7
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 24, 2001.
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 75254
(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 10, 2001, there were 10,107,788 shares of the registrant's
Common Stock outstanding, and the aggregate Market value of registrant's Common
Stock held by non-affiliates was $20,720,965, based upon the average of the bid
and ask prices.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X} No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[X}
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement, to be filed
pursuant to Section 14(a) of the Securities Exchange Act of 1934 in connection
with the registrant's annual meeting of shareholders in December 2001, 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 10, 2001, the Pizza Inn system consisted of 447 units,
including two Company operated units, a third which the Company is currently in
the process of relocating, and 444 franchised units. The Company-operated units
are used for product testing and franchisee training, in addition to serving
customers. The domestic units are comprised of 242 full service units, 44
delivery/carry-out units, 12 self serve buffet units, and 88 Express units. The
international units are comprised of 20 full service units, 28
delivery/carry-out units and 13 Express units. Pizza Inn units are currently
located in 20 states and 12 foreign countries. Domestic units are located
predominantly in the southern half of the United States, with Texas, North
Carolina and Arkansas accounting for approximately 31%, 17% and 9% of the
total, respectively. Norco 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 3,000 and 5,000 square feet
in size and seat 130 to 185 customers. The interior decor is designed to
promote a contemporary, family style atmosphere.
Restaurants that offer delivery and carry-out service only ("Delcos") are
growing in popularity and number. Delcos typically are located in shopping
centers or other in-line arrangements, occupy approximately 1,000 square feet,
and offer limited or no seating. Delcos generally offer the same menu as
Full-Service units, except for buffet. The decor of these units is designed to
be bright and highly visible, featuring neon, lighted displays and awnings.
The Self Serve Buffet restaurant ("Self Serve") offers items from the full
dine-in menu, and features delivery and carryout and a self-serve buffet and
beverage station. The Self Serve can be free-standing or located in a strip
center. Slightly larger than a Delco, it ranges in size from 2,400 to 2,600
square feet and seats between 60 to 70 customers.
A fourth version, Pizza Inn Express Serve units ("Express"), are typically
located in a convenience store, college campus, airport terminal or other
commercial facility. They have limited or no seating and offer quick carry-out
service of a limited menu of pizza and other foods and beverages. An Express
unit typically occupies approximately 300 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, thus
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, $15,000 for a Self Serve,
$7,500 for a Delco and $3,500 for an Express unit, (ii) an initial franchise
term of 20 years for a Full Service or Self Serve 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,
Self Serve or Delco and 6% of gross sales for an Express unit and (v) required
advertising expenditures of at least 5% of gross sales for a Full Service, Self
Serve and 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.
As with developers, a master licensee for a foreign country pays a
negotiated fee to purchase the right to develop and operate Pizza Inn
restaurants within a defined foreign territory, typically for a term of 20 years
plus renewal options for 10 years. The master licensee agrees to a new store
development schedule and the Company trains the master licensee to monitor and
assist franchisees in their territory with local franchise service and quality
control, with support from the Company. In return, the master licensee
typically retains half the franchise fees and approximately half the royalties
on all units within the territory during the term of the agreement. While all
Pizza Inn restaurants opened in an area of a developer's territory enter into
franchise agreements with the Company, a master licensee may open restaurants
owned and operated by the master licensee, or they may open sub-franchised
restaurants owned and operated by third parties through agreement with the
master licensee.
FOOD AND SUPPLY DISTRIBUTION
The Company's Norco division offers substantially all of the food and paper
products, equipment and other supplies necessary to operate a Pizza Inn
restaurant. Franchisees are required to purchase from Norco certain food
products which are proprietary to the Pizza Inn system. In addition, the vast
majority of franchisees also purchase other supplies from Norco.
Norco operates its central distribution facility six days per week, and it
delivers to all domestic units on a weekly basis, utilizing a fleet of
refrigerated tractor-trailer units operated by Company drivers and independent
owner-operators. Norco also ships products and equipment to its international
franchisees. The food, equipment, and other supplies distributed by Norco are
generally available from several qualified sources, and the Company is not
dependent upon any one supplier or limited group of suppliers. The Company
contracts with established food processors for the production of its proprietary
products. The Company does not anticipate any difficulty in obtaining supplies
in the foreseeable future.
ADVERTISING
The Pizza Inn Advertising Plan ("PIAP") is a non-profit corporation that
creates and produces print advertisements, television and radio commercials, and
in-store promotional materials along with related advertising services for use
by its members. Each operator of a Full Service, Self Serve or Delco unit,
including the Company, is entitled to membership in PIAP. Nearly all of the
Company's existing franchise agreements for Full Service, Self Serve 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 10, 2001, the Company-operated stores and
substantially all of its franchisees were members of PIAP. Operators of Express
units do not participate in PIAP; however, they contribute up to 1% of their
gross sales directly to the Company to help fund Express unit marketing
materials and similar expenditures. Express units may also voluntarily
contribute up to 2% of their gross sales to the Royalty Rebate Advertising
Program ("RRAP").
Groups of franchisees in some of the Pizza Inn system's market areas have
formed local advertising cooperatives. These cooperatives, which may be formed
voluntarily or may be required by the Company under the franchise agreements,
establish contributions to be made by their members and direct the expenditure
of these contributions on local media advertising using materials developed by
PIAP and the Company.
The Company and its franchisees conduct independent marketing efforts in
addition to their participation in PIAP and local cooperatives.
TRADEMARKS AND QUALITY CONTROL
The Company owns various trademarks, including the name "Pizza Inn", which
are used in connection with the restaurants and have been registered with the
United States Patent and Trademark Office. The duration of such trademarks is
unlimited, subject to continued use. In addition, the Company has obtained
trademark registrations in several foreign countries and has applied for
registration in others. The Company believes that it holds the necessary rights
for protection of the trademarks essential to its business.
The Company requires all units to satisfy certain quality standards
governing the products and services offered through use of the Company's
trademarks. The Company maintains a staff of field representatives, whose
primary responsibilities include periodic visits to provide advice in
operational and marketing activities and to evaluate and enforce compliance with
the Company's quality standards.
TRAINING
The Company offers numerous training programs for the benefit of
franchisees and their restaurant crew managers. The training programs, taught
by experienced Company employees, focus on food preparation, service, cost
control, sanitation, safety, local store marketing, personnel management, and
other aspects of restaurant operation. The training programs include group
classes, supervised work in Company operated units, and special field seminars.
Training programs are offered free of charge to franchisees, who pay their own
travel and lodging expenses. Restaurant managers train their staff through
on-the-job training, utilizing video tapes and printed materials produced by the
Company.
WORKING CAPITAL PRACTICES
The Company's Norco division maintains a sufficient inventory of food and
other consumable supplies which it distributes to Pizza Inn units typically on a
weekly basis. The Company's accounts receivable and notes receivable consist
primarily of receivables from food and supply sales, equipment sales, and
accrued franchise royalties.
GOVERNMENT REGULATION
The Company is subject to registration and disclosure requirements and
other restrictions under federal and state franchise laws. The Company's Norco
division is subject to various federal and state regulations, including those
regarding transportation of goods, food labeling, safety, sanitation,
distribution, and vehicle licensing.
The development and operation of Pizza Inn units are subject to federal,
state and local regulations, including those pertaining to zoning, public
health, and alcoholic beverages, where applicable. Many restaurant employees
are paid at rates related to the minimum wage established by federal and state
law. Increases in the federal minimum wage can result in higher labor costs for
the Company operated units, as well as its franchisees, which may be partially
offset by price increases or operational and equipment efficiencies.
EMPLOYEES
On September 10, 2001, the Company had approximately 211 employees,
including 61 in the Company's corporate office, 80 at its Norco division, and 19
full-time and 51 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, attractiveness and cleanliness of their restaurant facilities.
Because of the importance of brand awareness, the Company has increased its
development emphasis on individual market penetration and local cooperative
advertising by franchisees.
The Company's Norco division competes with both national and local
distributors of food, equipment and other restaurant supplies. The distribution
industry is very competitive. The Company believes that the principal
competitive factors in the distribution industry are product quality, customer
service and price. Norco is the sole authorized supplier of certain proprietary
products which are required to be used by all Pizza Inn units.
In the sale of franchises, the Company competes with franchisors of other
restaurant concepts and franchisors of a variety of other products and services.
The Company believes that the principal competitive factors affecting the sale
of franchises are product quality and value, consumer acceptance, franchisor
experience and support, and the quality relationship maintained between the
franchisor and its franchisees.
SEASONALITY
Historically, sales at Pizza Inn restaurants have been somewhat higher
during the warmer months and somewhat lower during the colder months of the
year. The Company believes that the increasing popularity of delivery service
and expansion into the high impulse purchase markets of Express units should
lessen the seasonal impact on future chainwide sales.
ITEM 2 - PROPERTIES
The Company leases 20,677 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 April 2003 and October 2001,
respectively. The Company also leases 2,736 square feet in Addison, Texas for
its training facility and test kitchen with a term expiring in December 2001.
The Company's current lease for its distribution facility expires in
October 2001, at which time the Company plans to relocate Norco operations to
its new distribution facility as described below.
In December 2000 the Company purchased approximately 11 acres of land in
The Colony, Texas for the relocation of its corporate office, training center
and distribution facility. Construction is underway on a 100,000 square foot
distribution facility and a 40,000 square foot facility to house the Company's
corporate office and training center. Occupancy is scheduled for November 2001.
