SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D. C. 20549
FORM
10-K
(Mark
One)
[X] Annual Report pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended June 29,
2008.
Transition report pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934
[ ] For
the transition period from _____ to _____.
Commission
File Number 0-12919
PIZZA
INN, INC.
(Exact
name of registrant as specified in its charter)
|
Missouri
|
47-0654575
|
|
(State
or jurisdiction of
|
(Employer
|
|
incorporation
or organization)
|
Identification
No.)
|
|
3551
Plano Parkway
|
|
|
The
Colony, Texas
|
75056
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area
code: (469) 384-5000
Securities
registered pursuant to Section 12(b) of the Act:
|
Title
of class
|
Name
of each exchange on which registered
|
|
|
Common
stock, par value $.01 each
|
NASDAQ
Capital Market
|
Securities registered pursuant to
Section 12(g) of the
Act: None
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes __ No Ö_
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act. Yes __ No
Ö
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 for
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 Ö
No ___
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer or a smaller reporting company. See definition of “accelerated
filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act. (Check one):
1
Large accelerated filer Accelerated
filer Non-accelerated
filer
Smaller
reporting company Ö
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes
___ No Ö
As of
December 23, 2007, the last business day of the registrant’s most recently
completed second fiscal quarter, the aggregate market value of the voting and
non-voting common equity held by non-affiliates was $14,836,422 computed by
reference to the closing price at which the common equity was last sold, or the
average bid and asked price of such common equity, as of the last business day
of the registrant’s most recently completed second fiscal quarter.
As
of September 2, 2008, there were 8,837,842 shares of the registrant’s common
stock outstanding.
2
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrant’s definitive
proxy statement, to be filed pursuant to Section 14(a) of the Securities
Exchange Act in connection with the registrant’s annual meeting of shareholders
scheduled for December 17, 2008, have been incorporated by reference in Part III
of this report.
Risks Associated with
Forward-Looking Statements
This Form
10-K contains certain forward-looking statements, within the meaning of the
Private Securities Litigation Reform Act of 1995, which are intended to be
covered by the safe harbors created thereby. Forward-looking
statements include statements which are predictive in nature, which depend upon
or refer to future events or conditions, or which include words such as
“expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate” or similar
expressions. These statements include the plans and objectives of
management for future operations, including plans and objectives relating to
future growth of our business activities and availability of
funds. Statements regarding the following subjects are
forward-looking by their nature:
• our
business and growth strategies;
• our
performance goals;
• our
projected financial condition and operating results;
• our
understanding of our competition;
• industry
and market trends; and
• any
other statements or assumptions that are not historical facts.
The
forward-looking statements included in this Form 10-K are based on current
expectations that involve numerous risks and
uncertainties. Assumptions relating to these forward-looking
statements involve judgments with respect to, among other things, future
economic, competitive and market conditions, regulatory framework and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond our control. Although we
believe that the assumptions underlying these forward-looking statements are
reasonable, any of the assumptions could be inaccurate and, therefore, there can
be no assurance that the forward-looking statements included in this Form 10-K
will prove to be accurate. In light of the significant uncertainties
inherent in these forward-looking statements, the inclusion of such information
should not be regarded as a representation that our objectives and plans will be
achieved.
PART
I
ITEM
1. BUSINESS.
General
Pizza
Inn, Inc. and its subsidiaries (collectively referred to as the “Company”,
“Pizza Inn” or in the first person notations of “we”, “us” and “our”) operate
and franchise pizza buffet, delivery/carry-out and express restaurants
domestically and internationally under the trademark “Pizza
Inn.” Through our Norco Restaurant Services Company (“Norco”)
division, and through agreements with third party distributors, we provide or
facilitate food, equipment and supply distribution to our domestic and
international system of restaurants.
As of June 29, 2008, the Pizza Inn
system consisted of 323 restaurants, including one Company-owned restaurant, and
322 franchised restaurants. The 255 domestic restaurants are
comprised of 158 buffet restaurants, 41 delivery/carry-out restaurants and 56
express restaurants. The 68 international franchised restaurants are
comprised of 12 buffet restaurants, 47 delivery/carry-out restaurants and 9
express restaurants. Domestic restaurants are located predominantly
in the southern half of the United States, with Texas, North Carolina,
Mississippi and Arkansas accounting for approximately 35%, 15%, 8% and 8%,
respectively, of the total number of domestic restaurants.
3
Our
History
Pizza Inn has offered consumers
affordable, high quality pizza since 1958, when the first Pizza Inn restaurant
opened in Dallas, Texas. We awarded our first franchise in 1963 and
opened our first buffet restaurant in 1969. We began franchising the
Pizza Inn brand internationally in the late 1970s. In 1993, our stock
began trading on the NASDAQ Stock Market, and presently trades on the NASDAQ
Capital Market under the ticker symbol “PZZI.”
Our
Concepts
We offer three restaurant concepts:
buffet, delivery/carry-out and express. Each is designed to enhance the smooth
flow of food ordering, preparation and service, and we believe that the overall
configuration of each results in simplified operations, lower training and labor
costs, increased efficiency and improved consistency and quality of our food
products. Our restaurants may be configured to adapt to a variety of
building shapes and sizes, offering the flexibility necessary for our concepts
to be operated at any number of otherwise suitable locations.
Our focused menu is designed to present
an appealing variety of high quality pizza and side items to our
customers. Our basic buffet restaurant menu offers three main crusts
(Original Thin Crust, New York Pan and Italian), with standard toppings and
special combinations of toppings. Buffet restaurants also offer
pasta, salad, sandwiches, appetizers, desserts and beverages, including beer and
wine in some locations, in an informal, family-oriented
atmosphere. We occasionally offer other items on a limited
promotional basis. Delivery/carryout restaurants typically offer the
three main crusts and some combination of side items. We believe that
our focus on three main crust types creates a better brand identity among
customers, improves operating efficiency and maintains food quality and
consistency.
Our buffet and delivery/carry-out
concepts feature crusts that are hand-made from dough made fresh in the
restaurant each day. Pizza Inn pizzas are made from a proprietary
all-in-one flour mixture, real mozzarella cheese and a proprietary mix of
classic pizza spices. Domestically, all ingredients and toppings can
be purchased from Norco which makes deliveries to each domestic restaurant in
our system at least once per week. Beginning in November 2006, two
authorized third party distributors, each of which has delivery responsibilities
for different geographical regions of our system, began providing certain of the
warehousing and delivery services that were previously provided by
Norco. In international markets, the menu mix of toppings and side
items is occasionally adapted to local tastes.
Buffet
Restaurants
Buffet
restaurants offer dine-in, carryout and catering service and, in many cases,
also offer delivery service (“Buffet Units”). They are generally
located in free standing buildings or in-line locations in retail developments
in close proximity to offices, shopping centers and residential
areas. The current standard Buffet Units are between 2,100 and 4,500
square feet in size and seat 120 to 185 customers. The interior decor
is designed to promote a casual, lively, contemporary, family-style
atmosphere.
The buffet is typically offered at
prices from $4.99 to $6.99, and the average ticket price per meal, including a
drink, is approximately $8.30 per person for fiscal year 2008. The
average per person ticket is slightly higher in restaurants offering beer and
wine.
We are implementing an updated image
for our domestic Buffet Units. The new image includes significant
exterior and interior changes in signage, color schemes and dining area
configuration, including the addition of a back-fed buffet bar offering an
attractive and efficient presentation. The interior features vibrant
colors, graphic accents, contemporary furnishings and updated signage and
logos. Some Buffet Units feature game rooms that offer a range of
electronic game entertainment for the entire family. Interiors
feature selected memorabilia capturing some of the milestones in our nearly 50
years of operation. Additionally, some Buffet Units offer guests the
convenience of curbside service. The new image has been introduced in
the Company-owned Buffet Unit, as well as in new franchised Buffet Units and
several existing, remodeled franchise Buffet Units.
Delivery/Carryout
Restaurants
Delivery/carryout restaurants offer
delivery and carryout service only and are typically located in shopping centers
or other in-line retail developments (“Delco Units”). These
relatively small restaurants, occupying approximately 1,200 square feet, are
primarily production facilities and, in most instances, do not offer
seating. Because Delco Units do not typically offer
dine-in areas, they usually do not require expensive real estate leasehold or
ownership costs and are relatively less expensive to build and
equip. The decor of the Delco Unit is designed to be bright and
highly visible and feature neon, lighted displays and awnings. We
have attempted to locate Delco Units strategically to facilitate timely delivery
service and to provide easy access for carryout service.
4
Express
Restaurants
Express restaurants serve our customers
through a variety of non-traditional points of sale. Express
restaurants are typically located in a convenience store, food court, college
campus, airport terminal, athletic facility or other commercial facility
(“Express Units”). They have limited or no seating and solely offer
quick carryout service of a limited menu of pizza and other foods and
beverages. An Express Unit typically occupies approximately 200 to
400 square feet and is commonly operated by the operator or food service
licensee of the commercial host facility. We have developed a
high-quality pre-prepared crust that is topped and cooked on-site, allowing this
concept to offer a lower initial investment and reduced labor and operating
costs while maintaining product quality and consistency. Like Delco
Units, Express Units are primarily production-oriented facilities and,
therefore, do not require all of the equipment, labor, real estate or square
footage of the Buffet Unit.
Site
Selection
We consider the restaurant site
selection process critical to a restaurant’s long-term success and devote
significant resources to the investigation and evaluation of potential sites.
The site selection process includes a review of trade area demographics and
other competitive factors. We also rely on the franchisee’s knowledge
of the trade area and market characteristics when selecting a location for a
franchised restaurant. A member of our development team will visit each
potential domestic Company-owned restaurant location. We try to
locate franchised and Company-owned restaurants in retail strip centers or
freestanding buildings offering visibility, curb appeal and
accessibility.
Development
and Operations
We intend to continue our expansion
domestically in markets with significant long-term growth potential and where we
believe we can use our competitive strengths to establish brand recognition and
gain local market share. We believe our franchise-oriented business
model will allow us to expand our restaurant base with limited capital
expenditures and working capital requirements. While we plan to
expand our domestic restaurant base primarily through opening new franchised
restaurants, we also will continue to evaluate our mix of Company-owned and
franchised restaurants and may strategically develop Company-owned restaurants,
acquire franchised restaurants and re-franchise Company-owned
restaurants. We also believe that our most promising development and
system growth opportunities lie with experienced, well-capitalized,
multi-restaurant operators.
The specific rate at which we will be
able to expand through franchise development is determined in part by our
success at selecting qualified franchisees, by our ability to identify
satisfactory sites in appropriate markets and by our ability to continue
training and monitoring our franchisees.
Franchise
Operations
We have adopted a franchising strategy
that has two major components: continued development within our
existing market areas and new development in strategically targeted domestic
territories. We also intend to continue to seek appropriate
international development opportunities.
Franchise and development
agreements. Our current forms of franchise agreements provide for: (i) an
initial franchise fee of $25,000 for a Buffet Unit, $10,000 for a Delco Unit and
$5,000 for an Express Unit, (ii) an initial franchise term of 20 years for a
Buffet Unit and ten years for a Delco Unit or Express Unit, plus a renewal term
of ten years for each concept, (iii) required contributions equal to 1% of gross
sales to the Pizza Inn Advertising Plan (“PIAP”) or to us, as discussed below,
(iv) royalties equal to 4% of gross sales for a Buffet Unit or Delco Unit, and
5% of gross sales for an Express Unit, and (v) required advertising expenditures
of at least 5% of gross sales for a Buffet Unit or Delco Unit, and 2% for an
Express Unit. We have offered, to certain experienced restaurant
operators, area developer rights in new and existing domestic
markets. An area developer typically pays a negotiated fee to
purchase the right to operate or develop restaurants within a defined territory
and typically agrees to a multi-restaurant development schedule and
to assist us in local franchise service and quality control in exchange for half
of the franchise fees and royalties from all restaurants within the territory
during the term of the agreement.
Since the Pizza Inn concept was first
franchised in 1963, industry franchising concepts and development strategies
have changed, and our present franchise relationships are evidenced by a variety
of contractual forms. Common to those forms are provisions that: (i)
require the franchisee to follow the Pizza Inn system of restaurant operation
and management, (ii) require the franchisee to pay a franchise fee and
continuing royalties, and (iii) except for Express Units, prohibit the
development of one restaurant within a specified distance from
another.
5
Training. We offer
numerous training programs for the benefit of franchisees and their restaurant
crew managers. The training programs, taught by experienced Company
employees, focus on food preparation, service, cost control, sanitation, safety,
local store marketing, personnel management and other aspects of restaurant
operation. The training programs include group classes, supervised
work in Company-owned restaurants and special field seminars. Initial
and certain supplemental training programs are offered free of charge to
franchisees, who pay their own travel and lodging
expenses. Restaurant managers train their staff through on-the-job
training, utilizing video and printed materials produced by us.
Standards. We
require adherence to a variety of standards designed to ensure
proper operations and to protect and enhance our
brand. All franchisees are required to operate their restaurants in
compliance with these written policies, standards and specifications, which
include matters such as menu items, ingredients, materials, supplies, services,
furnishings, decor and signs. Our efforts to maintain consistent
operations may result from time to time in closing certain restaurants that have
not achieved and maintained a consistent standard of quality or
operations. We also maintain adherence to our standards
through ongoing support and education of our franchisees by our
franchise business consultants, who are deployed locally in markets where our
franchisees are located.
Company
Operations
One of our long-term objectives is to
selectively expand the number of Company-owned restaurants by identifying
appropriate opportunities. We believe that developing a domestic
network of Company-owned restaurants will play an important strategic role in
our predominately franchised operating structure. In addition to
generating revenues and earnings, we expect to use domestic Company-owned
restaurants as test sites for new products and promotions as well as restaurant
operational improvements and as a forum for training new managers and
franchisees. We also believe that as the number of Company-owned
restaurants increases, they may add to the economies of scale available for
advertising, marketing and other costs for the entire system.
As of June 29, 2008, we operated one
Buffet Unit in the Dallas, Texas market. We closed two Buffet Units
in the Houston, Texas market in July and August of 2007 and the Company is
currently considering alternatives including sub-leasing the units to new or
existing franchisees or unrelated third-party tenants . From time to
time, we also consider opportunities to acquire select franchisee-owned
restaurants in other markets. We do not currently intend to operate
any Delco Units or Express Units.
Our ability to open Company-owned
restaurants is affected by a number of factors, including the terms of available
financing and our ability to locate suitable sites, negotiate acceptable lease
or purchase terms, secure appropriate local governmental permits and approvals,
supervise construction and recruit and train management personnel.
International
Operations
We also offer master franchise rights
to develop Pizza Inn restaurants in certain foreign countries, with negotiated
fees, development schedules and ongoing royalties. A master licensee
for a foreign country pays a negotiated fee to purchase the right to develop and
operate Pizza Inn restaurants within a defined territory, typically for a term
of 20 years, plus a ten-year renewal option. The master licensee
agrees to a multi-restaurant development schedule and we train the master
licensee to monitor and assist franchisees in their territory with local service
and quality control, with support from us. In return, the master
licensee typically retains half the franchise fees and half the royalties on all
restaurants within the territory during the term of the
agreement. Master licensees may open restaurants that they own and
operate, or they may open sub-franchised restaurants owned and operated by third
parties through agreements with the master licensee, but subject to our
approval.
Our first franchised
restaurant outside of the United States opened in the late 1970s. As
of June 29, 2008, there were 68 restaurants operating internationally, with 47
of those restaurants operated or sub-licensed by our franchisees in the United
Arab Emirates and Saudi Arabia. Our master licensee in Saudi Arabia
has also developed one express restaurant at U. S. military facilities in the
Middle East. Our ability to continue to develop select international
markets is affected by a number of factors, including our ability to locate
experienced, well-capitalized developers who can commit to an aggressive
multi-restaurant development schedule and achieve maximum initial market
penetration with minimal supervision by us.
6
Food
and Supply Distribution
In fiscal 2007, we entered into
distribution service agreements with two reputable and experienced restaurant
distribution companies. Under these agreements, The SYGMA Network
(“SYGMA”) and The Institutional Jobbers Company (“IJ”) began making deliveries
to all restaurants, with delivery territories and responsibilities for each
determined according to geographical region. Norco retained product
sourcing, purchasing, quality assurance, research and development, franchisee
order and billing services, and logistics support functions. We
continue to own a significant portion of the inventory warehoused and delivered
by SYGMA and IJ, and franchisees are expected to continue to purchase such
products from Norco. We believe this division of responsibilities for
our purchasing, franchisee support and distribution systems has resulted in
lower operating costs, logistical efficiencies and increased customer
satisfaction. Norco is able to leverage the advantages of direct
vendor negotiations and volume purchasing of food, equipment and supplies for
the franchisees’ benefit in the form of a concentrated, one-truck delivery
system, competitive pricing and product
consistency. Operators are able to purchase all products
and ingredients from Norco and have them delivered by experienced and efficient
distributors. In order to assure product quality and consistency, our
franchisees are required to purchase from Norco certain food products that are
proprietary to the Pizza Inn system, including our flour mixture and spice
blend. In addition, almost all franchisees purchase other supplies
from Norco. Franchisees may also purchase non-proprietary products
and supplies from other suppliers who meet our requirements for quality and
reliability.
