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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 23, 2001.
-------------------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO
_______________.
COMMISSION FILE NUMBER 0-12919
PIZZA INN, INC.
(EXACT NAME OF REGISTRANT IN ITS CHARTER)
MISSOURI 47-0654575
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3551 PLANO PARKWAY
THE COLONY, TEXAS 75056
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES,
INCLUDING ZIP CODE)
(469) 384-5000
(REGISTRANT'S TELEPHONE NUMBER,
INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR SUCH SHORTER PERIOD THAT THE REGISTRANT
WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO
INDICATE BY CHECK MARK WHETHER THE REGISTRANT 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 FEBRUARY 1, 2002, AN AGGREGATE OF 10,057,874 SHARES OF THE REGISTRANT'S
COMMON STOCK, PAR VALUE OF $.01 EACH (BEING THE REGISTRANT'S ONLY CLASS OF
COMMON STOCK), WERE OUTSTANDING.
PIZZA INN, INC.
Index
-----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
- -------- --------------------- ----
Consolidated Statements of Operations for the three months and six months
ended December 23, 2001 and December 24, 2000 3
Consolidated Balance Sheets at December 23, 2001 and June 24, 2001 4
Consolidated Statements of Cash Flows for the six months ended
December 23, 2001 and December 24, 2000 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
- ------- -------------------------------------------
Financial Condition and Results of Operations 11
---------------------------------------------
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
- -------- ------------------
Item 4. Submission of Matters to a Vote of Security Holders 14
- -------- -----------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K 14
- -------- -------------------------------------
Signatures 15
PART 1. FINANCIAL INFORMATION
1. Financial Statements
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- -----------------
DECEMBER 23, DECEMBER 24, DECEMBER 23, DECEMBER 24,
REVENUES: 2001 2000 2001 2000
------------------- ----------------- -------------- -------------
Food and supply sales. . . . . . . . . . . . . $ 13,637 $ 13,502 $ 28,368 $ 28,230
Franchise revenue. . . . . . . . . . . . . . . 1,316 1,338 2,696 2,739
Restaurant sales . . . . . . . . . . . . . . . 517 582 1,091 1,151
Other income . . . . . . . . . . . . . . . . . 119 98 274 216
------------------- ----------------- -------------- -------------
15,589 15,520 32,429 32,336
------------------- ----------------- -------------- -------------
COSTS AND EXPENSES:
Cost of sales. . . . . . . . . . . . . . . . . 12,903 12,710 27,186 26,635
Franchise expenses . . . . . . . . . . . . . . 525 597 1,067 1,181
General and administrative expenses. . . . . . 1,146 1,163 2,148 2,183
Interest expense . . . . . . . . . . . . . . . 156 248 275 503
------------------- ----------------- -------------- -------------
14,730 14,718 30,676 30,502
------------------- ----------------- -------------- -------------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . 859 802 1,753 1,834
Provision for income taxes . . . . . . . . . . 292 273 596 659
------------------- ----------------- -------------- -------------
NET INCOME . . . . . . . . . . . . . . . . . . . $ 567 $ 529 $ 1,157 $ 1,175
=================== ================= ============== =============
BASIC EARNINGS PER COMMON SHARE. . . . . . . . . $ 0.06 $ 0.05 $ 0.11 $ 0.11
=================== ================= ============== =============
DILUTED EARNINGS PER COMMON SHARE. . . . . . . . $ 0.06 $ 0.05 $ 0.11 $ 0.11
=================== ================= ============== =============
DIVIDENDS DECLARED PER COMMON SHARE. . . . . . . $ - $ 0.06 $ - $ 0.12
=================== ================= ============== =============
WEIGHTED AVERAGE COMMON SHARES . . . . . . . . . 10,067 10,723 10,127 10,729
=================== ================= ============== =============
WEIGHTED AVERAGE COMMON AND
POTENTIAL DILUTIVE COMMON SHARES . . . . . . . 10,068 10,725 10,134 10,735
=================== ================= ============== =============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED . . . . . . . . . SIX MONTHS ENDED
------------------------------------------------ -------------------
DECEMBER 23, . . . . DECEMBER 24, DECEMBER 23, DECEMBER 24,
2001 2000 2001 2000
------------------- ----------------- -------------- -------------
Net Income . . . . . . . . . . . . . . . . . . . $ 567 $ 529 $ 1,157 $ 1,175
Interest rate swap gain (loss)
(net of tax of ($48) and $57, respectively) . 93 - (110) -
------------------- ----------------- -------------- -------------
Comprehensive Income . . . . . . . . . . . . . . $ 660 $ 529 $ 1,047 $ 1,175
=================== ================= ============== =============
See accompanying Notes to Consolidated Financial Statements.
PIZZA INN, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 23, JUNE 24,
ASSETS 2001 2001
-------------- ----------
(UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . $ 264 $ 540
Accounts receivable, less allowance for doubtful
accounts of $724 and $729, respectively. . . . . . . . . . . 5,216 4,839
Notes receivable, current portion, less allowance
for doubtful accounts of $177 and $263, respectively . . . . 861 958
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . 2,102 2,063
Deferred taxes, net. . . . . . . . . . . . . . . . . . . . . . 1,223 1,285
Prepaid expenses and other . . . . . . . . . . . . . . . . . . 495 578
-------------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . 10,161 10,263
Property, plant and equipment, net . . . . . . . . . . . . . . . 13,717 6,594
Property under capital leases, net . . . . . . . . . . . . . . . 395 576
Deferred taxes, net. . . . . . . . . . . . . . . . . . . . . . . 1,455 1,897
Long-term notes receivable, less
allowance for doubtful accounts of $5 and $9,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . - 9
Deposits and other . . . . . . . . . . . . . . . . . . . . . . . 416 533
-------------- ----------
$ 26,144 $ 19,872
============== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade . . . . . . . . . . . . . . . . . . . $ 3,520 $ 3,245
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . 1,957 2,000
Current portion of long-term debt. . . . . . . . . . . . . . . 1,250 1,250
Current portion of capital lease obligations . . . . . . . . . 355 486
-------------- ----------
Total current liabilities. . . . . . . . . . . . . . . . . . 7,082 6,981
LONG-TERM LIABILITIES
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . 16,517 10,934
Long-term capital lease obligations. . . . . . . . . . . . . . 193 227
Other long-term liabilities. . . . . . . . . . . . . . . . . . 1,012 865
-------------- ----------
24,804 19,007
-------------- ----------
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value; authorized 26,000,000 shares;
issued 14,955,469 and 14,955,119 shares, respectively
outstanding 10,057,838 and 10,319,638 shares, respectively. 150 150
Additional paid-in capital . . . . . . . . . . . . . . . . . . 7,824 7,823
Loans to officers. . . . . . . . . . . . . . . . . . . . . . . (2,325) (2,325)
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . 15,358 14,201
Accumulated other comprehensive loss . . . . . . . . . . . . . (183) (73)
Treasury stock at cost
Shares in treasury: 4,897,631 and 4,635,481 respectively . . (19,484) (18,911)
-------------- ----------
Total shareholders' equity . . . . . . . . . . . . . . . . . 1,340 865
-------------- ----------
$ 26,144 $ 19,872
============== ==========
See accompanying Notes to Consolidated Financial Statements.
PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
------------------
DECEMBER 23, DECEMBER 24,
2001 2000
------------------ --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,157 $ 1,175
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . 635 676
Provision for bad debt. . . . . . . . . . . . . . . . . . . . 100 125
Utilization of pre-reorganization net operating . . . . . . . 504 544
loss carryforwards
Changes in assets and liabilities:
Notes and accounts receivable . . . . . . . . . . . . . . . . (371) (541)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . (39) 471
Accounts payable - trade. . . . . . . . . . . . . . . . . . . (314) 13
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . (153) 119
Prepaid expenses and other. . . . . . . . . . . . . . . . . . 246 311
------------------ --------------
CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . . . . . . . 1,765 2,893
------------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . (6,842) (2,067)
------------------ --------------
CASH USED FOR INVESTING ACTIVITIES. . . . . . . . . . . . . . (6,842) (2,067)
------------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term bank debt . . . . . . . . . . . . . . . 6,634 2,235
Repayments of long-term bank debt and capital lease obligations (1,260) (1,787)
Dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . - (1,243)
Proceeds from exercise of stock options . . . . . . . . . . . . - 298
Officer loan payment. . . . . . . . . . . . . . . . . . . . . . - 165
Purchases of treasury stock . . . . . . . . . . . . . . . . . . (573) (575)
------------------ --------------
CASH USED FOR FINANCING ACTIVITIES. . . . . . . . . . . . . . 4,801 (907)
------------------ --------------
Net decrease in cash and cash equivalents . . . . . . . . . . . . (276) (81)
Cash and cash equivalents, beginning of period. . . . . . . . . . 540 484
------------------ --------------
Cash and cash equivalents, end of period. . . . . . . . . . . . . $ 264 $ 403
------------------ --------------
See accompanying Notes to Consolidated Financial Statements.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
-----------------
DECEMBER 23, DECEMBER 24,
2001 2000
----------------- -------------
CASH PAYMENTS FOR:
Interest . . . . . . . . . . . . . . . . . . . $ 445 $ 525
Income taxes . . . . . . . . . . . . . . . . . 50 25
NONCASH FINANCING AND INVESTING
ACTIVITIES:
Stock issued to officers in exchange for loans $ - $ 303
Capital lease obligations incurred . . . . . . 156 -
See accompanying Notes to Consolidated Financial Statements.
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 24, 2001. 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 fairly present the Company's
financial position and results of operations for the interim periods. All
adjustments contained herein are of a normal recurring nature.
(2) The Company entered into an agreement effective December 21, 2001 with
its current lender to extend the term of its existing $9.5 million revolving
credit line through December 31, 2003, and to modify certain financial
covenants. Interest on the revolving credit line is payable monthly. Interest
is provided for at a rate equal to prime plus an interest rate margin from -1.0%
to 0.0% or, at the Company's option, at the LIBOR rate plus 1.25% to 2.25%. The
interest rate margin is based on the Company's performance under certain
financial ratio tests. As of December 23, 2001, the revolving credit line had
an outstanding balance of $8.0 million.
The Company entered into a term note effective March 31, 2000 with its current
lender. The $5,000,000 term note had an outstanding balance of $2.9 million at
December 23, 2001 and requires monthly principal payments of $104,000 with the
balance maturing on March 31, 2004. Interest on the term loan is also payable
monthly. Interest is provided for at a rate equal to prime less an interest
rate margin of 0.75% or, at the Company's option, at the LIBOR rate plus 1.5%.
The Company entered into an agreement effective December 28, 2000, as amended,
with its current lender to provide up to $8.125 million of financing for the
construction of the Company's new headquarters, training center and distribution
facility. The construction loan converted to a term loan effective January 31,
2002 with the unpaid principal balance to mature on December 28, 2007. The term
loan will amortize over a term of twenty years, with principal and interest
payments due monthly. Interest is provided for at a rate equal to prime less an
interest rate margin of .75% or, at the Company's option, to the LIBOR rate plus
1.5%. The Company, to fulfill bank requirements, has caused the outstanding
principal amount to be subject to a fixed interest rate after the conversion
date. As of December 23, 2001, the Company had borrowed $6.8 million for the
construction in progress of its new headquarters. As of February 1, 2002 the
Company had borrowed $8.125 million for its new headquarters.
(3) Effective February 27, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities". The Company entered into an interest rate swap on that
date, as amended, designated as a cash flow hedge, to manage interest rate risk
relating to the financing of the construction of the Company's new headquarters
and to fulfill bank requirements. The Company entered into an agreement
effective December 11, 2001 to modify the termination date and the fixed pay
rate of the interest rate swap. The swap agreement has a notional principal
amount of $8.125 million with a fixed pay rate of 5.84% which began November 1,
2001 and will end November 19, 2007. SFAS No. 133 requires that for cash flow
hedges, which hedge the exposure to variable cash flows of a forecasted
transaction, the effective portion of the derivative's gain or loss be initially
reported as a component of other comprehensive income in the equity section of
the balance sheet and subsequently reclassified into earnings when the
forecasted transaction affects earnings. Any ineffective portion of the
derivative's gain or loss is reported in earnings immediately. At December 23,
2001, the Company recorded its interest rate swap with a fair value of $278,000
in other liabilities, with the offset recorded in the other comprehensive income
component of stockholder's equity and in deferred income taxes. At December 23,
2001, there was no hedge ineffectiveness. The Company's expectation is that the
hedging relationship will be highly effective at achieving offsetting changes in
cash flows.
(4) On April 30, 1998, Mid-South Pizza Development, Inc., an area developer
of the Company ("Mid-South") entered into a promissory note whereby, among other
things, Mid-South borrowed $1,330,000 from a third party lender (the "Loan").
The proceeds of the Loan, less transaction costs, were used by Mid-South to
purchase area developer rights from the Company for certain counties in Kentucky
and Tennessee. As part of the terms and conditions of the Loan, the Company was
required to guaranty the obligations of Mid-South under the Loan. In the event
such guaranty ever required payment, the Company has personal guarantees from
certain Mid-South principals and a security interest in certain personal
property.
(5) The Company capitalizes interest on borrowings during the active
construction period of major capital projects. Capitalized interest is added to
the cost of the underlying asset and will be amortized over the useful life of
the asset. For the six months ended December 23, 2001 interest of $179,000 was
capitalized in connection with the construction of the Company's new
headquarters, training center, and distribution facility.
