Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

November 9, 1999

Documents

10-Q: Quarterly report pursuant to Section 13 or 15(d)

Published on November 9, 1999


SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-Q
(MARK ONE)

[ X ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 26, 1999.
--------------------

[ ]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 IN ITS CHARTER)


MISSOURI 47-0654575
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)


5050 QUORUM DRIVE
SUITE 500
DALLAS, TEXAS 75240
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES,
INCLUDING ZIP CODE)

(972) 701-9955
(REGISTRANT'S TELEPHONE NUMBER,
INCLUDING AREA CODE)

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR SUCH SHORTER PERIOD THAT THE REGISTRANT
WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES [X} NO [ ]

INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTIONS 12, 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY A COURT. YES [X] NO [ ]

AT NOVEMBER 8, 1999, AN AGGREGATE OF 11,704,078 SHARES OF THE REGISTRANT'S
COMMON STOCK, PAR VALUE OF $.01 EACH (BEING THE REGISTRANT'S ONLY CLASS OF
COMMON STOCK), WERE OUTSTANDING.









PIZZA INN, INC.

Index
-------------

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements Page
- ------- --------------------- ----

Consolidated Statements of Operations for the three months
ended September 26, 1999 and September 27, 1998 3

Consolidated Balance Sheets at September 26, 1999 and
June 27, 1999. 4

Consolidated Statements of Cash Flows for the three months
ended September 26, 1999 and September 27, 1998 5

Notes to Consolidated Financial Statements 7



Item Management's Discussion and Analysis of
- ----- -------------------------------------
Financial Condition and Results of Operations 10
---------------------------------------------


PART II.OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders 12
- ------ ----------------------------------------------------

Item 6. Exhibits and Reports on Form 8-K 12
- ------- --------------------------------

Signatures 13
----------------------------------------------------------

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL INFORMATION
- --------------------------------




PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)


THREE MONTHS ENDED
-------------------
SEPTEMBER 26, SEPTEMBER 27,
REVENUES: 1999 1998
------------------- --------------

Food and supply sales $ 15,329 $ 14,442
Franchise revenue 1,469 1,454
Restaurant sales 577 596
Other income 19 92
------------------- --------------
17,394 16,584
------------------- --------------

COSTS AND EXPENSES:
Cost of sales 14,584 13,940
Franchise expenses 627 712
General and administrative expenses 907 1,139
Interest expense 139 113
------------------- --------------
16,257 15,904
------------------- --------------

INCOME BEFORE INCOME TAXES 1,137 680

Provision for income taxes 390 210
------------------- --------------

NET INCOME $ 747 $ 470
=================== ==============

BASIC EARNINGS PER COMMON SHARE $ 0.07 $ 0.04
=================== ==============

DILUTED EARNINGS PER COMMON SHARE $ 0.07 $ 0.04
=================== ==============

DIVIDENDS DECLARED PER COMMON SHARE $ 0.06 $ 0.06
=================== ==============

WEIGHTED AVERAGE COMMON SHARES 11,250 12,212
=================== ==============

WEIGHTED AVERAGE COMMON AND
POTENTIAL DILUTIVE COMMON SHARES 11,470 13,009
=================== ==============


See accompanying Notes to Consolidated Financial Statements.













PIZZA INN, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)


SEPTEMBER 26, JUNE 27,
1999 1999
--------------- ---------
ASSETS (unaudited)
CURRENT ASSETS

Cash and cash equivalents $ 396 $ 509
Accounts receivable, less allowance for doubtful
accounts of $829 and $808, respectively 4,937 4,588
Notes receivable, current portion, less allowance
for doubtful accounts of $109 and $144, respectively 808 814
Inventories 2,042 2,393
Deferred taxes, net 1,459 1,149
Prepaid expenses and other 510 591
--------------- ---------
Total current assets 10,152 10,044

LONG-TERM ASSETS
Property, plant and equipment, net 1,760 1,754
Property under capital leases, net 1,401 1,587
Deferred taxes, net 3,733 4,407
Long-term notes receivable, less
allowance for doubtful accounts of $118 and $80,respectively 300 380
Deposits and other 387 414
--------------- ---------
$ 17,733 $ 18,586
=============== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade $ 2,389 $ 2,641
Accrued expenses 1,558 1,795
Current portion of capital lease obligations 456 428
--------------- ---------
Total current liabilities 4,403 4,864

LONG-TERM LIABILITIES
Long-term debt 6,500 5,700
Long-term capital lease obligations 1,107 1,244
Other long-term liabilities 721 719
--------------- ---------
12,731 12,527
--------------- ---------

SHAREHOLDERS' EQUITY
Common Stock, $.01 par value; authorized 26,000,000
shares; outstanding 11,090,338 and 11,407,945
shares, respectively (after deducting shares in
treasury: September - 3,851,731 and June -3,519,231) 111 114
Additional paid-in capital 4,671 4,765
Retained earnings 220 1,180
--------------- ---------
Total shareholders' equity 5,002 6,059
--------------- ---------
$ 17,733 $ 18,586
=============== =========


See accompanying Notes to Consolidated Financial Statements.








PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)


THREE MONTHS ENDED
--------------------
SEPTEMBER 26, SEPTEMBER 27,
1999 1998
-------------------- ---------------

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income $ 747 $ 470
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 273 288
Provision for bad debt 25 60
Deferred income taxes 364 170
Changes in assets and liabilities:
Notes and accounts receivable (288) 336
Inventories 351 (243)
Accounts payable - trade (252) 1,068
Accrued expenses (237) (27)
Prepaid expenses and other 153 32
-------------------- ---------------
CASH PROVIDED BY OPERATING ACTIVITIES 1,136 2,154
-------------------- ---------------

CASH FLOWS FROM INVESTING ACTIVITIES:

Capital expenditures (133) (369)
-------------------- ---------------
CASH USED FOR INVESTING ACTIVITIES (133) (369)
-------------------- ---------------

CASH FLOWS FROM FINANCING ACTIVITIES:

Borrowings of long-term bank debt 1,000 1,952
Repayments of long-term bank debt and capital lease obligations (309) (14)
Dividends paid (706) (754)
Proceeds from exercise of stock options 30 15
Purchases of treasury stock (1,131) (4,269)
-------------------- ---------------
CASH USED FOR FINANCING ACTIVITIES (1,116) (3,070)
-------------------- ---------------

Net decrease in cash and cash equivalents (113) (1,285)
Cash and cash equivalents, beginning of period 509 2,335
-------------------- ---------------
Cash and cash equivalents, end of period $ 396 $ 1,050
-------------------- ---------------



See accompanying Notes to Consolidated Financial Statements.








SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
(IN THOUSANDS)
(UNAUDITED)



THREE MONTHS ENDED
-------------------
SEPTEMBER 26, SEPTEMBER 27,
1999 1998
------------------- --------------

CASH PAYMENTS FOR:

Interest $ 73 $ 93
Income taxes - -


NONCASH FINANCING AND INVESTING
ACTIVITIES:
Capital lease obligations incurred $ - $ 290




PIZZA INN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1) The accompanying consolidated financial statements of Pizza Inn, Inc.
(the "Company") have been prepared without audit pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in the financial statements have been
omitted pursuant to such rules and regulations. The consolidated financial
statements should be read in conjunction with the notes to the Company's audited
consolidated financial statements in its Form 10-K for the fiscal year ended
June 27, 1999. Certain prior year amounts have been reclassified to conform
with current year presentation.

In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary to present fairly the Company's
financial position and results of operations for the interim periods. All
adjustments contained herein are of a normal recurring nature.

(2) On September 27, 1999, the Company's Board of Directors declared a
quarterly dividend of $.06 per share on the Company's common stock, payable
October 22, 1999 to shareholders of record on October 8, 1999.

(3) The Company entered into an agreement effective August 31, 1999 with its
current lender to extend the term of its existing $9.5 million revolving credit
line through August 2001 and to modify certain financial covenants.

(4) In October 1999, the Company loaned $2,506,754 to certain officers of
the Company in the form of promissory notes due in June 2004 to acquire 900,000
shares of the Company's common stock through the exercise of vested stock
options previously granted to them in 1995 by the Company. The notes bear
interest at the same floating interest rate the Company pays on its credit
facility with Wells Fargo and are collaterized by certain real property and
existing Company stock owned by the officers. The notes will be reflected as a
reduction to stockholders' equity, therefore, causing the transaction to have no
net effect on stockholders' equity.

(5) The following table shows the reconciliation of the numerator and
denominator of the basic EPS calculation to the numerator and denominator
of the diluted EPS calculation (in thousands, except per share amounts).





INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- ----------

THREE MONTHS ENDED SEPTEMBER 26, 1999
BASIC EPS
Income Available to Common Shareholders $ 747 11,250 $ 0.07
Effect of Dilutive Securities - Stock Options 220
------------
DILUTED EPS
Income Available to Common Shareholders
& Assumed Conversions $ 747 11,470 $ 0.07
============ ============= ==========

THREE MONTHS ENDED SEPTEMBER 27, 1998
BASIC EPS
Income Available to Common Shareholders $ 470 12,212 $ 0.04
Effect of Dilutive Securities - Stock Options 797
------------
DILUTED EPS
Income Available to Common Shareholders
& Assumed Conversions $ 470 13,009 $ 0.04
============ ============= ==========



(6) Summarized in the following tables are net sales and operating revenues,
operating profit (loss), and geographic information (revenues) for the Company's
reportable segments for the three months ended September 26, 1999, and September
27, 1998:





SEPTEMBER 26, SEPTEMBER 27,
1999 1998
------------------------- --------------------------

(In thousands)
NET SALES AND OPERATING REVENUES:
Food and Equipment Distribution $ 15,329 $ 14,442
Franchise and Other 2,046 2,050
Intersegment revenues 217 246
------------------------- --------------------------
Combined 17,592 16,738
Other revenues 19 92
Less intersegment revenues (217) (246)
------------------------- --------------------------
Consolidated revenues 17,394 16,584
========================= ==========================

OPERATING PROFIT:
Food and Equipment Distribution (1) $ 727 $ 417
Franchise and Other (1) 846 686
Intersegment profit 56 60
------------------------- --------------------------
Combined 1,629 1,163
Other profit or loss 19 92
Less intersegment profit (56) (60)
Corporate administration and other (455) (515)
------------------------- --------------------------
Income before taxes 1,137 680
========================= ==========================

GEOGRAPHIC INFORMATION (REVENUES):
United States $ 17,073 $ 16,206
Foreign countries 321 378
------------------------- --------------------------
Consolidated total 17,394 16,584
========================= ==========================


(1) Does not include full allocation of corporate administration








14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- --------------

Quarter ended September 26, 1999 compared to the quarter ended September 27,
1998.

Diluted earnings per share for the first quarter of the current fiscal year
increased by 75% to $0.07 from $0.04 for the same period last year. Net income
for the quarter increased 59% to $747,000 from $470,000 for the same quarter
last year.

Food and supply sales increased 6% or $887,000 for the quarter compared to
the same period last year. Food and supply sales to domestic franchise
restaurants increased 4% or $623,000 compared to the same quarter last year due
to greater sales volume to franchised restaurants and higher cheese prices.
Equipment sales increased $362,000 due to additional sales to more full-service
stores opened during the quarter. Last year's sales also included temporary
closings of the Company's franchise restaurants in several larger revenue
producing southeastern states that were effected by hurricanes.

Franchise revenue, which includes income from royalties, license fees and
area development and foreign master license (collectively, "Territory") sales,
increased 1% or $15,000 over the same period last year. Domestic and
international royalties increased $61,000 due to higher chainwide sales. The
first quarter of the prior year included final recognition of $53,000 in
proceeds for Territory sales.

Restaurant sales, which consists of revenue generated by Company-owned
stores, decreased 3% or $19,000 due to the closing of one Delco store in August
1998. Comparable store sales growth at Company-owned stores increased 4% for
the quarter.

Other income, which consists primarily of interest income and non-recurring
revenue items decreased 79% or $73,000 for the quarter compared to the same
period last year. The prior year's quarter included recognition of $65,000 in
vendor incentives.

Cost of sales increased 5% or $644,000 compared to the same period last
year. This increase is due primarily to increased domestic retail sales as
noted above and increased vehicle costs caused by higher fuel prices. Cost of
sales, as a percentage of sales, decreased to 92% from 93% compared to the same
quarter last year.

Franchise expenses include selling, general and administrative expenses
directly related to the sale and service of franchises and Territories. These
costs decreased 12% or $85,000 for the first quarter primarily due to lower
compensation expense relating to franchise sales.

General and administrative expenses decreased 20% or $232,000 compared to
the same quarter last year primarily due to decreased miscellaneous expenses and
professional fees. Additionally, Company-owned store expenses were lower due to
increased cost efficiencies.

Interest expense increased 23% or $26,000 for the quarter, as the result of
higher debt balances and interest expense on the new capitalized leases.

LIQUIDITY AND CAPITAL RESOURCES

During the first quarter of fiscal 2000, the Company utilized cash provided
by operations in the amount of $1,136,000, bank borrowings of $800,000 and a
portion of its cash balances to purchase 332,500 shares of its own common stock
for $1,131,000 and to pay dividends of $706,000.