SYGMA leases Norco’s warehouse and
distribution facility in The Colony, Texas, from which it provides distribution
services to restaurants in the western areas of the franchise
system. The initial term of the lease agreement began on November 1,
2006 and continues for thirty-five months. On December 19, 2006, the
Company completed a sale-leaseback transaction with Vintage Interests, L.P.
(“Vintage”) and sold the real estate, corporate office building and distribution
facility located at 3551 Plano Parkway, The Colony, Texas for approximately
$11.5 million. Under the terms of the Sale-Leaseback Agreement, the
Company assigned to Vintage, the three-year lease agreement for the distribution
facility between the Company and SYGMA.
IJ
services eastern restaurants from its distribution center in
Tennessee. Norco continues to ship products and equipment to
international franchisees. Non-proprietary food and ingredients,
equipment and other supplies distributed by SYGMA and IJ are generally available
from several qualified sources. With the exception of several
proprietary food products, such as cheese and dough flour, we are not dependent
upon any one supplier or limited group of suppliers. We contract with
established food processors for the production of our proprietary
products.
We have not experienced any significant
shortages of supplies or any delays in receiving our food or beverage
inventories, restaurant supplies or products, and do not anticipate any
difficulty in obtaining inventories or supplies in the foreseeable
future. Prices charged to us by our suppliers are subject to
fluctuation, and we may from time to time attempt to pass increased costs and
savings on to our franchisees. We do not engage in commodity
hedging.
Advertising
By communicating a common brand message
at the regional, local market and restaurant levels, we believe we can create
and reinforce a strong, consistent marketing message to consumers and increase
our market share. We offer or facilitate a number of ways for the
brand image and message to be promoted at the local and regional
levels.
PIAP is a Texas non-profit corporation
that is responsible for creating and producing print advertisements, television
and radio commercials and in-store promotional materials, along with related
advertising services for use by its members. Each operator of a
Buffet Unit or Delco Unit, is entitled to membership in PIAP. Nearly
all of our existing franchise agreements for Buffet Units and Delco Units
require the franchisees to become members of PIAP. Members contribute
1% of their gross sales to PIAP. PIAP is managed by a board of
trustees comprised solely of franchisee representatives who are elected by the
members each year. We do not have any ownership interest in
PIAP. We provide certain administrative, marketing and other services
to PIAP and are paid by PIAP for such services. As of June 29, 2008,
the Company-owned Buffet Unit and substantially all of our franchisees were
members of PIAP. Operators of Express Units do not participate in
PIAP; however, they contribute up to 1% of their gross sales directly to us to
help fund purchases of Express Unit marketing materials and similar
expenditures.
7
In some market areas groups of
franchisees that are also participants of PIAP have formed local advertising
cooperatives. These cooperatives, which may be formed voluntarily or
may be required by us under the franchise agreements, establish contributions to
be made by their members and direct the expenditure of these contributions on
local media advertising using materials developed by PIAP and/or
us. Franchisees are required to conduct independent marketing efforts
in addition to their participation in PIAP and local cooperatives.
We provide Company-owned and franchised
restaurants with catalogs for the purchase of marketing and promotional items
and pre-approved print and radio marketing materials. We have also
developed an internet-based system, The Pizza Inn Inn-tranet, by which all of
our restaurants may communicate with us and place orders for marketing and
promotional products.
Trademarks
and Quality Control
We own various trademarks, including
the name "Pizza Inn," that are used in connection with the restaurants and have
been registered with the United States Patent and Trademark
Office. The duration of our trademarks is unlimited, subject to
periodic renewal and continued use. In addition, we have obtained
trademark registrations in several foreign countries and have periodically
re-filed and applied for registration in others. We believe that we
hold the necessary rights for protection of the trademarks essential to our
business.
Government
Regulation
We and our franchisees are subject to
various federal, state and local laws affecting the operation of our
restaurants. Each restaurant is subject to licensing and regulation
by a number of governmental authorities, which include health, safety,
sanitation, wage and hour, alcoholic beverage, building and fire agencies in the
state or municipality in which the restaurant is
located. Difficulties in obtaining, or the failure to obtain,
required licenses or approvals could delay or prevent the opening of a new
restaurant or require the temporary or permanent closing of existing restaurants
in a particular area.
We are subject to Federal Trade
Commission (“FTC”) regulation and to various state laws regulating the offer and
sale of franchises. The FTC requires us to furnish to prospective
franchisees a franchise disclosure document containing prescribed
information. Substantive state laws that regulate the
franchisor-franchisee relationship presently exist in a number of states, and
bills have been introduced in Congress from time to time that would provide for
further federal regulation of the franchisor-franchisee relationship in certain
respects. Some foreign countries also have disclosure requirements
and other laws regulating franchising and the franchisor-franchisee
relationship.
Employees
As of September 2, 2008, we had
approximately 67 employees, including 41 in our corporate office, of which six
are part of our Norco division, and 14 full-time and 12 part-time employees
at the Company-owned restaurant. None of our employees are currently
covered by collective bargaining agreements.
Industry
and Competition
The restaurant industry is intensely
competitive with respect to price, service, location and food quality, and there
are many well-established competitors with substantially greater brand
recognition and financial and other resources than Pizza
Inn. Competitors include a large number of international, national
and regional restaurant and pizza chains, as well as local restaurants and pizza
operators. Some of our competitors may be better established in the
markets where our restaurants are or may be located. Within the pizza
segment of the restaurant industry, we believe that our primary competitors are
national pizza chains and several regional chains, including chains executing a
“take and bake” concept. A change in the pricing or other market
strategies of one or more of our competitors could have an adverse impact on our
sales and earnings.
With respect to the sale of franchises,
we compete with many franchisors of restaurants and other business
concepts. We believe that the principal competitive factors affecting
the sale of franchises are product quality and price, value, consumer
acceptance, franchisor experience and support and the quality of the
relationship maintained between the franchisor and its
franchisees. In general, there is also active competition for
management personnel and attractive commercial real estate sites suitable for
our restaurants.
8
Our Norco division competes with
both national and local distributors of food, equipment and other restaurant
suppliers. The distribution industry is very
competitive. We believe that the principal competitive factors in the
distribution industry are product quality, customer service and
price. Norco or its designees are the sole authorized suppliers of
certain proprietary products that all Pizza Inn restaurants are required to
use.
ITEM
1A. RISK FACTORS.
Not
applicable to smaller reporting company.
ITEM
1B. UNRESOLVED STAFF COMMENTS.
Not
applicable.
ITEM
2. PROPERTIES.
The Company currently operates one
Buffet Unit in the Dallas, Texas area from a leased location of
approximately 4,100 square feet. Annual lease payments are
approximately $22.00 per square foot. The lease has a five-year term
with multiple renewal options. We closed two leased Buffet Units in
the Houston, Texas market in July and August of 2007 and the Company is
currently considering alternatives such as sub-leasing the units to new or
existing franchisees or unrelated third-party tenants. One location has
approximately 4,347 square feet at an annual rate of approximately $13.00 per
square foot and the other has approximately 2,760 square feet at an annual
lease rate of approximately $18.00 per square foot. The Houston
leases expire in 2015 and each has at least one renewal option.
The
Company also leases its 38,130 square foot corporate office facility from
Vintage Interests, L.P. pursuant to a sale-leaseback transaction at an annual
rate of approximately $10.00 per square foot. This lease began on
December 19, 2006 and has a ten year term.
On June 24, 2008, the Company signed a
lease for a new Company buffet unit in Denton, Texas. This lease is
for approximately 4,227 square feet with average annual lease payments of $27.00
per square foot. The lease has a five year term.
The Company also owns property in
Little Elm, Texas that was purchased in June 2003 from which the Company
previously operated a Delco Unit. The Company has listed the property
with a broker for sale to a third party. This property was classified
as “held for sale” at June 29, 2008.
ITEM
3. LEGAL PROCEEDINGS.
The Company is subject to claims and
legal actions in the ordinary course of its business. With the
possible exception of the matters set forth below, the Company believes that all
such claims and actions currently pending against it are either adequately
covered by insurance or would not have a material adverse effect on the
Company’s annual results of operations, cash flows or financial condition if
decided in a manner that is unfavorable to the Company.
On August 31, 2006, the Company was
served with notice of a lawsuit filed against it in federal court by a former
franchisee and its guarantors who operated one restaurant in the Harlingen,
Texas market in 2003. The former franchisee and guarantor alleged
generally that the Company intentionally and negligently misrepresented costs
associated with development and operation of the Company’s franchise, and that
as a result they sustained business losses that ultimately led to the closing of
the restaurant. They seek damages of approximately $768,000, representing
amounts the former franchisees claim to have lost in connection with their
development and operation of the restaurant. In addition, they seek
unspecified punitive damages, and recovery of attorneys’ fees and court
costs. Pursuant to an Agreed Stipulation of Dismissal and Order, the
plaintiff has dismissed the claim in federal court, with prejudice, and has
re-filed the case in the state district courts of Dallas County,
Texas. Pizza Inn has answered, denying all claims, and filed a
counterclaim against Plaintiffs for (i) breach of the franchise agreement, (ii)
breach of guaranty and (iii) recovery of attorney fees. The Company
is waiting on a trial date to be set. The Company believes that
the plaintiff’s allegations are without merit and intends to vigorously defend
against such allegations. An adverse outcome to the proceeding could
materially affect the Company’s financial position and results of
operation. Due to the preliminary nature of this matter and the general
uncertainty surrounding the outcome, the Company has not made any accrual for
such amounts as of June 29, 2008.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not
applicable
9
PART
II
ITEM
5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND
ISSUER PURCHASES OF EQUITY SECURITIES.
As of September 2, 2008, there were
approximately 1,963 stockholders of record of the Company's common
stock.
The Company had no sales of
unregistered securities during fiscal 2008 or 2007.
The Company's common stock is listed on
the Capital Market of the NASDAQ Stock Market, LLC (“NASDAQ”) under the symbol
“PZZI”. The following table shows the highest and lowest daily closing price per
share of the common stock during each quarterly period within the two most
recent fiscal years, as reported by NASDAQ. Such prices reflect
inter-dealer quotations, without adjustment for any retail markup, markdown or
commission.
|
Actual
Trade
|
||||||||
|
Executed
Price
|
||||||||
|
High
|
Low
|
|||||||
|
First
Quarter Ended 9/23/2007
|
$ | 3.17 | $ | 2.08 | ||||
|
Second
Quarter Ended 12/23/2007
|
2.92 | 2.20 | ||||||
|
Third
Quarter Ended 3/23/2008
|
3.04 | 2.45 | ||||||
|
Fourth
Quarter Ended 6/29/2008
|
2.98 | 2.26 | ||||||
|
First
Quarter Ended 9/24/2006
|
$ | 2.90 | $ | 1.85 | ||||
|
Second
Quarter Ended 12/24/2006
|
2.25 | 1.51 | ||||||
|
Third
Quarter Ended 3/25/2007
|
2.53 | 1.77 | ||||||
|
Fourth
Quarter Ended 6/24/2007
|
3.22 | 2.24 | ||||||
Under the Company’s bank loan agreement
(the “CIT Credit Facility”), the Company is limited in the payment of dividends
or other distributions on its common stock to an aggregate amount of $3,000,000.
The Company did not pay any dividends on its common stock during the fiscal
years ended June 29, 2008 and June 24, 2007. Any determination to pay
cash dividends in the future will be at the discretion of the Company’s board of
directors and will be dependent upon the Company’s results of operations,
financial condition, capital requirements, contractual restrictions and other
factors deemed relevant. Currently, there is no intention to pay any
dividends on its common stock.
2007
Stock Purchase Plan
On May
23, 2007, the Company’s board of directors approved a stock purchase plan (the
“2007 Stock Purchase Plan”) authorizing the purchase on our behalf of up to
1,016,000 shares of our common stock in the open market or in privately
negotiated transactions. On June 2, 2008, the Company’s board of
directors amended the 2007 Stock Purchase Plan to increase the number of share
of common stock the Company may repurchase by 1,000,000 shares to a total of
2,016,000 shares. The 2007 Stock Purchase Plan does not have an expiration
date. The following table furnishes information for purchases made
pursuant to the 2007 Stock Purchase Plan during the fourth quarter of fiscal
2008:
10
|
Pizza
Inn, Inc.
|
||||||||||||||||
|
Common
Shares Purchased through June 29, 2008
|
||||||||||||||||
|
Under
the 2007 Stock Purchase Plans
|
||||||||||||||||
|
Period
|
Total
Number of Shares Purchased
|
Average
Price Paid per Share
|
Cum.
Number of Shares Purchased as Part of Publicly Announced
Plan
|
Maximum
Number of Shares that May Yet Be Purchased Under the Plan
|
||||||||||||
|
Shares
Authorized to Purchase
|
2,016,000 | |||||||||||||||
|
03/24/2008
- 04/27/2008
|
327,333 | $ | 2.7489 | 1,000,000 | 1,016,000 | |||||||||||
|
04/28/2008
- 04/25/2008
|
0 | $ | 0.0000 | 1,000,000 | 1,016,000 | |||||||||||
|
05/26/2008
- 06/29/2008
|
74,133 | $ | 2.3400 | 1,074,133 | 941,867 | |||||||||||
| 401,466 | $ | 2.6734 |
Cum.
Avg. price
|
|||||||||||||
The
Company’s ability to purchase shares of our common stock is subject to various
laws, regulations and policies as well as the rules and regulations of the
Securities and Exchange Commission (the “SEC”). Subsequent to June 29,
2008, the Company has purchased 316,099 shares at an average price of $2.5554
per share and intends to make further purchases under the 2007 Stock Purchase
Plan. The Company may also purchase shares of our common stock other than
pursuant to the 2007 Stock Purchase Plan or other publicly announced plan or
program.
Equity
Compensation Plan Information
The following table furnishes
information with respect to the Company’s equity compensation plans (including
individual compensation arrangements) as of June 29, 2008:
|
Plan
Category
|
Number
of securities to be issued upon excercise of outstanding options,
warrants, and rights
|
Weighted-average
excercise price of outstanding options, warrants, and
rights
|
Number
of securities remaining available for future issuance under equity
compensation plans
|
|||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Equity
compensation plans approved by security holders
|
275,000 | $ | 2.55 | 1,225,000 | ||||||||
|
|
||||||||||||
|
Equity
compensation plans
not approved by security
holders
|
- | $ | 0.00 | - | ||||||||
|
Total
|
275,000 | $ | 2.55 | 1,225,000 | ||||||||
Additional information regarding
equity compensation can be found in the notes to the consolidated financial
statements.
ITEM
6. SELECTED FINANCIAL DATA
Not
applicable to smaller reporting company.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results
of Operations
The following discussion should be
read in conjunction with the consolidated financial statement and accompanying
notes appearing elsewhere in this Annual Report on Form 10-K and may contain
certain forward-looking statements. See “Risks Associated with
Forward-Looking Statements.”
Fiscal
2008 Compared to Fiscal 2007
Overview
The Company is a franchisor and food
and supply distributor to a system of restaurants operating under the trademark
“Pizza Inn”. At June 29, 2008, there were 323 Pizza Inn restaurants,
consisting of one Company-owned restaurant and 322 franchised
restaurants. At June 29, 2008, the domestic restaurants were operated
as: (i) 158 Buffet Units; (ii) 41 Delco Units; and (iii) 56 Express
Units. The 255 domestic restaurants were located in 18 states
predominately situated in the southern half of the United
States. Additionally, the Company had 68 international
restaurants located in nine foreign countries.
Diluted
earnings per common share were $0.29 as compared to $0.02 per share in the prior
year. Net income was $2,825,000 as compared to $206,000 in the prior
year, on revenues of $49,518,000 in the current year and $46,425,000 in the
prior year. Pre-tax income from continuing operations was $2,942,000
for fiscal 2008 as compared to $587,000 in the prior year.
Results
of operations for fiscal 2008 and 2007 included 53 weeks and 52 weeks,
respectively.