(6) On January 18, 2002 the Company was served with a lawsuit filed by
Blakely-Witt & Associates, Inc. alleging Pizza Inn sent or caused to be sent
unsolicited facsimile advertisements. The plaintiff has requested this matter be
certified as a class action. We have referred this matter to our insurers and
plan to vigorously defend our position in this litigation. We cannot assure you
that we will prevail in this lawsuit and our defense could be costly and consume
the time of our management. We are unable to predict the outcome of this case.
However, an adverse resolution of this matter could materially affect our
financial position and results of operations.
(7) At December 23, 2001 interest payments on the Company's note receivable
from an officer of the Company were past due, therefore, the note receivable was
technically in default. The Company intends to enforce this obligation under
the relevant terms of the Promissory Note and the Pledge Agreement. The Company
acknowledges that the current collateral on this note receivable may not be
sufficient in the event of nonpayment of the note and can, to the extent legally
permissible, utilize future amounts owed to the officer as an offset for the
amounts due under this obligation. The Company believes that the note
receivable, including accrued but unpaid interest, is recoverable through the
terms and remedies specified in the Pledge Agreement. The note receivable is
reflected as reduction to stockholders' equity.
(8) The following table shows the reconciliation of the numerator and
denominator of the basic EPS calculation to the numerator and denominator of the
diluted EPS calculation (in thousands, except per share amounts).
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
THREE MONTHS ENDED DECEMBER 23, 2001
BASIC EPS
Income Available to Common Shareholders $ 567 10,067 $ 0.06
Effect of Dilutive Securities - Stock Options 1
DILUTED EPS --------
Income Available to Common Shareholders
& Assumed Conversions $ 567 10,068 $ 0.06
======== =========== ========
THREE MONTHS ENDED DECEMBER 24, 2000
BASIC EPS
Income Available to Common Shareholders $ 529 10,723 $ 0.05
Effect of Dilutive Securities - Stock Options 2
DILUTED EPS
Income Available to Common Shareholders -----------
& Assumed Conversions $ 529 10,725 $ 0.05
======= =========== =======
SIX MONTHS ENDED DECEMBER 23, 2001
BASIC EPS
Income Available to Common Shareholders $ 1,157 10,127 $ 0.11
Effect of Dilutive Securities - Stock Options 7
DILUTED EPS
Income Available to Common Shareholders ---------
& Assumed Conversions $ 1,157 10,134 $ 0.11
========= ========= =======
SIX MONTHS ENDED DECEMBER 24, 2000
BASIC EPS
Income Available to Common Shareholders $ 1,175 10,729 $ 0.11
Effect of Dilutive Securities - Stock Options 6
DILUTED EPS
Income Available to Common Shareholders -------
& Assumed Conversions $ 1,175 10,735 $ 0.11
======= ========= =======
(9) 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 and six months ended December 23, 2001,
and December 24, 2000.
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- -----------------
DECEMBER 23, DECEMBER 24, DECEMBER 23, DECEMBER 24,
2001 2000 2001 2000
--------------- -------------- -------------- --------------
(In thousands). . . . . . . . . (In thousands)
NET SALES AND OPERATING REVENUES:
Food and Equipment Distribution . . $ 13,637 $ 13,502 $ 28,368 $ 28,230
Franchise and Other . . . . . . . . 1,833 1,920 3,787 3,890
Intersegment revenues . . . . . . . 192 213 416 419
--------------- -------------- -------------- --------------
Combined. . . . . . . . . . . . . 15,662 15,635 32,571 32,539
Other revenues. . . . . . . . . . . 119 98 274 216
Less intersegment revenues. . . . . (192) (213) (416) (419)
--------------- -------------- -------------- --------------
Consolidated revenues . . . . . . $ 15,589 $ 15,520 $ 32,429 $ 32,336
=============== ============== ============== ==============
OPERATING PROFIT:
Food and Equipment Distribution (1) $ 690 $ 756 $ 1,173 $ 1,563
Franchise and Other (1) . . . . . . 830 629 1,640 1,321
Intersegment profit . . . . . . . . 50 66 109 127
--------------- -------------- -------------- --------------
Combined. . . . . . . . . . . . . 1,570 1,451 2,922 3,011
Other profit or loss. . . . . . . . 119 98 274 216
Less intersegment profit. . . . . . (50) (66) (109) (127)
Corporate administration and other. (780) (681) (1,334) (1,266)
--------------- -------------- -------------- --------------
Income before taxes . . . . . . . $ 859 $ 802 $ 1,753 $ 1,834
=============== ============== ============== ==============
GEOGRAPHIC INFORMATION (REVENUES):
United States . . . . . . . . . . . $ 15,446 $ 15,382 $ 32,173 $ 31,973
Foreign countries . . . . . . . . . 143 138 256 363
--------------- -------------- -------------- --------------
Consolidated total. . . . . . . . $ 15,589 $ 15,520 $ 32,429 $ 32,336
=============== ============== ============== ==============
(1) Does not include full allocation of corporate administration.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- -----------------------
Quarter and six months ended December 23, 2001 compared to the quarter and six
months ended December 24, 2000.
Diluted earnings per share for the second quarter of the current fiscal
year were $0.06 versus $0.05 for the same period last year. For the six months
ended December 23, 2001, diluted earnings per share were $0.11 versus $0.11 for
the same period last year. Net income for the quarter increased 7% to $567,000
from $529,000 for the same quarter last year. For the six months ended December
23, 2001, net income decreased 2% to $1,157,000 from $1,175,000 compared to the
same period last year.
Food and supply sales for the quarter increased 1% to $13,637,000 from
$13,502,000 compared to the same period last year. For the six month period,
food and supply sales increased slightly to $28,368,000 from $28,230,000 for the
same period last year.
Franchise revenue, which includes income from royalties, license fees and
area development and foreign master license (collectively, "Territory") sales,
decreased 2% or $22,000 for the quarter and 2% or $43,000 for the six month
period, compared to the same periods last year. These decreases are the result
of lower royalties in the first and second quarters of the current year which
were offset by higher franchise fees in the current year.
Restaurant sales, which consists of revenue generated by Company-owned
training stores, decreased 11% or $65,000 for the quarter compared to the same
period of the prior year. For the six month period, restaurant sales decreased
5% or $60,000. Higher comparable sales at the two full service units were
offset by the temporary closing of the delco unit during the first week of
September.
Other income consists primarily of interest income and non-recurring
revenue items. Other income for the quarter increased 21% or $21,000 and 27% or
$58,000 year to date compared to the prior year. This is the result of
increased vendor incentives, which were offset by lower interest income.
