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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 30, 1996.
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.)
5050 QUORUM DRIVE
SUITE 500
DALLAS, TEXAS 75240
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 701-9955
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 6, 1996, there were 12,918,801 shares of the
registrant's Common Stock outstanding, and the aggregate market value of
registrant's Common Stock held by non-affiliates was $39,911,998, 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 x 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
1996, 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 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 September 6, 1996, the Pizza Inn system consisted of 470 units,
including five Company operated units (which are used for product testing and
franchisee training, in addition to serving customers) and 465 franchised
units. The domestic units are comprised of 332 full service units, 30
delivery/carry-out units and 47 Express units. The international units are
comprised of 38 full service units, 9 delivery/carry-out units and 14 Express
units. Pizza Inn units are currently located in 19 states and 18 foreign
countries. Domestic units are located predominantly in the southern half of
the United States, with Texas accounting for approximately 32% of the total.
Norco Manufacturing and Distributing Company ("Norco"), a division of the
Company, distributes food products, equipment, and other supplies to units in
the United States and, to the extent feasible, in other countries.
PIZZA INN RESTAURANTS
Full service restaurants ("Full-Service") offer dine-in and carry-out
service and, in most cases, also offer delivery service. These restaurants
serve pizza on three different crusts (The Original Thin Crust, San Francisco
Crust and New York Pan), 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 current standard Full-Service units are between 3,000
and 4,400 square feet in size and seat 110 to 180 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
Full-Service units, except for buffet and dine-in service. The decor of these
units is designed to be bright and highly visible, featuring neon, lighted
displays and awnings.
A third version, Pizza Inn Express units ("Express"), are typically
located in a convenience store, college campus, airport terminal or other
commercial facility. They have limited or no seating and offer quick
carry-out service of a limited menu of pizza and other foods and beverages.
An Express unit typically occupies approximately 200 to 400 square feet and is
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, so that
present franchise relationships are evidenced by a variety of contractual
forms. Common to those forms are provisions which: (i) provide an initial
franchise term of 20 years 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) 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 Full-Service unit, $7,500 for a Delco and
$3,500 for an Express unit, (ii) an initial franchise term of 20 years for a
Full- Service unit, 10 years for a Delco, plus a renewal term of 10 years in
both cases, and an initial term of five years for an Express unit plus a
renewal term of five 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 Full-Service or Delco and 5% of
gross sales for an Express unit and (v) required advertising expenditures of
at least 4% of gross sales for a Full-Service unit, 5% for a Delco and 2% for
an Express unit.
The Company has adopted a franchising strategy which 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.
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 which are proprietary to the Pizza Inn system. 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 international
franchisees. The food, equipment, and other supplies distributed by Norco are
generally available from several 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 non-profit corporation which
creates and produces print advertisements, television and radio commercials,
and promotional materials for use by its members. Each operator of a
Full-Service or Delco unit, including the Company, is entitled to membership
in PIAP. Nearly all of the Company's existing franchise agreements for
Full-Service and Delco units require the franchisees to become members of
PIAP. Members contribute 1% of their gross sales. 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 6, 1996, the Company
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 to the Company to help fund Express unit marketing materials
and similar expenditures.
Groups of franchisees in many 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 advertising and promotions 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 has a staff of field representatives, whose
responsibilities include periodic visits to provide advice in operational and
marketing activities and to evaluate compliance with the Company's quality
standards.
TRAINING
The Company offers training programs for the benefit of franchisees and
their restaurant managers. The training programs, taught by experienced
Company employees, focus on food preparation, service, cost control, 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 which it distributes to Pizza Inn units on a weekly
basis, plus certain other items ordered on an irregular basis. The Company's
accounts receivable consist primarily of receivables from food and supply
sales, accrued franchise royalties, and deferred franchise fees.
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 and 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 to become effective in October 1996
and September 1997 are expected to result in higher labor costs for the
Company and its franchisees, which may be partially offset by price increases
or operational efficiencies.
EMPLOYEES
On September 6, 1996, the Company had approximately 279 employees,
including 62 in the Company's corporate office, 79 at its Norco division, and
62 full-time and 76 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 which 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 and attractiveness of their restaurant facilities.
Because of the importance of brand awareness, the Company has increased its
emphasis on market penetration and 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 quality,
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 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. The Company believes that the increasing popularity of delivery service
and expansion into the high impulse buying market of Express units should
lessen the seasonal impact on future chainwide sales.
ITEM 2 - PROPERTIES
The Company leases 18,000 square feet in Dallas, Texas for its corporate
office and 76,700 square feet in Grand Prairie, Texas for its Norco warehouse
and office facilities. The leases expire in 2003 and 2001, respectively.
On September 6, 1996, all five of the Company operated Pizza Inn
restaurants (all located in Texas) were leased. The Company also owns one
restaurant property which it leases to a franchisee. The Company operated
units range in size from approximately 1,000 to 4,000 square feet and incur
annual minimum rent between $6.80 and $20.00 per square foot. Most of the
leases require payment of additional rent based upon a percentage of gross
sales and require the Company to pay for repairs, insurance and real estate
taxes.
ITEM 3 - LEGAL PROCEEDINGS
On September 21, 1989, the Company, Pizza Inn, Inc. (a Delaware
corporation) and Memphis Pizza Inns, Inc. filed for protection under the
United States Bankruptcy Code in the United States Bankruptcy Court for the
Northern District of Texas, Dallas Division. The plan of reorganization, as
confirmed by the court, became effective on September 5, 1990. The court
retained jurisdiction to help ensure that the plan of reorganization was
carried out and to hear any disputes that arose during the five year term of
the plan. In May 1996, the court issued its final order finding that the
proceedings have been completed and closing the bankruptcy cases.
On September 16, 1995, the Company filed a lawsuit against Choyung
International, Inc. in the Seoul District Court in Korea. In the lawsuit and
related proceedings, the Company seeks an order requiring the Company's former
licensee in Korea to comply with its post-termination obligations and pay all
amounts owed to the Company. The former licensee is contesting the
proceedings.
Certain other pending legal proceedings exist against the Company which
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 1996.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
On September 6, 1996, there were 3,256 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 bid 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.
Bid
------------------
High Low
-------- -------
1995
First Quarter Ended 9/25/94 3 11/16 2 7/8
Second Quarter Ended 12/25/94 3 3/8 2 1/2
Third Quarter Ended 3/26/95 3 1/16 2 1/2
Fourth Quarter Ended 6/25/95 3 7/16 2 5/16
1996
First Quarter Ended 9/24/95 4 1/16 3 3/16
Second Quarter Ended 12/24/95 4 1/2 3 5/8
Third Quarter Ended 3/24/96 4 7/8 3 3/4
Fourth Quarter Ended 6/30/96 5 3/16 4 1/8
Under the Company's bank loan agreement, the Company is not permitted to pay
dividends or make other distributions on the Common Stock (except
distributions of additional shares of stock). The Company has not paid any
dividends on its Common Stock during the past two years and has no present
intention of paying cash dividends in the future. Future dividend policy with
respect to the Common Stock will be determined by the Board of Directors of
the Company, taking into consideration factors such as the bank loan, future
earnings, capital requirements and the financial condition of the Company.