Management
believes that key performance indicators in evaluating financial results include
chain-wide retail sales and the number and type of operating
restaurants. The following table summarizes these key performance
indicators.
|
Fiscal
Year Ended
|
||||||||
|
June
29,
|
June
24,
|
|||||||
|
2008
|
2007
|
|||||||
|
Chainwide
retail sales Buffet Units (in thousands)
|
$ | 117,347 | $ | 114,083 | ||||
|
Chainwide
retail sales Delco Units (in thousands)
|
$ | 11,791 | $ | 12,576 | ||||
|
Chainwide
retail sales Express Units (in thousands)
|
$ | 5,883 | $ | 7,175 | ||||
|
Average
number of Buffet Units
|
161 | 171 | ||||||
|
Average
number of Delco Units
|
42 | 46 | ||||||
|
Average
number of Express Units
|
59 | 67 | ||||||
Revenues
Revenues
are primarily derived from sales of food, paper products and equipment and
supplies by Norco to franchisees, franchise royalties and franchise
fees. Financial results are dependent in large part upon the pricing
and cost of these products and supplies to franchisees, and the level of
chain-wide retail sales, which is driven by changes in same store sales and
restaurant count.
Food
and Supply Sales
Food and
supply sales by Norco include food and paper products, equipment and other
distribution revenues. Food and supply sales increased 7%, or
$2,778,000, to $43,807,000 in fiscal 2008 from $41,029,000 last
year. The increase in food and supply sales was due primarily to a
41% surge in cheese prices. The additional week of food and supply sales was
offset by lower volume due to store closings. Freight and storage
revenue declined $503,000 due to outsourcing certain warehouse management and
delivery services in the prior year. In addition, the sale of
equipment decreased $277,000 primarily as a result of the Company’s decision to
gradually discontinue the sale of such items to franchisees.
12
Franchise
Revenue
Franchise
revenue, which includes income from royalties and franchise fees, increased 8%,
or $348,000, in fiscal 2008 compared to the prior year primarily due to
increased international development fees. International royalties
also increased 17% due primarily to increased retail sales. The
additional week of domestic royalties was offset by the impact of lower retail
sales resulting from a lower store count. The following chart
summarizes the major components of franchise revenue (in
thousands):
|
Fiscal
Year Ended
|
||||||||
|
June
29,
|
June
24,
|
|||||||
|
2008
|
2007
|
|||||||
|
Domestic
royalties
|
$ | 3,995 | $ | 3,963 | ||||
|
International
royalties
|
494 | 423 | ||||||
|
Domestic
franchise fees
|
215 | 191 | ||||||
|
International
development fees
|
266 | 45 | ||||||
|
Franchise
revenue
|
$ | 4,970 | $ | 4,622 | ||||
Restaurant Sales
Restaurant
sales, which consist of revenue generated by the Company-owned restaurant,
decreased 4%, or $33,000, in fiscal 2008 compared to the prior
year. The decrease is the result of economic conditions,
decreased marketing dollars spent and the discontinuation of delivery
sales.
Cost
of Sales
Cost of
sales increased 4% or $1,649,000 in fiscal 2008 compared to the prior
year. This increase is primarily the result of 47% higher cheese
cost. Offsetting the increased cheese prices were $1,523,000 lower
payroll costs, $456,000 lower net distribution costs, $297,000 lower equipment
cost due to lower equipment sales, $153,000 lower repairs and maintenance and
$110,000 lower utility costs due to the outsourcing of its warehouse management
and delivery services for the distribution of food product to
restaurants. Cost of sales, as a percentage of food and supply sales
and restaurant sales, decreased to 92% in fiscal 2008 from 94% for last
year.
Franchise
Expenses
Franchise
expenses include selling, general and administrative expenses (primarily wages
and travel expenses) directly related to the sale and continuing service of
franchises and territories. These expenses decreased 4%, or $95,000,
in fiscal 2008 compared to the year. This decrease was primarily the
result of lower professional and administrative fees which were offset slightly
by higher travel expenses. The following chart summarizes the
variances in franchise expenses (in thousands):
|
Fiscal
Year Ended
|
||||||||
|
June
29,
|
June
24,
|
|||||||
|
2008
|
2007
|
|||||||
|
Payroll
|
$ | 1,814 | $ | 1,800 | ||||
|
Administrative
expenses and other
|
235 | 289 | ||||||
|
Travel
|
318 | 268 | ||||||
|
Depreciation
and amortization
|
192 | 192 | ||||||
|
Professional
fees
|
43 | 135 | ||||||
|
Utilities
|
37 | 39 | ||||||
|
Marketing
|
(101 | ) | (90 | ) | ||||
|
Total
franchise expenses
|
$ | 2,538 | $ | 2,633 | ||||
13
General
and Administrative Expenses
General
and administrative expenses decreased 23%, or $885,000, in fiscal 2008 compared
to last year. The following chart summarizes the variances in general
and administrative expenses (in thousands):
|
Fiscal
Year Ended
|
||||||||
|
June
29,
|
June
24,
|
|||||||
|
2008
|
2007
|
|||||||
|
Legal
and Other Professional Fees
|
$ | 994 | $ | 1,829 | ||||
|
Depreciation
and Amortization
|
69 | 155 | ||||||
|
Payroll
|
264 | 400 | ||||||
|
Information
Technology
|
141 | 210 | ||||||
|
Repairs
and Maintenance
|
37 | 75 | ||||||
|
Utilities
|
160 | 189 | ||||||
|
Company
Store Marketing
|
34 | 48 | ||||||
|
Administrative
expenses and other
|
468 | 383 | ||||||
|
Occupancy
Costs
|
739 | 567 | ||||||
|
Stock
Compensation
|
51 | (14 | ) | |||||
|
Total
general and administrative expenses
|
$ | 2,957 | $ | 3,842 | ||||
The
decrease in legal and other professional fees is the result of the settlement of
various lawsuits during fiscal 2007 and 2008. Fiscal 2008 includes
fourth quarter expenses of approximately $215,000 related to an internal
controls assessment and compliance
work in accordance with the Sarbanes-Oxley Act of 2002.
Depreciation and amortization decreased due to the outsourcing of Norco and the
sale of the corporate office and warehouse facilities in the prior
year. The increase in administrative expenses is the result of
refunds for insurance and tax in the prior year resulting from the sale of the
building. Information technology expenses also decreased due to
programming required for the outsourcing of Norco in the prior
year. Occupancy costs increased due to rent payments required
since the sale of the building.
Severance
Due to the departure of the Company’s
former President and CEO, $300,000 severance was recognized in August
2007. The remaining severance expense was recognized later in the
fiscal year for various positions eliminated.
Loss/Gain
on Sale of Assets
The
current fiscal year includes a loss on miscellaneous used equipment and signage
sold from the Houston stores. The prior year included the net gain of
approximately $570,000 on the sale of the corporate office and warehouse
facility and various warehouse equipment and trailers the Company no longer
needed. A $261,000 deferred gain was also realized as a result of the
sale of the office building and is being recognized ratably over the ten-year
term of the office lease.
Impairment
of Long-lived Assets
As a
result of management’s decision to close the two Houston area Buffet units
operated by the Company in the fourth quarter of fiscal 2007, the Company
recognized (i) additional impairment of approximately $48,000 to certain
property held for sale to value these assets at their approximate net realizable
value, and (ii) additional depreciation of approximately $46,000 related to
equipment and other fixed assets. There was no additional impairment
recorded in fiscal 2008.
Litigation
Settlement Expense (Benefit)
The
current year includes a net recovery of $284,000 from litigation settlements
compared to a net provision of $302,000 for settlement payments in fiscal
2007.
14
Other
(Income) Expense
Other income in fiscal 2007 consisted
primarily of rental income of $175,000 on the corporate warehouse that was
received prior to the sale of the building in the second quarter of fiscal year
2007.
Interest
Expense
Interest
expense decreased $476,000 for the year ended June 29, 2008, compared to prior
year due to the payoff of the credit facility with Wells Fargo in December of
2006.
Provision
for Bad Debt
Bad debt
provision related to accounts receivable from franchisees increased by $50,000
to $146,000 in fiscal 2008 compared to prior year due to recording an additional
allowance for a receivable previously awarded by a default
judgment. During fiscal 2008 management determined this judgment was
unrealizable and recorded the additional provision for bad debt expense to fully
reserve the balance. The Company believes that the restaurant
closings in fiscal year 2008 did not have a material impact on collectibility of
outstanding receivables and royalties because most of these closed restaurants
were low volume units. For restaurants that are anticipated to close
or are exhibiting signs of financial distress, credit terms are typically
restricted, weekly food orders are required to be paid for prior to delivery and
royalty and advertising fees are collected as add-ons to the delivered price of
weekly food orders.
The
reserve for doubtful accounts was reduced by $450,000 in fiscal 2008 due to a
write off of reserved accounts deemed uncollectible.
Provision
for Income Tax
The
Company booked an income tax benefit of $99,000 for the year ended June 29, 2008
compared to no provision for the prior year. The Company received a
refund of approximately $680,000 in fiscal 2007 as the result of a loss
carryback from 2006 of prior taxes paid.
As of
June 24, 2007 we had recorded a valuation allowance based on our assessment that
the realization of a portion of our net deferred tax assets did not meet the
“more likely than not” criterion under SFAS No. 109, “Accounting for Income
Taxes.” During fiscal 2008, we determined that based upon a
number of factors, including our cumulative taxable income in recent quarters
and our expected profitability in future years, substantially all of our net
deferred tax assets are “more likely that not” realizable through future
earnings. The entire valuation allowance was released as a result of
this determination and is the primary reason the effective tax rate for fiscal
2008 was not the standard 34% corporate rate.
Restaurant
Openings and Closings
During
fiscal 2008 a total of 11 new franchise restaurants opened, including 8 domestic
and 3 international restaurants. Domestically, 29 restaurants were
closed by franchisees or terminated by the Company, typically because operations
were not up to Company standards or poor financial performance. In
addition, 12 international restaurants were closed of which six had ceased
communications with the Company. The majority of net store closings
were express units which are typically smaller volume stores. The
following chart summarizes restaurant openings and closings for the periods
ended June 29, 2008 compared to the comparable period in the prior
year:
15
|
Fiscal
year ended June 29, 2008
|
||||||||||
|
Beginning
|
Concept
|
End
of
|
||||||||
|
|
of
Period
|
Opened
|
Closed
|
Change
|
Period
|
|||||
| Domestic | ||||||||||
|
Buffet
Units
|
166
|
6
|
14
|
-
|
158
|
|||||
|
Delco
Units
|
42
|
1
|
2
|
-
|
41
|
|||||
|
Express
Units
|
68
|
1
|
13
|
-
|
56
|
|||||
|
International
Units
|
77
|
3
|
12
|
-
|
68
|
|||||
|
Total
|
353
|
11
|
41
|
-
|
323
|
|||||
|
Fiscal
year ended June 24, 2007
|
||||||||||
|
Beginning
|
Concept
|
End
of
|
||||||||
|
|
of
Period
|
Opened
|
Closed
|
Change
|
Period
|
|||||
| Domestic | ||||||||||
|
Buffet
Units
|
182
|
3
|
20
|
1
|
166
|
|||||
|
Delco
Units
|
49
|
1
|
8
|
-
|
42
|
|||||
|
Express
Units
|
70
|
4
|
5
|
(1)
|
68
|
|||||
|
International
Units
|
74
|
7
|
4
|
-
|
77
|
|||||
|
Total
|
375
|
15
|
37
|
-
|
353
|
|||||
Liquidity and Capital Resources
Cash
flows from operating activities are generally the result of net income adjusted
for depreciation and amortization and changes in working capital. In fiscal
2008, cash provided by operations was $2,419,000 compared to cash used by
operations of $1,371,000 in fiscal 2007. Cash generated from
operations in fiscal 2008 was primarily due to increased net
income. Payments totaling $2,800,000 to the Company’s former Chief
Executive Officer in conjunction with settlement of a lawsuit reduced cash flow
in fiscal 2007.
The
Company used cash in investing activities of approximately $141,000 in fiscal
2008 mainly for the purchase of computer and software upgrades net of proceeds
from the sale of used restaurant equipment. The Company generated net
cash flows from investing activities of approximately $11,076,000 in fiscal 2007
primarily from proceeds from the Company's sale of its corporate office building
and distribution facility to Vintage Interests, L.P. for approximately $11.5
million in December 2006.
Cash
flows from financing activities generally reflect changes in the Company's net
repayments of borrowings during the period, together with treasury stock
purchases and exercise of stock options. During fiscal 2008, the
Company used net cash of $3,000,000 primarily to repurchase treasury
stock. During fiscal 2007, the Company used net cash for financing
activities of $8,010,000 primarily to retire its credit facility with Wells
Fargo in December 2006.
Management believes that future
operations will generate sufficient taxable income, along with the reversal of
temporary differences, to fully realize the net deferred tax asset of
$792,000. 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 2006 loss was carried back against
prior taxes paid, and the Company received a refund of approximately $680,000
for a portion of taxes paid in the prior two years in February
2007.
On
January 23, 2007, the Company and The CIT Group / Commercial Services, Inc.
(“CIT”) entered into an agreement for a revolving credit facility of up to $3.5
million (the “CIT Credit Facility”). The actual availability on the
CIT Credit Facility is determined by advance rates on eligible inventory and
accounts receivable. Interest on borrowings outstanding on the CIT
Credit Facility is provided for at a rate equal to a range of the prime rate
plus an interest rate margin of 0.0% to 0.5% or, at the Company’s option, at the
LIBOR rate plus an interest rate margin of 2.0% to 3.0%. The specific
interest rate margin is based on the Company’s performance under certain
financial ratio tests. An annual commitment fee is payable on any
unused portion of the CIT Credit Facility at a rate of 0.375%. All of
the Company’s (and its subsidiaries’) personal property assets (including, but
not limited to, accounts receivable, inventory, equipment, and intellectual
property) have been pledged to secure payment and performance of the CIT Credit
Facility, which is subject to customary covenants for asset-based
loans.
16
On June
27, 2007, the Company and CIT entered into an agreement to amend the CIT Credit
Facility to (i) allow the Company to repurchase Company stock in an amount up to
$3,000,000, (ii) allow the Company to make permitted cash distributions or cash
dividend payments to the Company’s shareholders in the ordinary course of
business and (iii) increase the aggregate capital expenditure limit from
$750,000 per fiscal year to $3,000,000. As of June 29, 2008, there
were no borrowings outstanding on the CIT Credit Facility, and the Company had
used the facility to obtain one letter of credit for approximately $230,000 to
reinsurers to secure loss reserves on behalf of its wholly-owned insurance
subsidiary.
On May
30, 2008, the Company CIT Group entered into a Third Amendment to Financing
Agreement modifying certain terms of the CIT Credit Facility. The amendment
permits the Company to repurchase up to $7,000,000 of the Company’s common
stock.
We expect
to fund planned capital expenditures, new restaurant openings and any additional
share repurchases of our common stock for the next fiscal year from operating
cash flow and the CIT Credit Facility under our revolving line of credit,
reduced for certain outstanding letters of credit. At June 29, 2008,
there was no debt outstanding.
Critical
Accounting Policies and Estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America requires the Company’s management to make estimates and assumptions
that affect our reported amounts of assets, liabilities, revenues, expenses and
related disclosure of contingent liabilities. The Company bases its
estimates on historical experience and various other assumptions that it
believes are reasonable under the circumstances. Estimates and
assumptions are reviewed periodically. Actual results could differ
materially from estimates.
The Company believes the following
critical accounting policies require estimates about the effect of matters that
are inherently uncertain, are susceptible to change, and therefore require
subjective judgments. Changes in the estimates and judgments could
significantly impact the Company’s results of operations and financial condition
in future periods.
Accounts receivable consist primarily
of receivables generated from food and supply sales to franchisees and franchise
royalties. The Company records a provision for doubtful receivables
to allow for any amounts which may be unrecoverable based upon an analysis of
the Company’s prior collection experience, customer creditworthiness and current
economic trends. Actual realization of accounts receivable could
differ materially from the Company’s estimates.
Notes receivable primarily consist of
notes from franchisees for the refinancing of existing trade
receivables. 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 based
upon an analysis of the Company’s prior collection experience, creditworthiness
and current economic trends. Actual realization of notes receivable
could differ materially from the Company’s estimates.
Inventory,
which consists primarily of food, paper products, supplies and equipment
primarily warehoused by the Company’s two third-party distributors, is stated at
lower of cost or market, with cost determined according to the weighted average
cost method. The valuation of inventory requires us to estimate the
amount of obsolete and excess inventory. The determination of
obsolete and excess inventory requires us to estimate the future demand for the
Company’s products within specific time horizons, generally six months or
less. If the Company’s demand forecast for specific products is
greater than actual demand and the Company fails to reduce purchasing
accordingly, the Company could be required to write down additional inventory,
which would have a negative impact on the Company’s gross margin.