Each of the Company operated Pizza Inn restaurants (all located in Texas)
are leased. The Company operated units range in size from approximately 2,500
to 3,600 square feet and incur annual minimum rent between $12.50 and $20.00 per
square foot. Some 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. The leases are renewable and will expire in 2005 and
2007.
ITEM 3 - LEGAL PROCEEDINGS
Certain 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 2001.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On September 10, 2001, there were 2,446 stockholders of record of the
Company's Common Stock.
The Company's Common Stock is listed on the Small-Cap Market of the
National Association of Securities Dealers Automated Quotation ("NASDAQ") system
under the symbol "PZZI". The following table shows the highest and lowest actual
trade executed price per share of the Common Stock during each quarterly period
within the two most recent fiscal years, as reported by the National Association
of Securities Dealers. Such prices reflect inter-dealer quotations, without
adjustment for any retail markup, markdown or commission.
Actual Trade
Executed Price
High Low
-------------- -------
2001
First Quarter Ended 9/24/2000 . 4 2 15/16
Second Quarter Ended 12/24/2000 3 3/8 1 5/8
Third Quarter Ended 3/25/2001 . 2 7/8 1 7/16
Fourth Quarter Ended 6/24/2001. 2 1/4 1 5/8
2000
First Quarter Ended 9/26/1999 . 4 2 5/16
Second Quarter Ended 12/26/1999 4 1/4 3 1/4
Third Quarter Ended 3/26/2000 . 4 1/8 2 7/8
Fourth Quarter Ended 6/25/2000. 3 3/4 3 1/8
During the first two quarters of fiscal 2001 the Board of Directors of the
Company declared quarterly cash dividends of $0.06 per share. For the year
ended June 24, 2001 cash dividends paid were approximately $1.2 million or $0.12
per share. 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 24 2001, and should
be read in conjunction with the financial statements and schedules in Item 8 of
this report. Earnings per share data for all periods presented have been
restated to reflect the computation of earnings per share in accordance with
SFAS 128.
Year Ended
------------------------------------------------------
June 24, June 25, June 27, June 28, June 29,
2001 2000 1999 1998 1997
----------- --------- ---------- --------- ----------
(In thousands, except per share amounts)
SELECTED INCOME STATEMENT DATA:
Total revenues . . . . . . . . . . . . $ 63,827 $ 66,304 $ 66,294 $ 68,640 $ 69,123
Income before taxes. . . . . . . . . . 3,921 4,389 4,096 7,023 6,860
Net income . . . . . . . . . . . . . . 2,480 2,884 2,752 4,880 4,528
Basic earnings per common share. . . . 0.23 .25 .24 .38 .35
Diluted earnings per common share. . . 0.23 .25 .23 .36 .33
Dividends declared per common share. . 0.12 .24 (2) .18(1) .24 -
SELECTED BALANCE SHEET DATA:
Total assets . . . . . . . . . . . . . 19,872 17,691 18,586 21,773 24,310
Long-term debt and
capital lease obligations . . . . 11,161 10,655 6,944 5,454 7,789
(1) On June 28, 1999 the Company's Board of Directors declared a quarterly dividend of $.06 per share
on the Company's common stock, payable to shareholders of record on July 9, 1999.
(2) On June 26, 2000 the Company's Board of Directors declared a quarterly dividend of $.06 per share
on the Company's common stock, payable to shareholders of record on July 7, 2000.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL 2001 COMPARED TO FISCAL 2000
Diluted earnings per share decreased 8% to $0.23 from $0.25 in the
prior year. Net income decreased 14% to $2,480,000 from $2,884,000 in the prior
year, on revenues of $63.8 million in the current year and $66.3 million in the
prior year. Pre-tax income decreased 11% to $3,921,000 from $4,389,000. 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 $2.8 million at June 24, 2001, reduce the income
taxes paid by the Company from the 34% statutory rate to the minimum tax rate of
approximately 2%.
Food and supply sales by the Company's distribution division decreased 4%
to $55.7 million from $58.0 million in the prior year as a result of fewer
stores, softer retail sales, and slightly lower cheese prices. International
food and supply sales decreased $554,000 from the prior year due to lower sales
and store closings caused primarily by poor economic and social conditions in
international markets. Domestic and international equipment sales decreased
12.6%, or $213,000 from the prior year due to fewer store openings.
Franchise revenue, which includes royalties, license fees and income from
area development and foreign master license (collectively, "Territory") sales,
decreased 6% or $326,000 in fiscal 2001. Royalty revenue decreased 5% or
$294,000 compared to last year, mainly resulting from a decrease in domestic and
international chainwide sales.
Restaurant sales, which consist of revenue generated by Company-owned
stores, for the year decreased less than 1% or $6,000 compared to the same
period of the prior year.
Other income consists of primarily interest income and non-recurring
revenue items. Other income increased 69% or $153,000 due to higher vendor
incentives in the current year, the sale of promotional items, and increased
interest income.
Cost of sales decreased 4% to $52.8 million from $55.3 million in the prior
year. As a percentage of sales, cost of sales decreased to 90.9% from 91.5%
compared to the prior year. Cost of sales decreased primarily due to lower food
and supply sales as noted above, which was partially offset by higher vehicle
costs, depreciation and amortization, and rent expense.
Franchise expenses include selling, general and administrative expenses
(primarily wages and travel expenses) directly related to the sale and service
of franchises and Territories. These costs increased 9% or $185,000 compared to
last year. This was primarily due to lower marketing expenses in the prior
year.
General and administrative expenses increased 5% or $188,000 in fiscal
2001. This is a result of computer system modifications that were capitalized
in the prior year, and lower legal fees in the prior year.
Interest expense increased 11% or $86,000 in the current year. Lower
interest rates and capitalized interest on funds used in construction of the new
corporate office and distribution facility were partially offset by higher debt
levels in the current year.
During fiscal 2001, the Company opened for business a total of 35 new Pizza
Inn franchise units, including 27 domestic and 8 international units.
Domestically, 58 units, including 25 Express units, were closed by franchisees
or terminated by the Company typically because of unsatisfactory standards of
operation or performance. Similarly 23 international units were closed, of
which 11 were kiosk units.
FISCAL 2000 COMPARED TO FISCAL 1999
Diluted earnings per share increased 9% to $0.25 from $0.23 in the
prior year. Net income increased 5% to $2,884,000 from $2,752,000 in the prior
year, on revenues of $66.3 million in each year. Pre-tax income increased 7% to
$4,389,000 from $4,096,000. 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 $6.6 million at June 25,
2000, reduce the income taxes paid by the Company from the 34% statutory rate to
the minimum tax rate of approximately 2%.
Food and supply sales of $58 million for the year decreased slightly as
compared to the same period last year due to higher overall cheese prices in the
prior year. Excluding the change in cheese prices, food and supply sales
increased approximately $2,000,000 reflecting greater chainwide sales.
Franchise revenue, which includes royalties, license fees and income from
area development and foreign master license (collectively, "Territory") sales,
increased 1% or $80,000 in fiscal 2000. Royalty revenue increased $191,000 or 4%
compared to last year, mainly resulting from an increase in domestic chainwide
sales. These increases were offset by $106,000 less of area development
territory sales in fiscal 2000.
Restaurant sales, which consist of revenue generated by Company-owned
stores, for the year increased 3% or $65,000 compared to the same period of the
prior year. Comparable store sales growth at Company-owned stores increased 5%
for the year, which offset the closing of one Delco unit in August 1998.
Other income consists of primarily interest income and non-recurring
revenue items. Other income decreased 22% or $64,000 due to higher vendor
incentives in the prior year, partially offset by increased interest income in
the current year.
Cost of sales decreased slightly compared to the same period last year. As
a percentage of sales, cost of sales remained the same for both years at 91.5%.
Lower cheese prices in fiscal 2000 were offset by higher chainwide sales, as
noted above. These higher chainwide sales required additional distribution
miles resulting in higher fuel costs, compounded even further by higher fuel
prices.
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 decreased 27% or $738,000 compared
to last year. This was primarily due to lower marketing expenses and an
increase in allocation of corporate services expenses to the distribution center
resulting in a corresponding decrease in franchise expenses.
General and administrative expenses increased 7% or $251,000 in fiscal
2000. This is a result of higher insurance costs, higher franchise and property
taxes, and payroll costs that were capitalized as software development costs as
required by current accounting pronouncements in the prior year. These
increases were partially offset by lower legal and contract services expenses.
Interest expense increased 43% or $226,000 in the current year as a result
of higher debt levels, capital lease interest expense on new computer equipment,
and higher interest rates.
During fiscal 2000, the Company opened for business a total of 42 new Pizza
Inn franchise units, including 26 domestic and 16 international units.
Domestically, 27 units were closed by franchisees or terminated by the Company
typically because of unsatisfactory standards of operation or performance.
Similarly, 34 Kmart express units and 5 international units were closed.
FINANCIAL CONDITION
Cash and cash equivalents increased $56,000 in fiscal 2001. The Company
used the cash flow generated from operations plus the proceeds from increased
net bank borrowings of $1.1 million to fund $4.7 million of capital expenditures
consisting primarily of land and construction costs for the new corporate office
and distribution center, and $1.3 million to reacquire 541,122 shares of its own
common stock at prevailing prices on the open market. The Company also used $1.2
million to pay cash dividends on its common stock in fiscal 2001.
