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 MARCH 28, 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 MAY 10, 1999, AN AGGREGATE OF 11,420,925 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. <TABLE> <CAPTION> PIZZA INN, INC. Index - ------------------------------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements Page - ------- ------------------------------------------------------------------------------- ---- <S> <C> <C> <C> Consoldiated Statements of Operations for the three months and six months ended March 28, 1999 and March 29, 1998 3 Consolidated Balance Sheets at March 28, 1999 and June 28, 1998 4 Consolidated Statements of Cash Flows for the six months ended 5 March 28, 1999 and March 29, 1998 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of ------- ----------------------------------------------------------------------------- Financial Condition and Results of Operations 9 ------------------------------------------------------------------------------- ---- 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 ---- </TABLE> PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL INFORMATION - -------------------------------- <TABLE> <CAPTION> PIZZA INN, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED ------------------- ------------------ MARCH 28, MARCH 29, MARCH 28, MARCH 29, REVENUES: 1999 1998 1999 1998 ------------------- ------------------ ---------- ---------- <S> <C> <C> <C> <C> Food and supply sales $ 14,004 $ 14,516 $ 43,835 $ 43,678 Franchise revenue 1,364 1,579 4,214 4,944 Restaurant sales 576 619 1,722 2,063 Other income 73 150 192 299 ------------------- ------------------ ---------- ---------- 16,017 16,864 49,963 50,984 ------------------- ------------------ ---------- ---------- COSTS AND EXPENSES: Cost of sales 12,700 13,094 40,415 39,407 Franchise expenses 743 882 2,289 2,540 General and administrative expenses 1,261 1,383 3,992 3,825 Interest expense 140 117 396 375 ------------------- ------------------ ---------- ---------- 14,844 15,476 47,092 46,147 ------------------- ------------------ ---------- ---------- INCOME BEFORE INCOME TAXES 1,173 1,388 2,871 4,837 Provision for income taxes 373 209 897 1,382 ------------------- ------------------ ---------- ---------- NET INCOME $ 800 $ 1,179 $ 1,974 $ 3,455 =================== ================== ========== ========== BASIC EARNINGS PER COMMON SHARE $ 0.07 $ 0.09 $ 0.17 $ 0.27 =================== ================== ========== ========== DILUTED EARNINGS PER COMMON SHARE $ 0.07 $ 0.09 $ 0.16 $ 0.25 =================== ================== ========== ========== DIVIDENDS DECLARED PER COMMON SHARE $ - $ - $ 0.12 $ 0.12 =================== ================== ========== ========== WEIGHTED AVERAGE COMMON SHARES 11,483 12,734 11,762 12,709 =================== ================== ========== ========== WEIGHTED AVERAGE COMMON AND POTENTIAL DILUTIVE COMMON SHARES 11,788 13,868 12,332 13,630 =================== ================== ========== ========== <FN> See accompanying Notes to Consolidated Financial Statements. </TABLE> <TABLE> <CAPTION> PIZZA INN, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) MARCH 28, JUNE 28, 1999 1998 ------------ --------- ASSETS (unaudited) CURRENT ASSETS <S> <C> <C> Cash and cash equivalents $ 590 $ 2,335 Accounts receivable, less allowance for doubtful accounts of $807 and $825, respectively 5,426 6,021 Notes receivable, current portion, less allowance for doubtful accounts of $158 and $174, respectively 538 741 Inventories 1,963 1,953 Prepaid expenses and other 636 556 ------------ --------- Total current assets 9,153 11,606 LONG-TERM ASSETS Property, plant and equipment, net 1,823 1,921 Property under capital leases, net 1,362 761 Deferred taxes, net 5,793 6,705 Long-term notes receivable, less allowance for doubtful accounts of $80 and $8,respectively 764 436 Deposits and other 387 344 ------------ --------- $ 19,282 $ 21,773 ============ ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable - trade $ 3,052 $ 2,014 Accrued expenses 1,719 2,507 Current portion of capital lease obligations 237 125 ------------ --------- Total current liabilities 5,008 4,646 LONG-TERM LIABILITIES Long-term debt 6,400 4,700 Long-term capital lease obligations 1,156 754 Other long-term liabilities 719 756 ------------ --------- 13,283 10,856 ------------ --------- SHAREHOLDERS' EQUITY Common Stock, $.01 par value; authorized 26,000,000 shares; outstanding 11,461,130 and 12,528,436 shares, respectively (after deducting shares in treasury: March - 3,460,986; June -2,381,386) 115 125 Additional paid-in capital 4,579 4,911 Retained earnings 1,305 5,881 ------------ --------- Total shareholders' equity 5,999 10,917 ------------ --------- $ 19,282 $ 21,773 ============ ========= <FN> See accompanying Notes to Consolidated Financial Statements. </TABLE> <TABLE> <CAPTION> PIZZA INN, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) NINE MONTHS ENDED ------------------- MARCH 28, MARCH 29, 1999 1998 ------------------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: <S> <C> <C> Net income $ 1,974 $ 3,455 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 