17
Re-acquired
development franchise rights are initially recorded at cost. When
circumstances warrant, the Company assesses the fair value of these assets based
on estimated, undiscounted future cash flows, to determine if impairment in the
value has occurred and an adjustment is necessary. If an adjustment
is required, a discounted cash flow analysis is performed and an impairment loss
is recorded.
The
Company continually evaluates the realizability of its deferred tax assets based
upon the Company’s analysis of existing tax credits by jurisdiction and
expectations of the Company’s ability to utilize these tax attributes through a
review of estimated future taxable income and establishment of tax
strategies. These estimates could be materially impacted by changes
in future taxable income and the results of tax strategies.
The Company assesses its exposures to
loss contingencies including legal and income tax matters based upon factors
such as the current status of the cases and consultations with external counsel
and provides for the exposure by accruing an amount if it is judged to be
probable and can be reasonably estimated. If the actual loss from a contingency
differs from management’s estimate, operating results could be adversely
impacted.
New
Pronouncements
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
No. 157 establishes a framework for measuring fair value within generally
accepted accounting principles clarifies the definition of fair value within
that framework and expands disclosures about the use of fair value
measurements. SFAS No. 157 does not require any new fair value
measurements in generally accepted accounting principles. However,
the definition of fair value in SFAS No. 157 may affect assumptions used by
companies in determining fair value. The Company adopted SFAS No. 157
on June 30, 2008. The impact of the adoption of SFAS No. 157 did not
require material modification of the Company’s fair value
measurements.
In
February 2007, the FASB issued SFAS No. 159, Fair Value Option for Financial
Assets and Financial Liabilities. SFAS
No. 159 permits entities to choose to measure many financial instruments,
including employee stock option plans and operating leases accounted for in
accordance with SFAS No. 13, Accounting for Leases, at
their fair value. This Statement is effective as of the beginning of
an entity’s first fiscal year that begins after November 15,
2007. The Company has not completed its evaluation of the impact of
adoption of SFAS No. 159 on the Company’s financial statements but currently
believes the impact of the adoption of SFAS No. 159 will not require material
modification of the Company’s consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141 (Revised), Business
Combinations. SFAS No. 141(R) improves the relevance,
representational faithfulness, and comparability of the information that a
reporting entity provides in its financial reports about a business combination
and requires an acquirer to recognize the assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree at the acquisition
date, measured at their fair values as of that date. This Statement
applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. The adoption of this Statement is not
expected to have a material impact on the Company’s financial position or
results of operations.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements. SFAS
No. 160 amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary and clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. This Statement is effective
for fiscal years beginning on or after December 15, 2008. The
adoption of this Statement is not expected to have a material impact on the
Company’s financial position or results of operations.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an Amendment of FASB Statement No.
133. SFAS No. 161 amends SFAS No. 133 and requires entities to
enhance their disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under SFAS No. 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. SFAS No. 161 is
effective for fiscal years beginning on or after November 15,
2008. The adoption of SFAS No. 161 is not expected to have a material
impact on the Company’s financial position or results of
operations.
18
In March
2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 162,
“The Hierarchy of Generally Accepted Accounting Principles.” This
statement is intended to improve financial reporting by identifying a consistent
framework, or hierarchy, for selecting accounting principals to be used in
preparing financial statements that are presented in conformity with U.S.
generally accepted accounting principles for nongovernmental
entities. SFAS No. 162 is effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, “The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles.” SFAS No. 162 is not expected to have
a material impact on the Company’s financial statements, as the FASB does not
expect that this Statement will result in a change in current
practice.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not
applicable to smaller reporting company.
19
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See
information set forth on Index to Consolidated Financial Statements appearing on
page F-1 on this report on Form 10K.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Not applicable.
ITEM
9A(T). CONTROLS AND PROCEDURES.
Evaluation
of Disclosure Controls and Procedures
The
Company maintains disclosure controls and procedures designed to ensure that
information it is required to disclose in the reports filed or submitted under
the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed,
summarized, and reported, within the time periods specified in the SEC’s rules
and forms. The Company’s disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed in the reports filed or submitted under the Exchange Act is
accumulated and communicated to the Company’s management, including its
principal executive and principal financial officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.
Management
Report on Internal Control over Financial Reporting
The
Company’s management is responsible for establishing and maintaining adequate
“internal control over financial reporting” (as defined in Rule 13a-15(f) under
the Securities Exchange Act of 1934). Under the supervision and with
the participation of management, including our principal executive officer and
principal financial officer, the Company has conducted an evaluation of the
effectiveness of its internal control over financial reporting. The Company’s
management based it’s evaluation on criteria set forth in the framework in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based upon that evaluation, management has
concluded that our internal control over financial reporting was effective as of
June 29, 2008. During the most recent fiscal quarter, there have been
no changes in the Company’s internal controls over financial reporting that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
This report does not include an
attestation report of our registered public accounting firm regarding internal
control over financial reporting. Management’s report was not subject
to attestation by the Company’s registered public accounting firm pursuant to
temporary rules of the SEC that permit the Company to provide only management’s
report in this Form 10-K.
ITEM
9B. OTHER INFORMATION.
There is
no information required to be disclosed under this Item.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by this Item
is incorporated by reference from the Company’s definitive proxy statement to be
filed with the SEC pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year covered by this report.
ITEM
11. EXECUTIVE COMPENSATION.
The
information required by this Item is incorporated by reference from the
Company’s definitive proxy statement to be filed with the SEC pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this report.
20
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The
information required by this Item is incorporated by reference from the
Company’s definitive proxy statement to be filed with the SEC pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS AND DIRECTOR INDEPENDENCE.
The
information required by this Item is incorporated by reference from the
Company’s definitive proxy statement to be filed with the SEC pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this report.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The
information required by this Item is incorporated by reference from the
Company’s definitive proxy statement to be filed with the SEC pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this report.
21
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
|
(a)
|
1.
|
The
financial statements filed as part of this report are listed in the Index
to Financial Statements and Supplemental Data under Part II, Item 8 of
this Form 10-K.
|
|
|
2.
|
The
financial statement schedule filed as part of this report are listed in
the Index to Financial Statements and Supplemental Data under Part II,
Item 8 of this Form 10-K.
|
||
|
3.
|
Exhibits:
|
||
|
3.1
|
Amended
and Restated By-Laws (filed as Exhibit 3.1 to Form 10-K for the fiscal
year ended June 25, 2006 and incorporated herein by
reference)
|
||
|
3.2
|
Restated
Articles of Incorporation (filed as Exhibit 3.2 to Form 10-K
for the fiscal year ended June 25, 2006 and incorporated herein by
reference)
|
||
|
10.1
|
Employment
Letter entered into between the Company and Charles R. Morrison on January
31, 2007 (filed as Exhibit 10.5 to Form 10-Q for the quarterly period
ended December 24, 2006 and incorporated herein by
reference).*
|
||
|
10.2
|
2005
Non-Employee Directors Stock Award Plan of the Company and form of Stock
Option Award Agreement (filed as Exhibit 10.25 to Form 10-K for the fiscal
year ended June 26, 2005 and incorporated herein by
reference).*
|
||
|
10.3
|
2005
Employee Incentive Stock Option Award Plan of the Company and form of
Stock Option Award Agreement (filed as Exhibit 10.26 to Form 10-K.for the
fiscal year ended June 26, 2005 and incorporated herein by
reference)*
|
||
|
10.4
|
Warehouse
Lease Agreement dated August 25, 2006 between the Company and The SYGMA
Network (filed as Exhibit 10.15 to Form 10-K for the fiscal year ended
June 25, 2006 and incorporated herein by reference)
|
||
|
10.5
|
Compromise
and Settlement Agreement dated September 24, 2006 between the Company and
Ronald W. Parker (filed as Exhibit 10.16 to Form 10-K for the fiscal year
ended June 25, 2006 and incorporated herein by
reference).
|
||
|
10.6
|
Compromise
Settlement Agreement and Mutual Release entered into between the Company
and PepsiCo, Inc. on December 14, 2006 (filed as Exhibit 10.3 to Form 10-Q
for the quarterly period ended December 24, 2006 and incorporated herein
by reference).
|
||
|
10.7
|
First
Amendment to Purchase and Sale Agreement entered into between the Company
and Vintage Interests, L.P. on November 21, 2006 (filed as Exhibit 10.1 to
Form 10-Q for the quarterly period ended December 24, 2006 and
incorporated herein by reference).
|
||
|
10.8
|
Second
Amendment to the Financing Agreement between the Company and The CIT Group
/ Commercial Services, Inc. (“CIT”) dated June 27, 2007 (filed as Exhibit
10.22 to Form 10-K for the fiscal year ended June 24, 2007 and
incorporated herein by reference).
|
||
|
10.9
|
Purchase
and Sale Agreement entered into between the Company and Vintage Interests,
L.P. on October 20, 2006 (filed as Exhibit 10.1 to Form 10-Q for the
quarterly period ended September 24, 2006 and incorporated herein by
reference).
|
||
|
10.10
|
Third
Amendment to the Financing Agreement between the Company and The CIT Group
/ Commercial Services, Inc. (“CIT”) dated May 30,
2008.
|
||
|
21.0
|
List
of Subsidiaries of the Company (filed as Exhibit 21.0 to the Company’s
Annual Report on Form 10-K for the fiscal year ended June 26, 1994 and
incorporated herein by reference).
|
||
|
23.1
|
Consent
of Independent Registered Public Accounting Firm.
|
||
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification of Principal Executive
Officer.
|
||
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification of Principal Accounting
Officer.
|
||
|
32.1
|
Section
1350 Certification of Principal Executive Officer.
|
||
|
32.2
|
Section
1350 Certification of Principal Accounting Officer.
|
||
|
*
Denotes a management contract or any compensatory plan, contract or
arrangement.
|
|||
22
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
Pizza
Inn, Inc.
|
||
|
Date:
September 25, 2008
|
By:
/s/ Charles R.
Morrison
|
|
|
Charles
R. Morrison
|
||
|
President
and Chief Executive Officer
|
||
|
(Principal
Executive Officer)
|
||
|
By:
/s/ Nancy
Ellefson
|
||
|
Vice
President of Finance and
|
||
|
Principal
Accounting Officer
|
||
|
(Principal
Financial Officer)
|
||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
Name
and Position
|
Date
|
||
|
/s/Mark E.
Schwarz
|
September 25,
2008
|
||
|
Mark
E. Schwarz
|
|||
|
Director
and Chairman of the Board
|
|||
|
/s/Ramon D.
Phillips
|
September 25,
2008
|
||
|
Ramon
D. Phillips
|
|||
|
Director
and Vice Chairman of the Board
|
|||
|
/s/ Steven M.
Johnson
|
September 25,
2008
|
||
|
Steven
M. Johnson
|
|||
|
Director
|
|||
|
/s/ James K.
Zielke
|
September 25,
2008
|
||
|
James
K. Zielke
|
|||
|
Director
|
|||
|
/s/Robert B.
Page
|
September 25,
2008
|
||
|
Robert
B. Page
|
|||
|
Director
|
|||
|
/s/ William
Hammett
|
September 25,
2008
|
||
|
William
Hammett
|
|||
|
Director
|
|||
|
/s/ Clinton J.
Coleman
|
September 25,
2008
|
||
|
Clinton
J. Coleman
|
|||
|
Director
|
23
PIZZA
INN, INC.
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Description
|
Page No.
|
||
|
Report
of Independent Registered Public Accounting Firm.
|
F-2
|
||
|
Consolidated
Statements of Operations for the years ended June 29, 2008 and June 24,
2007.
|
F-3
|
||
|
Consolidated
Statements of Comprehensive Income for the years ended June 29, 2008 and
June 24, 2007.
|
F-4
|
||
|
Consolidated
Balance Sheets at June 29, 2008 and June 24, 2007.
|
F-5
|
||
|
Consolidated
Statements of Shareholders' Equity for the years June 29, 2008 and June
24, 2007.
|
F-6
|
||
|
Consolidated
Statements of Cash Flows for the years ended June 29, 2008 and June 24,
2007.
|
F-7
|
||
|
Supplemental
Disclosures of Cash Flow Information for the years ended June 29, 2008 and
June 24, 2007.
|
F-8
|
||
|
Notes
to Consolidated Financial Statements.
|
F-9
|
||
|
Schedule
II - Consolidated Valuation and Qualifying Accounts
|
F-24
|
F
1
Report
of Independent Registered Public Accounting Firm
Board of
Directors and Shareholders’
Pizza
Inn, Inc.
The
Colony, Texas
We have
audited the accompanying consolidated balance sheets of Pizza Inn, Inc. as of
June 29, 2008 and June 24, 2007 and the related consolidated statements of
operations and comprehensive income, shareholders’ equity, and cash flows for
each of the two years in the period ended June 29, 2008. In
connection with our audits of the financial statements, we have also audited the
financial statement schedule listed in the accompanying index. These
financial statements and schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Pizza Inn, Inc. at June 29,
2008 and June 24, 2007, and the results of its operations and its cash flows for
each of the two years in the period ended June 29, 2008, in conformity with
accounting principles generally accepted in the United States of
America.
Also, in
our opinion, the financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
/s/ BDO
Seidman, LLP
Dallas,
Texas
September
19, 2008
F
2
|
PIZZA
INN, INC.
|
||||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||
|
(In
thousands, except per share amounts)
|
||||||||
|
Year
Ended
|
||||||||
|
June
29,
|
June
24,
|
|||||||
|
REVENUES:
|
2008
|
2007
|
||||||
|
Food
and supply sales
|
$ | 43,807 | $ | 41,029 | ||||
|
Franchise
revenue
|
4,970 | 4,622 | ||||||
|
Restaurant
sales
|
741 | 774 | ||||||
| 49,518 | 46,425 | |||||||
|
COSTS
AND EXPENSES:
|
||||||||
|
Cost
of sales
|
40,819 | 39,170 | ||||||
|
Franchise
expenses
|
2,538 | 2,633 | ||||||
|
General
and administrative expenses
|
2,957 | 3,842 | ||||||
|
Severance
|
391 | - | ||||||
|
Provision
for bad debts
|
146 | 96 | ||||||
|
Loss
(gain) on sale of assets
|
9 | (570 | ) | |||||
|
Other
income
|
- | (159 | ) | |||||
|
Impairment
of long-lived assets
|
- | 48 | ||||||
|
(Recovery
of) provision for litigation costs
|
(284 | ) | 302 | |||||
|
Interest
expense
|
- | 476 | ||||||
| 46,576 | 45,838 | |||||||
|
INCOME
FROM CONTINUING
|
||||||||
|
OPERATIONS
BEFORE TAXES
|
2,942 | 587 | ||||||
|
Income
taxes
|
(99 | ) | - | |||||
|
INCOME
FROM
|
||||||||
|
CONTINUING
OPERATIONS
|
3,041 | 587 | ||||||
|
Loss
from discontinued
|
||||||||
|
operations,
net of income tax benefit
|
(216 | ) | (381 | ) | ||||
|
NET
INCOME
|
$ | 2,825 | $ | 206 | ||||
|
EARNINGS
(LOSS) PER SHARE OF COMMON
|
||||||||
|
STOCK
- BASIC:
|
||||||||
|
Income
from continuing operations
|
$ | 0.31 | $ | 0.06 | ||||
|
Loss
from discontinued operations
|
$ | (0.02 | ) | $ | (0.04 | ) | ||
|
Net
income
|
$ | 0.29 | $ | 0.02 | ||||
|
EARNINGS
(LOSS) PER SHARE OF COMMON
|
||||||||
|
STOCK
- DILUTED:
|
||||||||
|
Income
from continuing operations
|
$ | 0.31 | $ | 0.06 | ||||
|
Loss
from discontinued operations
|
$ | (0.02 | ) | $ | (0.04 | ) | ||
|
Net
income
|
$ | 0.29 | $ | 0.02 | ||||
|
Weighted
average common
|
||||||||
|
shares
outstanding - basic
|
9,761 | 10,145 | ||||||
|
Weighted
average common
|
||||||||
|
shares
outstanding - diluted
|
9,789 | 10,146 | ||||||
|
See
accompanying Report of Independent Registered Public
|
||||||||
|
Accounting
Firm and Notes to Consolidated Financial Statements.
|
||||||||
F
3
|
PIZZA
INN, INC.
