SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 26, 2004.
-------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
COMMISSION FILE NUMBER 0-12919
PIZZA INN, INC.
(EXACT NAME OF REGISTRANT IN ITS CHARTER)
MISSOURI 47-0654575
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3551 PLANO PARKWAY
THE COLONY, TEXAS 75056
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES,
INCLUDING ZIP CODE)
(469) 384-5000
(REGISTRANT'S TELEPHONE NUMBER,
INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR SUCH SHORTER PERIOD THAT THE REGISTRANT
WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12 B-2 OF THE EXCHANGE ACT). YES [ ] NO [X]
AT JANUARY 31, 2005, AN AGGREGATE OF 10,084,494 SHARES OF THE REGISTRANT'S
COMMON STOCK, PAR VALUE OF $.01 EACH (BEING THE REGISTRANT'S ONLY CLASS OF
COMMON STOCK), WERE OUTSTANDING.
PIZZA INN, INC.
Index
-----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
- -------- --------------------- ----
Condensed Consolidated Statements of Operations for the three months and
six months ended December 26, 2004 and December 28, 2003 (unaudited) 3
Condensed Consolidated Statements of Comprehensive Income for the three months
and six months ended December 26, 2004 and December 28, 2003 (unaudited) 3
Condensed Consolidated Balance Sheets at December 26, 2004 (unaudited)
and June 27, 2004 4
Condensed Consolidated Statements of Cash Flows for the six months ended
December 26, 2004 and December 28, 2003 (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of
- ------- -------------------------------------------
Financial Condition and Results of Operations 13
---------------------------------------------
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
- ------- ----------------------------------------------------------------
Item 4. Controls and Procedures 19
- -------- -------------------------
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
- ------- ------------------
Item 2. Unregistered Sales of Equity Securities and the Use of Proceeds 22
- -------- ---------------------------------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders 22
- -------- -----------------------------------------------------------
Item 5. Other Information 22
- ------- ------------------
Item 6. Exhibits 23
- -------- --------
Signatures 24
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -------------------------------
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- ------------------
DECEMBER 26, DECEMBER 28, DECEMBER 26, DECEMBER 28,
REVENUES: 2004 2003 2004 2003
-------------------- ------------------ -------------- --------------
Food and supply sales. . . . . . . . . . . . . $ 12,301 $ 13,032 $ 25,123 $ 26,530
Franchise revenue. . . . . . . . . . . . . . . 1,225 1,264 2,565 2,715
Restaurant sales . . . . . . . . . . . . . . . 243 376 498 782
Other income . . . . . . . . . . . . . . . . . 35 97 39 118
-------------------- ------------------ -------------- --------------
13,804 14,769 28,225 30,145
-------------------- ------------------ -------------- --------------
COSTS AND EXPENSES:
Cost of sales. . . . . . . . . . . . . . . . . 11,721 12,074 23,914 24,671
Franchise expenses . . . . . . . . . . . . . . 701 728 1,330 1,542
General and administrative expenses. . . . . . 1,165 762 2,187 1,803
Interest expense . . . . . . . . . . . . . . . 138 160 274 320
-------------------- ------------------ -------------- --------------
13,725 13,724 27,705 28,336
-------------------- ------------------ -------------- --------------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . 79 1,045 520 1,809
Provision for income taxes . . . . . . . . . . 28 487 184 747
-------------------- ------------------ -------------- --------------
NET INCOME . . . . . . . . . . . . . . . . . . . $ 51 $ 558 $ 336 $ 1,062
==================== ================== ============== ==============
BASIC EARNINGS PER COMMON SHARE. . . . . . . . . $ 0.01 $ 0.06 $ 0.03 $ 0.11
==================== ================== ============== ==============
DILUTED EARNINGS PER COMMON SHARE. . . . . . . . $ 0.01 $ 0.06 $ 0.03 $ 0.11
==================== ================== ============== ==============
WEIGHTED AVERAGE COMMON SHARES . . . . . . . . . 10,104 10,071 10,119 10,065
==================== ================== ============== ==============
WEIGHTED AVERAGE COMMON AND
POTENTIAL DILUTIVE COMMON SHARES . . . . . . . 10,141 10,123 10,155 10,104
==================== ================== ============== ==============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
THREE MONTHS ENDED . . . . . . . . . SIX MONTHS ENDED
-------------------------------------------- -----------------------------
DECEMBER 26, . . .. . DECEMBER 28, DECEMBER 26, DECEMBER 28,
2004 2003 2004 2003
-------------------- ------------------ -------------- --------------
Net Income . . . . . . . . . . . . . . . . . . . $ 51 $ 558 $ 336 $ 1,062
Interest rate swap loss - (net of
tax benefit of $34 and $31
and $14 and $94, respectively). . . . . . . . (67) (60) (28) (183)
-------------------- ------------------ -------------- --------------
Comprehensive Income (Loss). . . . . . . . . . . $ (16) $ 498 $ 308 $ 879
==================== ================== ============== ==============
See accompanying Notes to Consolidated Financial Statements.
PIZZA INN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 26, JUNE 27,
ASSETS 2004 2004
-------------- ----------
(UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . $ 190 $ 617
Accounts receivable, less allowance for doubtful
accounts of $357 and $310, respectively. . . . . . . . . . . 3,270 3,113
Accounts receivable - related parties. . . . . . . . . . . . . 885 912
Notes receivable, current portion, less allowance
for doubtful accounts of $18 and $59, respectively . . . . . 24 50
Notes receivable - related parties . . . . . . . . . . . . . . 54 54
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . 1,915 1,713
Deferred taxes, net. . . . . . . . . . . . . . . . . . . . . . 199 183
Prepaid expenses and other . . . . . . . . . . . . . . . . . . 388 415
-------------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . 6,925 7,057
Property, plant and equipment, net . . . . . . . . . . . . . . . 12,624 12,756
Property under capital leases, net . . . . . . . . . . . . . . . 15 18
Deferred taxes, net. . . . . . . . . . . . . . . . . . . . . . . 123 105
Long-term notes receivable, less allowance
for doubtful accounts of $0 and $3, respectively . . . . . . - -
Re-acquired development territory. . . . . . . . . . . . . . . . 720 866
Deposits and other . . . . . . . . . . . . . . . . . . . . . . . 85 104
-------------- ----------
$ 20,492 $ 20,906
============== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade . . . . . . . . . . . . . . . . . . . $ 1,402 $ 1,246
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . 1,763 2,109
Current portion of long-term debt. . . . . . . . . . . . . . . 1,376 406
Current portion of capital lease obligations . . . . . . . . . 10 10
-------------- ----------
Total current liabilities. . . . . . . . . . . . . . . . . . 4,551 3,771
LONG-TERM LIABILITIES
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . 6,534 7,937
Long-term capital lease obligations. . . . . . . . . . . . . . 18 23
Other long-term liabilities. . . . . . . . . . . . . . . . . . 415 458
-------------- ----------
11,518 12,189
-------------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value; authorized 26,000,000 shares;
issued 15,036,319 and 15,031,319 shares, respectively;
outstanding 10,099,239 and 10,133,674 shares, respectively. 150 150
Additional paid-in capital . . . . . . . . . . . . . . . . . . 7,985 7,975
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . 20,714 20,378
Accumulated other comprehensive loss . . . . . . . . . . . . . (274) (302)
Treasury stock at cost,
Shares in treasury: 4,937,080 and 4,897,645, respectively. . (19,601) (19,484)
-------------- ----------
Total shareholders' equity . . . . . . . . . . . . . . . . . 8,974 8,717
-------------- ----------
$ 20,492 $ 20,906
============== ==========
See accompanying Notes to Condensed Consolidated Financial Statements.
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
------------------
DECEMBER 26, DECEMBER 28,
2004 2003
------------------ --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 336 $ 1,062
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . 579 523
Non cash settlement of accounts receivable. . . . . . . . . . - (281)
Recovery for bad debt, net. . . . . . . . . . . . . . . . . . 30 (249)
Utilization of deferred taxes . . . . . . . . . . . . . . . . (52) 547
Changes in assets and liabilities:
Notes and accounts receivable . . . . . . . . . . . . . . . . (134) (344)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . (202) 50
Accounts payable - trade. . . . . . . . . . . . . . . . . . . 156 272
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . (342) 973
Prepaid expenses and other. . . . . . . . . . . . . . . . . . 101 75
------------------ --------------
CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . . . . . . . 472 2,628
------------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets. . . . . . . . . . . . . . . . . . - 26
Acquisition of area development territory . . . . . . . . . . . - (682)
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . (354) (331)
------------------ --------------
CASH USED FOR INVESTING ACTIVITIES. . . . . . . . . . . . . . (354) (987)
------------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term bank debt and capital lease obligations (438) (1,878)
Officer loan payment. . . . . . . . . . . . . . . . . . . . . . - 7
Stock buy back. . . . . . . . . . . . . . . . . . . . . . . . . (117) -
Proceeds from exercise of stock options . . . . . . . . . . . . 10 30
------------------ --------------
CASH USED FOR FINANCING ACTIVITIES. . . . . . . . . . . . . . (545) (1,841)
------------------ --------------
Net decrease in cash and cash equivalents . . . . . . . . . . . . (427) (200)
Cash and cash equivalents, beginning of period. . . . . . . . . . 617 399
------------------ --------------
Cash and cash equivalents, end of period. . . . . . . . . . . . . $ 190 $ 199
------------------ --------------
See accompanying Notes to Consolidated Financial Statements.
