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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 29, 1997.
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to .
COMMISSION FILE NUMBER 0-12919
PIZZA INN, INC.
(Exact name of registrant 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 8, 1997, there were 12,768,685 shares of the
registrant's Common Stock outstanding, and the aggregate market value of
registrant's Common Stock held by non-affiliates was $41,366,347, 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
1997, 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 8, 1997, the Pizza Inn system consisted of 494 units,
including five Company operated units (which are used for product testing and
franchisee training, in addition to serving customers) and 489 franchised
units. The domestic units are comprised of 323 full service units, 35
delivery/carry-out units and 71 Express units. The international units are
comprised of 33 full service units, 12 delivery/carry-out units and 20 Express
units. Pizza Inn units are currently located in 18 states and 19 foreign
countries. Domestic units are located predominantly in the southern half of
the United States, with Texas, North Carolina and Arkansas accounting for
approximately 30%, 15% 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.
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, New York Pan,
and Italian Crust, with standard toppings and special combinations of
toppings. They also offer pasta, salad, sandwiches, desserts and beverages,
including beer and wine in some locations. They are generally located in free
standing buildings in close proximity to offices, shopping centers and
residential areas. The current standard Full-Service units are between 3,300
and 4,400 square feet in size and seat 130 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 selected 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. The Company offers similar master franchise rights
to develop Pizza Inn restaurants in certain foreign countries, with negotiated
fees, development schedules and ongoing royalties.
As with area developers, a master licensee for a foreign country pays a
negotiated fee to purchase the right to develop and operate Pizza Inn
restaurants within a defined foreign territory, typically for a term of 20
years plus renewal options for ten years. The master licensee agrees to a new
store development schedule and the Company trains the master licensee to
monitor and assist franchisees in their territory with local franchise service
and quality control, with support from the Company. In return, the master
licensee typically retains half the franchise fees and approximately half the
royalties on all units within the territory during the term of the agreement.
While all Pizza Inn restaurants opened in an area developer's territory enter
into franchise agreements with the Company, a master licensee may open
restaurants owned and operated by the master licensee, or they may open
sub-franchised restaurants owned and operated by third parties through
agreement with the master licensee.
In July 1997, the Company repurchased the area developer rights for the
majority Tennessee and portions of Kentucky for approximately $986,000.
Restaurants operating or developed in the repurchased territory will now pay
all royalties and franchisee fees directly to Pizza Inn, Inc.
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 and equipment 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 domestic
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 8, 1997, the Company
and substantially all of its domestic 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. International operators do
not participate in PIAP; however, like all other franchisees, they are
required to conduct local area advertising. The Company works with foreign
master licensees on local advertising and reserves the right to review all
such advertising before publication or broadcast.
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,
sales building and cost control 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,
sanitation, local store marketing, personnel management, and other aspects of
restaurant operation. The training programs include group classes, supervised
work in Company operated units and the Company's training center, 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 and accrued franchise royalties.
GOVERNMENT REGULATION
The Company is subject to registration and disclosure requirements and
other restrictions under federal and state franchise laws. The Company's
Norco division is subject to various federal and state regulations, including
those regarding transportation of goods, food labeling 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. Some restaurant employees
are paid at rates related to the minimum wage established by federal and state
law. Increases in the federal minimum wage can result in higher labor costs
for the Company and its franchisees, which may be partially offset by price
increases or operational efficiencies.
EMPLOYEES
On September 8, 1997, the Company had approximately 274 employees,
including 64 in the Company's corporate office, 79 at its Norco division, and
57 full-time and 74 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 and overall value of their menu, 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 23,402 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 also leases 2,736 square feet in Addison, Texas for its training
facility with a term expiring in 2001.
On September 8, 1997, 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 former 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 August 5, 1997, the Company entered into a settlement agreement
regarding a lawsuit against Choyung International, Inc. ("Choyung") in the
Seoul District Court in Korea. Pursuant to the terms of the settlement,
Choyung agreed to comply with its post-termination obligations of returning
all trademarks to the Company and de-identifying all former Pizza Inn
restaurant locations. The Company and Choyung also entered into mutual
releases and dismissed all pending litigation.
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 1997.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
On September 8, 1997, there were 3,016 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
-------- -------
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
1997
First Quarter Ended 9/29/96 4 13/16 3 11/16
Second Quarter Ended 12/29/96 5 4 1/4
Third Quarter Ended 3/30/97 4 7/8 3 7/8
Fourth Quarter Ended 6/29/97 4 1/4 3 1/4
On August 21, 1997 the Board of Directors of the Company declared a
quarterly cash dividend of $.06 per share payable October 24 to shareholders
of record on October 10, 1997. Any determination to pay cash dividends in the
future will be at the discretion of the Company's Board of Directors and will
be dependent upon the Company's results of operations, financial condition,
capital requirements, contractual restrictions and other factors deemed
relevant.