At June 24, 2001 the net deferred tax asset balance was $3.1 million. This
balance includes $2.8 million of net operating loss carryforwards and other
temporary differences. At June 24, 2001, the Company has a valuation allowance
of $38,000 for credit carryforwards that may expire before they can be utilized.
The Company believes that it is more likely than not that these credits will not
be realized.
Management believes that future operations will generate sufficient taxable
income, along with the reversal of temporary differences, to fully realize the
deferred tax asset, net of a valuation allowance of $38,000 related to the
potential expiration of certain tax credit carryforwards. Future taxable income
at the same level as fiscal 2001 would be sufficient for full realization of the
net operating loss carryforwards included in the net tax asset. Additionally,
management believes that taxable income based on recent growth trends of the
Company's franchise base 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 $2.8
million and expire in 2005 and 2006) to reduce its federal tax liability,
current accounting standards dictate that this benefit can not be reflected in
the Company's results of operations. In accordance with SFAS 109, the
carryforwards, when utilized, are reflected as a reduction of the deferred tax
asset rather than a reduction of income tax expense. This has caused the
Company to reflect an amount for federal income tax expense on its statements of
operations at an effective corporate rate of 37%, 34%, and 32% for fiscal years
2001, 2000 and 1999, respectively. However, the actual amount of taxes paid at
the alternative minimum tax rate of approximately 2% is significantly less than
the corporate rate reflected on the Company's statement of operations.
Historically, the differences between pre-tax earnings for financial reporting
purposes and taxable income for tax purposes have consisted of temporary
differences arising from the timing of depreciation, deductions for accrued
expenses and deferred revenues, as well as permanent differences as a result of
the exercise of stock options deducted for income tax purposes but not for
financial reporting purposes.
Under the Internal Revenue Code, the utilization of net operating losses
and credit carryforwards could be limited if certain changes in ownership of the
Company's common stock were to occur.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations totaled $6,420,000 in fiscal 2001 and was used
primarily, in conjunction with additional borrowings, to fund capital
expenditures, to reacquire the Company's common stock, and to pay dividends on
its common stock.
The Company increased its bank borrowings by $1.1 million to $12.2 million
at June 24, 2001 from $11.1 million at June 25, 2000.
During fiscal 2001 the Company purchased 541,122 shares of its own common
stock on the open market for a total price of $1.3 million. This brings the
total number of shares in treasury to 4,635,481 as of June 24, 2001.
Capital expenditures of $4,713,000 during fiscal 2001 consist primarily of
land and construction costs for the new corporate office and distribution
center.
The Company's future requirements for cash relate primarily to capital
expenditures, including the completion of the new corporate office and
distribution center, the periodic purchase of its own common stock, and
repayment of debt. The Company currently considers its common stock to be
undervalued and plans to continue purchasing its own shares on the open market
during fiscal year 2002. For the period June 25, 2001 through September 10, 2001
the Company has purchased 212,000 shares for a total amount of $467,762. In
addition to the the corporate office and distribution center, anticipated
capital expenditures include information system upgrades and miscellaneous
equipment. During fiscal 2001, the Board of Directors of the Company paid cash
dividends on the Company's common stock of approximately $1.2 million or $0.12
per share.
The Company entered into an agreement effective December 28, 2000 with its
current lender to provide up to $8.125 million of financing for the construction
of the Company's new headquarters, training center and distribution facility.
The construction loan will convert to a term loan upon completion of the
construction phase and the then unpaid principal balance will mature on December
28, 2007. The term loan will amortize over a term of twenty years, with
principal and interest payments due monthly. Interest is provided for at a rate
equal to prime less an interest rate margin of .50% prior to loan conversion and
.75% following loan conversion, or, at the Company's option, to the Eurodollar
rate plus 1.5%. The Company, to fulfill bank requirements, has caused the
outstanding principal amount to be subject to a fixed interest rate after the
conversion date. As of June 24, 2001, the Company had borrowed $916,000 for the
construction in progress of its new headquarters.
The Company's primary sources of cash are sales from the distribution
division, royalties, license fees and Territory sales. Existing area
development and master license agreements contain development commitments that
should result in future chainwide growth. Related growth in distribution sales
and royalties are expected to provide adequate working capital to supply the
needs described above. The signing of any new area development or master
license agreements, which cannot be predicted with certainty, would also provide
significant infusions of cash.
MARKET RISK
The Company has market risk exposure arising from changes in interest
rates. The Company's earnings are affected by changes in short-term interest
rates as a result of borrowings under its credit facilities which bear interest
based on floating rates.
At June 24, 2001 the Company had approximately $12.2 million of variable
rate debt obligations outstanding with a weighted average interest rate of
7.19%. A hypothetical 10% change in the effective interest rate for these
borrowings, assuming debt levels at June 24, 2001 would change interest expense
by approximately $88,000.
ECONOMIC FACTORS
The costs of operations, including labor, supplies, utilities, financing
and rental costs, to the Company and its franchisees, can be significantly
affected by inflation and other economic factors. Increases in any such costs
would result in higher costs to the Company and its franchisees, which may be
partially offset by price increases and increased efficiencies in operations.
The Company's revenues are also affected by local economic trends where units
are concentrated. The Company intends to pursue franchise development in new
markets in the United States and other countries, which would mitigate the
impact of local economic factors.
FORWARD-LOOKING STATEMENT
This report contains certain forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) relating to the
Company that are based on the beliefs of the management of the Company, as well
as assumptions and estimates made by and information currently available to the
Company's management. When used in the report, the words "anticipate,"
"believe," "estimate," "expect," "intend" and other similar expressions, as they
relate to the Company or the Company's management, identify forward-looking
statements. Such statements reflect the current views of the Company with
respect to future events and are subject to certain risks, uncertainties and
assumptions relating to the operations and results of operations of the Company
as well as its customers and suppliers, including as a result of competitive
factors and pricing pressures, shifts in market demand, general economic
conditions and other factors including but not limited to, changes in demand for
Pizza Inn products or franchises, the impact of competitors' actions, changes in
prices or supplies of food ingredients, and restrictions on international trade
and business. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions or estimates prove incorrect, actual results
may vary materially from those described herein as anticipated, believed,
estimated, expected or intended.
PIZZA INN, INC.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Schedules:
FINANCIAL STATEMENTS PAGE NO.
Report of Independent Accountants. 14
Consolidated Statements of Operations for the years ended
June 24, 2001, June 25, 2000, and June 27, 1999. 15
Consolidated Statements of Comprehensive Income for the years ended
June 24, 2001, June 25, 2000, and June 27, 1999. 15
Consolidated Balance Sheets at June 24, 2001 and June 25, 2000 16
Consolidated Statements of Shareholders' Equity for the years
ended June 24, 2001, June 25, 2000, and June 27, 1999. 17
Consolidated Statements of Cash Flows for the years ended June 24, 2001,
June 25, 2000, and June 27, 1999. 18
Notes to Consolidated Financial Statements. 20
FINANCIAL STATEMENT SCHEDULES
Schedule II - Consolidated Valuation and Qualifying Accounts 33
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. and its subsidiaries at June 24, 2001 and June 25, 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended June 24, 2001, in conformity with accounting principles
generally accepted in the United States of America. In addition, in our
opinion, the financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and the financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and the financial statement schedule based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
September 6, 2001
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED
-----------------------
JUNE 24, JUNE 25, JUNE 27,
REVENUES: 2001 2000 1999
----------------------- ---------------------- -----------------------
Food and supply sales. . . . . . . . . . . . . $ 55,732 $ 58,030 $ 58,101
Franchise revenue. . . . . . . . . . . . . . . 5,373 5,699 5,619
Restaurant sales . . . . . . . . . . . . . . . 2,346 2,352 2,287
Other income . . . . . . . . . . . . . . . . . 376 223 287
----------------------- ---------------------- -----------------------
63,827 66,304 66,294
----------------------- ---------------------- -----------------------
COSTS AND EXPENSES:
Cost of sales. . . . . . . . . . . . . . . . . 52,802 55,255 55,265
Franchise expenses . . . . . . . . . . . . . . 2,188 2,003 2,741
General and administrative expenses. . . . . . 3,870 3,682 3,431
Provision for bad debt . . . . . . . . . . . . 210 225 237
Interest expense . . . . . . . . . . . . . . . 836 750 524
----------------------- ---------------------- -----------------------
59,906 61,915 62,198
----------------------- ---------------------- -----------------------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . 3,921 4,389 4,096
Provision for income taxes . . . . . . . . . . 1,441 1,505 1,344
----------------------- ---------------------- -----------------------
NET INCOME . . . . . . . . . . . . . . . . . . . $ 2,480 $ 2,884 $ 2,752
======================= ====================== =======================
BASIC EARNINGS PER COMMON SHARE. . . . . . . . . 0.23 0.25 0.24
======================= ====================== =======================
DILUTED EARNINGS PER COMMON SHARE. . . . . . . . 0.23 0.25 0.23
======================= ====================== =======================
DIVIDENDS DECLARED PER COMMON SHARE. . . . . . . 0.12 0.24 0.18
======================= ====================== =======================
WEIGHTED AVERAGE COMMON SHARES . . . . . . . . . 10,635 11,316 11,678
======================= ====================== =======================
WEIGHTED AVERAGE COMMON AND
POTENTIAL DILUTIVE COMMON SHARES . . . . . . . 10,639 11,441 12,154
======================= ====================== =======================
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
YEAR ENDED
------------------------------------------------
JUNE 24, . . . . . . . JUNE 25, JUNE 27,
2001 2000 1999
----------------------- ---------------------- -----------------------
Net Income . . . . . . . . . . . . . . . . . $ 2,480 $ 2,884 $ 2,752
Interest rate swap loss (net of tax of $38). (73) - -
---------------------- --------------------- ----------------------
Comprehensive Income . . . . . . . . . . . . $ 2,407 $ 2,884 $ 2,752
======================= ====================== =======================
See accompanying Notes to Consolidated Financial Statements.