|
||||||||
|
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
|
||||||||
|
(In
thousands)
|
||||||||
|
Year
Ended
|
||||||||
|
June
29,
|
June
24,
|
|||||||
|
2008
|
2007
|
|||||||
|
Net
income
|
$ | 2,825 | $ | 206 | ||||
|
|
||||||||
|
Interest
rate swap gain - (net of tax expense of
$0 and $0, respectively)
|
- | 14 | ||||||
|
Comprehensive
income
|
$ | 2,825 | $ | 220 | ||||
|
See
accompanying Report of Independent Registered Public
|
||||||||
|
Accounting
Firm and Notes to Consolidated Financial Statements.
|
||||||||
F 4
|
PIZZA
INN, INC.
|
||||||||
|
CONSOLIDATED
BALANCE SHEETS
|
||||||||
|
(In
thousands, except share amounts)
|
||||||||
|
June
29,
|
June
24,
|
|||||||
|
ASSETS
|
2008
|
2007
|
||||||
|
CURRENT
ASSETS
|
||||||||
|
Cash
and cash equivalents
|
$ | 1,157 | $ | 1,879 | ||||
|
Accounts
receivable, less allowance for doubtful
|
||||||||
|
accounts
of $128 and $451, respectively
|
2,773 | 2,716 | ||||||
|
Notes
receivable, current portion
|
6 | 8 | ||||||
|
Income
tax receivable
|
272 | - | ||||||
|
Inventories
|
1,396 | 1,518 | ||||||
|
Property
held for sale
|
301 | 336 | ||||||
|
Deferred
income tax assets
|
555 | 458 | ||||||
|
Prepaid
expenses and other
|
235 | 165 | ||||||
|
Total
current assets
|
6,695 | 7,080 | ||||||
|
LONG-TERM
ASSETS
|
||||||||
|
Property,
plant and equipment, net
|
635 | 778 | ||||||
|
Notes
receivable
|
7 | 12 | ||||||
|
Deferred
income tax assets
|
237 | - | ||||||
|
Re-acquired
development territory, net
|
46 | 239 | ||||||
|
Deposits
and other
|
215 | 85 | ||||||
| $ | 7,835 | $ | 8,194 | |||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
|
CURRENT
LIABILITIES
|
||||||||
|
Accounts
payable - trade
|
$ | 2,380 | $ | 2,082 | ||||
|
Accrued
expenses
|
1,316 | 1,805 | ||||||
|
Total
current liabilities
|
3,696 | 3,887 | ||||||
|
LONG-TERM
LIABILITIES
|
||||||||
|
Deferred
gain on sale of property
|
184 | 209 | ||||||
|
Deferred
revenues, net of current portion
|
283 | 314 | ||||||
|
Other
long-term liabilities
|
18 | 7 | ||||||
|
Total
liabilities
|
4,181 | 4,417 | ||||||
|
COMMITMENTS
AND CONTINGENCIES (See Notes D, F and I)
|
||||||||
|
SHAREHOLDERS'
EQUITY
|
||||||||
|
Common
stock, $.01 par value; authorized 26,000,000
|
||||||||
|
shares;
issued 15,130,319 and 15,120,319 shares, respectively;
|
||||||||
|
outstanding
9,104,361 and 10,168,494 shares, respectively
|
151 | 151 | ||||||
|
Additional
paid-in capital
|
8,543 | 8,471 | ||||||
|
Retained
earnings
|
17,624 | 14,799 | ||||||
|
Treasury
stock at cost
|
||||||||
|
Shares
in treasury: 6,025,958 and 4,951,825, respectively
|
(22,664 | ) | (19,644 | ) | ||||
|
Total
shareholders' equity
|
3,654 | 3,777 | ||||||
| $ | 7,835 | $ | 8,194 | |||||
|
See
accompanying Report of Independent Registered Public
|
||||||||
|
Accounting
Firm and Notes to Consolidated Financial Statements.
|
||||||||
F
5
|
PIZZA
INN, INC.
|
||||||||||||||||||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
|
||||||||||||||||||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||||||||||||||
|
Accum.
|
||||||||||||||||||||||||||||||||
|
Other
|
||||||||||||||||||||||||||||||||
|
Additional
|
Comp.
|
Treasury
|
||||||||||||||||||||||||||||||
|
Common
Stock
|
Paid-in
|
Retained
|
Income
|
Treasury
|
Stock
|
|||||||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Earnings
|
(Loss)
|
Shares
|
at
Cost
|
Total
|
|||||||||||||||||||||||||
|
Exercise
of stock options
|
44 | 1 | 80 | - | - | - | - | 81 | ||||||||||||||||||||||||
|
BALANCE,
JUNE 25, 2006
|
10,139 | $ | 151 | $ | 8,426 | $ | 14,593 | $ | (14 | ) | (4,952 | ) | $ | (19,644 | ) | $ | 3,512 | |||||||||||||||
|
Exercise
of stock options
|
30 | - | 59 | - | - | - | - | 59 | ||||||||||||||||||||||||
|
Interest
rate swap gain (net of
|
||||||||||||||||||||||||||||||||
|
income
tax expense of $0)
|
- | - | - | - | 14 | - | - | 14 | ||||||||||||||||||||||||
|
Stock
compensation
|
||||||||||||||||||||||||||||||||
|
expense
(reversal)
|
- | - | (14 | ) | - | - | - | - | (14 | ) | ||||||||||||||||||||||
|
Net
income
|
- | - | - | 206 | - | - | - | 206 | ||||||||||||||||||||||||
|
BALANCE,
JUNE 24, 2007
|
10,169 | 151 | 8,471 | 14,799 | - | (4,952 | ) | (19,644 | ) | 3,777 | ||||||||||||||||||||||
|
Exercise
of stock options
|
10 | - | 20 | - | - | - | - | 20 | ||||||||||||||||||||||||
|
Treasury
stock purchases
|
(1,074 | ) | - | - | - | - | (1,074 | ) | (3,020 | ) | (3,020 | ) | ||||||||||||||||||||
|
Tax
benefit - stock options
|
- | - | 1 | - | - | - | - | 1 | ||||||||||||||||||||||||
|
Stock
compensation expense
|
- | - | 51 | - | - | - | - | 51 | ||||||||||||||||||||||||
|
Net
income
|
- | - | - | 2,825 | - | - | - | 2,825 | ||||||||||||||||||||||||
|
BALANCE,
JUNE 29, 2008
|
9,105 | $ | 151 | $ | 8,543 | $ | 17,624 | $ | - | (6,026 | ) | $ | (22,664 | ) | $ | 3,654 | ||||||||||||||||
|
See
accompanying Report of Independent Registered Public
|
||||||||||||||||||||||||||||||||
|
Accounting
Firm and Notes to Consolidated Financial Statements.
|
||||||||||||||||||||||||||||||||
F 6
|
PIZZA
INN, INC.
|
||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||
|
(In
thousands)
|
||||||||
|
Year
Ended
|
||||||||
|
June
29,
|
June
24,
|
|||||||
|
2008
|
2007
|
|||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
|
Net
income
|
$ | 2,825 | $ | 206 | ||||
|
Adjustments
to reconcile net income to cash
|
||||||||
|
provided
by (used for) operating activities:
|
||||||||
|
Depreciation
and amortization
|
342 | 692 | ||||||
|
Impairment
of long-lived assets and goodwill
|
- | 48 | ||||||
|
Deferred
rent expense (benefit)
|
54 | (9 | ) | |||||
|
Provision
for bad debt
|
146 | 96 | ||||||
|
Stock
compensation expense (benefit)
|
51 | (14 | ) | |||||
|
Litigation
expense (benefit)
|
- | 302 | ||||||
|
Loss
(gain) on sale of assets
|
9 | (570 | ) | |||||
|
Deferred
income taxes
|
(334 | ) | 687 | |||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Deferred
revenue
|
(53 | ) | 196 | |||||
|
Notes
and accounts receivable
|
(196 | ) | 320 | |||||
|
Income
tax receivable
|
(272 | ) | - | |||||
|
Inventories
|
122 | 254 | ||||||
|
Accounts
payable - trade
|
298 | (135 | ) | |||||
|
Accrued
expenses
|
(490 | ) | (3,520 | ) | ||||
|
Prepaid
expenses and other
|
(83 | ) | 76 | |||||
|
Cash
provided by (used for)
|
||||||||
|
operating
activities
|
2,419 | (1,371 | ) | |||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
|
Proceeds
from sale of assets
|
108 | 11,325 | ||||||
|
Capital
expenditures
|
(249 | ) | (249 | ) | ||||
|
Cash
(used for) provided by
|
||||||||
|
investing
activities
|
(141 | ) | 11,076 | |||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
|
Deferred
financing costs
|
- | (25 | ) | |||||
|
Repayments
of long-term bank debt
|
- | (8,044 | ) | |||||
|
Purchases
of treasury stock
|
(3,020 | ) | - | |||||
|
Proceeds
from exercise of stock options
|
20 | 59 | ||||||
|
Cash
used for financing activities
|
(3,000 | ) | (8,010 | ) | ||||
|
Net
(decrease) increase in cash and cash equivalents
|
(722 | ) | 1,695 | |||||
|
Cash
and cash equivalents, beginning of year
|
1,879 | 184 | ||||||
|
Cash
and cash equivalents, end of year
|
$ | 1,157 | $ | 1,879 | ||||
|
See
accompanying Report of Independent Registered Public
|
||||||||
|
Accounting
Firm and Notes to Consolidated Financial Statements.
|
||||||||
F 7
|
PIZZA
INN, INC.
|
||||||||
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION
|
||||||||
|
(In
thousands)
|
||||||||
|
Year
Ended
|
||||||||
|
June
29,
|
June
24,
|
|||||||
|
2008
|
2007
|
|||||||
|
CASH
PAID (RECEIVED) FOR:
|
||||||||
|
Interest
payments
|
$ | - | $ | 498 | ||||
|
Income
tax payments (refunds)
|
499 | (680 | ) | |||||
|
NONCASH
FINANCING AND INVESTING ACTIVITIES:
|
||||||||
|
Gain
on interest rate swap
|
$ | - | $ | 14 | ||||
|
See
accompanying Report of Independent Registered Public
|
||||||||
|
Accounting
Firm and Notes to Consolidated Financial Statements.
|
||||||||
F
8
PIZZA
INN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Description
of Business:
Pizza Inn, Inc. (the "Company"), a
Missouri corporation incorporated in 1983, is the successor to a Texas company
of the same name, which was incorporated in 1961. The Company is the
franchisor and food and supply distributor to a system of restaurants operating
under the trademark "Pizza Inn.”
On June
29, 2008, the Pizza Inn system consisted of 323 locations, including one
Company-operated restaurant and 322 franchised restaurants, with franchises in
18 states and nine foreign countries. Domestic restaurants are
located predominantly in the southern half of the United States, with Texas,
North Carolina, Mississippi and Arkansas accounting for approximately 35%, 15%,
8% and 8%, respectively, of the total number of domestic
restaurants. Through the Company’s Norco Restaurant Services Company
(“Norco”) division, and through agreements with third party distributors, the
Company provides and facilitates food, equipment and supply distribution to its
domestic and international system of restaurants.
Principles
of Consolidation:
The consolidated financial statements
include the accounts of the Company and its subsidiaries, all of which are
wholly owned. All appropriate inter-company balances and transactions
have been eliminated.
Cash
and Cash Equivalents:
The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
Inventories:
Inventory,
which consists primarily of food, paper products, supplies and equipment
primarily warehoused by the Company’s two third-party distributors, is stated at
lower of cost or market, with cost determined according to the weighted average
cost method. The valuation of inventory requires us to estimate the
amount of obsolete and excess inventory. The determination of
obsolete and excess inventory requires us to estimate the future demand for the
Company’s products within specific time horizons, generally six months or
less. If the Company’s demand forecast for specific products is
greater than actual demand and the Company fails to reduce purchasing
accordingly, the Company could be required to write down additional inventory,
which would have a negative impact on the Company’s gross margin.
Closed
Restaurants and Discontinued Operations:
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, requires that discontinued operations that
meet certain criteria be reflected in the statement of operations after results
of continuing operations as a net amount. SFAS No. 144 also requires
that the operations of the closed restaurants, including any impairment charges,
be reclassified to discontinued operations for all periods
presented.
SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. This Statement also establishes that fair
value is the objective for initial measurement of the liability.
The Company closed two of its
restaurants in Houston, Texas during the quarter ended September 23,
2007. The results of operations for these two restaurants are
reported as discontinued operations in accompanying Consolidated Statement of
Operations. No provision for impairment was required to be taken at
that time because the impairment taken in the fiscal year ended June 24, 2007,
reduced the carrying value of the properties to their estimated net realizable
value. That net realizable value remains unchanged. The
two properties are on the market for sub-lease and have received a number of
site visits. Because we believe that the properties will sub-lease at
or above the current lease rates, we have not reserved any additional costs
related to our obligations under these non-cancelable leases.
F
9
Property
Held for Sale:
Assets
that are to be disposed of by sale are recognized in the consolidated financial
statements at the lower of carrying amount or estimated net realizable value
(proceeds less cost to sell), and are not depreciated after being classified as
held for sale. In order for an asset to be classified as held for sale, the
asset must be actively marketed, be available for immediate sale and meet
certain other specified criteria. At June 29, 2008, the Company had
approximately $301,000 of assets classified as held for sale. As of
June 29, 2008, approximately $294,000 of such amount represents the carrying
value of the Company’s real estate and equipment located in Little Elm,
Texas. As of June 29, 2008, the remaining $7,000 of assets held for
sale represents miscellaneous trailers and other transportation
equipment.
Property,
Plant and Equipment:
Property, plant and equipment are
stated at cost less accumulated depreciation and
amortization. Repairs and maintenance are charged to operations as
incurred; major renewals and betterments are capitalized. Upon the
sale or disposition of a fixed asset, the asset and the related accumulated
depreciation or amortization are removed from the accounts and the gain or loss
is included in operations. The Company capitalizes interest on
borrowings during the active construction period of major capital
projects. Capitalized interest is added to the cost of the underlying
asset and amortized over the estimated useful life of the asset.
Depreciation and amortization are
computed on the straight-line method over the estimated useful lives of the
assets or, in the case of leasehold improvements, over the term of the lease
including any reasonably assured renewal periods, if shorter. The
useful lives of the assets range from three to 39 years.
Long-Lived
Asset Impairment Assessments:
The Company reviews long-lived assets
for impairment when events or circumstances indicate that the carrying value of
such assets may not be fully recoverable. Impairment is evaluated
based on the sum of undiscounted estimated future cash flows expected to result
from use of the assets compared to its carrying value. If impairment
is recognized, the carrying value of the impaired asset is reduced to its fair
value, based on discounted estimated future cash flows. During fiscal
years 2008 and 2007, the Company tested its long-lived assets for impairment and
recognized pre-tax, non-cash impairment charges of $0 and $48,000, related to
the carrying value of the Houston area Company-owned restaurants and the Little
Elm, Texas property.
Accounts
Receivable:
Accounts receivable consist primarily
of receivables from food and supply sales and franchise
royalties. The Company records a provision for doubtful receivables
to allow for any amounts that may be unrecoverable based upon an analysis of the
Company's prior collection experience, customer creditworthiness and current
economic trends. After all attempts to collect a receivable have
failed, the receivable is written off against the allowance. Finance
charges may be accrued for at a rate of 18% per year, or up to the maximum
amount allowed by law, on past due receivables. The interest income
recorded from finance charges is immaterial.
Notes
Receivable:
Notes receivable primarily consist of
notes from franchisees for the refinancing of existing trade
receivables. These notes generally have terms ranging from one to
five years, with interest rates of 6% to 12%. The Company records a
provision for doubtful receivables to allow for any amounts that may be
unrecoverable based upon an analysis of the Company's prior collection
experience, customer creditworthiness and current economic
trends. After all attempts to collect a receivable have failed, the
receivable is written off against the allowance.
F
10
Re-acquired
Development Territory:
Re-acquired
development franchise rights are initially recorded at cost. When
circumstances warrant, the Company assesses the fair value of these assets based
on estimated, undiscounted future cash flows, to determine if impairment in the
value has occurred and an adjustment is necessary. If an adjustment
is required, a discounted cash flow analysis is performed and an impairment loss
is recorded.