ITEM 6 - SELECTED FINANCIAL DATA
The following table contains certain selected financial data for the Company
for each of the last five fiscal years through June 29, 1997, and should be
read in conjunction with the financial statements and schedules in Item 8 of
this report.
Year Ended
----------------------------------------------------------------
June 29, June 30, June 25, June 26, June 27,
1997 1996 1995 1994 1993
--------- --------- --------- --------- ----------
(In thousands, except per share amounts)
SELECTED INCOME STATEMENT DATA:
Total revenues $ 69,123 $ 69,441 $ 62,044 $ 57,378 $ 53,468
Income before income taxes
and extraordinary item 6,860 5,921 4,845 3,899 2,444
Income before extraordinary item 4,528 3,908 3,198 2,573 1,406
Income before extraordinary
item per common share .33 .28 .22 .18 .11
Net income 4,528 3,908 3,198 2,573 2,186 (1)
Income per common share .33 .28 .22 .18 .17
SELECTED BALANCE SHEET DATA:
Total assets 24,310 24,419 25,803 27,234 26,018
Long-term debt and capital 7,789 7,902 11,039 14,538 15,600
lease obligations
Redeemable Preferred Stock - - - - (2) 3,371
(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 1997 COMPARED TO FISCAL 1996
Earnings per share for fiscal year ended June 29, 1997 grew 18% to $.33
from $.28. Net income increased 16% to $4.5 million from $3.9 million in the
prior year. Pre-tax income also increased 16% to $6.9 million from $5.9
million. 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 $20.6 million at June 29,
1997, 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 1997 include 52 weeks versus 53 weeks
for fiscal 1996. The effect of the additional week on prior year revenues and
net income was an increase of approximately 2%.
Food and supply sales by the Company's distribution division were up
slightly from last year. Increased market share on the sale of non-
proprietary food, supplies and equipment offset the decrease resulting from
the additional week in the prior fiscal year.
Franchise revenue, which includes royalties, license fees and income from
area development and foreign master license (collectively, "Territory") sales,
decreased 9% or $662,000 in fiscal 1997. This was primarily due to lower
income from Territory sales in the current year. Proceeds from Territory
sales vary depending on size, demographics and current market development in
the Territories. The timing and recognition of Territory sales may vary
significantly from year to year. Current year sales include partial
recognition of proceeds from the sale of new Territory rights for South Korea,
the Philippines, Brazil, the Palestinian territories and Puerto Rico. Current
year royalties also decreased 5% or $270,000, primarily due to the effect of
the additional week of operations in fiscal 1996, as well as the closure
during fiscal 1996 of all 39 units in Korea upon termination of the Company's
agreement with its former master licensee.
Restaurant sales, which consist of sales from Company operated training
units, decreased 8% or $238,000 during the current year. This was primarily
the result of the closing during the third quarter of fiscal 1996 of one of
the Company operated units.
Cost of sales decreased 1% during fiscal 1997. While product purchases
increased as a result of slightly higher food and supply sales to the
Company's franchises, this was offset by cost efficiencies in other areas.
Fleet modernization and improvements in routing have reduced transportation
costs, warehouse productivity is up, and the Company continues to find
opportunities to improve the purchasing process.
Franchise expenses include selling, general and administrative expenses,
primarily wages and travel expenses, directly related to the sale and service
of franchises and Territories. These costs have remained at the same level as
last year.
General and administrative expenses decreased 9% or $474,000 in the
current year. In fiscal 1997 the Company incurred fewer legal fees related to
international litigation. In addition, fiscal 1996 included a one-time charge
of $95,000 to write down assets to market value at two Company operated units.
Interest expense decreased 24% or $213,000 in fiscal 1997, as the result
of lower debt balances and lower average interest rates.
During fiscal 1997, a total of 67 new Pizza Inn franchise units were
opened for business. Domestically, 31 units were closed by franchisees or
terminated by the Company typically because of unsatisfactory standards of
operation or performance. In addition, 20 international units were closed,
including all 19 units operated by the Company's former licensee in Taiwan.
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.
Results of operations for fiscal 1996 include fifty-three weeks versus
fifty-two weeks for fiscal 1995. The effect of the additional week on fiscal
1996 revenues and net income was an increase of approximately 2%.
Revenues for fiscal 1996 were up 12% to $69.4 million from $62 million in
fiscal 1995. 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 and foreign master license (collectively, "Territory") sales,
increased 8% or $523,000 in fiscal 1996 due to higher royalties and Territory
sales, partially offset by lower license fees. Fiscal 1996 Territory sales
include installments on the sale of Territory 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 fiscal
1996 of all units in Korea, which paid less than $150,000 in annual royalties.