PIZZA INN, INC.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
-----------------
DECEMBER 26, DECEMBER 28,
2004 2003
----------------- -------------
CASH PAYMENTS FOR:
Interest . . . . . . . . . . . . . . . . . $ 273 $ 328
Income taxes . . . . . . . . . . . . . . . 250 -
NON-CASH FINANCING AND INVESTING
ACTIVITIES:
Non-cash settlement of accounts receivable $ - $ 281
See accompanying Notes to Consolidated Financial Statements.
PIZZA INN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) The accompanying condensed consolidated financial statements of Pizza
Inn, Inc. (the "Company") have been prepared without audit pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in the financial statements have been
omitted pursuant to such rules and regulations. The condensed consolidated
financial statements should be read in conjunction with the notes to the
Company's audited condensed consolidated financial statements in its Form 10-K
for the fiscal year ended June 27, 2004. Certain prior year amounts have been
reclassified to conform with current year presentation.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary to fairly present the
Company's financial position and results of operations for the interim periods.
All adjustments contained herein are of a normal recurring nature.
The Company elected to follow APB No. 25, and related Interpretations in
accounting for employee stock options because the alternative fair value
accounting provided for under SFAS No. 123, "Accounting for Stock Based
Compensation," requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB No. 25, because the
exercise price of our employee stock options equals or exceeds the fair value of
the underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net income and earnings per share is required to
be determined as if the Company had accounted for its stock options granted
subsequent to June 25, 1995 under the fair value method of SFAS No. 123. For
purposes of pro forma disclosures, the estimated fair value of the stock options
is amortized over the option vesting periods. The Company's pro forma
information follows (in thousands, except for earnings per share information):
SIX MONTHS ENDED
-----------------
DECEMBER 26, DECEMBER 28,
2004 2003
----------------- --------------
Net income, as reported. . . . . . . . . . . $ 336 $ 1,062
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects. . . . . . . . . . . . - (1)
----------------- --------------
Pro forma net income . . . . . . . . . . . . $ 336 $ 1,061
Earnings per share
Basic-as reported. . . . . . . . . . . . . $ 0.03 $ 0.11
Basic-pro forma. . . . . . . . . . . . . . $ 0.03 $ 0.11
Diluted-as reported. . . . . . . . . . . . $ 0.03 $ 0.11
Diluted-pro forma. . . . . . . . . . . . . $ 0.03 $ 0.11
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts as the pro forma amounts above do not include the
impact of additional awards anticipated in future years.
(2)
The Company entered into an agreement effective March 28, 2004 (the "Revolving
Credit Agreement") with Wells Fargo to provide a $4.0 million revolving credit
line that will expire October 1, 2005, replacing a $7.0 million line that was
due to expire December 31, 2004. Interest on the revolving credit line is
payable monthly. Interest is provided for at a rate equal to prime or, at the
Company's option, at the LIBOR rate plus 1.25%. A 0.375% annual commitment fee
is payable on any unused portion of the revolving credit line. As of December
26, 2004 and December 28, 2003, the variable interest rates were 5.0% and 2.64%,
using a prime and LIBOR rate basis, respectively. Amounts outstanding under the
revolving credit line as of December 26, 2004 and December 28, 2003 were
$970,000 and $1.5 million, respectively.
The Company entered into an agreement effective December 28, 2000, as amended
(the "Term Loan Agreement"), with Wells Fargo to provide up to $8.125 million of
financing for the construction of the Company's new headquarters, training
center and distribution facility. The construction loan converted to a term
loan effective January 31, 2002 with the unpaid principal balance to mature on
December 28, 2007. The term loan will amortize over a term of twenty years, with
principal payments of $34,000 due monthly. Interest on the term loan is also
payable monthly. Interest is provided for at a rate equal to prime less an
interest rate margin of 0.75% or, at the Company's option, to the LIBOR rate
plus 1.5%. As of December 26, 2004 and December 28, 2003, the LIBOR variable
interest rates used were 3.91% and 2.65%, respectively. The Company, to fulfill
bank requirements, has caused the outstanding principal amount to be subject to
a fixed interest rate by utilizing an interest rate swap agreement as discussed
below. The $8.125 million term loan had an outstanding balance of $6.9 million
at December 26, 2004 and $7.3 million at December 28, 2003.
On December 16, 2004, Wells Fargo notified the Company that, pursuant to the
terms of the Revolving Credit Agreement and the Term Loan Agreement
(collectively, the "Loan Agreements"), Wells Fargo's lending obligations under
such agreements were automatically terminated as a result of a Change of Control
(as defined in the Loan Agreements) resulting from Ronald W. Parker ceasing to
be the Chief Executive Officer of the Company. In a written notice dated
December 21, 2004, Wells Fargo agreed, notwithstanding the foregoing Change of
Control, to reinstate the Company's ability to obtain revolving credit advances
under the Revolving Credit Agreement subject to certain conditions described in
the notice, including, without limitation, limiting the aggregate amount of all
revolving credit advances and letter of credit liabilities at any time
outstanding to not exceed $1.2 million. Additionally, in the December 21, 2004
notice, Wells Fargo reserved the right to terminate its agreement to continue to
extend revolving credit advances at any time upon prior written notice to the
Company. The terms of the Loan Agreements require the Company, upon the
occurrence of a Change of Control, to notify Wells Fargo and to offer to
accelerate payment of all then outstanding loan balances, including revolving
credit advances and the term loan. On December 27, 2004, the Company provided
such notice. Wells Fargo advised the Company in a letter dated February 8,
2005 that it declined to accept the Company's offer of acceleration subject to
the execution of a letter agreement (the "Letter Agreement") and an amendment to
the Loan Agreements. On February 9, 2005, the Company and Wells Fargo entered
into the Letter Agreement. Pursuant to the Letter Agreement, the Company
expects to enter into an amendment to the Loan Agreements, effective December
26, 2004, to provide a $3.0 million revolving credit line that will expire
December 23, 2005, replacing a $4.0 million revolving credit line that was due
to expire October 1, 2005. The amendment provides, among other terms, for
modifications to certain financial covenants and the interest rates on each
loan. Interest is provided for at a rate equal to prime plus 0.50%, or, at the
Company's option, at the LIBOR rate plus 2.75%. Additionally, the interest rate
on the Company's term loan is provided for under the amendment at prime rate or
the LIBOR rate plus 2.25%, at the Company's option. In connection with
discussions regarding the amendment to the Loan Agreements, Wells Fargo notified
the Company on February 4, 2005 that Wells Fargo had not been given proper
notice of the Company's purchase of shares of its common stock, and that as a
result an Event of Default existed under the Loan Agreement. Such Event of
Default is to be waived by Wells Fargo upon execution of the amendment to the
Loan Agreement.
(3) The Company entered into an interest rate swap effective February 27,
2001, as amended, designated as a cash flow hedge, to manage interest rate risk
relating to the financing of the construction of the Company's headquarters and
to fulfill bank requirements. The swap agreement has a notional principal
amount of $8.125 million with a fixed pay rate of 5.84% which began November 1,
2001 and will end November 19, 2007. The swap's notional amount amortizes over
a term of twenty years to parallel the terms of the term loan. SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", requires that
for cash flow hedges which hedge the exposure to variable cash flow of a
forecasted transaction, the effective portion of the derivative's gain or loss
be initially reported as a component of other comprehensive income in the equity
section of the balance sheet and subsequently reclassified into earnings when
the forecasted transaction affects earnings. Any ineffective portion of the
derivative's gain or loss is reported in earnings immediately. At December 26,
2004 there was no hedge ineffectiveness. The Company's expectation is that the
hedging relationship will continue to be highly effective at achieving
offsetting changes in cash flows.
(4) On January 18, 2002, the Company was served with a lawsuit filed by
Blakely-Witt & Associates, Inc. alleging that the Company sent or caused to be
sent unsolicited facsimile advertisements. The Company has vigorously defended
its position in this litigation. In July 2004 the court preliminarily approved
a settlement agreement among all parties and certified the matter as a class
action for settlement purposes only. Under the settlement agreement the Company
would pay an amount that will not materially affect the Company's financial
performance. At a hearing on September 13, 2004 the court entered its final
order and judgment approving the settlement agreement and certifying the
settlement class. Pursuant to the settlement agreement the Company paid $90,000
in full and final settlement of all actual and potential claims of the members
and potential members of the certified settlement class. The final order
dismissed with prejudice all pending and potential claims against the Company.
