) $ 936 $ 489 $ 2,774
=========== =========== =========== ===========
GEOGRAPHIC INFORMATION (REVENUES):
United States . . . . . . . . . . . $ 13,060 $ 14,201 $ 40,593 $ 43,523
Foreign countries . . . . . . . . . 341 348 993 1,053
----------- ----------- ----------- -----------
Consolidated total. . . . . . . . $ 13,401 $ 14,549 $ 41,586 $ 44,576
=========== =========== =========== ===========
(1) Does not include full allocation of corporate administration.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- -----------------------
The following discussion should be read in conjunction with the
consolidated financial statements, accompanying notes and selected financial
data appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual
Report on Form 10-K and may contain certain forward-looking statements that are
based on current management expectations. Generally, verbs in the future tense
and the words "believe," "expect," "anticipate," "estimate," "intends,"
"opinion," "potential" and similar expressions identify forward-looking
statements. Forward-looking statements in this report include, without
limitation, statements relating to the strategies underlying our business
objectives, our customers and our franchisees, our liquidity and capital
resources, the impact of our historical and potential business strategies on our
business, financial condition, and operating results, and the expected effects
of potentially adverse litigation outcomes. Our actual results could differ
materially from our expectations. Further information concerning our business,
including additional risk factors and uncertainties that could cause actual
results to differ materially from the forward-looking statements contained in
this Quarterly Report on Form 10-Q, are set forth below under the heading
"Factors That May Affect Future Results." These risks and uncertainties should
be considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. The forward-looking statements contained
herein speak only as of the date of this Quarterly Report on Form 10-Q and,
except as may be required by applicable law and regulation, we do not undertake,
and specifically disclaim any obligation to, publicly update or revise such
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events. Except as
the context otherwise requires, references herein to "the Company,""we," or
"our" refer to the business of Pizza Inn, Inc. and its consolidated
subsidiaries.
RESULTS OF OPERATIONS
OVERVIEW
We are a franchisor and food and supply distributor to a system of
restaurants operating under the trade name "Pizza Inn ". At March 27, 2005,
there were 410 Pizza Inn restaurants, consisting of two Company-owned
restaurants and 408 franchised restaurants. Domestic restaurants are operated
as: (i) 210 buffet restaurants ("Buffet Units") that offer dine-in, carry-out,
and, in most cases, delivery services; (ii) 54 restaurants that offer delivery
and carry-out services only ("Delco Units"); and (iii) 74 express units
("Express Units") typically located within a convenience store, college campus
building, airport terminal, or other commercial facility that offer quick
carry-out service from a limited menu. Of these franchised restaurants, 336
were located in 18 states predominately situated in the southern half of the
United States. Additionally, we have 72 international restaurants located in
11 foreign countries.
REVENUES
Our revenues are primarily derived from sales of food, paper products, and
equipment and supplies by our Norco division to franchisees, franchise
royalties, and area development rights. Management believes that key
performance indicators in evaluating financial results include chainwide retail
sales, the number and type of operating restaurants and the percentage of
product and supplies such restaurants purchase from our Norco Division. Our
financial results are dependent in large part upon the pricing and cost of these
products and supplies to franchisees, and the level of chainwide retail sales,
which is driven by changes in same store sales and restaurant count.
FOOD AND SUPPLY SALES
Food and supply sales by the Company's Norco division include food and
paper products, equipment, marketing material and other distribution revenues.
Food and supply sales for the three month period ended March 27, 2005 decreased
7%, or $915,000, to $11,859,000 from $12,774,000 compared to the comparable
period last year. The decrease in revenues for the three month period ended
March 27, 2005 compared to the quarter ended March 28, 2004 is primarily due to
a decline of 5.3% in overall chainwide retail sales, which negatively impacted
product sales at our distribution division by approximately $487,000.
Additionally, the Company lowered sales prices on certain key ingredients,
including dough products and tomato tidbits, for these comparable periods, which
negatively impacted revenues by approximately $290,000. For the nine month
period ended March 27, 2005, food and supply sales decreased 6%, or $2,323,000,
to $36,981,000 from $39,304,000 for the comparable period in the previous year.