Fiscal 1996 license fees were down because more stores opened in Territories.
Restaurant sales decreased $219,000 in fiscal 1996 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 fiscal 1996 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 fiscal 1996 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 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 fiscal 1996. 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 fiscal 1996 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 fiscal 1996. Average
debt balances were 25% lower 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 fiscal 1996.
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 fiscal 1996, typically because of unsatisfactory standards of
operation or poor performance, compared to 33 units in fiscal 1995. In
addition, all 39 units operated by the Company's former licensee in Korea were
closed during fiscal 1996, 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.
FINANCIAL CONDITION
Cash and cash equivalents increased $1.4 million in fiscal 1997, as the
Company generated cash flow from operations beyond that required for debt
repayment, capital expenditures and open market purchases of the Company's own
common stock. Scheduled debt payments of $2 million in the current year
reduced debt from $8.9 million to $6.9 million at June 29, 1997. During
fiscal 1997, the Company also used $1.9 million in working capital to acquire
421,700 shares of its own common stock 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 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 29, 1997, the net deferred tax asset
balance was $8.5 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 $1.4 million
related to the potential expiration of certain tax credit carryforwards.
Future taxable income at the same level as fiscal 1997 would be more than
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 Territories
with agreements containing minimum required development schedules,is expected
to cause future growth in the Company's royalties, franchise fees and
distribution sales. 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 (which currently total
$20.6 million and expire in 2005) 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 require a different accounting
treatment. In accordance with SFAS 109, these carryforwards, when
utilized, 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. This
rate 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations totaled $5.4 million in fiscal 1997 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 $8.9 million at June 30,
1996 to $6.9 million at June 29, 1997. In August 1997, the Company signed an
agreement with its current lender to refinance its existing debt under a new
revolving credit facility. The new $9.5 million revolving credit line
combines the Company's existing $6.9 million term loan with its $1 million
revolving credit line, plus an additional $1.6 million revolving credit
commitment. The new agreement extends through August 1999.
During fiscal 1997, the Company purchased 421,700 shares of its own
common stock on the open market for a total price of $1.9 million, bringing
the number of shares purchased over the last three years to 1,790,416,
including 662,094 shares purchased on favorable terms from a former lender.
All reacquired shares will be held as treasury stock until retired.
Capital expenditures during fiscal 1997 included remodels for several
Company operated training restaurants, leasehold improvements for a new
corporate training center and testing facility, and updating the distribution
division offices. During fiscal 1997, the Company entered into leases for
five new distribution trailers, which were classified as operating leases, and
retired five older trailers.
The Company's future requirements for cash relate primarily to debt
repayment, the periodic purchase of its own common stock, capital
expenditures and payment of dividends on its common stock. Although the new
loan agreement does not require the Company to make any scheduled debt
reductions, the Company plans to continue using excess cash to retire debt.
The Company currently considers its common stock to be undervalued, and plans
to continue purchasing its own shares on the open market. Anticipated capital
expenditures include warehouse improvements and information systems updates.
In August 1997, the Board of Directors of the Company declared a quarterly
dividend on the Company's common stock. The dividends are payable in October
1997 and will require approximately $800,000 or $0.06 per share in cash.
Declaration of future dividends will be at the discretion of the Board of
Directors.
In July 1997, the Company repurchased the area developer rights for the
majority of Tennessee and Kentucky for approximately $986,000 in cash.
Restaurants operating or developed in the repurchased territory will now pay
all royalties and franchise fees directly to Pizza Inn, Inc.