(5) On June 15, 2004, B. Keith Clark provided the Company with notice of his
intent to resign as Senior Vice President - Corporate Development, Secretary,
and General Counsel of the Company effective as of July 7, 2004. By letter dated
June 24, 2004, Mr. Clark notified the Company that he reserved his right to
assert that the election of Ramon D. Phillips and Robert B. Page to the board of
directors of the Company at the February 11, 2004 annual meeting of shareholders
constituted a "change of control" of the Company under his executive
compensation agreement ("Clark Agreement"). As a result of the alleged change
of control under the Clark Agreement, Clark claims that he was entitled to
terminate the Clark Agreement within twelve (12) months of February 11, 2004 for
"good reason" (as defined in the Clark Agreement) and is entitled to severance.
On August 6, 2004, the Company instituted an arbitration proceeding against Mr.
Clark with the American Arbitration Association in Dallas, Texas pursuant to the
Clark Agreement seeking declaratory relief that Mr. Clark is not entitled to
severance payments or any other further compensation from the Company. On
January 18, 2005, the Company amended its claims against Mr. Clark to include
claims for compensatory damages, consequential damages, and disgorgement of
compensation paid to Mr. Clark under the Clark Agreement. On January 18, 2005,
Mr. Clark filed claims against the Company for breach of the Clark Agreement,
seeking the severance payment provided for in the Clark Agreement if a
termination occurs following a change of control plus a bonus payment for 2003
of approximately $12,500. The arbitration hearing has been scheduled to begin
on May 10, 2005.
The Company disagrees with Mr. Clark's claim that a "change of control" has
occurred under the Clark Agreement or that he is entitled to terminate the Clark
Agreement for "good reason". On May 4, 2004, the board of directors obtained a
written legal opinion that the "change of control" provision in the Clark
Agreement was not triggered by the results of the February 11, 2004 annual
meeting. Due to the nature of the preliminary stages of the arbitration
proceeding and the general uncertainty surrounding the outcome of this type of
legal proceeding, it is not possible for the Company to provide any certain or
meaningful analysis, projections, or expectations at this time regarding the
outcome of this matter. Although the ultimate outcome of the arbitration
proceeding cannot be projected with certainty, the Company believes that its
claims against Mr. Clark are well founded and intends to vigorously pursue all
relief to which it may be entitled. An adverse outcome to the proceeding could
affect the Company's financial position and results of operations. In the event
the Company is unsuccessful, it could be liable to Mr. Clark for the severance
payment of approximately $762,000, the $12,500 bonus payment, and costs and
fees. No accrual for any amount has been made as of December 26, 2004. The
executive compensation agreements of each of Ward T. Olgreen and Shawn M.
Preator contain similar provisions regarding a "change of control" and the
amounts potentially payable to each of them if a "change of control" is deemed
to have occurred under the agreements that is asserted by February 10, 2005 are
as follows: $630,000 to Mr. Olgreen and $597,000 to Mr. Preator.
(6) On December 11, 2004, the Board of Directors of the Company terminated
the Executive Compensation Agreement dated December 16, 2002 between the Company
and its then Chief Executive Officer, Ronald W. Parker ("Parker Agreement").
Mr. Parker's employment was terminated following ten days written notice to Mr.
Parker of the Company's intent to discharge him for cause as a result of
violations of the Parker Agreement. Written notice of termination was
communicated to Mr. Parker on December 13, 2004. The nature of the cause
alleged was set forth in the notice of intent to discharge and based upon
Section 2.01(c) of the Parker Agreement, which provides for discharge for "any
intentional act of fraud against the Company, any of its subsidiaries or any of
their employees or properties, which is not cured, or with respect to which
Executive is not diligently pursuing a cure, within ten (10) business days of
the Company giving notice to Executive to do so." Mr. Parker was provided with
an opportunity to cure as provided in the Parker Agreement as well as the
opportunity to be heard by the Board of Directors prior to the termination.
On January 12, 2005, the Company instituted an arbitration proceeding against
Mr. Parker with the American Arbitration Association in Dallas, Texas pursuant
to the Parker Agreement seeking declaratory relief that Mr. Parker is not
entitled to severance payments or any other further compensation from the
Company. In addition, the Company is seeking compensatory damages,
consequential damages, and disgorgement of compensation paid to Mr. Parker under
the Parker Agreement. On January 31, 2005, Mr. Parker filed claims against the
Company for breach of the Parker Agreement, seeking the severance payment
provided for in the Parker Agreement for a termination by the Company for reason
other than for cause (as defined in the Parker Agreement), plus interest,
attorney's fees and costs. No date for an arbitration hearing has been set.
Due to the preliminary stages of the arbitration proceeding and the general
uncertainty surrounding the outcome of this type of legal proceeding, it is not
possible for the Company to provide any certain or meaningful analysis,
projections, or expectations at this time regarding the outcome of this matter.
Although the ultimate outcome of the arbitration proceeding cannot be projected
with certainty at this time, the Company believes that its claims against Mr.
Parker are well founded and intends to vigorously pursue all relief to which it
may be entitled. An adverse outcome to the proceeding could materially affect
the Company's financial position and results of operations. In the event the
Company is unsuccessful, it could be liable to Mr. Parker for approximately $5.4
million under the Parker Agreement plus accrued interest and legal expenses.
The Company maintains that it does not owe Mr. Parker severance payments or any
other compensation, but it believes that it has sufficient assets available to
make any payments required by an adverse determination. No accrual has been
made for this amount as of December 26, 2004.
(7) The following table shows the reconciliation of the numerator and
denominator of the basic EPS calculation to the numerator and denominator of the
diluted EPS calculation (in thousands, except per share amounts).
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- ----------
THREE MONTHS ENDED DECEMBER 26, 2004
BASIC EPS
Income Available to Common Shareholders . . . $ 51 10,104 $ 0.01
Effect of Dilutive Securities - Stock Options 37
------------
DILUTED EPS
Income Available to Common Shareholders
& Assumed Conversions . . . . . . . . . . . . $ 51 10,141 $ 0.01
============ ============= ==========
THREE MONTHS ENDED DECEMBER 28, 2003
BASIC EPS
Income Available to Common Shareholders . . . $ 558 10,071 $ 0.06
Effect of Dilutive Securities - Stock Options 52
------------
DILUTED EPS
Income Available to Common Shareholders
& Assumed Conversions . . . . . . . . . . . . $ 558 10,123 $ 0.06
============ ============= ==========
SIX MONTHS ENDED DECEMBER 26, 2004
BASIC EPS
Income Available to Common Shareholders $ 336 10,119 $ 0.03
Effect of Dilutive Securities - Stock Options 36
--------
DILUTED EPS
Income Available to Common Shareholders
& Assumed Conversions $ 336 10,155 $ 0.03
============= ============= =========
SIX MONTHS ENDED DECEMBER 28, 2003
BASIC EPS
Income Available to Common Shareholders $ 1,062 10,065 $ 0.11
Effect of Dilutive Securities - Stock Options 39
--------
DILUTED EPS
Income Available to Common Shareholders
& Assumed Conversions $ 1,062 10,104 $ 0.11
================ ============= ========
(8) Summarized in the following tables are net sales and operating revenues,
operating profit, and geographic information (revenues) for the Company's
reportable segments for the three months and six months periods ended December
26, 2004 and December 28, 2003 (in thousands).
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- -----------------
DECEMBER 26, DECEMBER 28, DECEMBER 26, DECEMBER 28,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
NET SALES AND OPERATING REVENUES:
Food and Equipment Distribution . . $ 12,301 $ 13,032 $ 25,123 $ 26,530
Franchise and Other . . . . . . . . 1,468 1,640 3,063 3,497
Intersegment revenues . . . . . . . 84 216 169 363
-------------- -------------- -------------- --------------
Combined. . . . . . . . . . . . . 13,853 14,888 28,355 30,390
Other revenues. . . . . . . . . . . 35 97 39 118
Less intersegment revenues. . . . . (84) (216) (169) (363)
-------------- -------------- -------------- --------------
Consolidated revenues . . . . . . $ 13,804 $ 14,769 $ 28,225 $ 30,145
============== ============== ============== ==============
OPERATING PROFIT:
Food and Equipment Distribution (1) 198 590 504 1,284
Franchise and Other (1) . . . . . . 494 584 1,184 1,241
Intersegment profit . . . . . . . . 24 49 46 91
-------------- -------------- -------------- --------------
Combined. . . . . . . . . . . . . 716 1,223 1,734 2,616
Other profit or loss. . . . . . . . 35 97 39 118
Less intersegment profit. . . . . . (24) (49) (46) (91)
Corporate administration and other. (648) (226) (1,207) (834)
-------------- -------------- -------------- --------------
Income before taxes . . . . . . . $ 79 $ 1,045 $ 520 $ 1,809
============== ============== ============== ==============
GEOGRAPHIC INFORMATION (REVENUES):
United States . . . . . . . . . . . $ 13,610 $ 14,487 $ 27,573 $ 29,428
Foreign countries . . . . . . . . . 194 282 652 717
-------------- -------------- -------------- --------------
Consolidated total. . . . . . . . $ 13,804 $ 14,769 $ 28,225 $ 30,145
============== ============== ============== ==============
(1) Does not include full allocation of corporate administration.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- -----------------------
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis is based on the Company's condensed
consolidated financial statements and related footnotes contained within this
report. The Company's critical accounting policies used in the preparation of
those condensed consolidated financial statements are discussed below.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Significant estimates made by management include the
allowance for doubtful accounts, inventory valuation, deferred tax asset
valuation allowances, and legal accruals. Actual results could differ from
those estimates.