For the nine month period ended March 27, 2005, lower prices for certain key
ingredients negatively impacted revenue by approximately $859,000 and a 3.1%
decline in overall chainwide retail sales negatively impacted non-cheese product
sales by approximately $760,000. In addition, cheese product sales were
approximately $326,000 lower than the comparable nine month period in the prior
year due to lower retail sales which were partially offset by higher cheese
prices.
FRANCHISE REVENUE
Franchise revenue, which includes income from royalties, license fees and
area development and foreign master license (collectively, "Territory") sales,
decreased $4,000 for the three month period ended March 27, 2005 compared to the
comparable period last year and decreased 4% or $154,000 for the nine month
period ended March 27, 2005 compared to the comparable period last year.
International royalties were higher for the comparable nine month period in the
previous year as a result of the collection of previously unrecorded past due
royalties, which were partially offset by lower retail sales. The following
chart summarizes the major components of franchise revenue (in thousands):
Three Months Ended Nine Months Ended
------------------- ------------------
March 27, March 28, March 27, March 28,
2005 2004 2005 2004
------------------- ------------------ ---------- ----------
Domestic royalties. . . . . . . . . . . . . . $ 1,208 $ 1,172 $ 3,475 $ 3,396
International royalties . . . . . . . . . . . 92 100 269 284
Previously unrecorded international royalties - - - 173
Domestic franchise fees . . . . . . . . . . . 19 51 140 172
International development fees. . . . . . . . - - - 13
------------------- ------------------ ---------- ----------
Franchise revenue . . . . . . . . . . . . . . $ 1,319 $ 1,323 $ 3,884 $ 4,038
=================== ================== ========== ==========
RESTAURANT SALES
Restaurant sales, which consist of revenue generated by Company-owned
stores, decreased 51% or $229,000 for the three month period ended March 27,
2005, compared to the comparable period of the prior year. For the nine month
period ended March 27, 2005, restaurant sales decreased 42% or $513,000 compared
to the comparable period in the prior year. The decreases for both comparable
periods are the result of the sale of one buffet unit, which was replaced by a
smaller, lower sales volume Delco unit, and lower comparable sales at the other
Company-owned buffet unit. The following chart details the revenues at the
respective Company-owned restaurants (in thousands):
Three Months Ended Nine Months Ended
------------------- ------------------
March 27, March 28, March 27, March 28,
2005 2004 2005 2004
------------------- ------------------ ---------- ----------
Buffet unit . . . . . . . . . . . . . . $ 140 $ 157 $ 437 $ 484
Buffet unit - sold end of February 2004 - 161 - 616
Delco unit - opened mid-January 2004. . 83 134 284 134
------------------- ------------------ ---------- ----------
Restaurant sales. . . . . . . . . . . . $ 223 $ 452 $ 721 $ 1,234
=================== ================== ========== ==========
COSTS AND EXPENSES
COST OF SALES
Cost of sales decreased 5% or $561,000 for the three month period ended March
27, 2005 and decreased 3% or $1,255,000 for the nine month period ended March
27, 2005 compared to the comparable periods in the prior year, respectively.
These decreases are the result of lower retail sales and lower payroll costs as
a result of earlier staff reductions. Cost of sales, as a percentage of sales
for the three month ended March 27, 2005 and the nine month period ended March
27, 2005, increased to 93% from 89% and increased to 93% from 90% from the
comparable periods last year, respectively. These percentage increases are
primarily due to higher product costs of approximately 5% offset partially by
payroll savings of $72,000 for the quarter and $218,000 for the nine month
period resulting from earlier staff reductions. Although the Company does not
currently intend to raise prices to compensate for the increases in product
costs referenced, in part, because we do not believe that we would be able to do
so as a result of the competitive environment in which we operate, it may become
necessary to increase prices in the future. The Company experiences
fluctuations in commodity prices (most notably, block cheese prices), increases
in transportation costs (particularly in the price of diesel fuel), fluctuations
in interest rates, and net gains or losses in the number of restaurants open in
any particular period, among other things, all of which have impacted operating
margins over the past several quarters to some extent. Future fluctuations in
these factors are difficult for the Company to meaningfully predict with any
certainty.