The Company had one re-acquired
territory at June 29, 2008. The territory was re-acquired in December
2003, and is being amortized against incremental cash flows received, which were
estimated to continue approximately five years. The following chart
summarizes the carrying amount at June 29, 2008 and June 24, 2007, the current
year amortization expense and the estimated amortization schedule to be expensed
in fiscal year 2009 (in thousands).
|
June
29,
|
June
24,
|
|||||||
|
2008
|
2007
|
|||||||
|
Gross
Carrying Amount
|
$ | 912 | $ | 912 | ||||
|
Accumulated
Amortization
|
(866 | ) | (673 | ) | ||||
|
Net
|
$ | 46 | $ | 239 | ||||
|
Aggregate Amortization
Expense:
|
||||||||
|
For
the year ended June 29, 2008 and June 24, 2007
|
$ | 193 | 193 | |||||
|
Estimated Future
Amortization Expense:
|
||||||||
|
For
the year ending 2009
|
$ | 46 | ||||||
Income
Taxes:
Income
taxes are accounted for using the asset and liability method pursuant to SFAS
No. 109, "Accounting for Income Taxes" ("SFAS 109"). Deferred taxes
are recognized for the tax consequences of "temporary differences" by applying
enacted statutory tax rates applicable to future years to differences between
the financial statement and carrying amounts and the tax bases of existing
assets and liabilities. The effect on deferred taxes for a change in
tax rates is recognized in income in the period that includes the enactment
date. The Company recognizes future tax benefits to the extent that
realization of such benefits is more likely than not.
Prior to
and as of June 24, 2007, the Company had recorded a valuation allowance to
reflect the estimated amount of the deferred tax asset that more likely than not
would not be realized due to insufficient estimated pre-tax
profits. This assessment was based on the Company’s significant
pre-tax losses in fiscal 2006, minimal pre-tax income in fiscal 2007, the
possibility of pre-tax losses in the future, 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. Management re-evaluates the deferred
tax asset and allowance each quarter, and at the end of the third quarter of
fiscal 2008 determined it was more likely than not that the deferred tax asset
would be fully realized based on the Company’s recent history of pre-tax
profits, the expectation of future taxable income and the future reversal of
temporary differences. This determination and future estimates could
be impacted by changes in future taxable income and the results of tax
strategies.
On June
25, 2007, the Company adopted FIN 48, which prescribes a comprehensive model for
how a company should recognize, measure, present, and disclose in its financial
statements, uncertain tax positions that it has taken or expects to take on a
tax return. FIN 48 requires that a company recognize in its financial
statements the impact of tax positions that meet a “more likely than not”
threshold, based on the technical merits of the position. The tax
benefits recognized in the financial statements from such a position should be
measured based on the largest benefit that has a great than fifty percent
likelihood of being realized upon ultimate settlement. Upon adoption
of FIN 48 on June 25, 2007 and as of June 29, 2008, the Company had no uncertain
tax positions.
F
11
Revenue
Recognition:
The
Company recognizes food and supply revenue when products are delivered and the
customer takes ownership and assumes risk of loss, collection of the relevant
receivable is probable, persuasive evidence of an arrangement exists and the
sales price is fixed or determinable. The Company's Norco division
sells food and supplies to franchisees on trade accounts under terms common in
the industry. Recognition of revenue for equipment sales occurs upon
installation of such equipment. Other than for large remodel
projects, delivery date and installation date are the same. Norco
sales are reflected under the caption "Food and supply
sales." Shipping and handling costs billed to customers are
recognized as revenue and the associated costs are included in cost of
sales
Franchise
revenue consists of income from license fees, royalties, and area development
and foreign master license (collectively, "Territory") sales. License fees are
recognized as income when there has been substantial performance of the
agreement by both the franchisee and the Company, generally at the time the
restaurant is opened. Royalties are recognized as income when earned.
For the years ended June 29, 2008 and June 24, 2007, 90% and 95%, respectively,
of franchise revenue was comprised of recurring royalties.
Territory
sales are the fees paid by selected experienced restaurant operators to the
Company for the right to develop a specified number of restaurants in designated
geographical territories. The Company recognizes the fee to the
extent its obligations are fulfilled and to the extent of cash
received. There were no Territory sales recognized as income during
the fiscal years ended June 29, 2008 and June 24, 2007.
Stock
Options:
Prior to
June 27, 2005, we accounted for stock options using the intrinsic value method
under Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock
Issued to Employees” and related interpretations, as permitted by SFAS No. 123,
“Accounting for Stock-Based Compensation,” under which no compensation expense
was recognized for stock option grants. Accordingly, share-based
compensation related to our stock options for periods prior to fiscal year 2006
were included as a pro forma disclosure in the financial statement
footnotes.
Effective
June 27, 2005, we adopted the fair value recognition provisions of SFAS No.
123R, “Share-Based Payment” using the modified-prospective
method. Under this transition method, compensation cost recognized in
fiscal years 2008 and 2007 includes the applicable amounts of compensation costs
for all share-based payments granted subsequent to June 27, 2005 (based on
grant-date fair value estimated in accordance with the new provisions of SFAS
No. 123R).
The
Company uses the Black-Scholes formula to estimate the value of stock-based
compensation for options granted to employees and directors and expects to
continue to use this acceptable option valuation model in the
future. SFAS 123(R) also requires the benefits of tax deductions in
excess of recognized compensation cost to be reported as a financing cash
flow.
At June
29, 2008, the Company had one stock-based employee compensation plan, and one
stock-based non-employee director compensation plan. Stock options
under these plans are granted at exercise prices equal to the fair market value
of the Company’s stock at the dates of grant. Generally those options
vest ratably over various vesting periods. The Company’s stock-based
compensation plans are described more fully in Note H.
Fair
Value of Financial Instruments:
The carrying amounts of accounts
receivable, notes receivable and accounts payable approximate fair value
because of the short maturity of these instruments.. The Company had
no long-term debt or interest rate swaps at June 29, 2008 or June 24,
2007.
Contingencies:
Provisions for settlements are accrued
when payment is considered probable and the amount of loss is reasonably
estimable in accordance with SFAS No. 5 ”Accounting for
Contingencies.” If the best estimate of cost can only
be identified within a range and no specific amount within that range can be
determined more likely than any other amount within the range, and the loss is
considered probable, the minimum of the range is accrued. Legal and
related professional services costs to defend litigation of this nature are
expensed as incurred.
F
12
Use
of Management Estimates:
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the Company’s
management to make estimates and assumptions that affect its reported amounts of
assets, liabilities, revenues, expenses and related disclosure of contingent
liabilities. The Company bases its estimates on historical experience
and other various assumptions that it believes are reasonable under the
circumstances. Estimates and assumptions are reviewed
periodically. Actual results could differ materially from
estimates.
Fiscal
Year:
The Company's fiscal year ends on the
last Sunday in June. Fiscal year ending June 29, 2008 contained 53
weeks and fiscal year ending June 24, 2007contained 52 weeks.
New
Pronouncements:
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
No. 157 establishes a framework for measuring fair value within generally
accepted accounting principles, clarifies the definition of fair value within
that framework and expands disclosures about the use of fair value
measurements. SFAS No. 157 does not require any new fair value
measurements in generally accepted accounting principles. However,
the definition of fair value in SFAS No. 157 may affect assumptions used by
companies in determining fair value. The Company adopted SFAS No. 157
on June 30, 2008. The impact of the adoption of SFAS No. 157 did not
require material modification of the Company’s fair value
measurements.
In
February 2007, the FASB issued SFAS No. 159, Fair Value Option for Financial
Assets and Financial Liabilities. SFAS
No. 159 permits entities to choose to measure many financial instruments,
including employee stock option plans and operating leases accounted for in
accordance with SFAS No. 13, Accounting for Leases, at
their fair value. This Statement is effective as of the beginning of
an entity’s first fiscal year that begins after November 15,
2007. The Company has not completed its evaluation of the impact of
adoption of SFAS No. 159 on the Company’s financial statements but currently
believes the impact of the adoption of SFAS No. 159 will not require material
modification of the Company’s consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141 (Revised), Business
Combinations. SFAS No. 141(R) improves the relevance,
representational faithfulness, and comparability of the information that a
reporting entity provides in its financial reports about a business combination
and requires an acquirer to recognize the assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree at the acquisition
date, measured at their fair values as of that date. This Statement
applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. The adoption of this Statement is not
expected to have a material impact on the Company’s financial position or
results of operations.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements. SFAS
No. 160 amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary and clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. This Statement is effective
for fiscal years beginning on or after December 15, 2008. The
adoption of this Statement is not expected to have a material impact on the
Company’s financial position or results of operations.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an Amendment of FASB Statement No.
133. SFAS No. 161 amends SFAS No. 133 and requires entities to
enhance their disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments
and related hedged items are accounted for under SFAS No. 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash
flows. SFAS No. 161 is effective for fiscal years beginning on or
after November 15, 2008. The adoption of SFAS No. 161 is not expected
to have a material impact on the Company’s financial position or results of
operations.
F
13
In March 2008, the Financial
Accounting Standards Board (“FASB”) issued SFAS No. 162, “The Hierarchy of
Generally Accepted Accounting Principles.” This statement is intended
to improve financial reporting by identifying a consistent framework, or
hierarchy, for selecting accounting principals to be used in preparing financial
statements that are presented in conformity with U.S. generally accepted
accounting principles for nongovernmental entities. SFAS No. 162 is
effective 60 days following the SEC’s approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles.” SFAS No.
162 is not expected to have a material impact on the Company’s financial
statements, as the FASB does not expect that this Statement will result in a
change in current practice.
NOTE
B – PROPERTY, PLANT AND EQUIPMENT:
Property, and plant and equipment
consist of the following (in thousands):
|
Estimated
Useful
|
June
29,
|
June
24,
|
|||||||
|
Lives
|
2008
|
2007
|
|||||||
|
Equipment,
furniture and fixtures
|
3 -
7 yrs
|
$ | 1,352 | $ | 1,757 | ||||
|
Software
|
5
yrs
|
133 | - | ||||||
|
Leasehold
improvements
|
7
yrs or lease term
|
||||||||
|
if
shorter
|
1,237 | 1,237 | |||||||
| 2,722 | 2,994 | ||||||||
|
Less: accumulated
depreciation/amortization
|
(2,087 | ) | (2,216 | ) | |||||
| $ | 635 | $ | 778 | ||||||
Depreciation
and amortization expense, including amortization of re-acquired development
territory, was approximately $342,000 and $692,000 for the years ended June 29,
2008 and June 24, 2007, respectively.
NOTE
C - ACCRUED EXPENSES:
Accrued expenses consist of
the following (in thousands):
|
June
29,
|
June
24,
|
|||||||
|
2008
|
2007
|
|||||||
|
Compensation
|
$ | 482 | $ | 667 | ||||
|
Accrued
rent
|
205 | 149 | ||||||
|
Other
|
158 | 256 | ||||||
|
Professional
fees
|
158 | 226 | ||||||
|
Insurance
loss reserves
|
142 | 161 | ||||||
|
Deferred
revenue, current
|
134 | 231 | ||||||
|
Taxes
|
37 | 115 | ||||||
| $ | 1,316 | $ | 1,805 | |||||
NOTE D - LONG-TERM DEBT:
On
January 23, 2007, the Company and The CIT Group / Commercial Services, Inc.
(“CIT”) entered into an agreement for a revolving credit facility of up to $3.5
million (the “CIT Credit Facility”). The actual availability on the
CIT Credit Facility is determined by advance rates on eligible inventory and
accounts receivable. Interest on borrowings outstanding on the CIT
Credit Facility is provided for at a rate equal to a range of the prime rate
plus an interest rate margin of 0.0% to 0.5% or, at the Company’s option, at the
LIBOR rate plus an interest rate margin of 2.0% to 3.0%. The specific
interest rate margin is based on the Company’s performance under certain
financial ratio tests. An annual commitment fee is payable on any
unused portion of the CIT Credit Facility at a rate of 0.375%. All of
the Company’s (and its subsidiaries’) personal property assets (including, but
not limited to, accounts receivable, inventory, equipment, and intellectual
property) have been pledged to secure payment and performance of the CIT Credit
Facility, which is subject to customary covenants for asset-based
loans.
On June
27, 2007, the Company and CIT entered into an agreement to amend the CIT Credit
Facility to (i) allow the Company to repurchase Company stock in an amount up to
$3,000,000, (ii) allow the Company to make permitted cash distributions or cash
dividend payments to the Company’s shareholders in the ordinary course of
business and (iii) increase the aggregate capital expenditure limit from
$750,000 per fiscal year to $3,000,000. As of June 29, 2008, there
were no borrowings outstanding on the CIT Credit Facility, and the Company had
used the facility to obtain one letter of credit for approximately $230,000 to
reinsurers to secure loss reserves on behalf of its wholly-owned insurance
subsidiary.
On May
30, 2008, the Company CIT Group entered into a Third Amendment to Financing
Agreement modifying certain terms of the CIT Credit Facility. The amendment
permits the Company to repurchase up to $7,000,000 of the Company’s common
stock.
F
14
NOTE
E - INCOME TAXES:
Provision (benefit) for income taxes
from continuing operations consist of the following (in thousands):
|
Year
Ended
|
||||||||
|
June
29,
|
June
24,
|
|||||||
|
2008
|
2007
|
|||||||
|
Current
- Federal
|
$ | 227 | $ | (687 | ) | |||
|
Deferred
- Federal
|
(326 | ) | 696 | |||||
|
Deferred
- State
|
- | (9 | ) | |||||
|
Provision
(benefit) for income taxes
|
$ | (99 | ) | $ | - | |||
There were no income taxes associated
with discontinued operations.
The effective income tax rate varied from the statutory rate for the years ended
June 29, 2008 and June 24, 2007 as reflected below (in thousands):
|
June
29,
|
June
24,
|
|||||||
|
2008
|
2007
|
|||||||
|
|
||||||||
| Federal income taxes based on 34% of pre-tax income | $ | 927 | $ | 70 | ||||
|
State
income tax, net of federal effect
|
(20 | ) | 125 | |||||
|
Permanent
adjustments
|
29 | 5 | ||||||
|
Change
in valuation allowance
|
(1,148 | ) | (416 | ) | ||||
|
Foreign
tax credits
|
- | 208 | ||||||
|
Other
|
113 | 8 | ||||||
| $ | (99 | ) | $ | - | ||||
F
15
The tax effects of temporary
differences that give rise to the net deferred tax assets consisted of the
following (in thousands):
|
June
29,
|
June
24,
|
|||||||
|
2008
|
2007
|
|||||||
|
Reserve
for bad debt
|
$ | 45 | $ | 160 | ||||
|
Depreciable
assets
|
237 | 465 | ||||||
|
Deferred
fees
|
38 | 74 | ||||||
|
Other
reserves and accruals
|
374 | 473 | ||||||
|
Credit
carryforwards
|
98 | 98 | ||||||
|
Net
operating loss carry forwards
|
- | 336 | ||||||
|
Gross
deferred tax asset
|
792 | 1,606 | ||||||
|
Valuation
allowance
|
- | (1,148 | ) | |||||
|
Net
deferred tax asset
|
$ | 792 | $ | 458 | ||||
As of June 24, 2007 we had recorded a
valuation allowance based on our assessment that the realization of a portion of
our net deferred tax assets did not meet the “more likely than not” criterion
under SFAS No. 109, “Accounting for Income
Taxes.” During fiscal 2008, we determined that based upon a
number of factors, including our cumulative taxable income in recent quarters
and our expected profitability in future years, substantially all of our net
deferred tax assets are “more likely that not” realizable through future
earnings.
NOTE
F - LEASES:
Premises occupied by Company-owned
restaurants are leased for initial terms of five to ten years, and each has
multiple renewal terms. Each lease agreement contains either a
provision requiring additional rent if sales exceed specified amounts or an
escalation clause based upon a predetermined multiple.
On December 19, 2006, the Company sold
its real estate, corporate office building and distribution facility located at
3551 Plano Parkway, The Colony, Texas to Vintage Interests, L.P. (“Vintage”),
and entered into a ten-year lease agreement with Vintage for the
corporate office building.