Cost of sales increased 2% or $193,000 for the quarter and increased 2% or
$551,000 for the six month period. As a percentage of sales for the quarter,
cost of sales increased to 91% from 90% compared to the same period of the prior
year. For the six months, cost of sales, as a percentage of sales, increased to
92% from 91%. Higher rent costs were partially offset by lower fuel costs.
Franchise expenses include selling, general and administrative expenses
directly related to the sale and continuing service of franchises and
Territories. These costs decreased 12% or $72,000 for the quarter and 10% or
$114,000 for the six month period compared to the same periods last year. This
decrease was primarily due to lower marketing costs.
General and administrative expenses decreased 1% or $17,000 for the quarter
and decreased 2% or $35,000 for the first six months, compared to the same
periods last year. This is primarily a result of lower bad debt expense and
lower insurance costs, which were partially offset by higher property taxes and
moving expenses.
Interest expense decreased 37% or $92,000 for the quarter and 45% or
$228,000 for the first six months, compared to the same period of the prior
year. Capitalized interest on funds used in construction of the new corporate
headquarters and lower interest rates were partially offset by higher debt
levels in the current year.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations totaled $1,765,000 during the first six months
of fiscal 2002 and was utilized, in conjunction with additional borrowings and a
portion of its cash balance, primarily to fund capital expenditures and to
reacquire 262,100 shares of its own common stock for $572,724.
Capital expenditures of $6,842,000 during the first six months included the
new Corporate headquarters construction and equipment, vehicles, and the
remodeling of one Company store.
The Company continues to realize substantial benefit from the
utilization of its net operating loss carryforwards (which currently total $2.8
million and expire in 2005 and 2006) to reduce its federal tax liability from
the 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 ($2.7
million as of December 23, 2001) 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 entered into an agreement effective December 21, 2001 with its
current lender to extend the term of its existing $9.5 million revolving credit
line through December 31, 2003, and to modify certain financial covenants.
Interest on the revolving credit line is payable monthly. Interest is provided
for at a rate equal to prime plus an interest rate margin from -1.0% to 0.0% or,
at the Company's option, at the LIBOR rate plus 1.25% to 2.25%. The interest
rate margin is based on the Company's performance under certain financial ratio
tests. As of December 23, 2001, the revolving credit line had an outstanding
balance of $8.0 million.
The Company entered into a term note effective March 31, 2000 with
its current lender. The $5,000,000 term note had an outstanding balance of $2.9
million at December 23, 2001 and requires monthly principal payments of $104,000
with the balance maturing on March 31, 2004. Interest on the term loan is also
payable monthly. Interest is provided for at a rate equal to prime less an
interest rate margin of 0.75% or, at the Company's option, at the LIBOR rate
plus 1.5%.
The Company entered into an agreement effective December 28, 2000,
as amended, with its current lender to provide up to $8.125 million of financing
for the construction of the Company's new headquarters, training center and
distribution facility. The construction loan converted to a term loan effective
January 31, 2002 with the unpaid principal balance to mature on December 28,
2007. The term loan will amortize over a term of twenty years, with principal
and interest payments due monthly. Interest is provided for at a rate equal to
prime less an interest rate margin of .75% or, at the Company's option, to the
LIBOR rate plus 1.5%. The Company, to fulfill bank requirements, has caused the
outstanding principal amount to be subject to a fixed interest rate after the
conversion date. As of December 23, 2001, the Company had borrowed $6.8 million
for the construction in progress of its new headquarters. As of February 1,
2002 the Company had borrowed $8.125 million for the construction in progress of
its new headquarters.
The Company entered into an interest rate swap effective February 27,
2001, as amended, designated as a cash flow hedge, to manage interest rate risk
relating to the financing of the construction of the Company's new headquarters
and to fulfill bank requirements. The swap agreement has a notional principal
amount of $8.125 million with a fixed pay rate of 5.84% which began November 1,
2001 and will end November 19, 2007. The Company's expectation is that the
hedging relationship will be highly effective at achieving offsetting changes in
cash flows.
On January 18, 2002, the Company was served with a lawsuit filed by
Blakely-Witt & Associates, Inc. alleging Pizza Inn sent or caused to be sent
unsolicited facsimile advertisements. The plaintiff has requested this matter be
certified as a class action. We have referred this matter to our insurers and
plan to vigorously defend our position in this litigation. We cannot assure you
that we will prevail in this lawsuit and our defense could be costly and consume
the time of our management. We are unable to predict the outcome of this case.
However, an adverse resolution of this matter could materially affect our
financial position and results of operations.
MARKET RISK
The Company has market risk exposure arising from changes in interest
rates. The Company's earnings are affected by changes in short-term interest
rates as a result of borrowings under its credit facilities which bear interest
based on floating rates.
At December 23, 2001 the Company has approximately $17.8 million of
variable rate debt obligations outstanding with a weighted average interest rate
of 4.90%. A hypothetical 10% change in the effective interest rate for these
borrowings, assuming debt levels at December 23, 2001 would change interest
expense by approximately $36,000.
FORWARD-LOOKING STATEMENT
This report contains certain forward-looking statements (as such term
is defined in the Private Securities Litigation Reform Act of 1995) relating to
the Company that are based on the beliefs of the management of the Company, as
well as assumptions and estimates made by and information currently available to
the Company's management. When used in this report, the words "anticipate,"
"believe," "estimate," "expect," "intend" and similar expressions, as they
relate to the Company or the Company's management, identify forward-looking
statements. Such statements reflect the current views of the Company with
respect to future events and are subject to certain risks, uncertainties and
assumptions relating to the operations and results of operations of the Company
as well as its customers and suppliers, including as a result of competitive
factors and pricing pressures, shifts in market demand, general economic
conditions and other factors including but not limited to, changes in demand for
Pizza Inn products or franchises, the impact of competitors' actions, changes in
prices or supplies of food ingredients, and restrictions on international trade
and business. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions or estimates prove incorrect, actual results
may vary materially from those described herein as anticipated, believed,
estimated, expected or intended.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- ----------------------------
On January 18, 2002, the Company was served with a lawsuit filed by
Blakely-Witt & Associates, Inc. in the District Court, L-193rd Judicial
District, Dallas County, Texas (Cause No. 01-11043). The suit alleges Pizza Inn
sent or caused to be sent unsolicited facsimile advertisements to plaintiff and
others in violation of (i) 47 U.S.C. Section 227(b)(1)(C) and (b)(3), the
Telephone Consumer Protection Act, and (ii) Texas Business and Commerce Code
Section 35.47. The plaintiff has requested this matter be certified as a class
action. We have referred this matter to our insurers and plan to vigorously
defend our position in this litigation. We cannot assure you that we will
prevail in this lawsuit and our defense could be costly and consume the time of
our management. We are unable to predict the outcome of this case. However, an
adverse resolution of this matter could materially affect our financial position
and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ---------------------------------------------------------------------
At the Annual Meeting of Shareholders on December 19, 2001, the Company's
shareholders elected all three nominees to the Board of Directors. The results
of the voting were as follows:
NOMINEE FOR VOTES WITHHELD
------- --- ---------------
C. Jeffery Rogers 8,166,112 372,029
F. Jay Taylor 8,233,665 394,477
Steve A. Ungerman 8,235,410 302,731
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------------
Exhibits:
10.1 Second Amendment to the Second Amended and Restated Loan Agreement
between the Company and Wells Fargo Bank (Texas), N.A. dated January 31, 2002,
but effective December 23, 2001.