The Company's Norco division sells food, supplies and equipment to
franchisees on trade accounts under terms common in the industry. Revenue from
such sales is recognized upon shipment. Norco sales are reflected under the
caption "food and supply sales." Shipping and handling costs billed to customers
are recognized as revenue.
Franchise revenue consists of income from license fees, royalties, and
Territory sales. License fees are recognized as income when there has been
substantial performance of the agreement by both the franchisee and the Company,
generally at the time the unit is opened. Royalties are recognized as income
when earned.
Territory sales are the fees paid by selected experienced restaurant
operators to the Company for the right to develop Pizza Inn restaurants in
specific geographical territories. The Company recognizes the fee to the extent
its obligations are fulfilled and of cash received.
Inventories, which consist primarily of food, paper products, supplies and
equipment located at the Company's distribution center, are stated at the lower
of FIFO (first-in, first-out) cost or market. Provision is made for obsolete
inventories and is based upon management's assessment of the market conditions
for its products.
Accounts receivable consist primarily of receivables from food and supply
sales and franchise royalties. The Company records a provision for doubtful
receivables to allow for any amounts which may be unrecoverable and is based
upon an analysis of the Company's prior collection experience, customer
creditworthiness, and current economic trends.
Notes receivable primarily consist of notes from franchisees for trade
receivables, franchise fees and equipment purchases. These notes generally have
terms ranging from one to five years and interest rates of 6% to 12%. The
Company records a provision for doubtful receivables to allow for any amounts
which may be unrecoverable and is based upon an analysis of the Company's prior
collection experience, customer creditworthiness, and current economic trends.
The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets that may not be realized based upon the Company's
analysis of existing tax credits by jurisdiction and expectations of the
Company's ability to utilize these tax attributes through a review of estimated
future taxable income and establishment of tax strategies. These estimates
could be impacted by changes in future taxable income and the results of tax
strategies.
The Company assesses its exposures to loss contingencies including legal
and income tax matters based upon factors such as the current status of the
cases and consultations with external counsel and provides for an exposure if it
is judged to be probable and estimable. If the actual loss from a contingency
differs from management's estimate, operating results could be impacted.
RESULTS OF OPERATIONS
QUARTER AND SIX MONTHS ENDED DECEMBER 26, 2004 COMPARED TO THE QUARTER AND SIX
MONTHS ENDED DECEMBER 28, 2003.
Earnings per share for the quarter were $0.01 versus $0.06 for the same
period last year. Net income was $51,000 versus $558,000, on revenues of
$13,804,000 versus $14,769,000 in the previous year. For the six month period,
earnings per share were $0.03 versus $0.11 last year. Net income was $336,000
compared to $1,062,000 on revenues of $28,225,000 versus $30,145,000 last year.
Food and supply sales by the Company's Norco division include food and
paper products, equipment, marketing material, and other distribution revenues.
Food and supply sales for the quarter decreased 6%, or $731,000 to $12,301,000
from $13,032,000 compared to the same period last year. For the six month
period, food and supply sales decreased 5%, or $1,407,000, to $25,123,000 from
$26,530,000. The decrease in revenues is primarily due to reduced prices on
certain key ingredients and lower overall chainwide retail sales.
Franchise revenue, which includes income from royalties, license fees and
area development and foreign master license (collectively, "Territory") sales,
decreased 3% or $39,000 for the quarter compared to the same period last year
and decreased 6% or $150,000 for the six month period. The decrease for the
quarter is due to lower royalties due to lower retail sales. The decrease for
the six month period is due primarily to higher international royalties in the
prior year, which resulted from the collection of previously unrecorded past due
royalties, and was partially offset by lower domestic royalties due to lower
retail sales.
Restaurant sales, which consist of revenue generated by Company-owned
training stores decreased 35% or $133,000 for the quarter, compared to the same
period of the prior year. For the six month period, restaurant sales decreased
36% or $284,000. The decrease is the result of the sale of one buffet unit
replaced by a smaller Delco unit and lower comparable sales at the other
Company-owned store.
Other income consists primarily of interest income, third party
commissions, and non-recurring revenue items. Other income decreased 64% or
$62,000 for the quarter, compared to the same period of the prior year. For the
six months period, other income decreased 67% or $79,000. These decreases are
due primarily to lower vendor incentives. In addition, the prior year included
proceeds from the sale of used equipment.
Cost of sales, as a percentage of total costs, decreased 3% or $353,000 for
the quarter and decreased 3% or $757,000 for the six month period. Cost of
sales, as a percentage of sales for the quarter and the six month period,
increased to 93% from 90% for the same periods last year. The monetary decrease
was primarily due to lower payroll and related expenses, which were partially
offset by product cost inflation of approximately 5%. The increase as a
percentage of sales is the result of lower sales prices as mentioned above.
Franchise expenses include selling, general and administrative expenses
directly related to the sale and continuing service of franchises and
Territories. These costs decreased 4% or $27,000 for the quarter and decreased
14% or $212,000 for the six months period compared to the same period last year.
These decreases are primarily the result of lower payroll and related expenses
in both periods partially offset by higher product research expenses.
General and administrative expenses increased 53% or $403,000 for the
quarter and 21% or $384,000 for the six months, compared to the same periods
last year. The previous year's quarter included the reversal of $264,000 in bad
debt expense. In addition, legal and professional fees increased $188,000 for
ongoing litigation and arbitration compared to the same quarter last year.
Interest expense decreased 14% or $22,000 for the quarter and 14% or
$46,000 for the six months, compared to the same periods of the prior year due
to lower debt balances.
Provision for income taxes decreased 94% or $459,000 for the quarter, and
75% or $563,000 for the six months compared to the same periods in the prior
year. The effective tax rate was 40% for the current quarter, 34% for the
comparable period in the previous year, 38% for the six month period, and 34%
for the comparable period in the previous year.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities are generally the result of net
income, deferred taxes, depreciation and amortization, and changes in working
capital. In the first six months of fiscal 2005, the Company generated cash
flows of $472,000 from operating activities as compared to $2,628,000 in fiscal
2004. Cash provided by operations was utilized primarily to pay down debt and
to make capital expenditures.
Cash flows from investing activities primarily reflect the Company's
capital expenditure strategy. In the first six months of fiscal 2005, the
Company used cash of $354,000 for investing activities as compared to $987,000
in fiscal 2004. The cash used during fiscal 2005 consisted primarily of costs
associated with development of a new Company-owned store, and included
approximately $117,000 for repurchases of approximately 39,000 shares of the
Company's common stock pursuant to a repurchase plan authorized by the board of
directors.
Cash flows from financing activities generally reflect changes in the
Company's borrowings during the period, treasury stock transactions, and
exercise of stock options. Net cash used for financing activities was $545,000
in the first six months of fiscal 2005 as compared to cash used for financing
activities of $1,841,000 in fiscal 2004.
Management believes that future operations will generate sufficient taxable
income, along with the reversal of temporary differences, to fully realize the
deferred tax asset, net of a valuation allowance of $137,000 primarily related
to the potential expiration of certain foreign tax credit carryforwards.
Additionally, management believes that taxable income based on the Company's
existing franchise base should be more than sufficient to enable the Company to
realize its net deferred tax asset without reliance on material, non-routine
income. The Company's prior net operating loss carryforwards and alternative
minimum tax carryforwards have now been fully utilized and the Company began
making estimated quarterly tax payments in January 2004.
The Company entered into an agreement effective March 28, 2004
(the "Revolving Credit Agreement") with Wells Fargo to provide a $4.0 million
revolving credit line that will expire October 1, 2005, replacing a $7.0 million
line that was due to expire December 31, 2004. Interest on the revolving credit
line is payable monthly. Interest is provided for at a rate equal to prime or,
at the Company's option, at the LIBOR rate plus 1.25%. A 0.375% annual
commitment fee is payable on any unused portion of the revolving credit line.