PIZZA INN, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 24, JUNE 25,
ASSETS 2001 2000
--------------------- ---------------------
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $ 540 $ 484
Accounts receivable, less allowance for doubtful
accounts of $729 and $776, respectively . . . . . . . . . . . . 4,839 4,681
Notes receivable, current portion, less allowance
for doubtful accounts of $263 and $260, respectively. . . . . . 958 810
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,063 2,910
Deferred taxes, net . . . . . . . . . . . . . . . . . . . . . . . 1,285 1,117
Prepaid expenses and other. . . . . . . . . . . . . . . . . . . . 578 566
--------------------- ---------------------
Total current assets. . . . . . . . . . . . . . . . . . . . . 10,263 10,568
Property, plant and equipment, net. . . . . . . . . . . . . . . . . 6,594 1,650
Property under capital leases, net. . . . . . . . . . . . . . . . . 576 1,165
Deferred taxes, net . . . . . . . . . . . . . . . . . . . . . . . . 1,897 3,312
Long-term notes receivable, less
allowance for doubtful accounts of $9 and $66, respectively . . . 9 262
Deposits and other. . . . . . . . . . . . . . . . . . . . . . . . . 533 734
--------------------- ---------------------
$ 19,872 $ 17,691
===================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade. . . . . . . . . . . . . . . . . . . . . $ 3,245 $ 2,251
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . 2,000 1,797
Current portion of long-term debt . . . . . . . . . . . . . . . . 1,250 1,250
Current portion of capital lease obligations. . . . . . . . . . . 486 534
--------------------- ---------------------
Total current liabilities . . . . . . . . . . . . . . . . . . . 6,981 5,832
LONG-TERM LIABILITIES
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . 10,934 9,842
Long-term capital lease obligations . . . . . . . . . . . . . . . 227 813
Other long-term liabilities . . . . . . . . . . . . . . . . . . . 865 715
--------------------- ---------------------
19,007 17,202
--------------------- ---------------------
COMMITMENTS AND CONTINGENCIES (See Note I)
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value; authorized 26,000,000
shares; issued 14,955,119 and 14,954,789 shares, respectively;
outstanding 10,319,638 and 10,645,380 shares, respectively. . . 150 150
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . 7,823 7,708
Loans to officers . . . . . . . . . . . . . . . . . . . . . . . . (2,325) (2,250)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . 14,201 13,163
Accumulated other comprehensive loss. . . . . . . . . . . . . . . (73) -
Treasury stock at cost
Shares in treasury: 4,635,481 and 4,309,409, respectively . . . (18,911) (18,282)
--------------------- ---------------------
Total shareholders' equity. . . . . . . . . . . . . . . . . . . 865 489
--------------------- ---------------------
$ 19,872 $ 17,691
===================== =====================
See accompanying Notes to Consolidated Financial Statements.
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
ACCUM.
ADDITIONAL OTHER TREASURY
COMMON STOCK PAID-IN LOANS TO RETAINED COMP. STOCK
SHARES AMOUNT CAPITAL OFFICERS EARNINGS LOSS AT COST TOTAL
------------- -------- --------- ---------- ---------- ------- --------- --------
BALANCE, JUNE 28, 1998. . . . . 12,528 $ 149 $ 7,036 $ - $ 13,715 $ - $ (9,983) $10,917
Stock options exercised . . . . 17 - 52 - - - - 52
Tax benefits associated
with stock options. . . . . - - 233 - - - - 233
Dividends paid. . . . . . . . . - - - - (2,092) - - (2,092)
Acquisition of treasury
stock (see Note K) . . . . (1,137) - - - - - (5,803) (5,803)
Net income. . . . . . . . . . . - - - - 2,752 - - 2,752
------------- -------- --------- ---------- ---------- ------- --------- --------
BALANCE, JUNE 27, 1999. . . . . 11,408 $ 149 $ 7,321 $ - $ 14,375 $ - $(15,786) $ 6,059
------------- -------- --------- ---------- ---------- ------- --------- --------
Stock options exercised . . . . 47 1 83 - (1) - 61 144
Loans to officers for exercise
of stock options . . . . . 900 - - (2,250) (1,296) - 3,546 -
Tax benefits associated
with stock options. . . . . - 303 - - - - 303
Employee incentive options. . . - - 1 - - - - 1
Dividends paid. . . . . . . . . - - - - (2,799) - - (2,799)
Acquisition of treasury
stock (see Note K) . . . . (1,710) - - - - - (6,103) (6,103)
Net income. . . . . . . . . . . - - - - 2,884 - - 2,884
------------- -------- --------- ---------- ---------- ------- --------- --------
BALANCE, JUNE 25, 2000. . . . . 10,645 $ 150 $ 7,708 $ (2,250) $ 13,163 $ - $(18,282) $ 489
------------- -------- --------- ---------- ---------- ------- --------- --------
Stock options exercised . . . . 215 - 37 - (199) - 700 538
Loans to officers for
exercise of stock options. - - - (240) - - - (240)
Principal repayment of loans
by officers . . . . . . . . 165 165
Tax benefits associated
with stock options. . . . . - - 77 - - - - 77
Employee incentive options. . . 1 - 1 - - - - 1
Dividends paid. . . . . . . . . - - - - (1,243) - - (1,243)
Acquisition of treasury
stock (see Note K) . . . . (541) - - - - - (1,329) (1,329)
Interest rate swap loss . . . . -
(net of tax $38) . . . . . - - - - - (73) - (73)
Net income. . . . . . . . . . . - - - - 2,480 - - 2,480
------------- -------- --------- ---------- ---------- ------- --------- --------
BALANCE, JUNE 24, 2001. . . . . 10,320 $ 150 $ 7,823 $ (2,325) $ 14,201 $ (73) $(18,911) $ 865
============= ======== ========= ========== ========== ======= ========= ========
See accompanying Notes to Consolidated Financial Statements.
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED
----------------------
JUNE 24, JUNE 25, JUNE 27,
2001 2000 1999
---------------------- --------------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 2,480 $ 2,884 $ 2,752
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . 1,343 1,210 871
Provision for bad debt . . . . . . . . . . . . . . . 210 225 237
Income from transfer of Pizza Inn stock (see Note K) - - (15)
Deferred income taxes. . . . . . . . . . . . . . . . 1,247 1,127 1,149
Changes in assets and liabilities:
Notes and accounts receivable. . . . . . . . . . . . (263) (196) 1,179
Inventories. . . . . . . . . . . . . . . . . . . . . 847 (517) (440)
Accounts payable - trade . . . . . . . . . . . . . . 102 (390) 627
Accrued expenses . . . . . . . . . . . . . . . . . . 102 111 (717)
Deferred franchise revenue . . . . . . . . . . . . . (10) (109) 5
Prepaid expenses and other . . . . . . . . . . . . . 362 233 193
---------------------- --------------------- ----------------------
CASH PROVIDED BY OPERATING ACTIVITIES. . . . . . . . 6,420 4,578 5,841
---------------------- --------------------- ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . . . . . . (4,713) (754) (640)
---------------------- --------------------- ----------------------
CASH USED FOR INVESTING ACTIVITIES . . . . . . . . . (4,713) (754) (640)
---------------------- --------------------- ----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term bank debt and
capital lease obligations. . . . . . . . . . . . . . (4,184) (5,391) (199)
Borrowings of long-term debt . . . . . . . . . . . . . 4,642 10,300 1,000
Dividends paid . . . . . . . . . . . . . . . . . . . . (1,243) (2,799) (2,092)
Proceeds from exercise of stock options. . . . . . . . 298 144 52
Officer loan payment . . . . . . . . . . . . . . . . . 165 - -
Purchases of treasury stock. . . . . . . . . . . . . . (1,329) (6,103) (5,788)
---------------------- --------------------- ----------------------
CASH USED FOR FINANCING ACTIVITIES . . . . . . . . . (1,651) (3,849) (7,027)
---------------------- --------------------- ----------------------
Net increase (decrease) in cash and cash equivalents . . . 56 (25) (1,826)
Cash and cash equivalents, beginning of period . . . . . . 484 509 2,335
---------------------- --------------------- ----------------------
Cash and cash equivalents, end of period . . . . . . . . . 540 $ 484 509
---------------------- --------------------- ----------------------
See accompanying Notes to Consolidated Financial Statements.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
(IN THOUSANDS)
YEAR ENDED
-----------
JUNE 24, JUNE 25, JUNE 27,
2001 2000 1999
----------- --------- ---------
CASH PAYMENTS FOR:
Interest . . . . . . . . . . . . . . . . . . . $ 876 $ 582 $ 551
Income taxes . . . . . . . . . . . . . . . . . 65 75 20
NONCASH FINANCING AND INVESTING
ACTIVITIES:
Capital lease obligations incurred . . . . . . $ - $ 158 $ 992
Stock issued to officers in exchange for loans 303 2,507 -
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 24, 2001 the Pizza Inn system consisted of 446 locations, including
three Company operated units and 443 franchised units. On June 24, 2001 the
Company was franchised in 20 states and 12 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%, 17%, and 9%,
respectively, of the total. Norco 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.