10.2 Promissory Note between the Company and Wells Fargo Bank (Texas), N.A.
dated January 31, 2002.
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
President and
Principal Financial Officer
By: /s/Shawn M. Preator
---------------------
Shawn M. Preator
Vice President
Principal Accounting Officer
Dated: February 5, 2002
- ------
SECOND AMENDMENT TO THE SECOND AMENDED
--------------------------------------
AND RESTATED LOAN AGREEMENT AND RELATED LOAN DOCUMENTS
------------------------------------------------------
This SECOND AMENDMENT TO THE SECOND AMENDED AND RESTATED LOAN AGREEMENT AND
RELATED LOAN DOCUMENTS (the "AMENDMENT"), dated as of January 31, 2002, but
---------
effective as of December 23, 2001 (the "EFFECTIVE DATE"), is by and between
--------------
PIZZA INN, INC., a Missouri corporation ("BORROWER"), and WELLS FARGO BANK
--------
TEXAS, NATIONAL ASSOCIATION, a national banking association (successor by
consolidation to Wells Fargo Bank (Texas), National Association) (the "BANK").
----
RECITALS:
A. The Borrower and the Bank entered into that certain Second Amended and
Restated Loan Agreement dated as of March 31, 2000 (the "AMENDED AND RESTATED
--------------------
LOAN AGREEMENT") and, pursuant to Article IV of the Amended and Restated Loan
-------------
Agreement, that certain Construction Loan Agreement dated as of December 28,
2000, (the "CONSTRUCTION LOAN AGREEMENT"), together with a Promissory Note dated
---------------------------
December 28, 2000 in the principal amount of Eight Million One Hundred
Twenty-Five Thousand and no/100 Dollars ($8,125,000.00) (the "CONSTRUCTION
------------
NOTE") and a Fixed Rate Agreement (the "FIXED RATE AGREEMENT") attached thereto
--------------------
as Exhibit A. The Construction Loan Agreement, Construction Note and Fixed Rate
---------
Agreement are hereinafter referred to as the "CONSTRUCTION LOAN DOCUMENTS."
---------------------------
B. In connection with the Amended and Restated Loan Agreement, Barko Realty,
Inc., a Texas corporation, R-Check, Inc., a Texas corporation, and Pizza Inn of
Delaware, Inc., a Delaware corporation (collectively, the "GUARANTORS"),
----------
executed that certain Second Amended and Restated Guaranty dated as of March 31,
2000 in favor of the Bank (as the same may be amended, restated or modified from
time to time, the "GUARANTY").
--------
C. The Borrower and the Bank amended the Amended and Restated Loan
Agreement pursuant to that certain First Amendment to Second Amended and
Restated Loan Agreement dated as of December 28, 2000 (the "FIRST AMENDMENT").
---------------
The Amended and Restated Loan Agreement, as amended by the First Amendment, is
hereinafter referred to as the "LOAN AGREEMENT."
---------------
D. The Borrower and the Bank now desire to amend the Loan Agreement and
the Construction Loan Documents as herein 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 hereto agree as follows:
ARTICLE I.
-----------
DEFINITIONS
Section 1.1 DEFINITIONS.
-----------
Capitalized terms used in this Amendment, to the extent not otherwise
defined herein, shall have the same meanings as in the Loan Documents as amended
hereby.
ARTICLE II.
------------
AMENDMENTS TO LOAN AGREEMENT
Section 2.1 DELETION OF DEFINITIONS. Effective as of the Effective Date, the
-------------------------
following definitions in Section 1.1 of the Loan Agreement are hereby deleted in
their entirety:
"ADJUSTED EURODOLLAR RATE"
--------------------------
"EURODOLLAR RATE"
----------------
"EURODOLLAR RATE MARGIN"
------------------------
"RESERVE REQUIREMENT"
--------------------
Section 2.2 ADDITION OF DEFINITIONS. Effective as of the Effective Date, the
-------------------------
following definitions shall be inserted in their proper alphabetical order to
Section 1.1 of the Loan Agreement:
"BASE LIBOR" means, for any Eurodollar Advance for any Interest Period, the
----------
rate per annum for United States dollar deposits quoted by the Reference Bank as
the Inter-Bank Market Offered Rate on the date that is two Business Days prior
to the Interest Period, with the understanding that such rate is quoted by the
Reference Bank for the purpose of calculating effective rates of interest for
loans making reference thereto, on the first day of an Interest Period for
delivery of funds on such date for a period of time approximately equal to the
number of days in such Interest Period, and in an amount approximately equal to
the principal amount to which such Interest Period applies. Borrower
understands and agrees that the Reference Bank may base its quotation of the
Inter-Bank Market Offered Rate upon such offers or other market indicators of
the Inter-Bank Market as the Reference Bank, in its sole discretion, deems
appropriate including, without limitation, the rate offered for United States
dollar deposits on the London Inter-Bank Market.
"LIBOR" means, for any Eurodollar Advance for any Interest Period, the rate per
-----
annum determined pursuant to the following formula: (a) Base LIBOR applicable
to such Eurodollar Advance for such Interest Period, divided by (b) one hundred
percent (100%) minus the LIBOR Reserve Percentage for such Eurodollar Advance
for such Interest Period.
"LIBOR RATE MARGIN" means, (a) with respect to the Term Loan, one and one-half
-------------------
percent (1.50%) and (b) with respect to the Revolving Credit Loans, at such time
and from time to time as the relevant Funded Debt Ratio is in one of the
following ranges, the percentage per annum set forth opposite such Funded Debt
Ratio:
PERCENTAGE FOR REVOLVING
FUNDED DEBT RATIO CREDIT LOANS
----------------- ------------
Less than 2.0 to 1.0 1.25%
-------------------- -----
2.0 to 1.0 or greater and less than 2.5 to 1.0 1.50%
-----
2.5 to 1.0 or greater and less than 3.0 to 1.0 1.75%
-----
3.0 to 1.0 or greater and less than 3.25 to 1.0 2.00%
-----
3.25 to 1.0 or greater 2.25%
---------------------- -----
The Borrower shall give written notice to the Bank of any changes in the Funded
Debt Ratio as of the end of any fiscal quarter which results in a change to the
LIBOR Rate Margin concurrently with its delivery of the items required under
Section 10.1(c) hereof, and any change to the LIBOR Rate Margin shall be
effective with respect to any Interest Period commencing after the Bank has
received such information.