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 30, 1996, and should be
read in conjunction with the financial statements and schedules in Item 8 of
this report.
Year Ended
----------------------------------------------------------------
June 30, June 25, June 26, June 27, June 28,
1996 1995 1994 1993 1992
--------- --------- --------- --------- ----------
(In thousands, except per share amounts)
SELECTED INCOME STATEMENT DATA:
Total revenues $ 69,441 $ 62,044 $ 57,378 $ 53,468 $ 49,596
Income (loss) before income taxes
and extraordinary item 5,921 4,845 3,899 2,444 (866)
Income (loss) before extraordinary item 3,908 3,198 2,573 1,406 (866)
Income (loss) before extraordinary
item per common share .28 .22 .18 .11 (.07)
Net income (loss) 3,908 3,198 2,573 2,186 (1) (866)
Income (loss) per common share .28 .22 .18 .17 (.07)
SELECTED BALANCE SHEET DATA:
Total assets 24,419 25,803 27,234 26,018 27,039
Long-term debt and capital 7,902 11,039 14,538 15,600 16,062
lease obligations
Redeemable Preferred Stock - - - (2) 3,371 3,262
(1) Includes an extraordinary gain of $780,000 from the utilization of operating loss carryforwards.
(2) During fiscal 1994, the Company redeemed all outstanding shares of Redeemable Preferred Stock in
exchange for Common Stock and cash.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL 1996 COMPARED TO FISCAL 1995
Net income for fiscal year ended June 30, 1996 increased 22% to $3.9
million from $3.2 million in the prior year. Earnings per share grew 27% to
$.28 from $.22. Excluding the effect of a prior year non-recurring gain, net
income increased 37% and earnings per share grew 40%. Pre-tax income increased
22% to $5.9 million from $4.8 million in the prior year. The Company
considers pre-tax income to be the best measure of its performance due to the
significant benefit of its net operating loss carryforwards. These
carryforwards, which total $26.9 million at June 30, 1996, reduce the income
taxes paid by the Company from the 34% rate expensed on its statements of
operations to approximately 2%.
Results of operations for fiscal 1996 include fifty-three weeks versus
fifty-two weeks for fiscal 1995. The effect of the additional week on current
year revenues and net income was an increase of approximately 2%.
Revenues for fiscal 1996 were up 12% to $69.4 million from $62 million
last year. Food and supply sales grew 14% in fiscal 1996. This was partially
the result of continued growth in domestic chainwide retail sales, which grew
5%. Additional factors contributing to growth in food and supply sales were
increased market share on sales of non-proprietary food ingredients and
equipment, as well as increases in the market price of certain commodities.
Franchise revenue, which includes royalties, license fees and income from
area development ("A.D.") sales, increased 8% or $523,000 in fiscal 1996, due
to higher royalties and A.D. sales, partially offset by lower license fees.
Proceeds from A. D. sales vary depending on size, demographics and current
market development in the territories. The timing and amount of proceeds from
A.D. sales can vary significantly from year to year. Current year A.D. sales
include installments on the sale of area development rights for Arkansas,
portions of Missouri, North Carolina and South Carolina, as well as the
Philippines. Revenue from royalties was up due to growth in domestic retail
sales and international store openings at higher effective royalty rates than
existing units. The increase in revenue occurred despite the closing during
the current fiscal year of all units in Korea, which paid less than $150,000
in annual royalties. License fees were down because more stores opened in area
development territories.
Restaurant sales decreased $219,000 in the current year as a result of
closing one of the Company operated units that was not required for training
or other purposes.
Other income consists primarily of interest income and non-recurring
revenue items. Other income increased because the current year includes a
lawsuit settlement and a gain on the sale of a sublease.
Cost of sales increased 11% or $5.4 million in fiscal 1996. This
increase is directly related to the growth in food and supply sales to the
Company's franchisees. It includes the direct cost of increased product
volume, as well as proportionate increases in direct transportation and
warehouse costs. As a percentage of food and supply sales, cost of sales is
slightly lower during the current year due to cost improvements achieved
through fleet modernization and routing efficiencies, increased labor
productivity and improved buying power through volume purchasing.
Franchise expenses include selling, general and administrative expenses
directly related to the sale and service of franchises and A.D. territories.
These costs increased 10% or $282,000 in fiscal 1996. This increase reflects
investments in additional training and field service personnel and increases
in related costs of providing services to franchisees.
General and administrative expenses increased 11% in the current year.
This was due to the implementation of a new computer system, which resulted in
additional expenses related to hardware, software, programming and support.
Expenses for the current fiscal year also include a one-time charge of $95,000
to write down assets to market value at two Company operated units.
During fiscal 1995, certain sales and property tax liabilities were
settled for amounts lower than estimated in previous years. A one-time credit
of $531,000 ($350,000 net of tax) reflects the adjustment of the excess tax
accrual.
Interest expense decreased 32% or $417,000 during the current year.
Average debt balances were 25% lower in the current year as the Company made
$2.1 million in scheduled principal payments and $1.4 million in voluntary
principal payments. The average interest rate was also slightly lower in the
current year.
During fiscal 1996, a total of 73 new Pizza Inn franchise units were
opened for business, an 11% increase over the 66 locations opened during
fiscal 1995. A total of 32 units were closed by franchisees or terminated by
the Company in the current year, typically because of unsatisfactory standards
of operation or poor performance, compared to 33 units last year. In
addition, all 39 units operated by the Company's former licensee in Korea were
closed during the current year, after the Company terminated the license
following extensive efforts to resolve problems by mutual agreement. In
September 1996, the Company granted a new license to a Seoul, Korea-based firm
to be the Company's exclusive operator and subfranchisor in Korea. The
Company currently expects to open approximately 100 new franchised locations,
including domestic and international units, during the next twelve months.
FISCAL 1995 COMPARED TO FISCAL 1994
Pre-tax income for the fiscal year ended June 25, 1995 increased 24% to
$4.8 million from $3.9 million in the prior year. Net income for fiscal 1995
increased 24% to $3.2 million or 22 per share, from $2.6 million or 18 per
share in fiscal 1994.
Food and supply sales by the Company's distribution division increased
10% or $4.9 million in fiscal 1995. This increase was fueled by growth in
chainwide retail sales, which grew 7% to $222 million in fiscal 1995 versus
$207 million in fiscal 1994. Increased market share on sales of
non-proprietary food products and equipment and on sales to international
franchisees also contributed to higher food and supply sales.