FRANCHISE EXPENSES
Franchise expenses include selling, general and administrative expenses
directly related to the sale and continuing service of franchises and
Territories. These costs decreased 15% or $124,000 for the three month period
ended March 27, 2005 and decreased 14% or $336,000 for the nine month period
ended March 27, 2005 compared to the comparable periods last year, respectively.
These decreases in both periods are primarily the result of lower payroll and
related expenses resulting from earlier staff reductions and are partially
offset by higher product research expenses.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased 61% or $497,000 for the three
month period ended March 27, 2005 and 36% or $925,000 for the nine month period
ended March 27, 2005, compared to the comparable periods last year. The
previous year's quarter included the reversal of $390,000 in legal reserves
relating to the settlement of the fax litigation, partially offset by proxy
solicitation expenses of $190,000. In addition, the current year includes legal
expenses related to on-going litigation and related matters described previously
which are partially offset by lower payroll and related expenses resulting from
earlier staff reductions. The Company anticipates a higher level of legal
expenses from the on-going litigation and related matters described previously,
until all such matters are resolved. The following chart summarizes the primary
variances in general and administrative expenses (in thousands):
Three Months Ended Nine Months Ended
March 27, March 28, March 27, March 28,
2005 2004 2005 2004
---------- ----------- ---------- -----------
Legal fees . . . . . . . . . . . . . . . . $ 482 $ (298) $ 818 $ (112)
Proxy solicitation and related filing fees 16 207 53 228
Executive search fees. . . . . . . . . . . 71 - 117 -
---------- ----------- ---------- -----------
Primary variances in general
and administrative expenses. . . . . . $ 569 $ (91) $ 988 $ 116
========== =========== ========== ===========
INTEREST EXPENSE
Interest expense increased 5% or $7,000 for the three month period ended
March 27, 2005 and decreased 8% or $39,000 for the nine month period three month
period ended March 27, 2005, compared to the comparable periods of the prior
year due to lower debt balances offset by higher interest rates.
PROVISION FOR INCOME TAX
Provision for income taxes decreased 103% or $330,000 for the quarter and
84% or $922,000 for the nine month period compared to the comparable periods in
the prior year. The effective tax rate was 35% for the quarter, 34% for the
comparable period in the previous year, 35% for the nine month period, and 39%
for the comparable nine month period in the previous year.
RESTAURANT OPENINGS AND CLOSINGS
During the first nine months of fiscal 2005 a total of 22 new Pizza Inn
franchise units opened, including 17 domestic and 5 international.
Domestically, 17 units were closed by franchisees or terminated by the Company,
typically because of unsatisfactory standards of operation or performance during
this nine month period. No international units were closed during the nine
month period ended March 27, 2005. The following chart summarizes store
activity for the nine month period ended March 27, 2005 compared to the
comparable period in the prior year:
Nine months ending March 27, 2005
Beginning Concept End of
of Period Opened Closed Change Period
--------- ------- ------ ------- ------
Buffet. . . . . . . . . . . . . . 212 7 9 - 210
Delco . . . . . . . . . . . . . . 53 4 2 (1) 54
Express . . . . . . . . . . . . . 73 6 6 1 74
International . . . . . . . . . . 67 5 - - 72
--------- ------- ------ ------- ------
Total . . . . . . . . . . . . . . 405 22 17 - 410
========= ======= ====== ======= ======
Nine months ending March 28, 2004
Beginning Concept End of
of Period Opened Closed Change Period
----------- ------ ------ ------ ------
Buffet. . . . . . . . . . . . . . 220 8 9 - 219
Delco . . . . . . . . . . . . . . 56 2 5 1 54
Express . . . . . . . . . . . . . 75 3 5 (1) 72
International . . . . . . . . . . 59 8 - - 67
--------- ------- ------ ------- ------
Total . . . . . . . . . . . . . . 410 21 19 - 412
========= ======= ====== ======= ======
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 the first nine months of fiscal 2005, the Company generated cash
flows of $520,000 from operating activities as compared to $3,439,000 for the
same period in fiscal 2004. Cash provided by operations was utilized primarily
to make capital expenditures, repurchase shares of the Company's own stock and
pay down debt. Reductions in cash flows from operating activities for the nine
month period ended March 27, 2005 as compared to the comparable period last year
resulted from lower net income in the current year and recoveries of bad debt
and non-cash settlements of accounts receivable in the prior year.