Capital expenditures of $133,000 purchased during the first quarter
included computer equipment and freezer upgrades.

In September 1999, the Company's Board of Directors declared a quarterly
dividend of $0.06 per share on the Company's common stock, payable October 22,
1999 to shareholders of record on October 8, 1999.

The Company continues to realize substantial benefit from the utilization
of its net operating loss carryforwards (which currently total $9.6 million and
expire in 2005) to reduce its federal tax liability from the 31% to 34% tax rate
reflected on its statement of operations to an actual payment of approximately
2% of taxable income. Management believes that future operations will generate
sufficient taxable income, along with the reversal of temporary differences, to
fully realize its net deferred tax asset balance ($5.2 million as of September
26, 1999) without reliance on material, non-routine income. Taxable income in
future years at the same level as fiscal 1999 would be sufficient for full
realization of the net tax asset.

The Company has assessed its computerized systems to determine their
ability to correctly identify the year 2000 and is devoting the necessary
internal and external resources to replace, upgrade or modify all significant
systems related to the year 2000. The Company's assessment, purchase of new
equipment, installation of new software, conversion and testing of data are
completed. The Company fully implemented the new system in May 1999 and has
begun processing information.

Because third party computer failures could also have a material impact on
our ability to conduct business, confirmations were requested from our material
vendors and suppliers to certify that plans are being developed to address and
become compliant with the year 2000 issues. As of September 26, 1999, 80% have
replied and are comfortable with their preparations for the year 2000. The
Company believes that any year 2000 impact on its franchisee base will have no
material effect on the Company since sales information is not currently
communicated through computer systems. Through the assessment of the Company's
non-information technology systems, management has determined that no
modifications are required for year 2000 compliance in this area. The Company
will continue to assess and develop contingency plans, if needed, throughout the
remainder of 1999.

New software, testing, and conversion of systems and applications have been
completed and implemented. Total system upgrades are expected to position the
Company for anticipated future growth and enhance corporate service
capabilities. The cost of these upgrades will total approximately $1.2 million.
Of this cost, approximately $930,000 already has been incurred as of September
26, 1999. All of the above capital expenditures are funded through a 36-month
capitalized lease.

This report contains certain forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) relating to the
Company that are based on the beliefs of the management of the Company, as well
as assumptions and estimates made by and information currently available to the
Company's management. When used in the report, the words "anticipate,"
"believe," "estimate," "expect," "intend" and other similar expressions, as they
relate to the Company or the Company's management, identify forward-looking
statements. Such statements reflect the current views of the Company with
respect to future events and are subject to certain risks, uncertainties and
assumptions relating to the operations and results of operations of the Company
as well as its customers and suppliers, including as a result of competitive
factors and pricing pressures, shifts in market demand, general economic
conditions and other factors including but not limited to, changes in demand for
Pizza Inn products or franchises, the impact of competitors' actions, changes in
prices or supplies of food ingredients, and restrictions on international trade
and business. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions or estimates prove incorrect, actual results
may vary materially from those described herein as anticipated, believed,
estimated, expected or intended.



PART II. OTHER INFORMATION


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ---------------------------------------------------------------------

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------------

Exhibits:

10.1 Second Amendment to Amended and Restated Loan Agreement between the
Company and Wells Fargo Bank (Texas), N.A. dated as of August 31, 1999.

10.2 Employment Agreement between the Company and C. Jeffrey Rogers
dated as of July 1, 1999.

10.3 Employment Agreement between the Company and Ronald W. Parker
dated as of July 1, 1999.

10.4 Promissory Note between the Company and C. Jeffrey Rogers dated as
of October 6, 1999.

10.5 Promissory Note between the Company and Ronald W. Parker dated as
of October 6, 1999.

10.6 Pledge Agreement between the Company and C. Jeffrey Rogers dated
as of October 6, 1999.

10.7 Pledge Agreement between the Company and Ronald W. Parker dated as
of October 6, 1999.

27.0 Financial Data Schedule



No reports on Form 8-K were filed in the quarter for which this report is
filed.



------
SIGNATURES
----------




Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


PIZZA INN, INC.
Registrant




By: /s/Ronald W. Parker
---------------------
Ronald W. Parker
Executive Vice President and
Principal Financial Officer





By: /s/Shawn M. Preator
---------------------
Shawn M. Preator
Controller and
Principal Accounting Officer







Dated: November 9, 1999