The Company's primary sources of cash are royalties, license fees and
Territory sales, as well as sales from the distribution division. Existing
area development and master license 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 or
master license 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 29, 1997, June 30, 1996, and June 25, 1995. 16
Consolidated Balance Sheets at June 29, 1997 and June 30, 1996. 17
Consolidated Statements of Shareholders' Equity for the years
ended June 29, 1997, June 30, 1996, and June 25, 1995. 18
Consolidated Statements of Cash Flows for the years ended
June 29, 1997, June 30, 1996, and June 25, 1995. 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 29,
1997 and June 30, 1996, and the results of their operations and their cash
flows for each of the three years in the period ended June 29, 1997, 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 21, 1997
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended
----------------------------------
June 29, June 30, June 25,
1997 1996 1995
--------- ------------ ---------
REVENUES:
Food and supply sales $ 59,557 $ 58,823 $ 51,820
Franchise revenue 6,750 7,412 6,889
Restaurant sales 2,696 2,934 3,153
Other income 120 272 182
--------- ------------ ---------
69,123 69,441 62,044
--------- ------------ ---------
COSTS AND EXPENSES:
Cost of sales 53,744 54,273 48,881
Franchise expenses 2,978 3,019 2,737
General and administrative expenses 4,879 5,353 4,820
Non-recurring gain - - (531)
Interest expense 662 875 1,292
--------- ------------ ---------
62,263 63,520 57,199
--------- ------------ ---------
INCOME BEFORE INCOME TAXES 6,860 5,921 4,845
Provision for income taxes 2,332 2,013 1,647
--------- ------------ ---------
NET INCOME $ 4,528 $ 3,908 $ 3,198
========= ============ =========
NET INCOME PER COMMON SHARE $ 0.33 $ 0.28 $ 0.22
========= ============ =========
See accompanying Notes to Consolidated Financial Statements
PIZZA INN, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 29, June 30,
1997 1996
--------- ---------
ASSETS
- ----------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 2,037 $ 653
Restricted cash and short-term investments,
(including $0 and $230, respectively, pledged
as collateral for certain letters of credit) 295 360
Accounts receivable, less allowance for doubtful
accounts of $939 and $781, respectively 6,711 5,875
Notes receivable, less allowance for doubtful
accounts of $60 and $119, respectively 593 777
Inventories 2,224 1,919
Prepaid expenses and other 452 536
--------- ---------
Total current assets 12,312 10,120
PROPERTY, PLANT AND EQUIPMENTS, net 2,044 1,866
PROPERTY UNDER CAPITAL LEASES, net 934 1,107
DEFERRED TAXES, net 8,492 10,687
OTHER ASSETS
Long-term notes receivable, less allowance
for doubtful accounts of $122
and $63, respectively 149 149
Deposits and other 379 490
--------- ---------
$ 24,310 $ 24,419
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ----------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt $ - $ 2,000
Current portion of capital lease obligations 115 109
Accounts payable - trade 1,482 2,331
Accrued expenses 2,917 3,158
--------- ---------
Total current liabilities 4,514 7,598
LONG-TERM LIABILITIES
Long-term debt 6,910 6,910
Long-term capital lease obligations 879 992
Other long-term liabilities 786 813
COMMITMENTS AND CONTINGENCIES (See Note I)
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value; 26,000,000
shares authorized; outstanding 12,713,562
and 12,876,801 shares, respectively (after
deducting shares in treasury:
1997 - 1,790,416; 1996 - 1,360,567) 127 129
Additional paid-in capital 4,061 3,684
Retained earnings 7,033 4,293
--------- ---------
Total shareholders' equity 11,221 8,106
--------- ---------
$ 24,310 $ 24,419
========= =========
See accompanying Notes to Consolidated Financial Statements
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Retained
Additional Earnings
Common Stock Paid-In (Accumulated
Shares Amount Capital Deficit) Total
------- -------- ------------ -------------- --------
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
Stock options exercised 267 2 503 - 505
Purchases of treasury stock (430) (4) (126) (1,788) (1,918)
Net income - - - 4,528 4,528
------- -------- ------------ -------------- ---------
BALANCE, JUNE 29, 1997 12,714 $ 127 $ 4,061 $ 7,033 $11,221
======= ======== ============ ============== =========
See accompanying Notes to Consolidated Financial Statements
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended
---------------------------------------
June 29, June 30, June 25,
1997 1996 1995
---------- ------------ ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,528 $ 3,908 $ 3,198
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 707 595 500
Provision for doubtful accounts and notes receivable 110 - -
Utilization of pre-reorganization net operating
loss carryforwards 2,195 1,895 1,550
Non-recurring gain - - (531)
Changes in assets and liabilities:
Restricted cash and other short-term investments 65 (7) (64)
Notes and accounts receivable (762) (1,002) (495)
Inventories (305) (329) 196
Accounts payable - trade (849) 1,147 (333)
Accrued expenses (94) (83) (238)
Deferred franchise revenue (147) (100) (901)
Prepaid expenses and other (23) 195 (125)
---------- ---------- ----------
Cash provided by operating activities 5,425 6,219 2,757
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (628) (639) (955)
Proceeds from sales of assets - 84 420
---------- ---------- ----------
Cash used for investing activities (628) (555) (535)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of debt (2,000) (3,479) (2,487)
Proceeds from exercise of stock options 505 494 179
Purchases of treasury stock (1,918) (3,698) (1,166)
---------- ----------- ----------
Cash used for financing activities (3,413) (6,683) (3,474)
---------- ----------- ----------
Net increase (decrease) in cash and cash equivalents 1,384 (1,019) (1,252)
Cash and cash equivalents, beginning of period 653 1,672 2,924
---------- ---------- ----------
Cash and cash equivalents, end of period $ 2,037 $ 653 $ 1,672
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Year Ended
------------------------------------
June 29, June 30, June 25,
1997 1996 1995
---------- ------------ ----------
CASH PAYMENTS FOR:
Interest $ 612 $ 880 $ 1,320
Income taxes 150 110 60
NONCASH FINANCING AND INVESTING ACTIVITIES:
Notes received upon sale of assets and area - - 511
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 29, 1997 the Pizza Inn system consisted of 484 locations, including
five Company operated units and 479 franchised units. They are currently
franchised in 18 states and 19 foreign countries. Domestic units are located
predominantly in the southern half of the United States, with Texas, North
Carolina and Arkansas accounting for approximately 30%, 15%, 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. Certain prior year amounts have been
reclassified to conform with current year presentation.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
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 29, 1997,
these letters of credit were secured under the Company's revolving line of
credit. At June 30, 1996, 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.