Cash flows from investing activities primarily reflect the Company's
capital expenditure strategy. In the first nine months of fiscal 2005, the
Company used cash of $721,000 for investing activities as compared to $1,198,000
for the comparable period in fiscal 2004. The cash used during the first nine
months of fiscal 2005 consisted primarily of costs associated with development
of a new Company-owned store, purchase of warehouse equipment, construction of
additional parking for the warehouse and purchase of new software. In the prior
year, the Company used $682,000 to re-acquire an area development territory.
Cash flows from financing activities generally reflect changes in the
Company's borrowings during the period, treasury stock transactions and exercise
of stock options. Net cash used for financing activities was $246,000 in the
first nine months of fiscal 2005 as compared to cash used for financing
activities of $2,428,000 for the comparable period in fiscal 2004.
Management believes that future operations will generate sufficient taxable
income, along with the reversal of temporary differences, to fully realize the
deferred tax asset, net of a valuation allowance of $137,000 primarily related
to the potential expiration of certain foreign tax credit carryforwards.
Additionally, management believes that taxable income based on the Company's
existing franchise base should be more than sufficient to enable the Company to
realize its net deferred tax asset without reliance on material non-routine
income. The Company's prior net operating loss carryforwards and alternative
minimum tax carryforwards have now been fully utilized and the Company began
making estimated quarterly tax payments in January 2004.
The Company entered into an agreement on February 11, 2005, effective
December 26, 2004 (the "Revolving Credit Agreement"), with Wells Fargo to
provide a $3.0 million revolving credit line that will expire December 23, 2005,
replacing a $4.0 million line that was due to expire October 1, 2005. Interest
on the revolving credit line is payable monthly. Interest is provided for at a
rate equal to prime plus 0.50%, or, at the Company's option, at the LIBOR rate
plus 2.75%. A 0.375% annual commitment fee is payable on any unused portion of
the revolving credit line. As of March 27, 2005 and March 28, 2004, the
variable interest rates were 6.00% and 2.59%, using a prime and LIBOR rate
basis, respectively. Amounts outstanding under the revolving credit line as of
March 27, 2005 and March 28, 2004 were $1.4 million and $1.3 million,
respectively.
The Company entered into an agreement effective December 28, 2000, as
amended (the "Term Loan Agreement"), 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. The term loan amortizes over a term of twenty years, with
principal payments of $34,000 due monthly. Interest on the term loan is also
payable monthly. Interest is provided for at a rate equal to prime or, at the
Company's option, at the LIBOR rate plus 2.25%. The Company, to fulfill the
requirements of Wells Fargo, fixed the interest rate on the term loan by
utilizing an interest rate swap agreement as discussed below. The $8.125
million term loan had an outstanding balance of $6.8 million at March 27, 2005
and $7.2 million at March 28, 2004.
Wells Fargo notified the Company on February 4, 2005 that it had not
been given proper notice of the Company's repurchase of shares of its common
stock, and that as a result an event of default existed under the Company's loan
agreement. Such event of default was waived by Wells Fargo upon execution of
the Revolving Credit Agreement.
The Company entered into an interest rate swap effective February 27, 2001,
as amended, designated as a cash flow hedge, to manage interest rate risk
relating to the financing of the construction of the Company's headquarters and
to fulfill bank requirements. The swap agreement has a notional principal
amount of $8.125 million with a fixed pay rate of 5.84% which began November 1,
2001 and will end November 19, 2007. The swap's notional amount amortizes over
a term of twenty years to parallel the terms of the term loan. SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", requires that
for cash flow hedges which hedge the exposure to variable cash flow of a
forecasted transaction, the effective portion of the derivative's gain or loss
be initially reported as a component of other comprehensive income in the equity
section of the balance sheet and subsequently reclassified into earnings when
the forecasted transaction affects earnings. Any ineffective portion of the
derivative's gain or loss is reported in earnings immediately. At March 27,
2005 there was no hedge ineffectiveness.