Future
minimum rental payments under non-cancelable leases with initial or remaining
terms of one year or more at June 29, 2008 were as follows (in
thousands):
|
Operating
|
|||||
|
Leases
|
|||||
|
2009
|
$ | 699 | |||
|
2010
|
709 | ||||
|
2011
|
721 | ||||
|
2012
|
752 | ||||
|
2013
|
782 | ||||
|
Thereafter
|
2,760 | ||||
| $ | 6,423 | ||||
F
16
Rental expense consisted of the
following (in thousands):
|
|
Year
Ended
|
|||||||
|
June
29,
|
June
24,
|
|||||||
|
2008
|
2007
|
|||||||
|
Minimum
rentals
|
$ | 715 | $ | 764 | ||||
|
Sublease
rentals
|
(12 | ) | (187 | ) | ||||
| $ | 703 | $ | 577 | |||||
NOTE G - EMPLOYEE BENEFITS:
The
Company has a tax advantaged savings plan that is designed to meet the
requirements of Section 401(k) of the Internal Revenue Code (the
“Code”). The current plan is a modified continuation of a similar
savings plan established by the Company in 1985. Employees who have
completed six months of service and are at least 21 years of age are eligible to
participate in the plan. The plan provides that participating employees may
elect to have between 1% - 15% of their compensation deferred and contributed to
the plan subject to certain IRS limitations. Effective June 27, 2005,
the Company contributes on behalf of each participating employee an amount equal
to 50% of the employee’s contributions up to 4% of
compensation. Separate accounts are maintained with respect to
contributions made on behalf of each participating employee. Employer matching
contributions and earnings thereon are invested in the same investments as each
participant’s employee deferral. The plan is subject to the
provisions of the Employee Retirement Income Security Act, as amended, and is a
profit sharing plan as defined in Section 401 of the Code.
For the
years ended June 29, 2008 and June 24, 2007, total matching contributions to the
tax advantaged savings plan by the Company on behalf of participating employees
were approximately $25,000 and $48,000, respectively.
NOTE
H - STOCK OPTIONS:
In June 2005, the 2005 Employee
Incentive Stock Option Award Plan (the “2005 Employee Plan”) was approved by the
Company’s shareholders with a plan effective date of June 23,
2005. Under the 2005 Employee Plan, officers and employees of the
Company are eligible to receive options to purchase shares of the Company’s
common stock. Options are granted at market value of the stock on the
date of grant, are subject to various vesting and exercise periods as determined
by the Compensation Committee of the Board of Directors, and may be designated
as non-qualified or incentive stock options. A total of one million
shares of common stock are authorized for issuance under the 2005 Employee
Plan. During the 2008 fiscal year, 230,000 options were granted under
the 2005 Employee Plan, of which 205,000 were outstanding at June 29, 2008
(25,000 options were forfeited by employees who left the Company during the
year). As of June 29, 2008, there were 795,000 shares available under
the plan.
The shareholders also approved the 2005
Non-Employee Directors Stock Award Plan (the “2005 Directors Plan”) in June
2005, to be effective as of June 23, 2005. Directors not employed by
the Company are eligible to receive stock options under the 2005 Directors
Plan. Options for common stock equal to twice the number of shares of
common stock acquired during the previous fiscal year can be granted, up to
40,000 shares per year, to each non-employee director. Options are
granted at market value of the stock on the first day of each fiscal year, which
is also the date of grant, and with various vesting periods beginning at a
minimum of six months and with exercise periods up to ten years. A
total of 500,000 shares of Company common stock are authorized for issuance
pursuant to the 2005 Directors Plan. During the 2008 fiscal year,
40,000 options were granted under the 2005 Directors Plan, all of which were
outstanding at June 29, 2008. As of June 29, 2008, there were 430,000
shares available under the plan.
Subsequent to the end of the 2008
fiscal year, 130,000 options were granted to non-employee directors on July 2,
2008 under the 2005 Directors Plan. As a result of these grants,
300,000 shares remain available under the plan.
F
17
A summary of stock option transactions under all of the Company’s stock option plans and information about fixed-price stock options is as follows:
|
Year
Ended
|
||||||||||||||||||
|
June
29, 2008
|
June
24, 2007
|
|||||||||||||||||
|
Weighted-
|
Weighted-
|
|||||||||||||||||
|
Average
|
Average
|
|||||||||||||||||
|
Exercise
|
Exercise
|
|||||||||||||||||
|
Shares
|
Price
|
Shares
|
Price
|
|||||||||||||||
|
Outstanding
at beginning
|
||||||||||||||||||
|
of
year
|
588,358 | $ | 2.54 | 700,858 | $ | 2.68 | ||||||||||||
|
Granted
|
270,000 | $ | 2.50 | - | $ | - | ||||||||||||
|
Exercised
|
(10,000 | ) | $ | 2.85 | (30,000 | ) | $ | 2.00 | ||||||||||
|
Forfeited/Canceled/Expired
|
(573,358 | ) | $ | 2.53 | (82,500 | ) | $ | 3.73 | ||||||||||
|
Outstanding
at end of year
|
275,000 | $ | 2.55 | 588,358 | $ | 2.54 | ||||||||||||
|
Exercisable
at end of year
|
30,000 | $ | 2.73 | 388,358 | $ | 2.56 | ||||||||||||
|
Weighted-average
fair value of
|
||||||||||||||||||
|
options
granted during the year
|
$ | 2.50 | $ | - | ||||||||||||||
|
Total
intrinsic value of
|
||||||||||||||||||
|
options
exercised
|
$ | 8,472 | $ | 13,200 | ||||||||||||||
The total intrinsic value of options
outstanding at June 29, 2008 is $26,800 and of options exercisable at June 29,
2008 is $1,250.
The following table provides
information on options outstanding and options exercisable at June 29,
2008:
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||||||||
|
Weighted-
|
||||||||||||||||||||||
|
Average
|
||||||||||||||||||||||
|
Shares
|
Remaining
|
Weighted-
|
Shares
|
Weighted-
|
||||||||||||||||||
|
Range
of
|
Outstanding
|
Contractual
|
Average
|
Exercisable
|
Average
|
|||||||||||||||||
|
Exercise
Prices
|
at
June 29, 2008
|
Life
(Years)
|
Exercise
Price
|
at
June 29, 2008
|
Exercise
Price
|
|||||||||||||||||
| $ | 2.00 - 2.35 | 160,000 | 9.00 | $ | 2.23 | 5,000 | $ | 2.15 | ||||||||||||||
| $ | 2.70 - 3.05 | 75,000 | 7.10 | $ | 2.89 | 25,000 | $ | 2.85 | ||||||||||||||
| $ | 3.05- 3.40 | 40,000 | 9.40 | $ | 3.17 | - | $ | 0.00 | ||||||||||||||
| 275,000 | 8.50 | $ | 2.55 | 30,000 | $ | 2.73 | ||||||||||||||||
We determine fair value under SFAS No.
123R as follows:
Valuation
and Amortization Method. We estimate the fair value of share-based
awards granted using the Black-Scholes option valuation model. We
amortize the fair value of all awards on a straight-line basis over the
requisite service periods, which are generally the vesting periods.
Expected
Life. The expected life of awards granted represents the period of
time that they are expected to be outstanding. Unless a life is
specifically stated, we determine the expected life using the “simplified
method” in accordance with Staff Accounting Bulletin No. 107 since we do not
have sufficient historical share option exercise experience.
F
18
Expected
Volatility. Using the Black-Scholes option valuation model, we
estimate the volatility of our common stock at the date of grant based on the
historical volatility of our common stock.
Risk-Free
Interest Rate. We base the risk-free interest rate used in the
Black-Scholes option valuation model on the implied yield currently available on
U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the
expected life of the award.
Expected
Dividend Yield. We have not paid any cash dividends on our common
stock in the last ten years and we do not anticipate paying any cash dividends
in the foreseeable future. Consequently, we use an expected dividend
yield of zero in the Black-Scholes option valuation model.
Expected
Forfeitures. We use historical data to estimate pre-vesting option
forfeitures. We record stock-based compensation only for those awards
that are expected to vest.
The
following weighted average assumptions were used for options granted or had
options been granted:
|
June
29,
|
June
24,
|
|||||||
|
Fiscal
Years Ended
|
2008
|
2007
|
||||||
|
Expected
life (in years)
|
6.0 | 7.4 | ||||||
|
Expected
volatility
|
43.2 | % | 40.0 | % | ||||
|
Risk-free
interest rate
|
4.4 | % | 5.0 | % | ||||
|
Expected
forfeiture rate
|
9.9 | % | 38.5 | % | ||||
The share
based compensation expense is included in general and administrative expense in
the statement of operations.
At June
29, 2008, the Company had unvested options to purchase 245,000 shares with a
weighted average grant date fair value of $2.5255. The total
remaining unrecognized compensation cost related to unvested awards amounted to
approximately $215,000 at June 29, 2008 . The weighted average
remaining requisite service period of the unvested awards was 16
months. The total fair value of awards that vested during the fiscal
years ended June 29, 2008 and June 24, 2007 were $0 and $77,000,
respectively.
NOTE
I - COMMITMENTS AND CONTINGENCIES:
On
June 2, 2008, the Company announced that its Board of Directors had amended
the stock repurchase plan authorized on May 23, 2007 increasing the number of
shares of common stock the Company may repurchase by 1,000,000 shares to a total
of 2,016,000. As of June 29, 2008, there are 941,867 shares available
to be repurchased under the plan.
On August
31, 2006, the Company was served with notice of a lawsuit filed against it in
federal court by a former franchisee and its guarantors who operated one
restaurant in the Harlingen, Texas market in 2003. The former franchisee
and guarantor alleged generally that the Company intentionally and negligently
misrepresented costs associated with development and operation of the Company’s
franchise, and that as a result they sustained business losses that ultimately
led to the closing of the restaurant. They seek damages of approximately
$768,000, representing amounts the former franchisees claim to have lost in
connection with their development and operation of the restaurant. In
addition, they seek unspecified punitive damages, and recovery of attorneys’
fees and court costs. Pursuant to an Agreed Stipulation of Dismissal and
Order, the plaintiff has dismissed the claim in federal court, with prejudice,
and has re-filed the case in the state district courts of Dallas County,
Texas. Pizza Inn has answered, denying all claims, and filed a
counterclaim against Plaintiffs for (i) breach of the franchise agreement, (ii)
breach of guaranty and (iii) recovery of attorney fees. The Company
is waiting on a trial date to be set. The Company believes that
the plaintiff’s allegations are without merit and intends to vigorously defend
against such allegations. An adverse outcome to the proceeding could
materially affect the Company’s financial position and results of
operation. Due to the preliminary nature of this matter and the general
uncertainty surrounding the outcome, the Company has not made any accrual for
such amounts as of June 29, 2008.
F
19
The Company is also subject to other
various claims and contingencies related to employment agreements, franchise
disputes, lawsuits, taxes, food product purchase contracts and other matters
arising out of the normal course of business. With the possible
exception of the matter set forth above, management believes that any such
claims and actions currently pending against us are either covered by insurance
or would not have a material adverse effect on the Company's annual results of
operations or financial condition if decided in a manner that is unfavorable to
us.
NOTE J - RELATED
PARTIES:
One
director of the Company, Ramon Phillips, was a franchisee of one restaurant
during part of fiscal 2007.
He sold
this restaurant in April 2007 and is no longer a Pizza Inn
franchisee. Purchases by this franchisee comprised 0.4% of the
Company's total food and supply sales in the year ended June 24,
2007. Royalties from this franchisee comprised 0.4% of the Company's
total franchise revenues in the year ended June 24, 2007. As of June
24, 2007 his accounts payable to the Company was $0. This restaurant
paid royalties to the Company and purchased a majority of its food and supplies
from Norco.
A former director, Bobby Clairday,
currently operates a total of 10 restaurants located in
Arkansas. Purchases by this franchisee comprised 6.9% of the
Company’s total food and supply sales in the year ended June 24,
2007. Royalties and license fees and are development sales from this
franchises comprised 3.4% of the Company’s total franchise revenues in the year
ended June 24, 2007. These restaurants pay royalties to the Company
and purchase a majority of their food and supplies from Norco. This
franchisee director did not stand for re-election on the board in December
2006.
NOTE K - EARNINGS PER
SHARE:
The Company computes and presents
earnings per share (“EPS”) in accordance with SFAS No. 128, “Earnings Per
Share.” Basic EPS excludes the effect of potentially dilutive
securities while diluted EPS reflects the potential dilution that would occur if
securities or other contracts to issue common stock were exercised, converted or
resulted in the issuance of common stock that then shared in the earnings of the
entity.
The
following table shows the reconciliation of the numerator and denominator of the
basic EPS calculation to the numerator and denominator of the diluted EPS
calculation (in thousands, except per share amounts).
F
20
|
Year
Ended
|
||||||||
|
June
29,
|
June
24,
|
|||||||
|
2008
|
2007
|
|||||||
|
Income
from continuing operations
|
$ | 3,041 | $ | 587 | ||||
|
Discontinued
operations
|
(216 | ) | (381 | ) | ||||
|
Net
income available to common stockholders
|
$ | 2,825 | $ | 206 | ||||
|
BASIC:
|
||||||||
|
Weighted
average common shares
|
9,761 | 10,145 | ||||||
|
Income
from continuing operations per share
|
$ | 0.31 | $ | 0.06 | ||||
|
Discontinued
operations per common share
|
(0.02 | ) | (0.04 | ) | ||||
|
Net
income per common share
|
$ | 0.29 | $ | 0.02 | ||||
|
DILUTED:
|
||||||||
|
Weighted
average common shares
|
9,761 | 10,145 | ||||||
|
Stock
options
|
28 | 1 | ||||||
|
Average
common shares outstanding
|
9,789 | 10,146 | ||||||
|
Income
from continuing operations per share
|
$ | 0.31 | $ | 0.06 | ||||
|
Discontinued
operations per common share
|
(0.02 | ) | (0.04 | ) | ||||
|
Net
income per common share
|
$ | 0.29 | $ | 0.02 | ||||
At
June 29, 2008, options to purchase 115,000 shares of common stock at exercise
prices ranging from $2.85 to $3.17 were not included in the computation of
diluted EPS because the options’ exercise price were greater than the average
market price of the common shares during the year. At June 24, 2007,
options to purchase 373,358 shares of common stock at exercise prices ranging
from $2.50 to $3.56 were not included in the computation of diluted EPS because
the options’ exercise prices were greater than the average market price of the
common shares during the year.
NOTE
L– SEGMENT REPORTING:
The
Company has two reportable operating segments as determined by management using
the "management" approach as defined in SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information": (1) Food and
Equipment Sales and Distribution, and (2) Franchise and Other. These
segments are a result of differences in the nature of the products and services
sold. Corporate administration costs, which include, but are not
limited to, general accounting, human resources, legal and credit and
collections, are partially allocated to the two operating
segments. Other revenue consists of nonrecurring items.
The Food
and Equipment Distribution segment sells and distributes proprietary and
non-proprietary items to franchisees and to Company-owned
restaurants. Inter-segment revenues consist of sales to Company-owned
restaurants. Assets for this segment include equipment, furniture and
fixtures.
The
Franchise and Other segment derive revenue from royalties, license fees and area
development and foreign master license sales. The Franchise and Other
segment includes Company-owned restaurants, which are used as prototypes and
training facilities. Assets for this segment include equipment,
furniture and fixtures for the Company restaurants.
Corporate
administration and other assets primarily include the deferred tax asset, cash
and short-term investments, as well as furniture and fixtures located at the
corporate office. All assets are located within the United
States.