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.
ACCOUNTS RECEIVABLE:
Accounts receivable consist primarily of receivables from food and supply
sales and accrued franchise royalties. The Company records a provision for
doubtful receivables to allow for any amounts which may be unrecoverable. For
the year ended June 29, 1997, a provision of $110,000 was included in cost of
sales in the statement of operations. No provision was recorded for the years
ended June 30, 1996 and June 25, 1995.
NOTES RECEIVABLE:
Notes receivable primarily consist of notes from franchisees for the purchase
of area development and master license territories and the refinancing of
existing trade receivables. These notes generally have terms ranging from one
to five years, with interest rates of 8% to 12%. The carrying amount of notes
receivable currently approximates fair value. The Company records a provision
for doubtful receivables to allow for any amounts which may be unrecoverable.
No provision was recorded for the years ended June 29, 1997, June 30, 1996 and
June 25, 1995.
INCOME TAXES:
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. All reacquired shares will be held in treasury
until retired.
DISTRIBUTION DIVISION OPERATIONS:
The Company's Norco division sells food, supplies and equipment to franchisees
on trade accounts under terms common in the industry. Revenue from such sales
is recognized upon shipment. Norco sales are reflected under the caption
"food and supply sales."
FRANCHISE REVENUE:
Franchise revenue consists of income from license fees, royalties, and area
development and foreign master license (collectively, "Territory") sales.
License fees are recognized as income when there has been substantial
performance of the agreement by both the franchisee and the Company, generally
at the time the unit is opened. Royalties are recognized as income when
earned. For the years ended June 29, 1997, June 30, 1996 and June 25, 1995,
78%, 75%, and 79%, respectively, of franchise revenue was comprised of
recurring royalties.
Territory sales are the fees paid by selected experienced restaurant operators
to the Company for the right to develop Pizza Inn restaurants in specific
geographical territories. When the Company has no continuing substantive
obligations of performance to the area developer or master licensee regarding
the fee, the Company recognizes the fee to the extent of cash received. If
continuing obligations exist, fees are recognized ratably during the
performance of those obligations. Territory fees recognized as income for the
years ended June 29, 1997, June 30, 1996 and June 25, 1995 were $1,154,000,
$1,630,000 and $1,054,000 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 29, 1997, June 30, 1996, and June 25, 1995,
the weighted average number of shares considered to be outstanding were
13,707,249 and 14,007,380 and 14,234,431, respectively. Fully diluted
earnings per share is not presented because the effect of considering any
potentially dilutive securities is immaterial.
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of short-term investments, accounts and notes receivable,
and debt 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 related
revenues and expenses and disclosure of gain and loss contingencies at the
date of the financial statements. Actual results could differ from those
estimates.
FISCAL YEAR:
The Company's fiscal year ends on the last Sunday in June. Fiscal year ended
June 29, 1997 contained 52 weeks, fiscal year ended June 30, 1996 contained 53
weeks, and fiscal year ended June 25, 1995 contained 52 weeks.
NEW PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
"Reporting Comprehensive Income", and SFAS 131, "Disclosures About Segments
of an Enterprise and Related Information", which are effective for fiscal
years beginning after December 15, 1997. The adoption of these pronouncements
is not expected to have a significant effect on the Company.
NOTE B - PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment and assets under capital leases consist of the
following (in thousands):
June 29, June 30,
1997 1996
---------- ----------
Property, plant and equipment:
Equipment, furniture and fixtures $ 3,732 $ 3,337
Leasehold improvements 1,224 992
---------- ----------
4,956 4,329
Less: accumulated depreciation (2,912) (2,463)
---------- ----------
$ 2,044 $ 1,866
========== ==========
Assets under capital leases:
Real Estate $ 118 $ 118
Equipment 1,396 1,396
---------- ----------
1,514 1,514
Less: accumulated amortization (580) (407)
---------- ----------
$ 934 $ 1,107
========== ==========
Depreciation and amortization expense was $707,000, $595,000 and $508,000 for
the years ended June 29, 1997, June 30, 1996, and June 25, 1995, respectively.