The Company is in arbitration proceedings with Messrs. Parker and
Clark, as previously described. Although the ultimate outcome of the
arbitration proceedings cannot be projected with certainty at this time, the
Company believes that its claims against Messrs. Parker and Clark are well
founded and intends to vigorously pursue all relief to which it may be entitled.
An adverse outcome to the proceedings could materially affect the Company's
financial position, results of operations and liquidity. In the event the
Company is unsuccessful, it could be liable to Messrs. Parker and Clark for
approximately $6.2 million under the Parker Agreement and the Clark Agreement
plus accrued interest and legal expenses. The Company maintains that it does
not owe Messrs. Parker and Clark severance payments or any other compensation,
but it believes it has the ability to make any payments required by an adverse
determination. No accrual for any amount has been made as of March 27, 2005.
The Company anticipates a higher level of legal expenses from the on-going
litigation and related matters described previously, until all such matters are
resolved.
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 March 27, 2005 (in thousands):
After
Fiscal
Fiscal Year Fiscal Years Fiscal Years Year
Total . 2005 2006 - 2007 2008 - 2009 2009
------------ ------------ ------------- ---------- -----
Bank debt (1) . . . . . . . . . . $ 8,249 $ 1,817 $ 812 $ 5,620 $ -
Operating lease obligations . . . 1,992 897 893 180 22
Capital lease obligations (1) . . 25 10 15 - -
------------ ------------- ------------- ------------- ---
Total contractual cash obligations.$ 10,266 $ 2,724 $ 1,720 $ 5,800 $22
============ ============= ============= ============= ===
(1) Does not include amount representing interest.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires our management to make estimates and
assumptions that affect our reported amounts of assets, liabilities, revenues,
expenses and related disclosure of contingent liabilities. We base our
estimates on historical experience and various other assumptions that we believe
are reasonable under the circumstances. Estimates and assumptions are reviewed
periodically. Actual results could differ materially from estimates.
The Company believes the following critical accounting policies require
estimates about the effect of matters that are inherently uncertain, are
susceptible to change, and therefore require subjective judgments. Changes in
the estimates and judgments could significantly impact our results of operations
and financial conditions in future periods.
Accounts receivable consist primarily of receivables generated from food
and supply sales to franchisees 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, general customer creditworthiness, and the franchisee's ability to
pay, based upon the franchisee's sales, operating results, and other general and
local economic trends and conditions that may affect the franchisee's ability to
pay. Actual realization of amounts receivable could differ materially from our
estimates.
Notes receivable primarily consist of notes from franchisees for trade
receivables, franchise fees 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, general customer creditworthiness, and a franchisee's
ability to pay, based upon the franchisee's sales, operating results, and other
general and local economic trends and conditions that may affect the
franchisee's ability to pay. Actual realization of amounts receivable could
differ materially from our estimates.
Inventory, which consists 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. The valuation of inventory
requires us to estimate the amount of obsolete and excess inventory. The
determination of obsolete and excess inventory requires us to estimate the
future demand for our products within specific time horizons, generally six
months or less. If the Company's demand forecast for specific products is
greater than actual demand and the Company fails to reduce purchasing
accordingly, the Company could be required to write down additional inventory,
which would have a negative impact on our gross margin.
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 materially 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 by
accruing an amount if it is judged to be probable and can be reasonably
estimated. If the actual loss from a contingency differs from management's
estimate, operating results could be impacted.