650 713 Provision for bad debt 177 100 Utilization of pre-reorganization net operating loss carryforwards 912 1,285 Changes in assets and liabilities: Notes and accounts receivable 293 (1,789) Inventories (10) 270 Accounts payable - trade 1,038 662 Accrued expenses 11 (914) Prepaid expenses and other (57) (385) ------------------- ----------- CASH PROVIDED BY OPERATING ACTIVITIES 4,988 3,397 ------------------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (731) (301) Acquisition of area development territory - (986) Proceeds from transfer of assets to capital lease 249 - Proceeds from sale of re-acquired area develepment territory 986 - Proceeds from property held for sale - 66 ------------------- ----------- CASH USED FOR INVESTING ACTIVITIES (482) (235) ------------------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings of long-term bank debt 1,700 - Repayments of long-term bank debt and capital lease obligations (216) (1,496) Dividends paid (2,164) (1,530) Proceeds from exercise of stock options 35 778 Purchases of treasury stock (5,606) (1,710) ------------------- ----------- CASH USED FOR FINANCING ACTIVITIES (6,251) (3,958) ------------------- ----------- Net decrease in cash and cash equivalents (1,745) (796) Cash and cash equivalents, beginning of period 2,335 2,037 ------------------- ----------- Cash and cash equivalents, end of period $ 590 $ 1,241 ------------------- ----------- <FN> See accompanying Notes to Consolidated Financial Statements. </TABLE> <TABLE> <CAPTION> SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (IN THOUSANDS) (UNAUDITED) NINE MONTHS ENDED ------------------ MARCH 28, MARCH 29, 1999 1998 ------------------ ---------- CASH PAYMENTS FOR: <S> <C> <C> Interest $ 356 $ 406 Income taxes - 120 NONCASH FINANCING AND INVESTING ACTIVITIES: Capital lease obligations incurred $ 730 $ - </TABLE> 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/A for the fiscal year ended June 28, 1998. In the opinion of management, the accompanying unaudited condensed 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 March 29, 1999, the Company's Board of Directors declared a quarterly dividend of $.06 per share on the Company's common stock, payable April 23, 1999 to shareholders of record on April 9, 1999. (3) In September 1998, the Company signed an agreement with its current lender to extend the term of its existing $9.5 million revolving credit line through August 2000 and to modify certain financial covenants. As of March 28, 1999, the Company was in compliance with all of its debt covenants. (4) The Company decreased the net deferred tax asset during the quarter by $240,820 for general business tax credits that are not expected to be utilized through an addition to the tax valuation allowance. These general business tax credits are due to expire in 2000 and will not be utilized prior to their expiration due to a decrease in the estimated taxable income for this fiscal year. The Company believes that it is more likely than not that these credits will not be realized. This reduction is included in the provision for income tax for the quarter and the nine months. (5) Effective December 28, 1997, the Company adopted SFAS 128, "Earnings Per Share", which establishes standards for computing and presenting earnings per share (EPS). The statement requires dual presentation of basic and diluted EPS on the face of the income statement for entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation, to the numerator and denominator of the diluted EPS calculation. Basic EPS excludes the effect of potentially dilutive securities while diluted EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised, converted 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). <TABLE> <CAPTION> INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ------------ ------------- ---------- <S> <C> <C> <C> THREE MONTHS ENDED MARCH 28, 1999 BASIC EPS Income Available to Common Shareholders $ 800 11,483 $ 0.07 Effect of Dilutive Securities - Stock Options 305 ------------ DILUTED EPS Income Available to Common Shareholders & Assumed Conversions $ 800 11,788 $ 0.07 ============ ============= ========== THREE MONTHS ENDED MARCH 29, 1998 BASIC EPS Income Available to Common Shareholders $ 1,179 12,734 $ 0.09 Effect of Dilutive Securities - Stock Options 1,134 ------------ DILUTED EPS Income Available to Common Shareholders & Assumed Conversions $ 1,179 13,868 $ 0.09 ============ ============= ========== NINE MONTHS ENDED MARCH 28, 1999 BASIC EPS Income Available to Common Shareholders $ 1,974 11,762 $ 0.17 Effect of Dilutive Securities - Stock Options 570 ------------ DILUTED EPS Income Available to Common Shareholders & Assumed Conversions $ 1,974 12,332 $ 0.16 ============ ============= ========== NINE MONTHS ENDED MARCH 29, 1998 BASIC EPS Income Available to Common Shareholders $ 3,455 12,709 $ 0.27 Effect of Dilutive Securities - Stock Options 921 ------------ DILUTED EPS Income Available to Common Shareholders & Assumed Conversions $ 3,455 13,630 $ 0.25 ============ ============= ========== </TABLE> ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS - ----------------------- Quarter and nine months ended March 28, 1999 compared to the quarter and nine months ended March 29, 1998. Diluted earnings per share for the third quarter of the current fiscal year decreased 20% to $.07 from $.09 for the same period last year. For the nine months ended March 28, 1999, diluted earnings per share decreased 37% to $.16 from $.25 for the same period last year. Net income for the quarter decreased 32% to $800,000 from $1,179,000 for the same quarter last year. For the nine months ended March 28, 1999, net income decreased 43% to $1,974,000 from $3,455,000 for the same period last year. It should be noted that the comparisons for these two periods include a third quarter credit to income tax expense of $263,000 in the prior fiscal year of which a portion was reversed in the current fiscal year. Additionally, net income and earnings per share for the three and nine month periods decreased because of a lower volume of food product sales from slightly lower chainwide sales, lower revenues from area development territory sales, and higher cost of sales due to extraordinarily higher cheese prices from July 1998 through January 1999. Restaurant cost of sales, as a percentage of sales, throughout the Company's franchise community was up approximately 3 percentage points, due to extraordinarily higher cheese prices during these seven months. This increased cost also caused an adverse effect on chainwide sales because of decreased franchisee advertising as well as delayed new store openings and remodelings. Foreign economic factors continued to adversely affect international sales and new store openings in foreign markets. Food and supply sales for the quarter decreased 4% to $14,004,000 from $14,516,000 compared to the same period last year. This was primarily due to lower international food sales and decreased equipment sales during the quarter. For the nine month period, food and supply sales increased less than 1% to $43,835,000 from $43,678,000 for the same period last year. During the first nine months, food product revenues increased due to higher cheese prices, which were partially offset by a lower volume of food product sales. Franchise revenue, which includes income from royalties, license fees and area development and foreign master license (collectively, "Territory") sales, for the quarter decreased 14% or $215,000 compared to the same period of the prior year. The decrease in the quarter was primarily due to lower income recognized from Territory sales and royalty revenues. For the nine month period, franchise revenue decreased 15% or $730,000. The prior year's nine month period included the recognition of proceeds from the sale of foreign master license rights in Brazil, the Palestinian Territories and Korea in the amount of $371,000 and area development fees of $208,000. Current year revenues include partial recognition of proceeds from the sale of foreign master license rights in Puerto Rico in the amount of $50,000 and area development fees of $56,000. Royalty revenue was down $178,000 compared to the first nine months of last year, mainly resulting from a 1.5% decrease in chainwide sales and a slightly lower average royalty rate due to both more restaurants within area development territories and a lower ratio of full service units to Delco/Express units. Restaurant sales, which consist of revenue generated by Company-owned stores, for the quarter decreased 7% or $43,000 compared to the same period of the prior year. For the nine month period, restaurant sales decreased 17% or $341,000. This was due to the lease expiration and closing of one Delco store in August 1998. The Company owned and operated three and four stores for the periods ending March 28, 1999 and March 29, 1998, respectively. Comparable store sales growth at Company-owned stores increased 7% for the nine months ended March 28, 1999. Cost of sales for the quarter decreased 3% or $394,000 compared to the same period last year due to lower food and supply sales as noted above. For the nine month period, cost of sales increased 3% or $1,008,000 compared to the same period last year primarily due to the increase in domestic food sales due to higher cheese prices. As a percentage of sales for the first nine months, cost of sales increased to 89% from 86% compared to the same period last year. This was primarily due to the significantly higher cost of cheese, an increase in allocation of corporate services expenses related to the Company's distribution center, offset by a lower volume of food product sold. Franchise expenses include selling, general and administrative expenses directly related to the sale and service of franchises and Territories. These expenses decreased 16% or $139,000 for the quarter and 10% or $251,000 for the nine month period compared to the same period last year. The decreases were due to an increase in corporate services expenses allocation to the distribution center resulting in a corresponding decrease in franchise expenses, and decreases in travel expenses. These decreases were partially offset by increased