Franchise revenue, which includes royalties, license fees and income from
area development ("A.D.") sales, decreased 2% or $172,000 in fiscal 1995, due
to lower A.D. sales. Fiscal 1995 A.D. sales included installments on the sale
of area development rights for Arkansas, portions of Missouri, as well as
Cyprus and Guatemala.
Other income consists primarily of interest income and non-recurring
revenue items, and varies from year to year. Other income decreased during
fiscal 1995 due to the inclusion of several favorable lawsuit settlements in
fiscal 1994.
Cost of sales increased 9% or $4.1 million in fiscal 1995. This growth
is directly related to the growth in food and supply sales to the Company's
franchisees. It includes the direct cost of products from increased volume,
as well as proportionate increases in direct transportation and warehouse
costs. As a percentage of food and supply sales, the distribution component
of cost of sales is slightly improved for fiscal 1995 year due to improved
buying power through volume purchasing.
Franchise expenses increased 13% or $324,000 in fiscal 1995. The
increase reflects additional training, marketing and field service personnel,
as well as expenditures for updated franchisee training materials and new
prototype restaurant building plans.
General and administrative expenses decreased slightly for fiscal 1995.
This was due to lower total corporate salaries, reflecting a reallocation of
resources to the franchising area of the business. In addition, general and
administrative expenses declined due to lower legal fees and a consolidation
of management duties not directly related to field service support.
During fiscal 1995, certain sales and property tax liabilities were
settled for amounts lower than previously estimated. A one-time credit of
$531,000 ($350,000 net of tax) reflects the adjustment of the excess tax
accrual.
Interest expense decreased 12% or $184,000 during fiscal 1995, as the
effect of higher prime and Eurodollar interest rates was offset by lower debt
balances.
During fiscal 1995, a total of 66 new Pizza Inn units were opened for
business, a 40% increase over the 47 locations opened during fiscal 1994. A
total of 33 units were closed by franchisees or terminated by the Company in
fiscal 1995, typically because of unsatisfactory standards of operation or
poor performance, compared to 28 units during fiscal 1994.
FINANCIAL CONDITION
Cash and cash equivalents decreased $1 million in fiscal 1996, as cash
flow from operations was used to reduce debt and purchase shares of the
Company's own common stock. Current year debt payments, totaling $3.5 million
and including $2.1 million in scheduled payments and $1.4 million in voluntary
payments, reduced debt from $12.4 million to $8.9 million at June 30, 1996.
The Company also used $3.7 million in working capital to reacquire 941,094
shares of its own common stock, including 262,094 shares acquired on favorable
terms from a former lender and 679,000 shares purchased at prevailing prices
on the open market.
At June 28, 1993, upon adoption of SFAS 109, the Company recorded a net
deferred tax asset of $15.4 million, primarily representing the benefit of
pre-reorganization net operating loss carryforwards which expire in varying
amounts between 2004 and 2005. The net deferred tax asset was recorded as a
reduction of intangibles to the extent available ($13.7 million), and then as
an increase in additional paid-in capital ($1.7 million). At June 30, 1996,
the net deferred tax asset balance was $10.7 million.
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 $1.5 million
related to the potential expiration of certain tax credit carryforwards.
Future taxable income at the same level as fiscal 1996 would be sufficient for
full realization of the net tax asset. Management believes that, based on
recent growth trends and future projections, maintaining current levels of
taxable income is achievable. Expansion of the Company's franchise base,
through the sale of new franchises and area development territories with
agreements containing minimum required development schedules, is expected to
cause future growth in the Company's royalties, franchise fees and
distribution sales. In addition, average unit sales for the chain have
increased in each of the last five years. These factors are expected to
contribute to growth in future taxable income and should be more than
sufficient to enable the Company to realize its deferred tax asset without
reliance on material, non-routine income.
While the Company expects to realize substantial benefit from the
utilization of its net operating loss carryforwards to reduce its federal tax
liability, current accounting standards dictate that this benefit can not be
reflected in the Company's results of operations. Carryforwards resulting
from losses incurred after the Company's reorganization in September 1990 were
reflected as an extraordinary item, reducing a portion of income tax expense
on the statement of operations for the first three quarters of fiscal 1993.
When post-reorganization carryforwards were exhausted, the Company began
utilizing its pre-reorganization carryforwards, which currently total $26.9
million and require a different accounting treatment.
In accordance with SFAS 109, these carryforwards are reflected as a
reduction of the deferred tax asset rather than a reduction of income tax
expense. Beginning in the last quarter of fiscal 1993, this has caused the
Company to reflect an amount for federal income tax expense at the corporate
rate of 34% on its statement of operations that is significantly different
from the alternative minimum tax that it actually pays (approximately 2% of
taxable income).
Historically, the differences between pre-tax earnings for financial
reporting purposes and taxable income for tax purposes have consisted of
temporary differences arising from the timing of depreciation, deductions for
accrued expenses and deferred revenues, as well as permanent differences as a
result of goodwill amortization deducted for financial reporting purposes but
not for income tax purposes.
Under the Internal Revenue Code, the utilization of net operating loss
and credit carryforwards could be limited if certain changes in ownership of
the Company's Common Stock were to occur. The Company's Articles of
Incorporation contain certain restrictions which are intended to reduce the
likelihood that such changes in ownership would occur.
The following summarizes, as of June 30, 1996, the annual amounts of net
operating loss carryforwards for income tax purposes that expire by year:
Net Operating Loss
Carryforwards
(In Thousands) Expires in Year
-------------------- -----------------
$2,300 2004
24,600 2005
-------
$26,900
=======
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations totaled $6.2 million in fiscal 1996 and was
used primarily to service debt, to acquire the Company's common stock, and to
fund capital expenditures.
The Company reduced its term loan balance from $12.4 million at June 25,
1995 to $8.9 million at June 30, 1996. On June 30, 1995, the Company
purchased 262,094 shares of its own common stock from a former lender for
$596,285. Since September 1995, the Company has also purchased 679,000 shares
of its own common stock on the open market at a total cost of $3.1 million.
All of the reacquired shares will be held as treasury stock until retired.
Capital expenditures included remodels for several of the Company operated
restaurants and purchase of new point-of-sale cash register systems for two of
these locations. They also included costs related to installing and
customizing the new computer system purchased in the prior fiscal year, and
updates to the freezer facilities at the Company's distribution warehouse.
The Company, in continuing to update its transportation fleet, entered into
leases for eight new trailers during fiscal 1996, while retiring eight older
trailers.