FACTORS THAT MAY AFFECT FUTURE RESULTS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"1995 Act"), including information within Management's Discussion and Analysis
of Financial Condition and Results of Operations. The forward-looking
statements are based upon management's current expectations and assumptions
about future events. The following cautionary statements are being made
pursuant to the provisions of the 1995 Act and with the intention of obtaining
the benefits of the "safe harbor" provisions of the 1995 Act. Although we
believe that our expectations are based on reasonable assumptions, actual
results may differ materially from those in the forward looking statements as a
result of various factors, including but not limited to, the following:
- - Our ability to maintain good relationships with our franchisees;
- - Our ability to compete domestically and internationally in our intensely
competitive industry;
- - Our ability to successfully implement cost-saving strategies;
- - Increases in our operating costs, including cheese, fuel and other
commodity costs and the minimum wage;
- - Adverse legal judgments or settlements;
- - The ability to obtain ingredients from alternative suppliers if needed;
- - Increased advertising promotions and discounting by competitors which may
adversely affect sales;
- - New product and concept developments by food industry competitors;
- - Our ability to retain or replace our executive officers and other key
members of management and our ability to adequately staff our stores and
distribution center with qualified personnel;
- - Our ability to pay principal and interest on our debt;
- - Our ability to borrow in the future;
- - Adverse legislation or regulation;
- - Changes in consumer taste, demographic trends and traffic patterns;
- - Health- or disease-related disruptions or consumer concerns about the
commodity supply;
- - Continuation of certain trends and general economic conditions in the
industry; and
- - Adequacy of insurance coverage.
We do not undertake to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------
The Company has market risk exposure arising from changes in interest
rates. The Company's earnings are affected by changes in short-term interest
rates as a result of borrowings under its credit facilities which bear interest
based on floating rates.
At March 27, 2005, the Company has approximately $6.9 million of variable
rate debt obligations outstanding with a weighted average interest rate of
3.63%. A hypothetical 10% increase in the effective interest rate for these
borrowings, assuming debt levels at March 27, 2005, would have increased
interest expense by approximately $19,000 for the nine month period ended March
27, 2005. As discussed previously, the Company has entered into an interest
rate swap designed to manage the interest rate risk relating to $6.9 million of
the variable rate debt.
ITEM 4. CONTROLS AND PROCEDURES
- ------------------------------------
The Company's management, including the Company's principal executive
officer and principal financial officer, has evaluated the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered By this
Quarterly Report on Form 10-Q.Based upon that evaluation, the Company's
principal executive officer and principal financial officer have concluded that
the disclosure controls and procedures were effective as of the end of the
period covered by this Quarterly Report on Form 10-Q.
There were no changes in the Company's internal control over financial
reporting that occurred during the Company's last fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- ----------------------------
On December 11, 2004, the Board of Directors of the Company terminated
the Executive Compensation Agreement dated December 16, 2002 between the Company
and its then Chief Executive Officer, Ronald W. Parker ("Parker Agreement").
Mr. Parker's employment was terminated following ten days written notice to Mr.
Parker of the Company's intent to discharge him for cause as a result of
violations of the Parker Agreement. Written notice of termination was
communicated to Mr. Parker on December 13, 2004. The nature of the cause
alleged was set forth in the notice of intent to discharge and based upon
Section 2.01(c) of the Parker Agreement, which provides for discharge for "any
intentional act of fraud against the Company, any of its subsidiaries or any of
their employees or properties, which is not cured, or with respect to which
Executive is not diligently pursuing a cure, within ten (10) business days of
the Company giving notice to Executive to do so." Mr. Parker was provided with
an opportunity to cure as provided in the Parker Agreement as well as the
opportunity to be heard by the Board of Directors prior to the termination.
On January 12, 2005, the Company instituted an arbitration proceeding
against Mr. Parker with the American Arbitration Association in Dallas, Texas
pursuant to the Parker Agreement seeking declaratory relief that Mr. Parker is
not entitled to severance payments or any other further compensation from the
Company. In addition, the Company is seeking compensatory damages,
consequential damages, and disgorgement of compensation paid to Mr. Parker under
the Parker Agreement. On January 31, 2005, Mr. Parker filed claims against the
Company for breach of the Parker Agreement, seeking the severance payment
provided for in the Parker Agreement for a termination of Mr. Parker by the
Company for reason other than for cause (as defined in the Parker Agreement),
plus interest, attorney's fees and costs. No arbitrator has been appointed and
no date for an arbitration hearing has been set.