INVENTORIES:
Inventories, which consist primarily of food, paper products, supplies and
equipment located at the Company's distribution center, are stated at the lower
of FIFO (first-in, first-out) cost or market. Provision is made for obsolete
inventories.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, including property under capital leases, are
stated at cost less accumulated depreciation and amortization. Repairs and
maintenance are charged to operations as incurred; major renewals and
betterments are capitalized. Internal and external costs incurred to develop or
purchase internal-use computer software during the application development
stage, including upgrades and enhancements, are capitalized. Upon the sale or
disposition of a fixed asset, the asset and the related accumulation
depreciation or amortization are removed from the accounts and the gain or loss
is included in operations. The Company capitalizes interest on borrowings
during the active construction period of major capital projects. Capitalized
interest is added to the cost of the underlying asset and will be amortized over
the useful life of the asset. For the year ended June 24, 2001, interest of
$102,000 was capitalized in connection with the construction of the Company's
new headquarters, training center, and distribution facility.
Depreciation and amortization is computed on the straight-line method over the
useful lives of the assets or, in the case of leasehold improvements, over the
term of the lease, if shorter. The useful lives of the assets range from three
to eight years. It is the Company's policy to periodically review the net
realizable value of its long-lived assets when indicators exist through an
assessment of the estimated future cash flows related to such assets. In the
event that assets are found to be carried at amounts which are in excess of
estimated gross future cash flows, then the assets will be adjusted for
impairment to a level commensurate with a discounted cash flow analysis of the
underlying assets. The Company believes no impairment of long-lived assets
exists at June 24, 2001.
ACCOUNTS RECEIVABLE:
Accounts receivable consist primarily of receivables from food and supply sales
and franchise royalties. The Company records a provision for doubtful
receivables to allow for any amounts which may be unrecoverable.
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 Company records a provision for
doubtful receivables to allow for any amounts which may be unrecoverable.
INCOME TAXES:
Income taxes are accounted for using the asset and liability method pursuant to
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). Deferred taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement and carrying amounts
and the tax bases of existing assets and liabilities. The effect on deferred
taxes for a change in tax rates is recognized in income in the period that
includes the enactment date. In addition, the Company recognizes future tax
benefits to the extent that realization of such benefits are more likely than
not.
DISTRIBUTION DIVISION OPERATIONS:
The Company's Norco division sells food, supplies and equipment to franchisees
on trade accounts under terms common in the industry. Revenue from such sales
is recognized upon shipment. Norco sales are reflected under the caption "food
and supply sales." Shipping and handling costs billed to customers are
recognized as revenue.
FRANCHISE REVENUE:
Franchise revenue consists of income from license fees, royalties, and area
development and foreign master license (collectively, "Territory") sales.
License fees are recognized as income when there has been substantial
performance of the agreement by both the franchisee and the Company, generally
at the time the unit is opened. Royalties are recognized as income when earned.
For the years ended June 24, 2001, June 25, 2000 and June 27, 1999, 96%, 96% and
93%, 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 24, 2001, June 25, 2000 and June 27, 1999 were $0, $0 and $106,000,
respectively.
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of short-term investments, accounts and notes receivable,
and debt approximate fair value. The fair value of the Company's interest rate
swap is based on pricing models using current market rates.
USE OF MANAGEMENT ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and related revenues and
expenses and disclosure of gain and loss contingencies at the date of the
financial statements. Actual results could differ from those estimates.
FISCAL YEAR:
The Company's fiscal year ends on the last Sunday in June. Fiscal years ended
June 24, 2001, June 25, 2000 and June 27, 1999 all contained 52 weeks.
NEW PRONOUNCEMENTS:
The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities". The
Company entered into an interest rate swap, designated as a cash flow hedge, to
manage interest rate risk related to the financing of the construction of the
Company's new headquarters and to fulfill bank requirements. SFAS No. 133
requires that for cash flow hedges, which hedge the exposure to variable cash
flow of a forecasted transaction, the effective portion of the derivative's gain
or loss be initially reported as a component of other comprehensive income in
the equity section of the balance sheet and subsequently reclassified into
earnings when the forecasted transaction affects earnings. Any ineffective
portion of the derivative's gain or loss is reported in earnings immediately.
At June 24, 2001 there was no hedge ineffectiveness. The Company's expectation
is that the hedging relationship will be highly effective at achieving
offsetting changes in cash flows.
The Company has adopted Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue
Recognition in Financial Statements", which, among other guidance, clarifies
certain conditions to be met in order to recognize revenue. SAB 101 was to be
adopted no later than the fourth quarter of fiscal years beginning after
December 15, 1999. The adoption of SAB 101 has resulted in no material effect on
the Company's revenues recorded.
NOTE B - PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment and property under capital leases consist of the
following (in thousands):
JUNE 24, JUNE 25,
2001 2000
----------------------- ----------------------
Property, plant and equipment:
Equipment, furniture and fixtures $ 4,932 $ 4,522
Land. . . . . . . . . . . . . . . 1,984 -
Construction in progress. . . . . 3,279 -
Leasehold improvements. . . . . . 1,595 1,482
----------------------- ----------------------
11,790 6,004
Less: accumulated depreciation . (5,196) (4,354)
----------------------- ----------------------
6,594 1,650
======================= ======================
Property under capital leases:
Real Estate . . . . . . . . . . . $ 118 $ 118
Equipment . . . . . . . . . . . . 2,120 2,421
----------------------- ----------------------
2,238 2,539
Less: accumulated amortization . (1,662) (1,374)
----------------------- ----------------------
576 1,165
======================= ======================
Depreciation and amortization expense was $1,343,000, $1,210,000, and $871,000
for the years ended June 24, 2001, June 25, 2000, and June 27, 1999,
respectively.
NOTE C - ACCRUED EXPENSES:
Accrued expenses consist of the following (in thousands):
JUNE 24, JUNE 25,
2001 2000
--------------------- ---------------------
Compensation. . . . . . . . . . . $ 889 $ 1,018
Legal and other professional fees 197 100
Deferred franchise revenue. . . . 111 71
Other . . . . . . . . . . . . . . 803 608
--------------------- ---------------------
2,000 1,797
===================== =====================
NOTE D - LONG-TERM DEBT:
In August 1997, the Company signed an agreement (the "Loan Agreement") with its
current lender, Wells Fargo, to refinance its debt under a new revolving credit
facility. The revolving credit note is collateralized by essentially all of the
Company's assets. The Loan Agreement contains covenants which, among other
things, require the Company to satisfy certain financial ratios and restrict
additional debt.
In March 2000, the Company amended the agreement with its current lender to
extend the term of its existing $9.5 million revolving credit line through March
2002, to modify certain financial covenants, and to enter into a $5,000,000 term
note (described below). Amounts outstanding under the revolving credit line were
$7.7 million and $6.3 million at fiscal year end 2001 and 2000, respectively.
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. As of June 24, 2001, the Company was in compliance with
all of its debt covenants. A 0.375% to 0.5% annual commitment fee is payable on
any unused portion of the revolving credit line. For the years ending June 24,
2001 and June 25, 2000, the Company's interest rates were 5.25% and 7.625%,
respectively (using a Eurodollar rate basis).
The $5,000,000 term note had an outstanding balance of $3.5 million at June 24,
2001 and requires monthly principal payments of $104,000 with the balance
maturing on March 31, 2004. Interest on the term loan is also payable monthly.
Interest is provided for at a rate equal to prime less an interest rate margin
of 0.75%, or, at the Company's option, at the Eurodollar rate plus 1.5%. At
June 24, 2001, the Company's interest rate was 5.5 % (using a Eurodollar Rate
Basis).
The Company entered into an agreement effective December 28, 2000 with its
current lender to provide up to $8.125 million of financing for the construction
of the Company's new headquarters, training center and distribution facility.
The construction loan will convert to a term loan upon completion of the
construction phase and the then unpaid principal balance will mature on December
28, 2007. The term loan will amortize over a term of twenty years, with
principal and interest payments due monthly. Interest is provided for at a rate
equal to prime less an interest rate margin of 0.50% prior to loan conversion
and 0.75% following loan conversion, or, at the Company's option, to the
Eurodollar rate plus 1.5%. The Company, to fulfill bank requirements, has
caused the outstanding principal amount to be subject to a fixed interest rate
after the conversion date. As of June 24, 2001, the Company had borrowed
$916,000 for the construction in progress of its new headquarters.
In accordance with the agreement at February 27, 2001, the Company entered into
an interest rate swap on that date, designated as a cash flow hedge, to manage
interest rate risk relating to the financing of the construction of the
Company's new headquarters and to fulfill bank requirements. The swap agreement
has a notional principal amount of $8.125 million with a fixed pay rate of 5.80%
beginning November 1, 2001 and ending November 1, 2007. At June 24, 2001, the
Company recorded its interest rate swap with a fair value of $111,000 in other
liabilities, with the offset recorded in the other comprehensive income
component of stockholder's equity and in deferred income taxes. At June 24,
2001, there was no hedge ineffectiveness. The Company's expectation is that the
hedging relationship will be highly effective at achieving offsetting changes in
cash flows.