The Company's future requirements for cash relate primarily to debt
service, the periodic purchase of its own common stock and capital
expenditures. Under the term loan agreement, the Company is required to make
principal payments of $2 million during the fiscal year ending June 29, 1997,
and plans to make periodic voluntary pre-payments from current year cash flow.
The Company considers its common stock to be currently undervalued, and plans
to continue purchasing its own shares on the open market to the extent that
current prices prevail. Anticipated capital expenditures include warehouse
and information system updates at the distribution division as well as capital
improvements at several training stores. The Company expects to enter into
leases for five new trailers in the next year as it continues to update the
fleet.
The Company's primary sources of cash are royalties, license fees and
area development sales, as well as sales from the distribution division.
Existing area development agreements contain development commitments that
should result in future chainwide growth. Related growth in royalties and
distribution sales are expected to provide adequate working capital to supply
the needs described above. The signing of any new area development
agreements, which cannot be predicted with certainty, would also provide
significant infusions of cash.
ECONOMIC FACTORS
The costs of operations, including labor, supplies, utilities, financing
and rental costs, to the Company and its franchisees, are 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 in Texas and
other markets 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.
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" contains certain projections and other forward-looking
statements that are not historical facts and are subject to various risks and
uncertainties, including but not limited to: changes in demand for Pizza Inn
products or franchises; the impact of competitors' actions; changes in prices
or supplies of food ingredients; and restrictions on international trade and
business.
PIZZA INN, INC.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Schedules:
FINANCIAL STATEMENTS PAGE NO.
Report of Independent Accountants. 15
Consolidated Statements of Operations for the years ended
June 30, 1996, June 25, 1995, and June 26, 1994. 16
Consolidated Balance Sheets at June 30, 1996 and June 25, 1995. 17
Consolidated Statements of Shareholders' Equity for the years
ended June 30, 1996, June 25, 1995, and June 26, 1994. 18
Consolidated Statements of Cash Flows for the years
ended June 30, 1996, June 25,1995, and June 26, 1994. 19
Notes to Consolidated Financial Statements. 21
FINANCIAL STATEMENT SCHEDULES
Schedule II - Consolidated Valuation and Qualifying Accounts 32
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.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of Pizza Inn, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Pizza Inn, Inc. (the "Company") and its subsidiaries at June 30,
1996 and June 25, 1995, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards 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 the
opinion expressed above.
PRICE WATERHOUSE LLP
Dallas, Texas
August 19, 1996
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended
----------------------------------
June 30, June 25, June 26,
1996 1995 1994
--------- ------------ ---------
REVENUES:
Food and supply sales $ 58,823 $ 51,820 $ 46,922
Franchise revenue 7,412 6,889 7,061
Restaurant sales 2,934 3,153 3,044
Other income 272 182 351
--------- ------------ ---------
69,441 62,044 57,378
--------- ------------ ---------
COSTS AND EXPENSES:
Cost of sales 54,273 48,881 44,733
Franchise expenses 3,019 2,737 2,413
General and administrative expenses 5,353 4,820 4,857
Non-recurring gain - (531) -
Interest expense 875 1,292 1,476
--------- ------------ ---------
63,520 57,199 53,479
--------- ------------ ---------
INCOME BEFORE INCOME TAXES 5,921 4,845 3,899
Provision for income taxes 2,013 1,647 1,326
--------- ------------ ---------
NET INCOME $ 3,908 $ 3,198 $ 2,573
========= ============ =========
NET INCOME PER COMMON SHARE $ 0.28 $ 0.22 $ 0.18
========= ============ =========
See accompanying Notes to Consolidated Financial Statements
PIZZA INN, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, June 25,
1996 1995
--------- ---------
ASSETS
- ----------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 653 $ 1,672
Restricted cash and short-term investments,
(including $230 pledged as collateral for
certain letters of credit) 360 353
Notes and accounts receivable, less allowance
for doubtful accounts of $900 and $1,119,
respectively 6,652 5,109
Inventories 1,919 1,590
Prepaid expenses and other assets 466 590
Net assets held for sale 70 243
--------- ---------
Total current assets 10,120 9,557
PROPERTY, PLANT AND EQUIPMENTS, at
cost, less accumulated depreciation 1,866 1,722
PROPERTY UNDER CAPITAL LEASES, net 1,107 747
DEFERRED TAXES, net 10,687 12,582
OTHER ASSETS
Long-term notes and accounts receivable, less
allowance for doubtful accounts of $63
and $199, respectively 149 690
Deposits and other 490 505
--------- ---------
$ 24,419 $ 25,803
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ----------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt $ 2,000 $ 1,995
Current portion of capital lease obligations 109 71
Accounts payable - trade 2,331 1,184
Accrued expenses 3,158 2,808
--------- ---------
Total current liabilities 7,598 6,058
LONG-TERM LIABILITIES
Long-term debt 6,910 10,393
Long-term capital lease obligations 992 646
Other long-term liabilities 813 1,304
COMMITMENTS AND CONTINGENCIES (See Note J)
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value; 26,000,000
shares authorized; outstanding 12,876,801
and 13,526,970 shares, respectively (after
deducting shares in treasury:
1996 - 1,360,567; 1995 - 418,898) 129 135
Additional paid-in capital 3,684 3,974
Retained earnings 4,293 3,293
--------- ---------
Total shareholders' equity 8,106 7,402
--------- ---------
$ 24,419 $ 25,803
========= =========
See accompanying Notes to Consolidated Financial Statements
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Retained
Additional Earnings
Preferred Stock Common Stock Paid-In (Accumulated
Shares Amount Shares Amount Capital Deficit) Total
---------- -------- ------- -------- ------------ -------------- --------
BALANCE, JUNE 27, 1993 - - 12,740 $ 127 $ (35) $ (2,317) $(2,225)
Prospective adoption of SFAS 109 - - - - 1,736 - 1,736
Exchange of Common Stock for Preferred Stock - - 662 7 1,649 - 1,656
Reclassification of Preferred Stock 1,715 $ 1,715 - - - - 1,715
from debt to equity pursuant to
the Option Agreement
Redemption of Preferred Stock (1,715) (1,715) - - 1,144 - (571)
Stock issued to former unsecured - - 273 3 (3) - -
creditors in exchange for rights
to excess cash flow
Stock compensation expense - - - - 32 - 32
Stock options exercised - - 157 1 226 - 227
Unissued management shares and other - - (25) - - - -
Net income - - - - - 2,573 2,573
---------- -------- ------- -------- ------------ -------------- --------
BALANCE, JUNE 26, 1994 - - 13,807 138 4,749 256 5,143
Stock options exercised - - 121 1 177 - 178
Management shares issued - - 18 - 49 - 49
Purchase of treasury stock - - (419) (4) (1,001) (161) (1,166)
Net income - - - - - 3,198 3,198
---------- -------- ------- -------- ------------ -------------- --------
BALANCE, JUNE 25, 1995 - - 13,527 135 3,974 3,293 7,402
Stock options exercised - - 291 3 491 - 494
Purchases of treasury stock - - (941) (9) (781) (2,908) (3,698)
Net income - - - - - 3,908 3,908