Due to the preliminary stages of the arbitration proceeding and the
general uncertainty surrounding the outcome of this type of legal proceeding, it
is not possible for the Company to provide any certain or meaningful analysis,
projections, or expectations at this time regarding the outcome of this matter.
Although the ultimate outcome of the arbitration proceeding cannot be projected
with certainty at this time, the Company believes that its claims against Mr.
Parker are well founded and intends to vigorously pursue all relief to which it
may be entitled. An adverse outcome to the proceeding could materially affect
the Company's financial position and results of operations. In the event the
Company is unsuccessful, it could be liable to Mr. Parker for approximately $5.4
million under the Parker Agreement plus accrued interest and legal expenses. No
accrual for any amount has been made as of March 27, 2005.
On October 5, 2004 the Company filed a lawsuit against the law firm Akin,
Gump, Strauss, Hauer & Feld, and J. Kenneth Menges, one of the firm's partners.
Akin Gump served as the Company's principal outside lawyers from 1997 through
May 2004, when the Company terminated the relationship. The lawsuit alleges
that during the course of representation of the Company, the firm and Mr.
Menges, as the partner in charge of the firm's services for the Company,
breached certain fiduciary responsibilities to the Company by giving advice and
taking action to further the personal interests of certain of the Company's
executive officers to the detriment of the Company and its shareholders.
Specifically, the lawsuit alleges that the firm and Mr. Menges assisted in the
creation and implementation of so-called "golden parachute" agreements, which,
in the opinion of the Company's current counsel, provided for potential
severance payments to those executives in amounts greatly disproportionate to
the Company's ability to pay, and that if paid, could expose the Company to
significant financial liability which could have a material adverse effect on
the Company's financial position. This matter is in its preliminary stages, and
the Company is unable to provide any meaningful analysis, projections, or
expectations at this time regarding the outcome of this matter.
On June 15, 2004, B. Keith Clark provided the Company with notice of
his intent to resign as Senior Vice President - Corporate Development, Secretary
and General Counsel of the Company effective as of July 7, 2004. By letter
dated June 24, 2004, Mr. Clark notified the Company that he reserved his right
to assert that the election of Ramon D. Phillips and Robert B. Page to the board
of directors of the Company at the February 11, 2004 annual meeting of
shareholders constituted a "change of control" of the Company under his
executive compensation agreement (the "Clark Agreement"). As a result of the
alleged change of control under the Clark Agreement, Clark claims that he was
entitled to terminate the Clark Agreement within twelve (12) months of February
11, 2004 for "good reason" (as defined in the Clark Agreement) and is entitled
to severance. On August 6, 2004, the Company instituted an arbitration
proceeding against Mr. Clark with the American Arbitration Association in
Dallas, Texas pursuant to the Clark Agreement seeking declaratory relief that
Mr. Clark is not entitled to severance payments or any other further
compensation from the Company. On January 18, 2005, the Company amended its
claims against Mr. Clark to include claims for compensatory damages,
consequential damages and disgorgement of compensation paid to Mr. Clark under
the Clark Agreement. On January 18, 2005, Mr. Clark filed claims against the
Company for breach of the Clark Agreement, seeking the severance payment
provided for in the Clark Agreement if a termination occurs following a change
of control plus a bonus payment for 2003 of approximately $12,500. The
arbitration hearing is scheduled to begin on August 8, 2005.