NOTE C - ACCRUED EXPENSES:
Accrued expenses consist of the following (in thousands):
June 29, June 30,
1997 1996
--------- ---------
Compensation $ 1,145 $ 1,295
Taxes other than income 206 222
Insurance loss reserves 183 239
Legal and other professional fees 309 241
Deferred franchise revenue 624 772
Other 450 389
--------- ---------
$ 2,917 $ 3,158
========= =========
NOTE D - LONG-TERM DEBT:
The following table summarizes the components of long-term debt (in
thousands):
June 29, June 30,
1997 1996
---------- ----------
Note payable under a term loan facility $ - $ 8,910
Note payable under a revolving line of credit 6,910 -
---------- ----------
$ 6,910 $ 8,910
Less current portion - ( 2,000)
---------- ----------
$ 6,910 $ 6,910
========== ==========
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 was to mature in
November 1998. The Loan Agreement also provided for a $1 million revolving
credit line, which was renewable in November 1997. Interest on both the term
loan and the revolving credit line was payable monthly. Interest was 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 was based on the Company's performance under certain
financial ratio tests. A 0.5% annual commitment fee was payable on any unused
portion of the revolving credit line. As of June 29, 1997, the Company's
effective interest rate was 6.94% (with a Eurodollar rate basis).
Principal payments on the term loan were payable quarterly, with a balloon
payment due at the end of the term. The Loan Agreement contained covenants
which, among other things, required the Company to satisfy certain financial
ratios and restricted additional debt and payment of dividends. As of June
29, 1997, the Company was in compliance with all of its debt covenants. The
indebtedness was secured by essentially all of the Company's assets.
In August 1997, the Company signed a new agreement (the "New Loan Agreement")
with its current lender, Wells Fargo, to refinance its existing debt under a
new revolving credit facility. The new $9.5 million revolving credit line
combines the Company's existing $6.9 million term loan with its $1 million
revolving credit line, plus an additional $1.6 million revolving credit
commitment. The revolving credit note matures in August 1999 and is secured
by essentially all of the Company's assets.
Interest on the revolving credit line is payable monthly. Interest is
provided for at a rate equal to prime plus an interest rate margin from -1.0%
to 0.0% or, at the Company's option, at the Eurodollar rate plus 1.25% to
2.25%. The interest rate margin is based on the Company's performance under
certain financial ratio tests. A 0.5% annual commitment fee is payable on any
unused portion of the revolving credit line.
The New Loan Agreement contains covenants which, among other things, require
the Company to satisfy certain financial ratios and restrict additional debt.
In accordance with SFAS 6, "Classification of Short-Term Obligations Expected
to be Refinanced", the entire balance outstanding under the Loan Agreement at
June 29, 1997 has been classified as long-term to reflect the provisions of
the New Loan Agreement.
NOTE E - 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 29, 1997, the deferred tax asset balance was $8.5 million.
Income tax expense for the three years ended June 29, 1997, June 30, 1996, and
June 25, 1995, 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):
Year Ended
-------------------------------
June 29, June 30, June 25,
1997 1996 1995
--------- --------- ---------
Federal:
Current $ 137 $ 118 $ 97
Deferred 2,195 1,895 1,550
--------- --------- ---------
Provision for income taxes $ 2,332 $ 2,013 $ 1,647
========= ========= =========
The tax effects of temporary differences which give rise to the net deferred
tax assets (liabilities) consisted of the following (in thousands):
Year Ended
------------------------
June 29, June 30,
1997 1996
---------- ----------
Reserve for bad debt $ 422 $ 368
Depreciable assets 423 378
PIBCO reserves 84 113
Deferred fees 204 261
Other reserves (221) (6)
NOL carryforwards 7,013 9,130
Credit carryforwards 1,944 1,820
---------- ----------
Gross deferred tax asset $ 9,869 $ 12,064
Valuation allowance (1,377) (1,377)
---------- ----------
Net deferred tax asset $ 8,492 $ 10,687
========== ==========
As of June 29, 1997, the Company had $20.6 million of net operating loss
carryforwards that expire in 2005. The Company also had $1.5 million of
general business credit carryforwards expiring between 1998 and 2001 and
$444,000 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 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 F - 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 23,402 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 also leases 2,736 square feet in Addison, Texas for its training
facility with a term expiring in 2001.