As of December 26, 2004 and December 28, 2003, the variable interest rates were
5.0% and 2.64%, using a prime and LIBOR rate basis, respectively. Amounts
outstanding under the revolving credit line as of December 26, 2004 and December
28, 2003 were $970,000 and $1.5 million, respectively.
The Company entered into an agreement effective December 28, 2000, as
amended (the "Term Loan Agreement"), with Wells Fargo to provide up to $8.125
million of financing for the construction of the Company's new headquarters,
training center and distribution facility. The construction loan converted to a
term loan effective January 31, 2002 with the unpaid principal balance to mature
on December 28, 2007. The term loan will amortize over a term of twenty years,
with principal payments of $34,000 due monthly. Interest on the term loan is
also payable monthly. Interest is provided for at a rate equal to prime less an
interest rate margin of 0.75% or, at the Company's option, to the LIBOR rate
plus 1.5%. As of December 26, 2004 and December 28, 2003, the LIBOR variable
interest rates used were 3.91% and 2.65%, respectively. The Company, to fulfill
bank requirements, has caused the outstanding principal amount to be subject to
a fixed interest rate by utilizing an interest rate swap agreement as discussed
below. The $8.125 million term loan had an outstanding balance of $6.9 million
at December 26, 2004 and $7.3 million at December 28, 2003.
On December 16, 2004, Wells Fargo notified the Company that, pursuant to
the terms of the Revolving Credit Agreement and the Term Loan Agreement
(collectively, the "Loan Agreements"), Wells Fargo's lending obligations under
such agreements were automatically terminated as a result of a Change of Control
(as defined in the Loan Agreements) resulting from Ronald W. Parker ceasing to
be the Chief Executive Officer of the Company. In a written notice dated
December 21, 2004, Wells Fargo agreed, notwithstanding the foregoing Change of
Control, to reinstate the Company's ability to obtain revolving credit advances
under the Revolving Credit Agreement subject to certain conditions described in
the notice, including, without limitation, limiting the aggregate amount of all
revolving credit advances and letter of credit liabilities at any time
outstanding to not exceed $1.2 million. Additionally, in the December 21, 2004
notice, Wells Fargo reserved the right to terminate its agreement to continue to
extend revolving credit advances at any time upon prior written notice to the
Company. The terms of the Loan Agreements require the Company, upon the
occurrence of a Change of Control, to notify Wells Fargo and to offer to
accelerate payment of all then outstanding loan balances, including revolving
credit advances and the term loan. On December 27, 2004, the Company provided
such notice. Wells Fargo advised the Company in a letter dated February 8,
2005 that it declined to accept the Company's offer of acceleration subject to
the execution of a letter agreement (the "Letter Agreement") and an amendment to
the Loan Agreements. On February 9, 2005, the Company and Wells Fargo entered
into the Letter Agreement. Pursuant to the Letter Agreement, the Company
expects to enter into an amendment to the Loan Agreements, effective December
26, 2004, to provide a $3.0 million revolving credit line that will expire
December 23, 2005, replacing a $4.0 million revolving credit line that was due
to expire October 1, 2005. The amendment provides, among other terms, for
modifications to certain financial covenants and the interest rates on each
loan. Interest is provided for at a rate equal to prime plus 0.50%, or, at the
Company's option, at the LIBOR rate plus 2.75%. Additionally, the interest rate
on the Company's term loan is provided for under the amendment at prime rate or
the LIBOR rate plus 2.25%, at the Company's option. In connection with
discussions regarding the amendment to the Loan Agreements, Wells Fargo notified
the Company on February 4, 2005 that Wells Fargo had not been given proper
notice of the Company's purchase of shares of its common stock, and that as a
result an Event of Default existed under the Loan Agreement. Such Event of
Default is to be waived by Wells Fargo upon execution of the amendment to the
Loan Agreement.
On June 15, 2004, B. Keith Clark provided the Company with notice of his
intent to resign as Senior Vice President - Corporate Development, Secretary,
and General Counsel of the Company effective as of July 7, 2004. By letter dated
June 24, 2004, Mr. Clark notified the Company that he reserved his right to
assert that the election of Ramon D. Phillips and Robert B. Page to the board of
directors of the Company at the February 11, 2004 annual meeting of shareholders
constituted a "change of control" of the Company under his executive
compensation agreement ("Clark Agreement"). As a result of the alleged change
of control under the Clark Agreement, Clark claims that he was entitled to
terminate the Clark Agreement within twelve (12) months of February 11, 2004 for
"good reason" (as defined in the Clark Agreement) and is entitled to severance.
On August 6, 2004, the Company instituted an arbitration proceeding against Mr.
Clark with the American Arbitration Association in Dallas, Texas pursuant to the
Clark Agreement seeking declaratory relief that Mr. Clark is not entitled to
severance payments or any other further compensation from the Company. On
January 18, 2005, the Company amended its claims against Mr. Clark to include
claims for compensatory damages, consequential damages, and disgorgement of
compensation paid to Mr. Clark under the Clark Agreement. On January 18, 2005,
Mr. Clark filed claims against the Company for breach of the Clark Agreement,
seeking the severance payment provided for in the Clark Agreement if a
termination occurs following a change of control plus a bonus payment for 2003
of approximately $12,500. The arbitration hearing has been scheduled to begin
on May 10, 2005.
The Company disagrees with Mr. Clark's claim that a "change of control" has
occurred under the Clark Agreement or that he is entitled to terminate the Clark
Agreement for "good reason". On May 4, 2004, the board of directors obtained a
written legal opinion that the "change of control" provision in the Clark
Agreement was not triggered by the results of the February 11, 2004 annual
meeting. Due to the nature of the preliminary stages of the arbitration
proceeding and the general uncertainty surrounding the outcome of this type of
legal proceeding, it is not possible for the Company to provide any certain or
meaningful analysis, projections, or expectations at this time regarding the
outcome of this matter. Although the ultimate outcome of the arbitration
proceeding cannot be projected with certainty, the Company believes that its
claims against Mr. Clark are well founded and intends to vigorously pursue all
relief to which it may be entitled. An adverse outcome to the proceeding could
affect the Company's financial position and results of operations. In the event
the Company is unsuccessful, it could be liable to Mr. Clark for the severance
payment of approximately $762,000, the $12,500 bonus payment, and costs and
fees. No accrual for any amount has been made as of December 26, 2004. The
executive compensation agreements of each of Ward T. Olgreen and Shawn M.
Preator contain similar provisions regarding a "change of control" and the
amounts potentially payable to each of them if a "change of control" is deemed
to have occurred under the agreements that is asserted by February 10, 2005 are
as follows: $630,000 to Mr. Olgreen and $597,000 to Mr. Preator.
On December 11, 2004, the Board of Directors of the Company terminated the
Executive Compensation Agreement dated December 16, 2002 between the Company and
its then Chief Executive Officer, Ronald W. Parker ("Parker Agreement"). Mr.
Parker's employment was terminated following ten days written notice to Mr.
Parker of the Company's intent to discharge him for cause as a result of
violations of the Parker Agreement by Mr. Parker. Written notice of termination
was communicated to Mr. Parker on December 13, 2004. The nature of the cause
alleged was set forth in the notice of intent to discharge and based upon
Section 2.01(c) of the Parker Agreement, which provides for discharge for "any
intentional act of fraud against the Company, any of its subsidiaries or any of
their employees or properties, which is not cured, or with respect to which
Executive is not diligently pursuing a cure, within ten (10) business days of
the Company giving notice to Executive to do so." Mr. Parker was provided with
an opportunity to cure as provided in the Parker Agreement as well as the
opportunity to be heard by the Board of Directors prior to the termination.
On January 12, 2005, the Company instituted an arbitration proceeding
against Mr. Parker with the American Arbitration Association in Dallas, Texas
pursuant to the Parker Agreement seeking declaratory relief that Mr. Parker is
not entitled to severance payments or any other further compensation from the
Company. In addition, the Company is seeking compensatory damages,
consequential damages, and disgorgement of compensation paid to Mr. Parker under
the Parker Agreement. On January 31, 2005, Mr. Parker filed claims against the
Company for breach of the Parker Agreement, seeking the severance payment
provided for in the Parker Agreement for a termination by the Company for reason
other than for cause (as defined in the Parker Agreement), plus interest,
attorney's fees and costs. No date for an arbitration hearing has been set.
Due to the preliminary stages of the arbitration proceeding and the general
uncertainty surrounding the outcome of this type of legal proceeding, it is not
possible for the Company to provide any certain or meaningful analysis,
projections, or expectations at this time regarding the outcome of this matter.
Although the ultimate outcome of the arbitration proceeding cannot be projected
with certainty at this time, the Company believes that its claims against Mr.