The Company disagrees with Mr. Clark's claim that a "change of control" has
occurred under the Clark Agreement or that he is entitled to terminate the Clark
Agreement for "good reason". On May 4, 2004, the board of directors obtained a
written legal opinion that the "change of control" provision in the Clark
Agreement was not triggered by the results of the February 11, 2004 annual
meeting. Due to the nature of the preliminary stages of the arbitration
proceeding and the general uncertainty surrounding the outcome of this type of
legal proceeding, it is not possible for the Company to provide any certain or
meaningful analysis, projections, or expectations at this time regarding the
outcome of this matter. Although the ultimate outcome of the arbitration
proceeding cannot be projected with certainty, the Company believes that its
claims against Mr. Clark are well founded and intends to vigorously pursue all
relief to which it may be entitled. An adverse outcome to the proceeding could
materially affect the Company's financial position and results of operations. In
the event the Company is unsuccessful, it could be liable to Mr. Clark for the
severance payment of approximately $762,000, the $12,500 bonus payment, and
costs and fees. No accrual for any such amounts has been made as of March 27,
2005.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND THE USE OF PROCEEDS
- --------------------------------------------------------------------------------
The Company made the following share repurchases in the quarter covered by
this report:
Total Number Maximum
Of Shares Number Of
Purchased As Part Shares That May
Average Of Publicly Yet Be Purchased
Total Number Of Price Paid Announced Plans Under The Plans
Period Shares Purchased Per Share Or Programs Or Programs
- ------------------- ----------------- ---------------- ---------------- ---------------
Month #1
December 27, 2004 -
January 30, 2005. . 14,745 $ 2.90 14,745 1,051,659
Month #2
January 31, 2005 -
February 27, 2005 . - - - 1,051,659
Month #3
March 1, 2005 - . . - $ - - 1,051,659
March 27, 2005
----------------- ---------------- ---------------- ---------------
Total . . . . . . . 14,745 $ 2.90 14,745 1,051,659
================= ================ ================ ===============
The Company purchased 2,200 shares of its common stock on December 27,
2004, 5,945 shares on December 29, 2004, 2,200 shares on December 30, 2004 and
4,400 shares on December 31, 2004 as part of plan approved by the board of
directors of the Company on August 15, 2001 and publicly announced on August 16,
2001. The Company was approved to purchase up to 1,500,000 shares of its own
common stock as part of the plan and a predecessor plan. There are 1,051,659
shares that may yet be purchased as part of these plans. These plans have no
expiration date.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- --------------------------------------------
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ---------------------------------------------------------------------
None
- ------
ITEM 5. OTHER INFORMATION
- ----------------------------
Wells Fargo notified the Company on February 4, 2005 that Wells Fargo had
not been given proper notice of the Company's purchase of shares of its common
stock, and that as a result an event of default existed under the Company's loan
agreement. Such event of default was waived by Wells Fargo upon execution of
the Revolving Credit Agreement.
ITEM 6. EXHIBITS
- ------------------
3.1 Restated Articles of Incorporation
3.2 Amended and Restated By-laws
10.1 Letter Agreement dated February 9, 2005 between the Company and Wells
Fargo Bank, N.A. (filed as item 10.1 on Form 10-Q for the quarterly period
ended December 26, 2004 and incorporated herein by reference)
10.2 Second Amendment to Third Amended and Restated Loan Agreement and
Amendment to Real Estate Note dated February 11, 2005 but effective as of
December 26, 2004, between the Company and Wells Fargo Bank, N.A. (filed as Item
1.01 on Form 8-K on February 15, 2005 and incorporated herein by reference)
10.3 Eighth Amended and Restated Revolving Credit Note Agreement dated
February 11, 2005 but effective as of December 26, 2004, between the Company and
Wells Fargo Bank, N.A. (filed as Item 1.01 on Form 8-K on February 15, 2005 and
incorporated herein by reference)
10.4 Employment Agreement dated March 31, 2005 between the Company and
Timothy P. Taft (filed as Item 1.01 on Form 8-K on April 5, 2005 and
incorporated herein by reference)
10.5 Non-Qualified Stock Option Agreement dated March 31, 2005 between
the Company and Timothy P. Taft.
10.6 Executive Compensation Agreement dated April 22, 2005 between the
Company and Ward T. Olgreen (filed as item 1.01 on Form 8-K on April 26, 2005
and incorporated herein by reference)
10.7 Executive Compensation Agreement dated April 22, 2005 between the
Company and Shawn M. Preator (filed as item 1.01 on Form 8-K on April 26, 2005
and incorporated herein by reference)
31.1 Certification of Chief Executive Officer as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
------
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PIZZA INN, INC.
Registrant
By: /s/Timothy P. Taft
--------------------
Timothy P. Taft
Chief Executive Officer
By: /s/Shawn M. Preator
---------------------
Shawn M. Preator
Chief Financial Officer
Dated: May 6, 2005