PIBCO, Ltd., a wholly owned insurance subsidiary of the Company, in the normal
course of operations, arranged for the issuance of a letter of credit for
$230,000 to reinsurers to secure loss reserves. At June 24, 2001 and June 25,
2000 this letter of credit was secured under the Company's revolving line of
credit. Loss reserves for approximately the same amount have been recorded by
PIBCO, Ltd. and are reflected as current liabilities in the Company's financial
statements.
NOTE E - INCOME TAXES:
Income tax expense consists of the following (in thousands):
JUNE 24, JUNE 25, JUNE 27,
2001 2000 1999
--------------------- --------------------- ---------------------
Federal:
Current. . . . . . . . . $ 156 $ 378 $ 195
Deferred . . . . . . . . 1,285 1,127 1,149
--------------------- --------------------- ---------------------
Provision for income taxes 1,441 1,505 1,344
===================== ===================== =====================
The effective federal income tax rate varied from the statutory rate for the
years ended June 24, 2001, June 25, 2000 and June 27, 1999 as reflected below.
JUNE 24, JUNE 25, JUNE 27,
2001 2000 1999
--------------------- ---------------------- ----------------------
(in thousands)
Federal income taxes based on 34%
of book income. . . . . . . . . $ 1,333 $ 1,492 $ 1,393
Permanent adjustments . . . . . . 70 (46) (290)
Change in valuation allowance . . 16 (182) (535)
Expired credits . . . . . . . . . 22 241 776
-------------------- -------------------- ---------------------
1,441 1,505 1,344
===================== ====================== ======================
The tax effects of temporary differences which give rise to the net deferred tax
assets (liabilities) consisted of the following (in thousands):
JUNE 24, JUNE 25,
2001 2000
---------------------- ----------------------
Reserve for bad debt . . $ 381 $ 415
Depreciable assets . . . 678 631
Deferred fees. . . . . . 79 55
Other reserves . . . . . 46 94
NOL carryforwards. . . . 954 2,246
Interest rate swap loss. 38 -
Credit carryforwards . . 1,044 1,010
---------------------- ----------------------
Gross deferred tax asset $ 3,220 $ 4,451
Valuation allowance. . . (38) (22)
---------------------- ----------------------
Net deferred tax asset . 3,182 4,429
====================== ======================
As of June 24, 2001, the Company had $2.8 million of net operating loss
carryforwards that expire in 2005 and 2006. The Company also had $241,000 of
foreign tax credit carryforwards expiring between 2004 and 2006 and $803,000 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 credit carryforwards will expire before they can
be utilized. In fiscal 2001, $22,000 of general business credits expired before
they could be utilized. The Company decreased the deferred tax asset by
$110,000 for foreign tax credits that are not expected to 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:
The real property occupied by the Company operated restaurants is leased for
initial terms ranging from five to twenty-five years with renewal options
ranging from three to fifteen years. Some of the lease agreements contain
either provisions requiring additional rent if sales exceed specified amounts,
or escalation clauses based on changes in the Consumer Price Index.
The Company leases 20,677 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 October 2001, respectively.
The Company also leases 2,736 square feet in Addison, Texas for its training
facility with a term expiring in December 2001. Upon expiration of the current
leases for the warehouse and training facility the Company plans to relocate
these facilities to its new headquarters and distribution facility currently
under construction in The Colony, Texas.
The Company's distribution division currently leases a significant portion of
its transportation equipment under leases with terms from five to seven years
under operating and capital leases. 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 24, 2001 are as follows (in
thousands):
CAPITAL OPERATING
LEASES LEASES
--------- ---------
2002. . . . . . . . . . . . . . . . . . . $ 529 1,260
2003. . . . . . . . . . . . . . . . . . . 107 846
2004. . . . . . . . . . . . . . . . . . . 108 432
2005. . . . . . . . . . . . . . . . . . . 11 253
2006. . . . . . . . . . . . . . . . . . . 12 163
Thereafter. . . . . . . . . . . . . . . . 13 239
------ ---------
780. . $ 3,193
==========
Less amount representing interest . . . . (67)
---------
Present value of total obligations under
capital leases. . . . . . . . . . . . 713
Less current portion. . . . . . . . . . . (486)
---------
Long-term capital lease obligations . . . $ 227
=========
Rental expense consisted of the following (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 24, JUNE 25, JUNE 27,
2001 2000 1999
------------ ------------ ------------
Minimum rentals. . $ 1,566 $ 1,438 $ 1,339
Contingent rentals 19 15 13
Sublease rentals . (102) (96) (99)
------------ ------------ ------------
$ 1,483 $ 1,357 $ 1,253
============ ============ ============
NOTE G - EMPLOYEE BENEFITS:
The Company has a tax advantaged savings plan which is designed to meet the
requirements of Section 401(k) of the Internal Revenue Code (the "Code"). The
current plan is a modified continuation of a similar savings plan established by
the Company in 1985. Employees who have completed six months of service and are
at least 21 years of age are eligible to participate in the plan. The plan
provides that participating employees may elect to have between 1% and 15% of
their compensation deferred and contributed to the plan. From January 1, 1998
through January 1, 1999, the Company contributed on behalf of each participating
employee an amount equal to 100% of up to 6% of the employee's contribution.
From January 1, 1999 through July 31, 2000, the Company contributed on behalf of
each participating employee an amount equal to 100% of the first 3% and 50% of
the next 3% of the employee's contribution. From August 1, 2000 through
December 31, 2000, the Company contributed on behalf of each participating
employee an amount equal to 50% of up to 6% of the employee's contribution.
Effective January 1, 2001, the Company contributes on behalf of each
participating employee an amount equal to 50% of up to 4% of the employee's
contribution. Separate accounts are maintained with respect to contributions
made on behalf of each participating employee. Employer matching contributions
and earnings thereon are invested in Common Stock of the Company. The plan is
subject to the provisions of the Employee Retirement Income Security Act, as
amended, and is a profit sharing plan as defined in Section 401 of the Code.
The Company is the administrator of the plan.
For the years ended June 24, 2001, June 25, 2000, and June 27, 1999, total
matching contributions to the tax advantaged savings plan by the Company on
behalf of participating employees were $77,000, $185,591, and $205,922,
respectively.
NOTE H - STOCK OPTIONS:
On September 1, 1992, the Company adopted the 1992 Stock Award Plan (the "1992
Plan"). All officers, employees and elected outside directors are eligible to
participate. The Company's 1992 Plan is a combined nonqualified stock option
and stock appreciation rights arrangement. A total of two million shares of
Pizza Inn, Inc. Common Stock were originally authorized to be awarded under the
1992 Plan. A total of 973,073 options were actually granted under the 1992 Plan
through December 1993. In January 1994, the 1993 Stock Award Plan ("the 1993
Plan") was approved by the Company's shareholders with a plan effective date of
October 13, 1993. Officers and employees of the Company are eligible to receive
stock options under the 1993 Plan. Options are granted at market value of the
stock on the date of grant, are subject to various vesting periods ranging from
six months to three years with exercise periods up to eight years, and may be
designated as incentive options (permitting the participant to defer resulting
federal income taxes). Originally, a total of two million shares of Common
Stock were authorized to be issued under the 1993 Plan. In December 1996, 1997
and 1998, the Company's shareholders approved amendments to the 1993 plan
increasing by 500,000 shares, in each year, the aggregate number of shares of
common stock issuable under the plan. In December, 2000, the Company's
Shareholders approved amendments to the 1993 plan increasing by 100,000 shares
the aggregate number of shares of common stock issuable under the plan.
The 1993 Outside Directors Stock Award Plan (the "1993 Directors Plan") was also
adopted by the Company effective as of October 13, 1993. Elected Directors who
are not employed by the Company are eligible to receive stock options under the
1993 Directors Plan. Options for common stock equal to twice the number of
shares of common stock acquired during the previous fiscal year are granted, up
to 20,000 shares per year, to each outside director. Options are granted at
market value of the stock on the first day of the fiscal year, which is also the
date of grant, and various vesting periods ranging from one to four years with
exercise periods up to nine years. A total of 200,000 shares of Company Common
Stock are authorized to be issued pursuant to the 1993 Directors Plan.