Parker are well founded and intends to vigorously pursue all relief to which it
may be entitled. An adverse outcome to the proceeding could materially affect
the Company's financial position and results of operations. In the event the
Company is unsuccessful, it could be liable to Mr. Parker for approximately $5.4
million under the Parker Agreement plus accrued interest and legal expenses.
The Company maintains that it does not owe Mr. Parker severance payments or any
other compensation, but it believes that it has sufficient assets available to
make any payments required by an adverse determination. No accrual has been
made for this amount as of December 26, 2004.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The following chart summarizes all of the Company's material obligations
and commitments to make future payments under contracts such as debt and lease
agreements as of December 26, 2004 (in thousands):
After
Fiscal
Fiscal Year Fiscal Years Fiscal Years Year
Total 2005 2006 - 2007 2008 - 2009 2009
------------- ------------- ------------- ------------- ---
Bank debt . . . . . . . . . . . . . $ 7,910 $ 1,406 $ 812 $ 5,692 $ -
Operating lease obligations . . . . 2,262 956 1,051 215 40
Capital lease obligations (1) . . . 28 10 18 - -
------------ ------------- ------------- ------------- ---
Total contractual cash obligations. $ 10,200 $ 2,372 $ 1,881 $ 5,907 $40
============ ============= ============= ============= ===
(1) Does not include amount representing interest.
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 this report, the words "anticipate,"
"believe,""estimate," "expect," "intend" and 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.
Because of the risks and uncertainties related to these factors and the
forward-looking statements, readers are cautioned not to place undue reliance on
the forward-looking statements. There can be no assurance that any events or
results described in any forward-looking statement will actually occur or be
achieved. We undertake no obligation to publicly revise the forward-looking
statements to reflect events or circumstances that arise after the date hereof
or to reflect the occurrence of unanticipated events or circumstances. Readers
should carefully review the risk factors described above and in other documents
filed by the Company with the Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------
The Company has market risk exposure arising from changes in interest
rates. The Company's earnings are affected by changes in short-term interest
rates as a result of borrowings under its credit facilities which bear interest
based on floating rates.
At December 26, 2004 the Company has approximately $7.0 million of variable
rate debt obligations outstanding with a weighted average interest rate of
3.23%. A hypothetical 10% change in the effective interest rate for these
borrowings, assuming debt levels at December 26, 2004, would change interest
expense by approximately $6,000 for the six months ended December 26, 2004. As
discussed previously, the Company has entered into an interest rate swap
designed to manage the interest rate risk relating to $7.0 million of the
variable rate debt.
- ------
ITEM 4. CONTROLS AND PROCEDURES
- ------------------------------------
The Company's management, including the Company's principal executive
officer and principal financial officer, has evaluated the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period
covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, the
Company's principal executive officer and principal financial officer have
concluded that the disclosure controls and procedures were effective as of the
end of the period covered by this Quarterly Report on Form 10-Q.
There were no changes in the Company's internal control over financial
reporting that occurred during the Company's last fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- ----------------------------
On January 18, 2002, the Company was served with a lawsuit filed by
Blakely-Witt & Associates, Inc. alleging that the Company sent or caused to be
sent unsolicited facsimile advertisements. The Company has vigorously defended
its position in this litigation. In July 2004 the court preliminarily approved
a settlement agreement among all parties and certified the matter as a class
action for settlement purposes only. Under the settlement agreement the Company
would pay an amount that will not materially affect the Company's financial
performance. At a hearing on September 13, 2004 the court entered its final
order and judgment approving the settlement agreement and certifying the
settlement class. Pursuant to the settlement agreement the Company paid $90,000
in full and final settlement of all actual and potential claims of the members
and potential members of the certified settlement class. The final order
dismissed with prejudice all pending and potential claims against the Company.
On June 15, 2004, B. Keith Clark provided the Company with notice of his
intent to resign as Senior Vice President - Corporate Development, Secretary,
and General Counsel of the Company effective as of July 7, 2004. By letter dated
June 24, 2004 Mr. Clark notified the Company that he reserved his right to
assert that the election of Ramon D. Phillips and Robert B. Page to the board of
directors of the Company at the February 11, 2004 annual meeting of shareholders
constituted a "change of control" of the Company under his executive
compensation agreement ("Clark Agreement"). As a result of the alleged change
of control under the Clark Agreement, Clark claims that he was entitled to
terminate the Clark Agreement within twelve (12) months of February 11, 2004 for
"good reason" (as defined in the Clark Agreement) and is entitled to severance.
On August 6, 2004, the Company instituted an arbitration proceeding against Mr.
Clark with the American Arbitration Association in Dallas, Texas pursuant to the
Clark Agreement seeking declaratory relief that Mr. Clark is not entitled to
severance payments or any other further compensation from the Company. On
January 18, 2005, the Company amended its claims against Mr. Clark to include
claims for compensatory damages, consequential damages, and disgorgement of
compensation paid to Mr. Clark under the Clark Agreement. On January 18, 2005,
Mr. Clark filed claims against the Company for breach of the Clark Agreement,
seeking the severance payment provided for in the Clark Agreement if a
termination occurs following a change of control plus a bonus payment for 2003
of approximately $12,500. The arbitration hearing has been scheduled to begin
on May 10, 2005.
The Company disagrees with Mr. Clark's claim that a "change of control" has
occurred under the Clark Agreement or that he is entitled to terminate the Clark
Agreement for "good reason". On May 4, 2004, the board of directors obtained a
written legal opinion that the "change of control" provision in the Clark
Agreement was not triggered by the results of the February 11, 2004 annual
meeting. Due to the nature of the preliminary stages of the arbitration
proceeding and the general uncertainty surrounding the outcome of this type of
legal proceeding, it is not possible for the Company to provide any certain or
meaningful analysis, projections, or expectations at this time regarding the
outcome of this matter. Although the ultimate outcome of the arbitration
proceeding cannot be projected with certainty, the Company believes that its
claims against Mr. Clark are well founded and intends to vigorously pursue all
relief to which it may be entitled. An adverse outcome to the proceeding could
affect the Company's financial position and results of operations. In the event
the Company is unsuccessful, it could be liable to Mr. Clark for the severance
payment of approximately $762,000, the $12,500 bonus payment, and costs and
fees. No accrual for any amount has been made as of December 26, 2004. The
executive compensation agreements of each of Ward T. Olgreen and Shawn M.
Preator contain similar provisions regarding a "change of control" and the
amounts potentially payable to each of them if a "change of control" is deemed
to have occurred under the agreements that is asserted by February 10, 2005 are
as follows: $630,000 to Mr. Olgreen and $597,000 to Mr. Preator.
On October 5, 2004 the Company filed a lawsuit against the law firm Akin,
Gump, Strauss, Hauer & Feld, and J. Kenneth Menges, one of the firm's partners.
Akin Gump served as the Company's principal outside lawyers from 1997 through
May 2004, when the Company terminated the relationship. The petition alleges
that during the course of representation of the Company, the firm and Mr.
Menges, as the partner in charge of the firm's services for the Company,
breached certain fiduciary responsibilities to the Company by giving advice and
taking action to further the personal interests of certain of the Company's
executive officers to the detriment of the Company and its shareholders.
Specifically, the petition alleges that the firm and Mr. Menges assisted in the
creation and implementation of so-called "golden parachute" agreements, which,
in the opinion of the Company's current counsel, provided for potential
severance payments to those executives in amounts greatly disproportionate to
the Company's ability to pay, and that, if paid, could expose the Company to
significant financial liability which could have a material adverse effect on
the Company's financial position. This matter is in its preliminary stages, and
the Company is unable to provide any meaningful analysis, projections, or
expectations at this time regarding the outcome of this matter. However, the
Company believes that its claims against Akin Gump and Mr. Menges are well
founded and intends to vigorously pursue all relief to which it may be entitled.
On January 25, 2005, Akin Gump filed a motion with the court asking for this
matter to be abated pending a determination in the Clark and Paker arbitrations.
No hearing date has been set for the motion.
On December 11, 2004, the Board of Directors of the Company terminated the
Executive Compensation Agreement dated December 16, 2002 between the Company and
its then Chief Executive Officer, Ronald W. Parker ("Parker Agreement"). Mr.
Parker's employment was terminated following ten days written notice to Mr.
Parker of the Company's intent to discharge him for cause as a result of
violations of the Parker Agreement by Mr. Parker. Written notice of termination
was communicated to Mr. Parker on December 13, 2004. The nature of the cause
alleged was set forth in the notice of intent to discharge and based upon
Section 2.01(c) of the Parker Agreement, which provides for discharge for "any
intentional act of fraud against the Company, any of its subsidiaries or any of
their employees or properties, which is not cured, or with respect to which
Executive is not diligently pursuing a cure, within ten (10) business days of
the Company giving notice to Executive to do so." Mr. Parker was provided with
an opportunity to cure as provided in the Parker Agreement as well as the
opportunity to be heard by the Board of Directors prior to the termination.