---------- -------- ------- -------- ------------ -------------- --------
BALANCE, JUNE 30, 1996 - - 12,877 $ 129 $ 3,684 $ 4,293 $ 8,106
========== ======== ======= ======== ============ ============== ========
See accompanying Notes to Consolidated Financial Statements
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended
------------------------------------
June 30, June 25, June 26,
1996 1995 1994
---------- ------------ ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,908 $ 3,198 $ 2,573
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 595 500 493
Provision for doubtful accounts and notes - - 8
Utilization of pre-reorganization net operating 1,895 1,550 1,248
loss carryforwards
Non-recurring gain - (531) -
Changes in assets and liabilities:
Restricted cash and other short-term investments (7) (64) 74
Notes and accounts receivable (1,002) (495) (314)
Inventories (329) 196 36
Prepaid expenses and other 124 44 18
Accounts payable - trade 1,147 (333) 36
Accrued expenses (83) (238) (925)
Deferred franchise revenue (100) (901) (101)
Other 71 (169) (443)
---------- ------------ ----------
Cash provided by operating activities 6,219 2,757 2,703
---------- ------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (639) (955) (749)
Proceeds from sales of assets 84 420 152
---------- ------------ ----------
Cash used for investing activities (555) (535) (597)
---------- ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of debt (3,479) (2,487) (1,310)
Redemption of preferred stock - - (571)
Proceeds from exercise of stock options 494 179 227
Purchases of treasury stock (3,698) (1,166) -
---------- ------------ ----------
Cash used for financing activities (6,683) (3,474) (1,654)
---------- ------------ ----------
Net increase (decrease) in cash and cash equivalents (1,019) (1,252) 452
Cash and cash equivalents, beginning of period 1,672 2,924 2,472
---------- ------------ ----------
Cash and cash equivalents, end of period $ 653 $ 1,672 $ 2,924
========== ============ ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Year Ended
------------------------------------
June 30, June 25, June 26,
1996 1995 1994
---------- ------------ ----------
CASH PAYMENTS FOR:
Interest $ 880 $ 1,320 $ 1,474
Income taxes 110 60 111
NONCASH FINANCING AND INVESTING ACTIVITIES:
Notes received upon sale of assets and area - 511 45
development territories
Capital lease obligations incurred 477 659 -
See accompanying Notes to Consolidated Financial Statements
PIZZA INN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS:
Pizza Inn, Inc. (the "Company"), a Missouri corporation incorporated in 1983,
is the successor to a Texas company of the same name which was incorporated in
1961. The Company is the franchisor and food and supply distributor to a
system of restaurants operating under the trade name "Pizza Inn ".
On June 30, 1996 the Pizza Inn system consisted of 469 locations, including
five Company operated units and 464 franchised units. They are currently
franchised in 19 states and 18 foreign countries. Domestic units are located
predominantly in the southern half of the United States, with Texas, North
Carolina and Arkansas accounting for approximately 32%, 14%, and 11%,
respectively, of the total. Norco Manufacturing and Distributing Company
("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.
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.
RESTRICTED CASH AND OTHER SHORT-TERM INVESTMENTS:
PIBCO, Ltd., a wholly owned insurance subsidiary of the Company, in the normal
course of operations, arranged for the issuance of letters of credit to
reinsurers to secure unearned premium and loss reserves. At June 30, 1996 and
June 25, 1995, time deposits and short-term investments in the amount of
$230,000 were pledged as collateral for these letters of credit. Unearned
premium and 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.
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.
NET ASSETS HELD FOR SALE:
Net assets held for sale include restaurants and vacant properties that will
be sold or franchised by the Company. These assets are recorded at expected
net realizable value and classified as current assets. Subsequent changes in
the balance reflect depreciation, sales and related gains or losses, and
changes in market value. At June 30, 1996 and June 25, 1995, one property and
three properties, respectively, were classified as net assets held for sale.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, including property under capital leases, is
stated at cost less accumulated depreciation. Depreciation 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 seven to eight years.
NOTES RECEIVABLE:
Notes receivable primarily consist of notes from franchisees for the purchase
of Company restaurants and area development territories. As of June 30, 1996
and June 25, 1995, net notes receivable totaled $926,284, and $1,143,928,
respectively. The carrying amount of notes receivable currently approximates
fair value.
INCOME TAXES:
Effective June 28, 1993, the Company, as required by current accounting
standards, prospectively adopted SFAS 109 which requires a change from the
deferred method of accounting for income taxes to the liability method. Under
SFAS 109, deferred tax assets and liabilities result from differences between
the financial statement carrying amounts of existing assets and liabilities
compared to their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are projected to be recovered.
TREASURY STOCK:
The excess of the cost of shares acquired for the treasury over par value is
allocated to additional paid-in capital based on the per share amount of
additional capital for all shares in the same issue, with any difference
charged to retained earnings.
DISTRIBUTION DIVISION OPERATIONS:
The Company's distribution division ("Norco") 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."
FRANCHISE REVENUE:
Franchise revenue consists of income from license fees, royalties and area
development fees. 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 30, 1996, June 25, 1995, and
June 26, 1994, 75%, 79%, and 77%, respectively, of franchise revenue was
comprised of recurring royalties.
An area development fee is the fee paid by selected experienced restaurant
operators to the Company for the right to develop Pizza Inn restaurants in a
specific geographical territory. When the Company has no continuing
substantive obligations of performance to the area developer regarding the
area development 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. Area development fees recognized as
income for years ended June 30, 1996, June 25, 1995, and June 26, 1994 were
$1,630,000, $1,054,000 and $1,200,000, respectively.
NON-RECURRING GAIN:
During the year ended June 25, 1995, the Company settled certain sales and
property tax liabilities for amounts lower than previously estimated. The
excess tax accruals, which had been classified as other long-term liabilities,
were reversed and recorded as a non-recurring gain in the statement of
operations.
NET INCOME PER COMMON SHARE:
Net income per common share is computed based on the weighted average number
of common and equivalent shares outstanding during each period. Common stock
equivalents include shares issuable upon exercise of the Company's stock
options. For the years ended June 30, 1996, June 25, 1995, and June 26, 1994,
the weighted average number of shares considered to be outstanding were
14,007,380 and 14,234,431 and 14,051,548, respectively. Fully diluted
earnings per share is not presented because the effect of considering any
potentially dilutive securities is immaterial.