A summary of stock option transactions under all of the Company's stock option
plans and information about fixed-price stock options follows:
SUMMARY OF STOCK OPTION TRANSACTIONS
June 24, 2001 June 25, 2000 June 27, 1999
--------------- -------------- ---------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------- -------------- --------------- ------ ---------- ------
Outstanding at beginning of year 2,123,306 $ 3.91 3,247,972 $ 3.50 2,675,366 $ 3.27
Granted. . . . . . . . . . . . . 464,160 $ 2.83 94,000 $ 3.57 655,290 $ 4.79
Exercised. . . . . . . . . . . . (215,000) $ 2.50 (947,913) $ 2.53 (17,084) $ 2.97
Canceled . . . . . . . . . . . . (162,433) $ 3.82 (270,753) $ 4.38 (65,600) $ 4.68
--------------- -------------- --------------- ------ ---------- ------
Outstanding at end of year . . . 2,210,033 $ 3.82 2,123,306 $ 3.91 3,247,972 $ 3.50
=============== ============== =============== ====== ========== ======
Exercisable at end of year . . . 1,696,873 $ 4.07 1,872,616 $ 3.88 2,745,448 $ 3.42
Weighted-average fair value of
options granted during the year. $ 0.93 $ 0.75 $ 1.30
FIXED PRICE STOCK OPTIONS
The following table provides information on options outstanding and options
exercisable at June 24, 2001:
Options Outstanding Options Exercisable
------------------- --------------------
Weighted-
Average
Shares Remaining Weighted- Shares Weighted-
Range of Outstanding Contractual Average Exercisable Average
Exercise Prices at June 24, 2001 Life (Years) Exercise Price at June 24, 2001 Exercise Price
---------------- ------------------- -------------------- --------------- ---------------- ---------------
1.75 - 3.25 . . 274,100 5.37 $ 2.21 61,100 $ 2.93
3.33 - 4.25 . . 1,452,943 2.40 $ 3.74 1,184,283 $ 3.78
4.38 - 5.50 . . 482,990 2.93 $ 4.97 451,490 $ 4.97
------------------- ----------------
1.75 - 5.50 . . 2,210,033 2.88 $ 3.82 1,696,873 $ 4.07
=================== ================
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
1999, 2000 and 2001 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 4.2% to 6.6%, expected volatility of 39.4% to 50.8%,
expected dividend yield of 0% 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 option vesting periods. The Company's pro forma
information follows (in thousands, except for earnings per share information):
June 24, 2001 June 25, 2000 June 27, 1999
-------------- -------------- --------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
-------------- -------------- -------------- ---------- ------------ ----------
Net income . . . . . . . . $ 2,480 $ 2,288 $ 2,884 $ 2,872 $ 2,752 $ 2,291
Basic earnings per share . $ 0.23 $ 0.22 $ 0.25 $ 0.25 $ 0.24 $ 0.20
Diluted earnings per share $ 0.23 $ 0.22 $ 0.25 $ 0.25 $ 0.23 $ 0.19
The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts as the pro forma amounts above do not include the impact of
additional awards anticipated in future years.
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 out of the normal course of business. Management believes that any
liabilities arising from these claims and contingencies are either covered by
insurance or would not have a material adverse effect on the Company's annual
results of operations or financial condition.
On April 30, 1998, Mid-South Pizza Development, Inc., an area developer of the
Company ("Mid-South") entered into a promissory note whereby, among other
things, Mid-South borrowed $1,330,000 from a third party lender (the "Loan").
The proceeds of the Loan, less transaction costs, were used by Mid-South to
purchase area developer rights from the Company for certain counties in Kentucky
and Tennessee. As part of the terms and conditions of the Loan, the Company was
required to guaranty the obligations of Mid-South under the Loan. In the event
such guaranty ever required payment, the Company has personal guarantees from
certain Mid-South principals and a security interest in certain personal
property.
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 13 restaurants located in Arkansas. Purchases by this franchisee comprised
6% of the Company's total food and supply sales in fiscal 2001. Royalties and
license fees and area development sales from this franchisee comprised 3% of the
Company's total franchise revenues in fiscal 2001. As franchised units, his
restaurants pay royalties to the Company and purchase a majority of their food
and supplies from the Company's distribution division. As of June 24, 2001, his
accounts and note payable to the Company were $875,294.
The Company believes the above transactions were at the same prices and on the
same terms available to non-related third parties.
In October 1999, the Company loaned $2,506,754 to certain officers of the
Company in the form of promissory notes due in June 2004 to acquire 900,000
shares of the Company's common stock through the exercise of vested stock
options previously granted to them in 1995 by the Company. The notes bear
interest at the same floating interest rate the Company pays on its revolving
credit line with Wells Fargo and are collateralized by certain real property and
existing Company stock owned by the officers. The notes are reflected as a
reduction to stockholders' equity.
In July 2000, the Company loaned $302,581 to an officer of the Company in the
form of a promissory note due in June 2004 to acquire 200,000 shares of the
Company's common stock through the exercise of vested stock options previously
granted in 1995 by the Company. In October 2000, a $164,647 principal payment
was made on the note. The note bears interest at the same floating interest
rate the Company pays on its revolving credit line with Wells Fargo and is
collateralized by certain real property and existing Company stock owned by the
officer. The note is reflected as a reduction to stockholders' equity.
NOTE K - TREASURY STOCK:
For the period of September 1995 through June 2001, the Company purchased
4,982,061 shares of its own Common Stock from time to time on the open market at
a total cost of $20.8 million. In April 1999, the Company received a gift of
4,945 shares from a vendor which was recorded at current market value in the
amount of $15,000. The purchases of common shares described above were funded
from working capital, and reduced the Company's outstanding shares by
approximately 31%.
In June 1995, the Company adopted the par value method of accounting for
treasury share purchases with the intent to retire the shares purchased. In
December 1999, the Company changed its method of accounting for treasury shares
purchased to the cost method because it is now the Company's intent to reissue a
portion of the shares held in treasury. Accordingly, retained earnings and
additional paid in capital as of June 27, 1999 and June 28, 1998 were adjusted
by $5,361,115 and $431,166, and $2,975,817 and $211,940, respectively.
NOTE L - EARNINGS PER SHARE:
The Company computes and presents earnings per share (EPS) in accordance with
SFAS 128, "Earnings Per Share". Basic EPS excludes the effect of potentially
dilutive securities while diluted EPS reflects the potential dilution that would
occur if securities or other contracts to issue common stock were exercised,
converted or resulted in the issuance of common stock that then shared in the
earnings of the entity.
The following table shows the reconciliation of the numerator and denominator of
the basic EPS calculation to the numerator and denominator of the diluted EPS
calculation (in thousands, except per share amounts).
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- ----------
YEAR ENDED JUNE 24, 2001
BASIC EPS
Income Available to Common Shareholders . . . $ 2,480 10,635 $ 0.23
Effect of Dilutive Securities - Stock Options 4
------------
DILUTED EPS
Income Available to Common Shareholders
& Assumed Conversions . . . . . . . . . . . . $ 2,480 10,639 $ 0.23
============ ============= ==========
YEAR ENDED JUNE 25, 2000
BASIC EPS
Income Available to Common Shareholders . . . $ 2,884 11,316 $ 0.25
Effect of Dilutive Securities - Stock Options 125
------------
DILUTED EPS
Income Available to Common Shareholders
& Assumed Conversions . . . . . . . . . . . . $ 2,884 11,441 $ 0.25
============ ============= ==========
YEAR ENDED JUNE 27, 1999
BASIC EPS
Income Available to Common Shareholders . . . $ 2,752 11,678 $ 0.24
Effect of Dilutive Securities - Stock Options 476
------------
DILUTED EPS
Income Available to Common Shareholders
& Assumed Conversions . . . . . . . . . . . . $ 2,752 12,154 $ 0.23
============ ============= ==========
Options to purchase 2,195,033 shares of common stock at exercise prices ranging
from $2.00 to $5.50 per share were outstanding at June 24, 2001 but were not
included in the computation of diluted EPS because the option's exercise price
was greater than the average market price of the common shares. Options to
purchase 1,194,773 and 2,002,106 shares of common stock during fiscal years 2000
and 1999, respectively, were excluded from the computation of EPS in those years
because their inclusion would result in an anti-dilutive effect on EPS.
NOTE M - SEGMENT REPORTING:
The Company has two reportable operating segments as determined by management
using the "management" approach as defined in SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". (1) Food and Equipment
Distribution, and (2) Franchise and Other. These segments are a result of
differences in the nature of the products and services sold. Corporate
administration costs, which include, but are not limited to, general accounting,
human resources, legal and credit and collections, are partially allocated to
the two operating segments. Other revenue consists of nonrecurring items.
The Food and Equipment Distribution segment sells and distributes proprietary
and non-proprietary items to franchisees and to three company-owned and operated
stores. Inter-segment revenues consist of sales to the company owned stores.
Assets for this segment include tractor/trailers, equipment, furniture and
fixtures.
The Franchise and Other segment includes income from royalties, license fees and
area development and foreign master license sales. The Franchise segment
includes the three company-owned stores, which are used as prototype and
training facilities. Assets for this segment include equipment, furniture and
fixtures for the company stores.
Corporate administration and other assets include primarily the deferred tax
asset, cash and short term investments, as well as furniture and fixtures
located at the corporate office.