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 29, 1997 are as follows (in
thousands):
Capital Operating
Leases Leases
--------- ----------
1998 $ 193 $ 806
1999 193 723
2000 193 712
2001 193 581
2002 310 475
Thereafter 222 480
--------- ----------
$ 1,304 $ 3,777
==========
Less amount representing interest (310)
---------
Present value of total obligations under
capital leases 994
Less current portion (115)
---------
Long-term capital lease obligations $ 879
=========
Rental expense consisted of the following (in thousands):
Year Ended
-------------------------------------
June 29, June 30, June 25,
1997 1996 1995
------------ ------------ ------------
Minimum rentals $ 1,117 $ 1,068 $ 1,053
Contingent rentals 11 11 8
Sublease rentals (90) (127) (166)
------------ ------------ ------------
$ 1,038 $ 952 $ 895
============ ============ ============
NOTE G - EMPLOYEE BENEFITS:
The Company has a tax advantaged savings plan which is designed to meet the
requirements of Section 401(k) of the Internal Revenue Code. The current plan
is a modified continuation of a similar savings plan established by the
Company in 1985. Employees who have completed six months of service and are
at least 21 years of age are eligible to participate in the plan. 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 29, 1997, June 30, 1996 and June 25, 1995, total
matching contributions to the tax advantaged savings plan by the Company on
behalf of participating employees were $58,774, $60,394 and $56,738,
respectively.
NOTE H - STOCK OPTIONS:
On September 1, 1992, the Company adopted the 1992 Stock Award Plan (the "1992
Plan"). All officers, employees and elected outside directors are eligible to
participate. The Company's 1992 Plan is a combined nonqualified stock option
and stock appreciation rights arrangement. A total of two million shares of
Pizza Inn, Inc. Common Stock were originally authorized to be awarded under
the 1992 Plan. A total of 973,073 options were actually granted under the
1992 Plan through December 1993. In January 1994, the 1993 Stock Award Plan
(the "1993 Plan") was approved by the Company's shareholders with a plan
effective date of October 13, 1993. Officers and employees of the Company are
eligible to receive stock options under the 1993 Plan. Options are granted at
market value of the stock on the date of grant, are subject to various vesting
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 were originally authorized to be issued under
the 1993 Plan. In December 1996, the Company's shareholders approved an
amendment to the 1993 plan increasing by 500,000 shares the aggregate number
of shares of common stock issuable under the plan.
The 1993 Outside Directors Stock Award Plan (the "1993 Directors Plan") was
also adopted by the Company effective as of October 13, 1993. 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.
A summary of stock option transactions under both of the Company's stock
option plans and information about fixed-price stock options follows:
Summary of Stock Option Transactions
June 29, 1997 June 30, 1996 June 25, 1995
------------------------ ----------------------- --------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- ---------- ----------- ------------ ------------ -----------
Outstanding at beginning of year 2,608,356 $ 2.82 2,181,073 $ 2.22 1,563,573 $ 2.68
Granted 876,783 3.56 781,283 4.06 3,053,500 2.68
Exercised (266,500) 1.90 (291,500) 1.70 (121,000) 1.47
Canceled (75,000) 3.74 (62,500) 2.50 (2,315,000) 3.18
----------- ----------- -------------
Outstanding at end of year 3,143,639 $ 3.08 2,608,356 $ 2.82 2,181,073 $ 2.22
=========== ========== ========== =========== ============= ============
Exercisable at end of year 2,076,856 $ 2.84 1,625,856 $ 2.27 608,073 $ 1.41
Weighted-average fair value of
options granted during the year $ .89 $ 1.21
Fixed Price Stock Options
Options Outstanding Options Exercisable
----------------------------------------------- ------------------------------------
Weighted-
Average
Shares Remaining Weighted- Shares Weighted-
Range of Outstanding Contractual Average Exercisable Average
Exercise Prices at 6/29/97 Life(Years) Exercise Price at 6/29/97 Exercise Price
- ------------------ ------------- -------------- ---------------- -------------- -----------------
$ 1.13 - $2.25 226,250 0.86 $ 1.26 226,250 $ 1.26
$ 1.75 - $3.94 20,323 2.48 3.87 20,323 3.87
$ 2.50 - $3.25 1,312,783 2.88 2.52 1,242,783 2.53
$ 2.69 - $4.13 707,500 5.52 4.09 587,500 4.08
$ 3.44 - $4.63 876,783 6.73 3.56 0 -
------------ --------------
$ 1.13 - $4.63 3,143,639 4.40 $ 3.08 2,076,856 $ 2.84
============ ==============
Pro forma information regarding net income and earnings per share is required
to be determined as if the Company had accounted for its stock options granted
subsequent to June 25, 1995 under the fair value method of SFAS 123,
"Accounting for Stock-Based Compensation". The fair value of options granted
in fiscal 1996 and 1997 was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rates ranging from 5.5% to 6.5%, expected
volatility of 43.9% to 50.8%, expected dividend yield of 5.2% to 8.9% and
expected lives of 2 to 6 years.