STOCK-BASED COMPENSATION:
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-based Compensation" ("SFAS No. 123") was issued. This
statement requires the fair value of stock options and other stock-based
compensation issued to employees to either be included as compensation expense
in the income statement or the pro-forma effect on net income and earnings per
share of such compensation expense to be disclosed in the footnotes to the
Company's financial statements beginning in fiscal year 1997. The Company
expects to adopt SFAS No. 123 on a disclosure basis only. As such,
implementation of SFAS No. 123 is not expected to impact the Company's
consolidated balance sheet or results of operations.
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company values financial instruments as required by Statement of
Accounting Standards No. 107, "Disclosure About Fair Value of Financial
Instruments". The carrying amounts of current assets and current liabilities
approximate fair value.
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 disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FISCAL YEAR:
The Company's fiscal year ends on the last Sunday in June. Fiscal year ended
June 30, 1996 contained 53 weeks, and fiscal years ended June 25, 1995 and
June 26, 1994 each contained 52 weeks.
NOTE B - PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment and property under capital leases consist of the
following (in thousands):
June 30, June 25,
1996 1995
---------- ----------
Property, plant and equipment:
Equipment, furniture and fixtures $ 3,337 $ 2,903
Leasehold improvements 992 989
---------- ----------
4,329 3,892
Less: accumulated depreciation (2,463) (2,170)
---------- ----------
$ 1,866 $ 1,722
========== ==========
Property under capital leases:
Real Estate $ 118 $ 118
Equipment 1,396 918
---------- ----------
1,514 1,036
Less: accumulated amortization (407) (289)
---------- ----------
$ 1,107 $ 747
========== ==========
During the year ended June 30, 1996, the Company leased eight new refrigerated
trailers for its distribution fleet and retired eight older trailers.
Depreciation and amortization expense was $595,000, $508,000 and $425,000 for
the years ended June 30, 1996, June 25, 1995, and June 26, 1994, respectively.
NOTE C - ACCRUED EXPENSES:
Accrued expenses consist of the following (in thousands):
June 30, June 25,
1996 1995
--------- ---------
Compensation $ 1,295 $ 1,129
Taxes other than income 222 154
Insurance loss reserves 239 293
Interest 11 74
Deferred franchise revenue 772 339
Other 619 819
--------- ---------
$ 3,158 $ 2,808
========= =========
NOTE D - LONG-TERM DEBT:
The following table summarizes the components of long-term debt (in
thousands):
June 30, June 25,
1996 1995
---------- ----------
Note payable under a term loan facility $ 8,910 $ 12,388
Note payable under a revolving line of credit - -
---------- ----------
$ 8,910 $ 12,388
Less current portion ( 2,000) ( 1,995)
---------- ----------
$ 6,910 $ 10,393
========== ==========
In December 1994, the Company entered into a loan agreement (the "Loan
Agreement") with two banks, in which the Company refinanced its existing
indebtedness of $14 million under a term loan facility which matures in
November 1998. The Loan Agreement also provides for a $1 million revolving
credit line, which is renewable in November 1997.
Interest on both the term loan and the revolving credit line is payable
monthly. Interest is provided for at a rate equal to prime plus an interest
rate margin from 0.5% to 1.25% or, at the Company's option, at the Eurodollar
rate plus 1.25% to 2.25%. The interest rate margin is based on the Company's
performance under certain financial ratio tests. A 0.5% annual commitment fee
is payable on any unused portion of the revolving credit line. As of June 30,
1996, the Company's effective interest rate was 7.24% (with a Eurodollar rate
basis).
Principal payments on the term loan are payable quarterly, with a balloon
payment due at the end of the term.
The Loan Agreement contains covenants which, among other things, require the
Company to satisfy certain financial ratios and restrict additional debt and
payment of dividends. As of June 30, 1996, the Company was in compliance with
all of its debt covenants.
The aggregate amount of all advances outstanding under the revolving credit
line is subject to limitation under a borrowing base, which is defined by
certain calculations of eligible inventory and accounts receivable. As of
June 30, 1996, there were no advances outstanding under the revolving credit
line.
The above indebtedness is secured by essentially all of the Company's assets.
Maturities of debt for each of the next five fiscal years are as follows:
1997 $2,000,000
1998 $2,000,000
1999 $4,910,000
2000 $0
2001 $0
NOTE E - REDEEMABLE PREFERRED STOCK:
The previous bank loan agreement allowed for the issuance of up to $5 million
of redeemable preferred stock ("Redeemable Preferred Stock"), under certain
circumstances, in lieu of interest payments on the term loan. A total of
3,370,570 shares were issued under this provision during fiscal years 1991
through 1993. During the year ended June 27, 1993, the Company issued 108,873
shares of Redeemable Preferred Stock in lieu of interest payments.
In September 1993, the Company redeemed 1,655,235 shares of its Redeemable
Preferred Stock through the exchange of 662,094 shares of its Common Stock
under the terms of an agreement with its former lender. In June 1994, the
Company redeemed the remaining 1,715,335 preferred shares for $571,000 in cash
paid to its former lender. In April and June 1995, the Company bought back
all of the 662,094 common shares previously issued (see Note L).
Dividends were paid on outstanding shares of Redeemable Preferred Stock at an
annual rate of 10%. Accrued dividends were charged to interest expense.
Dividends accrued during the year ended June 26, 1994 were $179,010. The
Company paid remaining accrued, unpaid dividends concurrently with the
redemption of the 1,715,335 shares of preferred stock in June 1994.
NOTE F - INCOME TAXES:
As discussed in Note A, the Company adopted SFAS 109, "Accounting for Income
Taxes", effective June 28, 1993, which changed its method of accounting for
income taxes from the deferred method to the liability method. The cumulative
effect of adoption of SFAS 109 was a balance sheet benefit of $15.4 million.
At June 30, 1996, the deferred tax asset balance was $10.7 million.
Income tax expense for the three years ended June 30, 1996, June 25, 1995, and
June 26, 1994 is computed by applying the applicable U.S. corporate income tax
rate of 34% to net income before income taxes.