"LIBOR RESERVE PERCENTAGE" means, for any Eurodollar Advance for any
--------------------------
Interest Period, the reserve percentage prescribed by the Board of Governors of
the Federal Reserve system (or any successor) for "Eurocurrency Liabilities" (as
defined in Regulation D), adjusted by the Bank for expected changes in such
reserve percentage during the applicable Interest Period.
Section 2.3 REFERENCES TO DELETED DEFINITIONS. Effective as of the Effective
---------------------------------
Date:
(a) All references to "Adjusted Eurodollar Rate" in the Loan Agreement shall
be deemed to be references to "LIBOR";
(b) All references to "Eurodollar Rate" in the Loan Agreement shall be
deemed to be references to "Base LIBOR";
(c) All references to "Eurodollar Rate Margin" in the Loan Agreement shall
be deemed to be references to "LIBOR Rate Margin"; and
(d) All references to "Reserve Requirement" in the Loan Agreement shall be
deemed to be references to "LIBOR Reserve Percentage."
Section 2.4 AMENDMENT TO DEFINITIONS.
--------------------------
Effective as of the Effective Date, the following definitions in Section 1.1
of the Loan Agreement are hereby amended and restated in their entirety to read
as follows:
"COMMITMENT FEE RATE" means, at such times and from time to time as the
---------------------
relevant Funded Debt Ratio is in one of the following ranges, the percentage per
annum set forth opposite such Funded Debt Ratio:
FUNDED DEBT RATIO COMMITMENT FEE RATE
----------------- -------------------
Less than 2.0 to 1.0 0.375%
-------------------- ------
2.0 to 1.0 or greater and less than 2.5 to 1.0 0.375%
------
2.5 to 1.0 or greater and less than 3.0 to 1.0 0.375%
------
3.0 to 1.0 or greater and less than 3.25 to 1.0 0.50%
-----
3.25 to 1.0 or greater 0.50%
---------------------- -----
"EBITDA" means, for the preceeding 12 month period, Consolidated Net Income
------
calculated before federal income taxes, plus (a) depreciation and amortization
--- ----
and interest expenses, plus (b) terminated rent expenses prior to and ending on
----
November 30, 2001, to include (i) rent expense, including, without limitation,
base rent, CAM charges and repairs and maintenance, and (ii) associated rent
expenses incurred in connection with the Norco distribution warehouse located at
920 Avenue R, Suite 100, Grand Prairie, Texas 75050, the Borrower's corporate
headquarters located at 5050 Quorum Dive, Suite 500, Dallas, Texas 75240, and
the Borrower's training center located at 4819 Keller Springs, Addison, Texas
75248, minus (c) any extraordinary gains or losses of the Borrower during the
-----
period in question.
"EURODOLLAR ADVANCES" means Advances the interest rates on which are determined
--------------------
on the basis on the rates referred to in the definition of LIBOR in this Section
1.1.
"FIXED CHARGE COVERAGE RATIOFIXED CHARGE COVERAGE RATIO" means, at any time,
---------------------------------------------------------
the quotient determined by dividing (a) the sum of (i) EBITDA for the preceding
twelve (12) calendar months, minus (ii) treasury stock purchases made by the
Borrower for the preceding twelve (12) calendar months, minus (iii) dividends
paid by the Borrower during the preceding twelve (12) calendar months, by (b)
the sum of (i) all scheduled payments on all Long Term Debt of the Borrower and
the Subsidiaries and all scheduled payments under Capital Lease Obligations of
the Borrower and the Subsidiaries to be paid during the next twelve (12)
calendar months, plus (ii) interest expenses and tax expenses (to the extent
paid in cash) of the Borrower and the Subsidiaries for the preceding twelve (12)
calendar months.
"FUNDED DEBT RATIO" means, at any time, the quotient determined by dividing (a)
------------------
the sum of all Debt for borrowed money, Capital Lease Obligations and purchase
money Debt of the Borrower and the Subsidiaries, by (b) EBITDA for the preceding
twelve (12) complete fiscal months.
"PRIME RATE MARGIN" means, (a) with respect to the Term Loan, a deduction of
-------------------
three-fourths of one percent (-0.75%) and (b) with respect to the Revolving
Credit Loans, at any time, the following percentage determined by reference to
the Funded Debt Ratio then existing:
FUNDED DEBT RATIO PERCENTAGE FOR REVOLVING CREDIT LOANS
----------------- -------------------------------------
Less than 2.0 to 1.0 -1.00
-------------------- -----
2.0 to 1.0 or greater and less than 2.5 to 1.0 -0.75%
------
2.5 to 1.0 or greater and less than 3.0 to 1.0 -0.50%
------
3.0 to 1.0 or greater and less than 3.25 to 1.0 -0.25%
------
3.25 to 1.0 or greater 0.00%
---------------------- -----
"REVOLVING CREDIT NOTE" means the Fifth Amended and Restated Revolving Credit
-----------------------
Note executed by the Borrower and payable to the order of the Bank in the
-
aggregate principal amount of the Revolving Credit Commitment, in substantially
-
the form of Exhibit A hereto, together with all amendments, modifications and
---------
renewals thereof.
"TERMINATION DATE" means 10:00 A.M. Dallas, Texas time on December 31, 2003, or
-----------------
such earlier date and time on which the Revolving Credit Commitment terminates
as provided in this Agreement; provided, however, if such date is not a Business
Day, the "Termination Date" shall be the first Business Day following such date.
Section 2.5 AMENDMENT OF EXHIBIT A. Effective as of the Effective Date, Exhibit
----------------------
A to the Loan Agreement is deleted and a new Exhibit A, attached as Exhibit
A to this Amendment, is inserted in its place.
Section 2.6 AMENDMENT TO SECTION 11.4.
Effective as of the Effective Date, Section 11.4 of the Loan Agreement
is hereby amended and restated in its entirety to read as follows:
(b) Restricted Payments. The Borrower will not declare or pay any
--------------------
dividends or make any other payment or distribution (whether in cash, property,
or obligations) on account of its capital stock, or redeem, purchase, retire, or
otherwise acquire any of its capital stock, or permit any of its Subsidiaries to
purchase or otherwise acquire any capital stock of the Borrower or another
Subsidiary, or set apart any money for a sinking or other analogous fund for any
dividend or other distribution on its capital stock or for any redemption,
purchase, retirement, or other acquisition of any of its capital stock; provided
that the foregoing restrictions do not prohibit (a) dividend payments on any
class of capital stock payable solely in shares of capital stock of the
Borrower; (b) payments of dividends from any Subsidiary to the Borrower; (c)
payments in lieu of taxes to the Borrower or a Subsidiary pursuant to a tax
sharing agreement; (d) any exchange of stock not involving any cash
consideration pursuant to a stock option plan for employees or directors of the
Borrower; and (e) any other redemption, purchase, retirement or the acquisition
of the Borrower's capital stock or payment of cash dividends upon obtaining the
prior written approval of the Bank, it being understood that, based on
performance, the Borrower may request the Bank to consider granting its approval
of restricted payments on a quarterly basis, or at such other time as deemed
necessary.