Summarized in the following tables are net sales and operating revenues,
depreciation and amortization expense, interest expense, interest income,
operating profit, capital expenditures, and assets for the Company's reportable
segments for the years ended June 24, 2001, June 25, 2000, and June 27, 1999:
JUNE 24, JUNE 25, JUNE 27,
2001 2000 1999
---------- ---------- ----------
(In thousands)
NET SALES AND OPERATING REVENUES:
Food and Equipment Distribution . . $ 55,732 $ 58,030 $ 58,101
Franchise and Other . . . . . . . . 7,719 8,051 7,906
Intersegment revenues . . . . . . . 861 828 847
---------- ---------- ----------
Combined. . . . . . . . . . . . . 64,312 66,909 66,854
Other revenues. . . . . . . . . . . 376 223 287
Less intersegment revenues. . . . . (861) (828) (847)
---------- ---------- ----------
Consolidated revenues . . . . . . $ 63,827 $ 66,304 $ 66,294
========== ========== ==========
DEPRECIATION AND AMORTIZATION:
Food and Equipment Distribution . . $ 992 $ 874 $ 579
Franchise and Other . . . . . . . . 227 120 129
---------- ---------- ----------
Combined. . . . . . . . . . . . . 1,219 994 708
Corporate administration and other. 124 216 163
---------- ---------- ----------
Depreciation and amortization . . $ 1,343 $ 1,210 $ 871
========== ========== ==========
INTEREST EXPENSE:
Food and Equipment Distribution . . $ 533 $ 495 $ 344
Franchise and Other . . . . . . . . 6 6 8
---------- ---------- ----------
Combined. . . . . . . . . . . . . 539 501 352
Corporate administration and other. 297 249 172
---------- ---------- ----------
Interest Expense. . . . . . . . . $ 836 $ 750 $ 524
========== ========== ==========
INTEREST INCOME:
Food and Equipment Distribution . . $ 25 $ 66 $ 72
Franchise and Other . . . . . . . . - - -
---------- ---------- ----------
Combined. . . . . . . . . . . . . 25 66 72
Corporate administration and other. 208 126 11
---------- ---------- ----------
Interest Income . . . . . . . . . $ 233 $ 192 $ 83
========== ========== ==========
OPERATING PROFIT:
Food and Equipment Distribution (1) $ 3,190 $ 2,709 $ 3,071
Franchise and Other (1) . . . . . . 2,685 3,790 2,813
Intersegment profit . . . . . . . . 256 225 216
---------- ---------- ----------
Combined. . . . . . . . . . . . . 6,131 6,724 6,100
Other revenue . . . . . . . . . . . 376 223 287
Less intersegment profit. . . . . . (256) (225) (216)
Corporate administration and other. (2,330) (2,333) (2,075)
---------- ---------- ----------
Income before taxes . . . . . . . $ 3,921 $ 4,389 $ 4,096
========== ========== ==========
(1) Does not include full allocation of corporate administration
JUNE 24, JUNE 25, JUNE 27,
2001 2000 1999
--------- --------- ---------
(In thousands)
CAPITAL EXPENDITURES:
Food and Equipment Distribution. . . $ 4,438 $ 413 $ 391
Franchise and Other. . . . . . . . . 227 138 66
--------- --------- ---------
Combined . . . . . . . . . . . . . 4,665 551 457
Corporate administration and other . 48 203 183
--------- --------- ---------
Consolidated capital expenditures. $ 4,713 $ 754 $ 640
========= ========= =========
ASSETS:
Food and Equipment Distribution. . . $ 13,575 $ 10,279 $ 10,402
Franchise and Other. . . . . . . . . 1,193 1,361 999
--------- --------- ---------
Combined . . . . . . . . . . . . . . 14,768 11,640 11,401
Corporate administration and other . 5,104 6,051 7,185
--------- --------- ---------
Consolidated assets. . . . . . . . . $ 19,872 $ 17,691 $ 18,586
========= ========= =========
GEOGRAPHIC INFORMATION (REVENUES):
United States. . . . . . . . . . . . $ 63,225 $ 65,047 $ 64,990
Foreign countries. . . . . . . . . . 602 1,257 1,304
--------- --------- ---------
Consolidated total . . . . . . . . $ 63,827 $ 66,304 $ 66,294
========= ========= =========
NOTE N - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
The following summarizes the unaudited quarterly results of operations for the
fiscal years ended June 24, 2001 and June 25, 2000 (in thousands, except per
share amounts):
Quarter Ended
--------------
September 24, December 24, March 25, June 24,
2000 2000 2001 2001
-------------- ------------- ---------- ---------
FISCAL YEAR 2001
Revenues . . . . . . . . . . . . . . . . $ 16,816 $ 15,520 $ 15,366 $ 16,125
Gross Profit . . . . . . . . . . . . . . 1,287 1,050 1,112 1,308
Net Income . . . . . . . . . . . . . . . 646 529 604 701
Basic earnings per share on net income . 0.06 0.05 0.06 0.06
Diluted earnings per share on net income 0.06 0.05 0.06 0.06
Quarter Ended
----------------------------------------
September 26,.December 26, March 26, June 25,
1999 1999 2000 2000
-------------- ------------- ---------- ---------
FISCAL YEAR 2000
Revenues . . . . . . . . . . . . . . . . $ 17,394 $ 16,331 $ 15,967 $ 16,612
Gross Profit . . . . . . . . . . . . . . 1,276 1,308 1,207 1,348
Net Income . . . . . . . . . . . . . . . 747 745 673 719
Basic earnings per share on net income . 0.07 0.06 0.06 0.07
Diluted earnings per share on net income 0.07 0.06 0.06 0.07
SCHEDULE II
PIZZA INN, INC.
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
ADDITIONS
------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COST AND OTHER AT END
OF PERIOD EXPENSE ACCOUNTS DEDUCTIONS (1) OF PERIOD
------------ ----------- ----------- --------------- -----------
YEAR ENDED JUNE 24, 2001
Allowance for doubtful. . . . . . . . . . . . . $ 1,102 $ 210 $ - $ (311) $ 1,001
accounts and notes receivable
YEAR ENDED JUNE 25, 2000
Allowance for doubtful. . . . . . . . . . . . . $ 1,032 $ 225 $ - $ (155) $ 1,102
accounts and notes receivable
YEAR ENDED JUNE 27, 1999
Allowance for doubtful. . . . . . . . . . . . . $ 1,007 $ 237 $ - $ (212) $ 1,032
accounts and notes receivable
(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 2001
(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
(a) 1. The financial statements filed as part of this report are listed
in the Index to
Financial Statements and Schedules under Part II, Item 8 of this Form
10-K.
2. The financial statement schedules filed as part of this report are
listed in the Index
to Financial Statements and Schedules under Part II, Item 8 of this Form
10-K.
3. Exhibits:
3.1 Restated Articles of Incorporation as filed on September 5, 1990 and
amended on February 16,1993 (filed as Exhibit 3.1 to the Company's Annual Report
on Form 10-K for the fiscal year ended June 27, 1993 and incorporated herein by
reference).
3.2 Amended and Restated By-Laws as adopted by the Board of
Directors on July 11, 2000.
4.1 Provisions regarding Common Stock in Article IV of the
Restated Articles of Incorporation, as amended (filed as Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended June 27, 1999 and
incorporated herein by reference).
4.2 Provisions regarding Redeemable Preferred Stock in Article V of the
Restated Articles of Incorporation, as amended (filed as Exhibit 3.1 to this
Report and incorporated herein by reference).
10.1 First Amendment to the Second Amendment and Restated Loan Agreement
between the Company and Wells Fargo Bank (Texas), N.A. dated December 28, 2000.
(filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended December 24, 2000 and incorporated herein by reference).
10.2 Construction Loan Agreement between the Company and Wells Fargo Bank
(Texas) N.A. dated December 28, 2000. (filed as Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended December 24, 2000 and
incorporated herein by reference).
10.3 Promissory Note between the Company and Wells Fargo Bank (Texas) N.A.
dated December 28, 2000. (filed as Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended December 24, 2000 and
incorporated herein by reference).
10.4 Second amended and Restated Loan Agreement between the Company and
Wells Fargo Bank (Texas), N.A. dated March 31, 2000 (filed as Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March
26, 2000 and incorporated herein by reference).
10.5 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 Form of Executive Employment Contract. (filed as Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December
24, 2000 and incorporated herein by reference).
10.8 Amended Employment Agreement between the Company and C. Jeffrey Rogers
dated April 20, 2001 (filed as Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 25, 2001 and incorporated herein by
reference).*
10.10 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).*
10.11 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).*
10.12 1992 Stock Award Plan of the Company (filed as Exhibit 10.6 to the
Company's Annual Report on Form 10-K for the fiscal year ended June 27, 1993 and
incorporated herein by reference).*
21.0 List of Subsidiaries of the Company (filed as Exhibit 21.0 to
the Company's Annual Report on Form 10-K for the fiscal year ended June 26, 1994
and incorporated herein by reference).
23.0 Consent of Independent Accountants.
* 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 2001.
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 19, 2001 By: /s/ Shawn Preator
Shawn Preator
Vice President of Finance
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 19, 2001
---------------------- --------------------
Steve A. Ungerman
Director and Chairman of the Board
/s/C. Jeffrey Rogers September 19, 2001
---------------------- --------------------
C. Jeffrey Rogers
Director, Vice Chairman and
Chief Executive Officer
(Principal Executive Officer)
/s/Butler E. Powell September 19, 2001
--------------------- --------------------
Butler E. Powell
Director
/s/Ramon D. Phillips September 19, 2001
---------------------- --------------------
Ramon D. Phillips
Director
/s/F. Jay Taylor September 19, 2001
------------------ --------------------
F. Jay Taylor
Director
/s/Bobby L. Clairday September 19, 2001
---------------------- --------------------
Bobby L. Clairday
Director
/s/Ronald W. Parker September 19, 2001
--------------------- --------------------
Ronald W. Parker
Director, President and
Chief Operating Officer
(Principal Financial Officer)
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (No. 33-56590, No. 33-71700, as amended by
Post-Effective Amendments No. One and Two, and No. 33-77617) of PIZZA INN, INC.
of our report dated SEPTEMBER 6, 2001 relating to the financial statements and
financial statement schedule, which appears in this Form 10-K.
PricewaterhouseCoopers LLP
Dallas, Texas
September 19, 2001