Income tax expense consists of the following (in thousands):
June 30, June 25, June 26,
1996 1995 1994
--------- --------- ---------
Federal:
Current $ 118 $ 97 $ 78
Deferred 1,895 1,550 1,248
--------- --------- ---------
Provision for income taxes $ 2,013 $ 1,647 $ 1,326
========= ========= =========
The tax effects of temporary differences which give rise to the net deferred
tax assets (liabilities) consisted of the following (in thousands):
June 30, June 25, June 26,
1996 1995 1994
---------- ---------- ----------
Reserve for bad debt $ 368 $ 457 $ 480
Depreciable assets 378 343 275
PIBCO reserves 113 121 169
Deferred fees 261 293 425
Other reserves (6) (37) 149
NOL carryforwards 9,130 11,076 12,133
Credit carryforwards 1,820 1,706 1,671
---------- ---------- ----------
Gross deferred tax asset $ 12,064 $ 13,959 $ 15,302
Valuation allowance (1,377) (1,377) (1,170)
---------- ---------- ----------
Net deferred tax asset $ 10,687 $ 12,582 $ 14,132
========== ========== ==========
As of June 30, 1996, the Company had $26.9 million of net operating loss
carryforwards that expire between 2004 and 2005. The Company also had $1.5
million of general business credit carryforwards expiring between 1998 and
2001 and $320,000 of minimum tax credits that can be carried forward
indefinitely. The valuation allowance was established upon adoption of SFAS
109, since it is more likely than not that a portion of certain of the general
business credit carryforwards will expire before they can be utilized.
Under the Internal Revenue Code, the utilization of net operating loss and
credit carryforwards could be limited if certain changes in ownership of the
Company's Common Stock were to occur. The Company's Articles of Incorporation
contain certain restrictions which are intended to reduce the likelihood that
such changes in ownership would occur.
NOTE G - LEASES:
All of the real property occupied by the Company operated restaurants is
leased for initial terms ranging from five to 25 years with renewal options
ranging from five to 15 years. Most 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 leases 18,000 square feet in Dallas, Texas for its corporate
office and 76,700 square feet in Grand Prairie, Texas for its Norco warehouse
and office facilities. The leases expire in 2003 and 2001, respectively.
The Company's distribution division currently leases a significant portion of
its transportation equipment under 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 30, 1996 are as follows (in
thousands):
Capital Operating
Leases Leases
--------- ----------
1997 $ 188 $ 938
1998 193 615
1999 193 534
2000 193 522
2001 193 391
Thereafter 538 548
--------- ----------
$ 1,498 $ 3,548
==========
Less amount representing interest (397)
---------
Present value of total obligations under
capital leases 1,101
Less current portion (109)
---------
Long-term capital lease obligations $ 992
=========
Rental expense consisted of the following (in thousands):
Year Ended Year Ended Year Ended
June 30, June 25, June 26,
1996 1995 1994
------------ ------------ ------------
Minimum rentals $ 1,068 $ 1,053 $ 823
Contingent rentals 11 8 16
Sublease rentals (127) (166) (170)
------------ ------------ ------------
$ 952 $ 895 $ 669
============ ============ ============
NOTE H - 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 current plan
is a modified continuation of a similar savings plan established by the
Company in 1985. Employees who have completed one year of service and are at
least 21 years of age are eligible to participate in the plan. The plan
provides that participating employees may elect to have between 1% and 15% of
their compensation deferred and contributed to the plan. Effective January 1,
1993, the Company contributes on behalf of each participating employee an
amount equal to 50% of the first 3% and 25% of next 3% of the employee's
contribution. Separate accounts are maintained with respect to contributions
made on behalf of each participating employee. The plan is subject to the
provisions of the Employee Retirement Income Security Act and is a profit
sharing plan as defined in Section 401 of the Code. The Company is the
administrator of the plan. Employees may direct investment of all
contributions to a variety of funds or to purchase shares of Common Stock of
the Company.
For the years ended June 30, 1996, June 25, 1995, and June 26, 1994, total
matching contributions to the tax advantaged savings plan by the Company on
behalf of participating employees were $60,394, $56,738, and $52,054,
respectively.
NOTE I - 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
and exercise periods, and may be designated as incentive options (permitting
the participant to defer resulting federal income taxes). A total of two
million shares of Common Stock are authorized to be issued under the 1993
Plan.
The 1993 Outside Directors Stock Award Plan (the "1993 Directors Plan") was
also adopted by the Company effective as of October 13, 1993. Directors who
are not employed by the Company are eligible to receive stock options under
the 1993 Directors Plan. Options are granted, up to 20,000 shares per year,
to each outside director who purchased a matching number of shares of Common
Stock of the Company during the preceding year. 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 are subject to various vesting and exercise periods. A total of
200,000 shares of Company Common Stock are authorized to be issued pursuant to
the 1993 Directors Plan.
During the year ended June 25, 1995, the Company canceled certain employee
options and granted replacement options at the then current market value of
the stock. In December 1994 and June 1995, 781,500 and 1,446,500 of these
options, respectively, were canceled and an equal number were granted. These
transactions are reflected in shares Granted and in shares Canceled in the
schedule below.
During the year ended June 30, 1996, 781,333 new options were granted and
62,500 options were canceled. A total of 291,500 options were exercised
during fiscal year 1996.
Option
Shares Prices
----------- --------------
Outstanding at June 28, 1992 -
Granted 926,750 $ 1.13 - $2.25
Exercised -
Canceled (24,500) $ 2.25
----------- --------------
Outstanding at June 27, 1993 902,250 $1.13 - $2.25
=========== ==============
Granted 865,323 $ 1.75 - $3.94
Exercised (156,667) $ 1.13 - $2.25
Canceled (47,333) $ 2.25 - $3.88
----------- --------------
Outstanding at June 26, 1994 1,563,573 $ 1.13 - $3.94
=========== ==============
Granted 3,053,500 $ 2.50 - $3.25
Exercised (121,000) $ 1.75 - $2.25
Canceled (2,315,000) $ 2.25 - $3.88
----------- --------------
Outstanding at June 25, 1995 2,181,073 $1.13 - $3.94
=========== ==============
Granted 781,333 $ 2.69 - $4.13
Exercised (291,500) $ 1.13 - $3.25
Canceled (62,500) $ 2.25 - $2.50
----------- --------------
Outstanding at June 30, 1996 2,608,406 $ 1.13 - $4.13
=========== ==============
NOTE J - COMMITMENTS AND CONTINGENCIES:
The Company is subject to 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.
NOTE K - 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 22 restaurants located in Arkansas, Texas and Missouri. Purchases by
this franchisee made up 8% of the Company's food and supply sales in fiscal
1996. Royalties, license fees and A.D. sales from this franchisee made up 6%
of the Company's franchise revenues in fiscal 1996. 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.
On September 24, 1990, this franchisee entered into an agreement with the
Company to purchase seven Pizza Inn restaurants for a price of $1,308,000. Of
this amount, $250,000 was paid in cash and the remainder in the form of
promissory notes with an interest rate of prime plus 2% and a maturity of July
1995. At June 30, 1996, these notes had been paid in full.
Also in December 1992, this franchisee purchased area development rights for
Arkansas and certain areas in Missouri. The total price was $1,250,000, of
which $800,000 was paid in cash and $450,000 in the form of a promissory note
with an interest rate of 8% and a maturity date of July 1998. At June 30,
1996, this note had been paid in full.