franchise trade show spending. Additionally, franchise expenses for the first nine months of the prior year also included the amortization of the Company's cost basis in a reacquired area development Territory. General and administrative expenses for the quarter decreased 9% or $122,000 compared to the same period last year primarily due to a higher allocation of corporate services expenses to the distribution center to accurately reflect the total operating costs of the center. For the nine month period, general and administrative expenses increased 4% or $167,000 compared to the same period last year. This is principally due to an increase in the allowance for doubtful accounts, as well as higher professional fees and insurance expenses. These increases were partially offset by the higher allocation of corporate services expenses to the distribution center. Interest expense increased 20% or $23,000 and 6% or $21,000 for the quarter and nine months, respectively, compared to the same periods of the prior year. This is a result of higher average debt, which was offset slightly by lower average interest rates. LIQUIDITY AND CAPITAL RESOURCES During the first nine months of fiscal 1999, the Company utilized cash provided by operations in the amount of $4,988,000, bank borrowings of $1,700,000, and a portion of its cash balances to purchase 1,079,600 shares of its own common stock for $5,605,852 and to pay dividends of $2,164,000 on the Company's common stock. Capital expenditures of $731,000 during the first nine months included $414,000 for upgrading the Company's computer system (including compliance with Year 2000 issues). During the first nine months, $249,000 of the computer system's upgrades was transferred to a 36-month capitalized lease. On March 29, 1999, the Company's Board of Directors declared a quarterly dividend of $.06 per share on the Company's common stock, payable April 23, 1999 to shareholders of record on April 9, 1999. The Company continues to realize substantial benefit from the utilization of its net operating loss carryforwards (which currently total $11.9 million and expire in 2005) to reduce its federal tax liability from the 34% to 31% 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 ($5.8 million as of March 28, 1999) without reliance on material, non-routine income. Taxable income in future years at the current level 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 a company's ability to conduct business, confirmations are being requested from our material vendors and suppliers to certify that plans are being developed by them to address and become compliant with the year 2000 issues. As of May 10, 1999, the Company had received responses from approximately 80% from such parties and all the responding companies have provided written assurances that they expect to address all their significant year 2000 issues on a timely basis. The Company believes that any year 2000 impact on its franchisee base will have no material effect on the Company's results of operations since sales information is not currently communicated through computer systems. Through the assessment of the Company's critical non-information technology systems, management has determined that no modifications are required for year 2000 compliance in this area. New software, testing, and conversion of systems and applications will cost approximately $550,000 and new hardware components will cost approximately $300,000. Total system upgrades are expected to position the Company for anticipated future growth and enhance corporate service capabilities. Of these costs, approximately $730,000 has been incurred as of March 28, 1999. All 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 this report, the words "anticipate," "believe," "estimate," "expect," "intend" and similar expressions, as they relate to the Company or the Company's management, identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions relating to the operations and results of operations of the Company as well as its customers and suppliers, including as a result of competitive factors and pricing pressures, shifts in market demand, general economic conditions and other factors including but not limited to, changes in demand for Pizza Inn products or franchises, the impact of competitors' actions, changes in prices or supplies of food ingredients, and restrictions on international trade and business. Should one or more of these risks or uncertainties materialize, or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - --------------------------------------------------------------------- Amendment to the Company's Restated Articles of Incorporation approved by shareholders at a Special Meeting on January 30, 1999. The results of the vote were as follows: FOR AGAINST ABSTAIN BROKER NON-VOTES --- ------- ------- ----------------- 6,462,349 114,933 43,873 3,668,097 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------------- Exhibits: 3.1 Restated Articles of Incorporation as filed on September 5, 1990 and amended on January 30, 1999. 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: May 11, 1999