Section 2.7 AMENDMENT TO SECTION 12.2.
----------------------------
Effective as of the Effective Date, Section 12.2 of the Loan Agreement
is hereby amended and restated in its entirety to read as follows:
Section 12.2. Funded Debt Ratio. The Borrower will maintain, as of the
-------------------
end of each fiscal quarter, a Funded Debt Ratio of not greater than (a) 3.25 to
1.00 for the three (3) fiscal quarters ending on or around December 31, 2001,
March 31, 2002, and June 30, 2002, respectively, (b) 3.00 to 1.00 for the next
three (3) consecutive fiscal quarters ending on or around September 30, 2002,
December 31, 2002 and March 31, 2003, respectively, and (c) 2.75 to 1.00 for the
fiscal year ending on or around June 30, 2003, and at all times thereafter.
ARTICLE III.
-------------
AMENDMENTS TO CONSTRUCTION LOAN DOCUMENTS
Section 3.1 AMENDMENTS TO CONSTRUCTION LOAN AGREEMENT
---------------------------------------------
(a) Amendment to Definitions.
- --- --------------------------
Effective as of the Effective Date, the following definition in Section
1.1 of the Construction Loan Agreement is hereby amended and restated in its
entirety to read as follows:
"LOAN CONVERSION" - The conversion of the Loan from the Construction Loan
----------------
to the Mini-Perm Loan all in accordance with the provisions of Section 2.4
hereof. The effective date of the Loan Conversion shall be the first (1st) day
of the calendar month following the satisfaction of the Loan Conversion
requirements set forth in Section 2.4, which effective date shall not be later
than February 1, 2002.
(b) Amendment to Section 2.4
- --- ---------------------------
Effective as of the Effective Date, the last sentence of Section 2.4 of the
Construction Loan Agreement is hereby amended and restated in its entirety to
read as follows:
To the extent Loan Conversion has not occurred by February 1, 2002, then
Borrower shall not thereafter be eligible for Loan Conversion.
(c) Amendment to Section 2.5. Effective as of the Effective Date, Section
- --- ----------------------------
2.5 of the Construction Loan Agreement is hereby amended and restated in its
entirety to read as follows:
Section 2.5. Maturity Date. The Maturity Date of the Loan means (a) at
-------------
all times prior to Loan Conversion, February 1, 2002, and (b) if Loan Conversion
occurs on or before February 1, 2002, then December 28, 2007; subject to the
right of acceleration provided herein and elsewhere in the Loan Documents, at
which time all sums due and owing under this Agreement and the other Loan
Documents shall be repaid in full. All payments due to Lender under this
Agreement, whether at the Maturity Date or otherwise, shall be paid in
immediately available funds.
Section 3.2 AMENDMENTS TO FIXED RATE AGREEMENT
--------------------------------------
(a) DELETION OF DEFINITIONS. Effective as of the Effective Date,
--------------------------
the following definitions in Section 1 of the Fixed Rate Agreement are hereby
deleted in their entirety:
"ADJUSTED EURODOLLAR RATE"
--------------------------
"EURODOLLAR RATE"
----------------
"EURODOLLAR RATE MARGIN"
------------------------
"RESERVE REQUIREMENT"
--------------------
(b)ADDITION OF DEFINITIONS. Effective as of the Effective Date, the
-------------------------
following definitions shall be inserted in their proper alphabetical order to
Section 1 of the Fixed Rate Agreement:
"BASE LIBOR" means, for any Eurodollar Advance for any Interest Period, the
----------
rate per annum for United States dollar deposits quoted by the Reference Bank as
the Inter-Bank Market Offered Rate on the date that is two Business Days prior
to the Interest Period, with the understanding that such rate is quoted by the
Reference Bank for the purpose of calculating effective rates of interest for
loans making reference thereto, on the first day of an Interest Period for
delivery of funds on such date for a period of time approximately equal to the
number of days in such Interest Period, and in an amount approximately equal to
the principal amount to which such Interest Period applies. Borrower
understands and agrees that the Reference Bank may base its quotation of the
Inter-Bank Market Offered Rate upon such offers or other market indicators of
the Inter-Bank Market as the Reference Bank, in its sole discretion, deems
appropriate including, without limitation, the rate offered for United States
dollar deposits on the London Inter-Bank Market.
"LIBOR" means, for any Eurodollar Advance for any Interest Period, the rate per
-----
annum and determined pursuant to the following formula: (a) Base LIBOR
applicable to such Eurodollar Advance for such Interest Period, divided by (b)
one hundred percent (100%) minus the LIBOR Reserve Percentage for such
Eurodollar Advance for such Interest Period.
"LIBOR RATE MARGIN" means one and one-half percent (1.50%).
-------------------
"LIBOR RESERVE PERCENTAGE" means, for any Eurodollar Advance for any Interest
--------------------------
Period, the reserve percentage prescribed by the Board of Governors of the
Federal Reserve system (or any successor) for "Eurocurrency Liabilities" (as
defined in Regulation D), adjusted by the Bank for expected changes in such
reserve percentage during the applicable Interest Period.
(c) REFERENCES TO DELETED DEFINITIONS. Effective as of the
------------------------------------
Effective Date:
(i) All references to "Adjusted Eurodollar Rate" in the Fixed Rate Agreement
shall be deemed to be references to "LIBOR";
(ii) All references to "Eurodollar Rate" in the Fixed Rate Agreement shall
be deemed to be references to "Base LIBOR";
(iii) All references to "Eurodollar Rate Margin" in the Fixed Rate Agreement
shall be deemed to be references to "LIBOR Rate Margin"; and
(iv) All references to "Reserve Requirement" in the Fixed Rate Agreement
shall be deemed to be references to "LIBOR Reserve Percentage."
(d) AMENDMENT TO DEFINITIONS. Effective as of the Effective Date,
------------------------
the following definitions in Section 1 of the Fixed Rate Agreement are hereby
amended and restated in their entirety to read as follows:
"EURODOLLAR ADVANCES" means Advances the interest rates on which are
--------------------
determined on the basis of the rates referenced to in the definition of LIBOR.
"MATURITY DATE" means (a) at all times prior to Loan Conversion, February 1,
--------------
2002, and (b) if Loan Conversion occurs on or before February 1, 2002, then
--
December 28, 2007.
--
ARTICLE IV.