F
21
Summarized
in the following tables are net sales and operating revenues, depreciation and
amortization expense, interest expense, pre-tax income (expense), income tax
provision (benefit), capital expenditures and assets for the Company's
reportable segments as of and for the years ended June 29, 2008 and June 24,
2007 (in thousands):
|
Year
Ended
|
||||||||
|
June
29,
|
June
24,
|
|||||||
|
2008
|
2007
|
|||||||
|
Net
sales and operating revenues:
|
||||||||
|
Food
and equipment distribution
|
$ | 43,807 | $ | 41,029 | ||||
|
Franchise
and other (2)
|
5,711 | 5,396 | ||||||
|
Inter-segment
revenues
|
311 | 541 | ||||||
|
Combined
|
49,829 | 46,966 | ||||||
|
Less
inter-segment revenues
|
(311 | ) | (541 | ) | ||||
|
Consolidated
revenues
|
$ | 49,518 | $ | 46,425 | ||||
|
Depreciation
and amortization:
|
||||||||
|
Food
and equipment distribution
|
$ | 1 | $ | 166 | ||||
|
Franchise
and other (2)
|
272 | 371 | ||||||
|
Combined
|
273 | 537 | ||||||
|
Corporate
administration and other
|
69 | 155 | ||||||
|
Depreciation
and amortization
|
$ | 342 | $ | 692 | ||||
|
Interest
expense:
|
||||||||
|
Food
and equipment distribution
|
$ | - | $ | 267 | ||||
|
Franchise
and other (2)
|
- | - | ||||||
|
Combined
|
- | 267 | ||||||
|
Corporate
administration and other
|
- | 209 | ||||||
|
Interest
expense
|
$ | - | $ | 476 | ||||
|
Pre-Tax
Income (loss):
|
||||||||
|
Food
and equipment distribution (1)
|
$ | 2,419 | $ | (49 | ) | |||
|
Franchise
and other (1), (2)
|
2,102 | 1,595 | ||||||
|
Inter-segment
profit
|
72 | 128 | ||||||
|
Combined
|
4,593 | 1,674 | ||||||
|
Less
inter-segment profit
|
(72 | ) | (128 | ) | ||||
|
Corporate
administration and other
|
(1,795 | ) | (1,340 | ) | ||||
|
Income
(loss) before taxes
|
$ | 2,726 | $ | 206 | ||||
|
Income
tax provision (benefit):
|
||||||||
|
Food
and equipment distribution
|
$ | - | $ | - | ||||
|
Franchise
and other
|
- | - | ||||||
|
Combined
|
- | - | ||||||
|
Corporate
administration and other
|
(99 | ) | - | |||||
|
Income
tax (benefit) provision
|
$ | (99 | ) | $ | - | |||
| (1) Does not include full allocation of corporate administration | ||||||||
| (2) Company stores that were closed are included in discontinued operations in the accompanying consolidated statement of operations | ||||||||
F
22
|
Year
Ended
|
||||||||
|
June
29,
|
June
24,
|
|||||||
|
2008
|
2007
|
|||||||
|
Capital
Expenditures:
|
||||||||
|
Food
and equipment distribution
|
$ | - | $ | 225 | ||||
|
Franchise
and other
|
10 | 23 | ||||||
|
Combined
|
10 | 248 | ||||||
|
Corporate
administration and other
|
239 | 1 | ||||||
|
Consolidated
capital expenditures
|
$ | 249 | $ | 249 | ||||
|
Assets:
|
||||||||
|
Food
and equipment distribution
|
$ | 3,311 | $ | 4,181 | ||||
|
Franchise
and other
|
629 | 1,460 | ||||||
|
Combined
|
3,940 | 5,641 | ||||||
|
Corporate
administration and other
|
3,895 | 2,553 | ||||||
|
Consolidated
assets
|
$ | 7,835 | $ | 8,194 | ||||
|
Geographic
Information (Revenues):
|
||||||||
|
United
States
|
$ | 47,709 | $ | 45,023 | ||||
|
Foreign
countries
|
1,809 | 1,402 | ||||||
|
Consolidated
total
|
$ | 49,518 | $ | 46,425 | ||||
F
23
|
PIZZA
INN, INC.
|
||||||||||||||||||||
|
CONSOLIDATED
VALUATION AND QUALIFYING ACCOUNTS
|
||||||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||
|
Additions
|
||||||||||||||||||||
|
Balance
at
|
Charged
to
|
Recovered
|
Balance
|
|||||||||||||||||
|
beginning
|
cost
and
|
cost
and
|
Other
|
at
end
|
||||||||||||||||
|
of
period
|
expense
|
expense
|
Deductions
|
of period
|
||||||||||||||||
|
Allowance
for doubtful
|
||||||||||||||||||||
|
accounts
and notes receivable
|
||||||||||||||||||||
|
Year
Ended June 29, 2008
|
$ | 451 | $ | 133 | $ | - | $ | (456 | ) | $ | 128 | |||||||||
|
Year
Ended June 24, 2007
|
$ | 324 | $ | 120 | $ | (24 | ) | $ | 31 | $ | 451 | |||||||||
F
24
Exhibit 10.10
THIRD AMENDMENT TO FINANCING
AGREEMENT
THIS
THIRD AMENDMENT TO FINANCING AGREEMENT (this "Amendment”) is
entered into on this 30th day of
May 2008, to be effective as of the date hereof (the "Effective Date"), by and
between PIZZA INN, INC., a Missouri corporation with a principal place of
business at 3551 Plano Parkway, The Colony, Texas 75056 (herein the "Company"), and THE
CIT GROUP/COMMERCIAL SERVICES, INC., a New York corporation (the "Lender").
RECITALS
A. The
Company and the Lender have entered into that certain Financing Agreement,
dated as
of January 23, 2007 (as amended from time to time, the "Financing
Agreement").
B. The
Company has requested that Lender amend the Financing Agreement to permit
Company to repurchase Company stock in an amount up to $7,000,000.
C. Pursuant
to the terms and conditions of this Amendment, Company and Lender are
willing to amend the Financing Agreement as hereinafter set forth.
NOW,
THEREFORE, in consideration of the premises herein contained and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Parties,
intending to be legally bound, agree as follows:
AGREEMENT
ARTICLE
I
Definitions
1.01 Capitalized
terms used in this Amendment are defined in the Financing Agreement, as amended
hereby, unless otherwise stated.
ARTICLE
II
Amendments
2.01 Amendment
to Definition of Permitted Distributions. 'Effective as of the
Effective Date, Section 1.1 of the
Financing Agreement is hereby amended by deleting the reference to "$3,000,000"
in the definition of Permitted Distributions and replacing it with a reference
to "$7,000,000".
ARTICLE
III
Conditions
Precedent
3.01 Conditions
to Effectiveness.
The effectiveness of this Amendment is subject to the satisfaction of the
following conditions precedent in a manner satisfactory to Lender, unless
specifically waived in writing by Lender:
(a) Lender
shall have received each of the following, each in form and substance
satisfactory to Lender, in its sole discretion, and, where applicable, each duly
executed by each party thereto, other than Lender:
(i) This
Amendment, duly executed by the Company; and
(ii) All
other documents Lender may request with respect to any matter relevant to this
Amendment or the transactions contemplated hereby.
(b) The
representations and warranties contained herein and in the Financing Agreement
and the other documents executed in connection with the Financing
Agreement herein referred to as "Loan Documents"), as each is amended
hereby, shall be true and correct as of the date hereof, as if made on the date
hereof.
(c) No Default or Event
of Default shall have occurred and be continuing, unless such Default or Event
of Default has been otherwise specifically waived in writing by Lender.
(d) All
organizational proceedings taken in connection with the transactions
contemplated by this Amendment and all documents, instruments and other legal
matters incident thereto shall be satisfactory to Lender.
ARTICLE
IV
Ratifications,
Representations and Warranties
4.01 Ratifications. The terms and
provisions set forth in this Amendment shall modify and supersede all
inconsistent terms and provisions set forth in the Financing Agreement and the
other Loan Documents, and,-· except as expressly modified and superseded by this
Amendment, the terms and provisions of the Financing Agreement and the other
Loan Documents are ratified and confirmed and shall continue in full force and
effect. Company and Lender agree that the Financing Agreement and the other Loan
Documents, as amended hereby, shall continue to be legal, valid, binding and
enforceable in accordance with their respective terms.
4.02 Representations
and Warranties. The Company
hereby represents and warrants to Lender that (a) the execution, delivery and
performance of this Amendment and any and all other Loan Documents executed
and/or delivered in connection herewith have been authorized by all requisite
organizational action on the part of the Company and will not violate the
Articles of Incorporation or Bylaws of the Company; (b) the representations and
warranties contained in the Financing Agreement, as amended hereby, and each
other Loan Document are true and correct on and as of the date hereof and on and
as of the date of execution hereof as though made on and as of each such date;
(c) no Default or Event of Default under the Financing Agreement, as amended
hereby, has occurred and is continuing, unless such Default or Event of Default
has been specifically waived in writing by Lender; (d) the Company is in full
compliance with all covenants and agreements contained in the Financing
Agreement and the other Loan Documents, as
amended hereby; and (e) the Company has not amended its Articles of
Incorporation or its Bylaws
since the Closing Date.
ARTICLE
V
Miscellaneous
Provisions
5.01 Survival
of Representations and Warranties. All
representations and warranties made in the Financing Agreement, or any other
Loan Document, including, without limitation, any document furnished in
connection with this Amendment, shall survive the execution and delivery of this
Amendment and the other Loan Documents, and no investigation by Lender or any
closing shall affect the representations and warranties or the right of Lender
to rely upon them.
5.02 Reference
to Financing Agreement. Each of the
Financing Agreement and the other Loan Documents, and any and all other Loan
Documents, documents or instruments now or hereafter executed and delivered
pursuant to the terms hereof or pursuant to the terms of the Financing
Agreement, as amended hereby, are hereby amended so that any reference in the
Financing Agreement and such other Loan Documents to the Financing Agreement
shall mean a reference to the Financing Agreement, as amended
hereby.
5.03 Expenses
of Lender. As provided in
the Financing Agreement, the Company agrees to pay on demand all
costs and expenses incurred by Lender in connection with the preparation,
negotiation, and execution of this Amendment and any and all amendments,
modifications, and supplements thereto, including, without limitation, the costs
and fees of Lender's legal counsel, and all costs and expenses incurred by
Lender in connection with the enforcement or preservation of any rights under
the Financing Agreement, as amended hereby, or any other Loan Documents,
including, without, limitation, the costs and fees of Lender's legal
counsel.
5.04 Severability. Any provision of
this Amendment held by a court of competent jurisdiction to be invalid or
unenforceable shall not impair or invalidate the remainder of this Amendment and
the effect thereof shall be confined to the provision so held to be invalid or
unenforceable.
5.05 Successors
and Assigns. This Amendment is
binding upon and shall inure to the benefit of Lender and Company and their
respective successors and assigns, except that Company may neither assign nor
transfer any of its rights or obligations hereunder without the prior written
consent of Lender.
5.06 Counterparts. This Amendment
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.
5.07 Effect of
Waiver. No
consent or waiver, express or implied, by Lender to or for any breach of or
deviation from any covenant or condition by the Company shall be deemed a
consent to or waiver of any other breach of the same or any other covenant,
condition or duty.
5.08 Headings. The headings, captions, and
arrangements used in this Amendment are for convenience only and shall not
affect the interpretation of this Amendment.
5.09 Applicable
Law. THIS
AMENDMENT AND ALL OTHER LOAN DOCUMENTS EXECUTED PURSUANT HERETO SHALL BE DEEMED
TO HAVE BEEN MADE AND TO BE PERFORMABLE IN AND SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
5.10 Final
Agreement. THE
FINANCING AGREEMENT AND THE OTHER LOAN DOCUMENTS, EACH AS AMENDED HEREBY,
REPRESENT THE ENTIRE EXPRESSION OF THE PARTIES WITH RESPECT TO THE SUBJECT
MATTER HEREOF ON THE DATE THIS AMENDMENT IS EXECUTED. THE FINANCING AGREEMENT
AND THE OTHER LOAN DOCUMENTS, AS AMENDED HEREBY, MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. NO MODIFICATION,
RESCISSION, WAIVER, RELEASE OR AMENDMENT OF ANY PROVISION OF THIS AMENDMENT
SHALL BE MADE, EXCEPT BY A WRITTEN AGREEMENT SIGNED BY THE COMPANY AND
LENDER.
5.11 Release. COMPANY HEREBY
ACKNOWLDGES THAT IT HAS NO DEFENSE, COUNTERCLAIM, OFFSET, CROSS-COMPLAINT, CLAIM
OR DEMAND OF ANY KIND OR NATURE WHATSOEVER THAT CAN BE ASSERTED TO REDUCE OR
ELIMINATE ALL OR ANY PART OF ITS LIABILITY TO REPAY THE "OBLIGATIONS" OR TO SEEK
AFFIRMATIVE RELIEF OR DAMAGES OF ANY KIND OR NATURE FROM LENDER. COMPANY HEREBY
VOLUNTARILY AND KNOWINGLY RELEASES AND FOREVER DISCHARGES LENDER, ITS
PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS, FROM ALL POSSIBLE
CLAIMS, DEMANDS, ACTIONS, CAUSES OF ACTION, DAMAGES, COSTS, EXPENSES, AND
LIABILITIES WHATSOEVER, WHETHER FIXED, CONTINGENT, OR CONDITIONAL, AT LAW OR IN
EQUITY, KNOWN IN WHOLE OR IN PART ON OR BEFORE THE DATE THIS AMENDMENT IS
EXECUTED, WHICH THE COMPANY MAY NOW OR HEREAFTER HAVE AGAINST LENDER, ITS
PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS AND
ASSIGNS, IF ANY, AND IRRESPECTIVE OF WHETHER ANY SUCH CLAIMS ARISE OUT OF
CONTRACT, TORT, VIOLATION OF LAW OR REGULATIONS, OR OTHERWISE, AND ARISING FROM
ANY "LOANS", INCLUDING, WITHOUT LIMITATION, ANY CONTRACTING FOR, CHARGING,
TAKING, RESERVING, COLLECTING OR RECEIVING INTEREST IN EXCESS OF THE HIGHEST
LAWFUL RATE APPLICABLE, THE EXERCISE OF ANY RIGHTS AND REMEDIES UNDER THE
FINANCING AGREEMENT OR OTHER LOAN DOCUMENTS, AND NEGOTIATION FOR AND EXECUTION
OF THIS AMENDMENT.
IN
WITNESS WHEREOF, this Amendment has been executed and is effective as of
the
date
first written above.
COMPANY:
PIZZA
INN, INC.
LENDER:
THE
CIT GROUP/COMMERCIAL SERVICES,
INC.
Name:
Charles Alcantar
Title:
Vice-President
Exhibit
23.1
CONSENT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Pizza
Inn, Inc.
The
Colony, Texas
We hereby
consent to the incorporation by reference in the Registration Statements on
Forms S-8 (Nos. 33-56590, 33-71700, 333-77617, and 333-76296) of Pizza Inn, Inc.
of our report dated September 19, 2008, relating to the consolidated financial
statements and financial statement schedule, which appear in this Form
10-K.
BDO
Seidman, LLP
Dallas,
Texas
September
25, 2008
Exhibit
31.1
CERTIFICATION
OF PRINCIPAL EXECUTIVE OFFICER
Pursuant
to section 3.02 of the Sarbanes-Oxley Act of 2002
I,
Charles R. Morrison, Chief Executive Officer of Pizza Inn, Inc. (the “Company”)
certify that:
|
1.
|
I
have reviewed this annual report on Form 10-K of the
Company.;
|
|
|
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 Company
as of, and for, the periods presented in this
report;
|
|
4.
|
The
Company’s other certifying officer 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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the Company 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 Company, 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.
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
|
c.
|
Evaluated
the effectiveness of the Company’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 Company’s internal control over financial
reporting that occurred during the Company’s most recent fiscal quarter
(the Company’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the
Company’s internal control over financial reporting;
and
|
|
5.
|
The
Company’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
Company’s auditors and the audit committee of the Company’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 Company’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 Company's internal control
over financial reporting.
|
|
Date:
September 25, 2008
|
By:
|
/s/ Charles R.
Morrison
President
and Chief Executive Officer
(Principal
Executive Officer)
|
Exhibit
31.2
CERTIFICATION
OF PRINCIPAL FINANCIAL OFFICER
Pursuant
to Section 3.02 of the Sarbanes-Oxley Act of 2002
I, Nancy
Ellefson, Vice President of Finance and Principal Accounting Officer of Pizza
Inn, Inc. (the “Company”) certify that:
|
1.
|
I
have reviewed this annual report on Form 10-K of the
Company.;
|
|
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 Company
as of, and for, the periods presented in this
report;
|
|
4.
|
The
Company’s other certifying officer 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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a–15(f)
and15d–15(f)) for the Company 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 Company, 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.
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
|
c.
|
Evaluated
the effectiveness of the Company’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 Company’s internal control over financial
reporting that occurred during the Company’s most recent fiscal quarter
(the Company’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the
Company’s internal control over financial reporting;
and
|
|
5.
|
The
Company’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
Company’s auditors and the audit committee of the Company’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 Company’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 Company’s internal control
over financial reporting.
|
|
Date:
September 25, 2008
|
By:
|
/s/ Nancy
Ellefson
Vice
President of Finance and Principal Accounting Officer
(Principal
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
The
undersigned officer of Pizza Inn, Inc. (the “Company”), does hereby certify, to
such officer’s knowledge, that the accompanying Annual Report on Form 10-K for
the fiscal year ended June 29, 2008, and filed with the Securities and Exchange
Commission on the date hereof (the “Form 10-K”) 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-K fairly
presents, in all material respects, the financial condition and results of
operations of the Company.
|
Date:
September 25, 2008
|
By:
|
/s/ Charles
R. Morrison
President
and Chief Executive Officer
(Principal
Executive Officer)
|
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
The
undersigned officer of Pizza Inn, Inc. (the “Company”), does hereby certify, to
such officer’s knowledge, that the accompanying Annual Report on Form 10-K for
the fiscal year ended June 29, 2008, and filed with the Securities and Exchange
Commission on the date hereof (the “Form 10-K”) 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-K fairly
presents, in all material respects, the financial condition and results of
operations of the Company.
|
Date:
September 25, 2008
|
By:
|
/s/ Nancy
Ellefson
Vice
President of Finance and Principal Accounting Officer
(Principal
Financial Officer)
|