On January 12, 2005, the Company instituted an arbitration proceeding
against Mr. Parker with the American Arbitration Association in Dallas, Texas
pursuant to the Parker Agreement seeking declaratory relief that Mr. Parker is
not entitled to severance payments or any other further compensation from the
Company. In addition, the Company is seeking compensatory damages,
consequential damages, and disgorgement of compensation paid to Mr. Parker under
the Parker Agreement. On January 31, 2005, Mr. Parker filed claims against the
Company for breach of the Parker Agreement, seeking the severance payment
provided for in the Parker Agreement for a termination by the Company for reason
other than for cause (as defined in the Parker Agreement), plus interest,
attorney's fees and costs. No date for an arbitration hearing has been set.
Due to the preliminary stages of the arbitration proceeding and the general
uncertainty surrounding the outcome of this type of legal proceeding, it is not
possible for the Company to provide any certain or meaningful analysis,
projections, or expectations at this time regarding the outcome of this matter.
Although the ultimate outcome of the arbitration proceeding cannot be projected
with certainty at this time, the Company believes that its claims against Mr.
Parker are well founded and intends to vigorously pursue all relief to which it
may be entitled. An adverse outcome to the proceeding could materially affect
the Company's financial position and results of operations. In the event the
Company is unsuccessful, it could be liable to Mr. Parker for approximately $5.4
million under the Parker Agreement plus accrued interest and legal expenses.
The Company maintains that it does not owe Mr. Parker severance payments or any
other compensation, but it believes that it has sufficient assets available to
make any payments required by an adverse determination. No accrual has been
made for this amount as of December 26, 2004.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND THE USE OF PROCEEDS
- --------------------------------------------------------------------------------
The Company made the following share repurchases during the second quarter of
fiscal 2005:
Total Number Maximum
Of Shares Number Of
Purchased As Part Shares That May
Average Of Publicly Yet Be Purchased
Total Number Of Price Paid Announced Plans Under The Plans
Period Shares Purchased Per Share Or Programs Or Programs
- -------------------- ----------------- ---------------- ---------------- ---------------
Month #1
September 27, 2004 -
October 31, 2004 . . 30,035 $ 3.00 - 1,075,804
Month #2
November 1, 2004 -
November 28, 2004. . - - - 1,075,804
Month #3
November 29, 2004 -. 9,400 $ 2.90 9,400 1,066,404
December 26, 2004
----------------- --------------- ----------------- ---------------
Total. . . . . . . . 39,435 $ 2.98 9,400 1,066,404
================= ================ ================ ===============
1) On October 25, 2004, the Company purchased 30,035 shares of its common stock
pursuant to a private purchase agreement. In October 2004, the board of
directors of the Company authorized the Company to purchase up to 1,000,000
shares of its common stock other than through a publicly announced plan or
program, including, without limitation, through private purchase agreements,
open-market transactions, and other transactions.
2) The Company purchased 1,550 shares of its common stock on December 16, 2004,
1,550 shares on December 17, 2,100 shares on December 21, 2,100 shares on
December 22, and 2,100 shares on December 23 as part of plan approved by the
board of directors of the Company on August 15, 2001 and publicly announced on
August 16, 2001. The Company was approved to purchased up to 1,000,000 shares of
its own common stock as part of the plan. There are 900,000 shares that may yet
be purchased as part of this plan. This plan has no expiration date.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ---------------------------------------------------------------------
NONE
ITEM 5. OTHER INFORMATION
- ----------------------------
In connection with discussions regarding the amendment to the Loan Agreement,
Wells Fargo notified the Company on February 4, 2005 that Wells Fargo had not
been given proper notice of the Company's purchase of shares of its common
stock, and that as a result an Event of Default existed under the Loan
Agreement. Such Event of Default is to be waived by Wells Fargo upon execution
of the amendment to the Loan Agreement, which is contemplated by a letter
agreement between the Company and Wells Fargo dated February 9, 2005.
- ------
ITEM 6. EXHIBITS
- ------------------
10.1 Letter Agreement dated February 9, 2005 between Pizza Inn, Inc. and Wells
Fargo Bank, National Association.
31.1 Certification of Chief Executive Officer as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PIZZA INN, INC.
Registrant
By: /s/Robert B. Page
-------------------
Robert B. Page
Chief Executive Officer
By: /s/Shawn M. Preator
---------------------
Shawn M. Preator
Chief Financial Officer
Dated: February 9, 2005
February 8, 2005
CERTIFIED MAIL;
- ---------------
RECEIPT NO.
- ------------
Pizza Inn, Inc.
3551 Plano Parkway
The Colony, Texas 75056
Attn: Mark Schwarz
Re: Third Amended and Restated Loan Agreement (as amended by that
certain First Amendment to Third Amended and Restated Loan Agreement dated as of
March 28, 2004, the "LOAN AGREEMENT") dated as of January 22, 2003 by and
between Pizza Inn, Inc. ("BORROWER") and Wells Fargo Bank, National Association
(successor to Wells Fargo Bank (Texas), National Association, herein "BANK").
All terms used herein and not otherwise defined herein shall have the meanings
given to them in the Loan Agreement.
Ladies and Gentlemen:
Reference is made to that certain letter dated December 27, 2004, sent by
you to Bank notifying Bank of a Change of Control resulting from Ronald Parker
ceasing to be the Chief Executive Officer of Borrower (the "PARKER CHANGE OF
CONTROL") and, in accordance with Section 10.12 of the Loan Agreement, offering
-------------
to accelerate payment of the obligations (the "NOTICE AND OFFER").
In addition, you are hereby notified that an Event of Default currently exists
under the Loan Agreement. As disclosed in the most recent draft 10Q statement
of Borrower received by Bank, Bank is aware that Borrower repurchased certain of
its capital stock for a purchase price of approximately $117,000. Section 11.4
------------
of the Loan Agreement prohibits Borrower's repurchase of its capital stock
without Bank's consent (the "CURRENT DEFAULT").
Without waiving any Default or Event of Default now existing or hereafter
arising under the Loan Agreement and the other Loan Documents, other than the
Current Default, or any of Bank's rights and remedies under the Loan Agreement
and the other Loan Documents resulting therefrom, Bank agrees (a) not to
accelerate payment of the Obligations based on the Notice and Offer and (b) to
waive the Current Default, subject to the following conditions precedent:
1. Borrower acknowledges the terms of this letter by executing it in the
space indicated below.
2. On or before the close of business on February 11, 2005, Borrower enters
into a Second Amendment to Third Amended and Restated Loan Agreement and such
other documents, instruments, promissory notes and agreements Bank deems
necessary in connection therewith (the "SECOND AMENDMENT") pursuant to which the
Loan Agreement is amended in accordance with the terms set forth below and such
other terms, covenants and agreements which are in form and substance
satisfactory to Bank;
a. The Revolving Credit Commitment shall be reduced to $3,000,000;
b. The definition of "Termination Date" shall be modified to December 23,
2005;
c. The interest rate for the Real Estate Loan shall be modified to LIBOR +
2.25%;
d. The interest rate for the Revolving Credit Loan shall be modified to
LIBOR + 2.75% or Prime + 0.50%;
e. The Commitment Fee set forth in Section 2.7 of the Loan Agreement shall
-----------
be terminated;
f. The definition of "Change of Control" and the Change of Control
provisions in the Loan Agreement shall be modified;
g. Borrower shall be prohibited from making non-financed capital
expenditures in excess of $500,000 in the aggregate during any given fiscal year
without Bank's consent;
h. Included with existing reporting requirements, Borrower shall be required
to deliver an aged listing of accounts receivable, accounts payable and a
reconciliation of accounts, and, at any time requested by Bank, a listing of all
account debtors that includes names, addresses and phone numbers of the account
debtors;
i. The Tangible Net Worth covenant contained in Section 12.2 of the Loan
------------
Agreement shall be deleted;
j. A new financial covenant shall be added that requires Borrower to
maintain total liabilities less subordinated debt divided by Tangible Net Worth
of not more than 1.50 to 1.00; and
k. A new covenant shall be added that prohibits the outstanding principal
and interest amount of the Revolving Credit Loan plus all Letter of Credit
Liabilities to exceed 80% of Eligible Accounts (as defined in EXHIBIT A attached
hereto);
3. No Event of Default, other than the Current Default, shall have occurred
and be continuing, or would result from the Second Amendment; and
4. All of the representations and warranties contained in the Loan Agreement
and in the other Loan Documents shall be true and correct on and as of the date
of the Second Amendment.
Failure by you to execute the Second Amendment and such other documents,
instruments, promissory notes and agreements Bank deems necessary in connection
therewith on or before February 11, 2005, shall constitute an Event of Default
under the Loan Agreement. This letter shall constitute a Loan Document.