For purposes of pro forma disclosures, the estimated fair value of the stock
options is amortized over the options vesting periods. The Company's pro
forma information follows (in thousands except for earnings per share
information):
June 29, 1997 June 30, 1996
------------------------ ------------------------
As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- ---------
Net Income $ 4,528 $ 3,981 $ 3,908 $ 3,891
Earnings Per Share $ 0.33 $ 0.29 $ 0.28 $ 0.28
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts as the pro forma amounts above do not include the
impact of stock option awards granted prior to June 25, 1995, and additional
awards are anticipated in future years.
NOTE I - 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 in 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 J - RELATED PARTIES:
One of the individuals nominated by the Company and elected to serve on its
Board of Directors is a franchisee. This franchisee currently operates a
total of 20 restaurants located in Arkansas, Texas and Missouri. Purchases by
this franchisee made up 7% of the Company's food and supply sales in fiscal
1997. Royalties and license fees from this franchisee made up 4% of the
Company's franchise revenues in fiscal 1997. 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.
The Company believes the above transactions were at the same prices and on the
same terms available to non-related third parties.
NOTE K - 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.
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. Under this program, the Company
purchased 8,149 shares at a total cost of $42,782.
For the period of September 1995 through June 1997, the Company purchased
1,100,700 shares of its own Common Stock from time to time on the open market
at a total cost of $5 million.
The purchases of common shares described above were funded from working
capital, and reduced the Company's outstanding shares by approximately 12%.
The Company plans to retire the shares at the earliest opportunity.
NOTE L - EARNINGS PER SHARE:
In February 1997, the Financial Accounting Standards Board issued SFAS 128,
"Earnings per Share", which is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods. Effective
December 28, 1997, the Company will adopt SFAS 128, which establishes
standards for computing and presenting earnings per share (EPS). The
statement requires dual presentation of basic and diluted EPS on the face of
the income statement for entities with complex capital structures and requires
a reconciliation of the numerator and denominator of the basic EPS
computation, to the numerator and denominator of the diluted EPS calculation.
Basic EPS excludes the effect of potentially dilutive securities while diluted
EPS reflects the potential dilution that would occur if securities or other
contracts to issue common stock were exercised, converted into or resulted in
the issuance of common stock that then shared in the earnings of the entity.
The pro forma EPS amounts shown below have been calculated assuming the
Company had already adopted the provisions of this statement.
Year Ended
----------------------------------------
June 29, June 30, June 25,
1997 1996 1995
------------ ------------ ------------
Basic EPS $ .35 $ .30 $ .24
Diluted EPS .33 .28 .22
NOTE M - SUBSEQUENT EVENTS (UNAUDITED):
In July 1997, the Company repurchased the area development rights for the
majority of Tennessee and Kentucky, for a cash price of $986,000. Restaurants
operating or developed in the repurchased territory will now pay all royalties
and franchise fees directly to Pizza Inn, Inc.
In August 1997, the Company's Board of Directors declared a quarterly dividend
of $0.06 per share on the Company's common stock, payable October 24, 1997 to
shareholders of record on October 10, 1997.
NOTE N - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
The following summarizes the unaudited quarterly results of operations for the
fiscal years ended June 29, 1997 and June 30, 1996 (in thousands, except per
share amounts):
Quarter Ended
----------------------------------------------------
September 29, December 29, March 30, June 29,
1996 1996 1997 1997
-------------- ------------- ---------- ---------
FISCAL YEAR 1997
Revenues $ 17,734 $ 17,559 $ 16,503 $ 17,327
Gross Profit 2,140 2,077 2,159 2,133
Net Income 996 1,165 1,076 1,291
Primary earnings per share 0.07 0.08 0.08 0.10
on net income
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
Gross Profit 1,629 1,758 1,788 2,309
Net Income 793 975 920 1,220
Primary earnings per share 0.06 0.07 0.07 0.09
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 29, 1997
Allowance for doubtful $ 963 $ 110 $ - $ (48) $ 1,121
accounts and notes
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
(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 1997 (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 8-K
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 and Wells Fargo (Texas),
N.A. dated August 28, 1997.
10.2 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).
10.3 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).
10.4 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).*
10.5 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).*
10.6 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).*
10.7 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).*
10.8 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 1997.
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 26, 1997 By: /s/ Elizabeth D. Reimer
Elizabeth D. Reimer
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 26, 1997
Steve A. Ungerman
Director and Chairman of the Board
/s/C. Jeffrey Rogers September 26, 1997
C. Jeffrey Rogers
Director, Vice Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
/s/Don G. Navarro September 26, 1997
Don G. Navarro
Director
/s/Ramon D. Phillips September 26, 1997
Ramon D. Phillips
Director
/s/F. Jay Taylor September 26, 1997
F. Jay Taylor
Director
/s/Bobby L. Clairday September 26, 1997
Bobby L. Clairday
Director
/s/Ronald W. Parker September 26, 1997
Ronald W. Parker
Director, Executive Vice President and
Chief Operating Officer
(Principal Financial Officer)