The Company believes the above transactions were at the same prices and on the
same terms available to non-related third parties.
NOTE L - TREASURY STOCK:
In January 1995, the Company implemented an odd lot buy-back program, in which
the Company offered to purchase its Common Stock for $3.50 per share from
shareholders who owned less than 100 shares. The program was implemented in
order to reduce future administrative costs related to small shareholder
accounts. The program, which was completed in March 1995, resulted in the
purchase of 18,898 shares from 675 shareholders, at a total cost of $66,143.
On April 28, 1995, the Company signed an agreement to purchase 662,094 shares
of its Common Stock held by a former lender. Under the terms of the
agreement, the Company paid $1,100,000 to purchase 400,000 of the shares on
April 28, 1995. The Company had the option to purchase the remaining 262,094
shares for a price of $596,285 on or before June 30, 1995, or for a price of
$720,758 between July 1 and September 30, 1995. On June 30, 1995, the Company
exercised its option to purchase the remaining 262,094 shares for a price of
$596,285. These common shares had been issued to the former lender in
September 1993, in exchange for 1,655,235 shares of the Company's redeemable
preferred stock. The redeemable preferred stock had been issued during the
period of September 1990 through August 1992, in lieu of $1,655,235 in
interest payments on the Company's term loan.
For the period of September 1995 through June 1996, the Company purchased
679,000 shares of its own Common Stock from time to time on the open market at
a total cost of $3.1 million.
The purchases of common shares described above were funded from working
capital, and reduced the Company's outstanding shares by approximately 10%.
The Company plans to retire the shares at the earliest opportunity.
NOTE M - SUBSEQUENT EVENT (UNAUDITED):
In July 1996, in order to further reduce future administrative costs related
to small shareholder accounts, the Company implemented another odd lot
buy-back program to purchase Common Stock for $5.25 per share from
shareholders who own less than 100 shares. As of September 17, 1996 a total
of 8,149 shares had been purchased by the Company under this program.
NOTE N - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
The following summarizes the unaudited quarterly results of operations for the
fiscal years ended June 30, 1996 and June 25, 1995 (in thousands, except per
share amounts):
Quarter Ended
----------------------------------------------------
September 24, December 24, March 24, June 30,
1995 1995 1996 1996
-------------- ------------- ---------- ---------
FISCAL YEAR 1996
Revenues $ 16,152 $ 16,894 $ 16,557 $ 19,838
Net Income 793 975 920 1,220
Primary earnings per share 0.06 0.07 0.07 0.09
on net income
Quarter Ended
----------------------------------------------------
September 25, December 25, March 26, June 25,
1994 1994 1995 1995
-------------- ------------- ---------- ---------
FISCAL YEAR 1995
Revenues $ 15,583 $ 15,169 $ 15,243 $ 16,049
Net Income 540 1,037 723 898
Primary earnings per share 0.04 0.07 0.05 0.06
on net income
SCHEDULE II
PIZZA INN, INC.
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
-----------------------
Balance at Charged to Charged to Balance at
beginning cost and other end
of period expense accounts Deductions (1) of period
----------- ----------- ----------- --------------- -----------
YEAR ENDED JUNE 30, 1996
Allowance for doubtful $ 1,318 $ - $ - $ 355 $ 963
accounts and notes
YEAR ENDED JUNE 25, 1995
Allowance for doubtful 1,386 - - 68 $ 1,318
accounts and notes
YEAR ENDED JUNE 26, 1994
Allowance for doubtful 2,416 8 - 1,038 $ 1,386
accounts and notes
(1) Write-off of receivables, net of recoveries.
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 1996 (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.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON 10-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 30, 1993 (filed as Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the fiscal year
ended June 27, 1993 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 this Report 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 Loan Agreement among the Company, First Interstate Bank of
Texas, N.A. and The Provident Bank dated December 1, 1994,
and the forms of the Term Notes, Revolving Credit Notes
and the Security Agreement thereunder (filed as Exhibit
10.13 to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended December 25, 1994 and incorporated
herein by reference).
10.2 First Amendment to the Loan Agreement among the Company,
First Interstate Bank of Texas, N.A. and The Provident
Bank dated April 28, 1995 (filed as Exhibit 10.2 to the
Company's Annual Report on Form 10-K for the fiscal year
ended June 25, 1995 and incorporated herein by reference).
10.3 Second Amendment to the Loan Agreement among the Company,
First Interstate Bank of Texas, N.A., and First Interstate
Bank of Texas, N.A. as agent, dated November 30, 1995, and
the forms of the Amended and Restated Term Note and the
Amended and Restated Revolving Credit Note thereunder
(filed as Exhibit 10.10 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended December 24, 1995
and incorporated herein by reference).
10.4 Third Amendment to Loan Agreement between the Company and
Wells Fargo Bank (Texas), National Association, formerly
named First Interstate Bank of Texas, N.A. dated June 28,
1996.
10.5 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).
10.6 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).
10.7 Employment Agreement between the Company and C. Jeffrey
Rogers dated July 1, 1994 (filed as Exhibit 10.7 to the
Company's Annual Report on Form 10-K for the fiscal year
ended June 26, 1994 and incorporated herein by reference).*
10.8 Form of Executive Compensation Agreement between the
Company and certain executive officers (filed as Exhibit
10.8 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 26, 1994 and incorporated herein
by reference).*
10.9 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).*
10.10 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).*
10.11 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).*
11.0 Computation of Net Income Per Share.
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.
* Denotes a management contract or compensatory plan or arrangement filed
pursuant to Item 14 (c) of this report.
(b) No reports were filed on Form 8-K during the fourth quarter
of the Company's fiscal year 1996.
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 27, 1996 By: /s/ Amy E. Manning
-------------------- ---------------------------
Amy E. Manning
Controller and 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/Steve A. Ungerman September 27, 1996
- ---------------------------------- --------------------
Steve A. Ungerman
Director and Chairman of the Board
/s/C. Jeffrey Rogers September 27, 1996
- ---------------------------------- --------------------
C. Jeffrey Rogers
Director, Vice Chairman, President
and Chief Executive Officer
(Principal Executive Officer)
/s/Don G. Navarro September 27, 1996
- ---------------------------------- --------------------
Don G. Navarro
Director
/s/Ramon D. Phillips September 27, 1996
- ---------------------------------- --------------------
Ramon D. Phillips
Director
/s/F. Jay Taylor September 27, 1996
- ---------------------------------- --------------------
F. Jay Taylor
Director
/s/Bobby L. Clairday September 27, 1996
- ---------------------------------- --------------------
Bobby L. Clairday
Director
/s/Ronald W. Parker September 27, 1996
- ---------------------------------- --------------------
Ronald W. Parker
Director, Executive Vice President
and Chief Operating Officer
(Principal Financial Officer)