Notwithstanding Bank's agreement (a) not to accelerate payment of the
Obligations based on the Notice and Offer and (b) to waive the Current Default,
subject to the foregoing conditions, you are hereby notified that Bank requires
strict compliance with the terms and conditions of the Loan Documents. The
execution by Bank of this letter, or any other act or omission by Bank, or its
officers in connection herewith, shall not be deemed a waiver by Bank of any
Default or Event of Default, other than the Current Default, which may exist or
which may occur in the future under the Loan Agreement or any other Loan
Document, or any future Default or Event of Default of the same provision waived
under the Current Default (collectively "OTHER VIOLATIONS"). No waiver of any
provision of the Loan Agreement or any other Loan Document shall be effective
unless the same shall be in writing and signed by Bank, and then such waiver or
consent shall be effective only in the specific instance to which it relates and
for the purpose for which it is given. Similarly, nothing contained in this
letter shall directly or indirectly in any way whatsoever either (i) impair,
prejudice or otherwise adversely affect Bank's right at any time to exercise any
right, privilege or remedy in connection with the Loan Agreement or any other
Loan Document with respect to any Other Violations, (ii) amend or alter any
provision of the Loan Agreement or any other Loan Document, or (iii) constitute
any course of dealing or other basis for altering any obligation of Borrower or
any right, privilege or remedy of Bank under the Loan Agreement or any other
Loan Document. Nothing in this letter shall be construed to be a consent or
waiver by Bank of any Other Violations. The rights provided for in the Loan
Agreement and the other Loan Documents are cumulative and not intended to be
exclusive of any other right given hereunder or now or hereafter existing at law
or in equity or by statute or otherwise.
This letter may be executed in one or more counterparts, each of which when
so executed shall be deemed to be an original, but all of which when taken
together shall constitute one and the same instrument. The parties agree that
this letter may be executed and delivered via facsimile and any such facsimile
copy of any such document shall be considered to have the same binding legal
effect as an original copy and each party hereby agrees that it shall not raise
the use of a facsimile copy as a defense to this letter and forever waives any
such defense. Furthermore, at the request of any party, a party executing and
delivering this letter by facsimile copy shall re-execute an original copy in
replacement.
Bank intends this letter to supercede and replace, in its entirety,
correspondence dated February 4, 2005, issued by Bank to Borrower.
Should you have any questions, please do not hesitate to contact the
undersigned.
Very truly yours,
WELLS FARGO BANK, NATIONAL ASSOCIATION
By: /s/ Ralph Hamm III
Name: Ralph Hamm III
Title: Vice President
AGREED AND ACCEPTED TO
THIS 9th DAY OF FEBRUARY, 2005 BY:
PIZZA INN, INC.
By: /s/ Robert B. Page
Name: Robert B. Page
Title: Chief Executive Officer
EXHIBIT A
- ----------
"Eligible Accounts" means, at any time, all accounts receivable of the
------------------
Borrower created in the ordinary course of business that are acceptable to Bank
and satisfy the following conditions:
1. The account complies with all applicable laws, rules, and regulations,
including, without limitation, usury laws, the Federal Truth in Lending Act, and
Regulation Z of the Board of Governors of the Federal Reserve System;
2. The account has not been outstanding for more than 90 days past the
original date of invoice;
3. The account does not represent a commission and the account was created
in connection with (i) the sale of goods by the Borrower in the ordinary course
of business and such sale has been consummated and such goods have been shipped
and delivered and received by the account debtor, or (ii) the performance of
services by the Borrower in the ordinary course of business and such services
have been completed and accepted by the account debtor;
4. The account arises from an enforceable contract, the performance of which
has been completed by the Borrower;
5. The account does not arise from the sale of any good that is on a
bill-and-hold, guaranteed sale, sale-or-return, sale on approval, consignment,
or any other repurchase or return basis;
6. The Borrower has good and indefeasible title to the account and the
account is not subject to any Lien except Liens in favor of Bank;
7. The account does not arise out of a contract with or order from, an
account debtor that, by its terms, prohibits or makes void or unenforceable the
grant of a security interest by the Borrower to Bank in and to such account;
8. The account is not subject to any setoff, counterclaim, defense, dispute,
recoupment, or adjustment other than normal discounts for prompt payment;
9. The account debtor is not insolvent or the subject of any bankruptcy or
insolvency proceeding and has not made an assignment for the benefit of
creditors, suspended normal business operations, dissolved, liquidated,
terminated its existence, ceased to pay its debts as they become due, or
suffered a receiver or trustee to be appointed for any of its assets or affairs;
10. The account is not evidenced by chattel paper or an instrument;
11. No default exists under the account by any party thereto;
12. The account debtor has not returned or refused to retain, or otherwise
notified the Borrower of any dispute concerning, or claimed nonconformity of,
any of the goods from the sale of which the account arose;
13. The account is not owed by an Affiliate, employee, officer, director or
shareholder of the Borrower, except certain trade accounts arising in the
ordinary course of business from director owned franchises that would otherwise
be Eligible Accounts;
14. The account is payable in Dollars by the account debtor;
15. The account is not owed by an account debtor whose accounts Bank in its
sole discretion has chosen to exclude from Eligible Accounts;
16. The account shall be ineligible if (a) the account debtor is domiciled
in any country other than the United States of America and (b) the aggregate
amount of accounts owed by account debtors domiciled outside the United States
of America is in excess of $500,000, to the extent of such excess;
17. The account shall be ineligible if more than twenty percent (20%) of the
aggregate balances then outstanding on accounts owed by such account debtor and
its Affiliates to the Borrower are more than 90 days past the dates of their
original invoices;
18. The account shall be ineligible if the account debtor is the United
States of America or any department, agency, or instrumentality thereof, and the
Federal Assignment of Claims Act of 1940, as amended, shall not have been
complied with; and
19. The Account is otherwise acceptable in the sole discretion of Bank;
provided that Bank shall have the right to create and adjust eligibility
standards and related reserves from time to time in its good faith credit
judgment.
The amount of the Eligible Accounts owed by an account debtor to the
Borrower shall be reduced by the amount of all "contra accounts" and other
obligations owed by the Borrower to such account debtor.
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert B. Page, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pizza Inn, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c. Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
By: /s/Robert B. Page
-------------------
Robert B. Page
Chief Executive Officer
Date: February 9, 2005 Director
- ------
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Shawn M. Preator, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pizza Inn, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c. Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
By: /s/Shawn M. Preator
---------------------
Shawn M. Preator
Date: February 9, 2005 Chief Financial Officer
EXHIBIT 32.1
- -------------
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a)
and (b) of Section 1350, Chapter 63 of Title 18, United States Code), the
undersigned officer of Pizza Inn, Inc. (the "Company"), does hereby certify, to
such officer's knowledge, that:
The Quarterly Report on Form 10-Q for the quarter ended December 26, 2004
(the "Form 10-Q") of the Company fully complies with the requirements of Section
13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and the
information contained in the Form 10-Q fairly presents, in all material
respects, the financial condition and results of operations of the Company as
of, and for, the periods presented in the Form 10-Q.
By: /s/Robert B. Page
-------------------
Robert B. Page
Chief Executive Officer
Date: February 9, 2005 Director
The foregoing certification is being furnished as an exhibit to the Form 10-Q
pursuant to Item 601(b)(32) of Regulation S-K and Section 906 of the
Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63
of Title 18, United States Code) and, accordingly, is not being filed as part of
the Form 10-Q for purposes of Section 18 of the Securities Exchange Act of 1934,
as amended, and is not incorporated by reference into any filing of the Company,
whether made before or after the date hereof, regardless of any general
incorporation language in such filing.
EXHIBIT 32.2
- -------------
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a)
and (b) of Section 1350, Chapter 63 of Title 18, United States Code), the
undersigned officer of Pizza Inn, Inc. (the "Company"), does hereby certify, to
such officer's knowledge, that:
The Quarterly Report on Form 10-Q for the quarter ended December 26, 2004
(the "Form 10-Q") of the Company fully complies with the requirements of Section
13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and the
information contained in the Form 10-Q fairly presents, in all material
respects, the financial condition and results of operations of the Company as
of, and for, the periods presented in the Form 10-Q.
By: /s/Shawn M. Preator
---------------------
Shawn M. Preator
Chief Financial Officer
Date: February 9, 2005
The foregoing certification is being furnished as an exhibit to the Form 10-Q
pursuant to Item 601(b)(32) of Regulation S-K and Section 906 of the
Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63
of Title 18, United States Code) and, accordingly, is not being filed as part of
the Form 10-Q for purposes of Section 18 of the Securities Exchange Act of 1934,
as amended, and is not incorporated by reference into any filing of the Company,
whether made before or after the date hereof, regardless of any general
incorporation language in such filing.