------------
CONDITIONS PRECEDENT
Section 4.1 CONDITIONS. The effectiveness of this Amendment is subject to the
----------
satisfaction of the following conditions precedent on or prior to February 15,
2002 (where applicable):
(a) The Bank shall have received all of the following, in form and substance
satisfactory to the Bank:
(1) Resolutions. Resolutions of the Board of Directors of the Borrower and
- --- -----------
each Guarantor certified by its Secretary or an Assistant Secretary which
authorize the execution, delivery, and performance by the Borrower and each
Guarantor of this Amendment and the other Loan Documents to which the Borrower
or such Guarantor is or is to be a party hereunder;
(2) Incumbency Certificate. A certificate of incumbency certified by the
- --- -----------------------
Secretary or an Assistant Secretary of the Borrower and each Guarantor
- --
certifying the names of the officers of the Borrower and each Guarantor
- --
authorized to sign this Amendment and each of the other Loan Documents to which
- --
the Borrower or such Guarantor is or is to be a party hereunder (including the
certificates contemplated herein), together with specimen signatures of such
officers;
(3) Articles of Incorporation. A certificate certified by the Secretary or
- --- --------------------------
an Assistant Secretary of the Borrower and each Guarantor certifying that the
articles of incorporation of the Borrower and each Guarantor have not been
amended or modified since March 31, 2000 and are still in full force and effect;
(4) Bylaws. A certificate certified by the Secretary or an Assistant
- --- ------
Secretary of the Borrower and each Guarantor certifying that the bylaws of the
- ---
Borrower and each Guarantor have not been amended or modified since March 31,
2000 and are still in full force and effect; and
(5) Governmental Certificates. Certificates of the appropriate government
- --- --------------------------
officials of the state of incorporation of the Borrower and each Guarantor as to
the existence and good standing of the Borrower and each Guarantor, each dated
no earlier than ten (10) days prior to the date hereof.
(b) Borrower shall have executed and delivered to the Bank the Revolving
Credit Note in the form attached hereto as Exhibit A.
----------
(c) The representations and warranties contained herein and in all other
Loan Documents, as amended hereby, shall be true and correct as of the date
hereof as if made on the date hereof.
(d) No Event of Default shall have occurred and be continuing and no event
or condition shall have occurred that with the giving of notice or lapse of time
or both would be an Event of Default.
(e) All corporate 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 the Bank and its legal
counsel, Vinson & Elkins L.L.P.
ARTICLE V.
-----------
RATIFICATIONS, REPRESENTATIONS AND WARRANTIES
Section 5.1 RATIFICATIONS.
-------------
The terms and provisions set forth in this Amendment shall modify and
supersede all inconsistent terms and provisions set forth in the Loan Agreement
or the Construction Loan Documents, as applicable (each, a "MODIFIED DOCUMENT"
-----------------
and collectively, the "MODIFIED DOCUMENTS"), and except as expressly modified
------------------
and superseded by this Amendment, the terms and provisions of the Modified
Documents are ratified and confirmed and shall continue in full force and
effect. The Borrower and the Bank agree that the Modified Documents as amended
hereby shall continue to be legal, valid, binding and enforceable in accordance
with their terms.
Section 5.2 REPRESENTATIONS AND WARRANTIES.
--------------------------------
The Borrower hereby represents and warrants to the Bank that (i) 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 corporate action on the part of the Borrower and will not
violate the articles of incorporation or bylaws of the Borrower, (ii) the
representations and warranties contained in the Modified Documents, as amended
hereby, and any other Loan Document are true and correct on and as of the date
hereof as though made on and as of the date hereof, (iii) no Event of Default
has occurred and is continuing and no event or condition has occurred that with
the giving of notice or lapse of time or both would be an Event of Default, and
(iv) Borrower is in material compliance with all covenants and agreements
contained in the Modified Documents as amended hereby.
ARTICLE VI.
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MISCELLANEOUS
Section 6.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
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All representations and warranties made in this Amendment or any other
Loan Document including any Loan 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 the Bank or any closing shall
affect the representations and warranties or the right of the Bank to rely upon
them.
Section 6.2 REFERENCE TO AGREEMENT.
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Each of the Loan Documents, including the Modified Documents and any and
all other agreements, documents, or instruments now or hereafter executed and
delivered pursuant to the terms hereof or pursuant to the terms of the Loan
Agreement as amended hereby, are hereby amended so that any reference in such
Loan Documents to the Modified Documents shall mean a reference to the Modified
Documents as amended hereby.
Section 6.3 EXPENSES OF BANK.
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As provided in the Loan Agreement, the Borrower agrees to pay on demand
all costs and expenses incurred by the Bank in connection with the preparation,
negotiation, and execution of this Amendment and the other Loan Documents
executed pursuant hereto and any and all amendments, modifications, and
supplements thereto, including, without limitation, the costs and fees of the
Bank's legal counsel in connection therewith, and all costs and expenses
incurred by the Bank in connection with the enforcement or preservation of any
rights under the Loan Agreement, as amended hereby, or any other Loan Document,
including without limitation the costs and fees of the Bank's legal counsel.
Section 6.4 SEVERABLITY.
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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.
Section 6.5 APPLICABLE LAW.
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This Amendment and all other Loan Documents executed pursuant hereto
shall be deemed to have been made and to be performable in Dallas, Dallas
County, Texas and shall be governed by and construed in accordance with the laws
of the State of Texas.
Section 6.6 SUCCESSORS AND ASSIGNS.
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This Amendment is binding upon and shall inure to the benefit of the
Bank and the Borrower and their respective successors and assigns, except the
Borrower may not assign or transfer any of its rights or obligations hereunder
without the prior written consent of the Bank.
Section 6.7 COUNTERPARTS.
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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.
Section 6.8 EFFECT OF WAIVER.
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No consent or waiver, express or implied, by the Bank to or for any
breach of or deviation from any covenant, condition or duty by the Borrower or
any of the Guarantors shall be deemed a consent or waiver to or of any other
breach of the same or any other covenant, condition or duty.
Section 6.9 HEADINGS.
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The headings, captions, and arrangements used in this Amendment are for
convenience only and shall not affect the interpretation of this Amendment.
Section 6.10 ENTIRE AGREEMENT.
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THIS AMENDMENT AND ALL OTHER INSTRUMENTS, DOCUMENTS AND AGREEMENTS
EXECUTED AND DELIVERED IN CONNECTION WITH THIS AMENDMENT EMBODY THE FINAL,
ENTIRE AGREEMENT AMONG THE PARTIES HERETO AND SUPERSEDE ANY AND ALL PRIOR
COMMITMENTS, AGREEMENTS, REPRESENTATIONS AND UNDERSTANDINGS, WHETHER WRITTEN OR
ORAL, RELATING TO THIS AMENDMENT, AND MAY NOT BE CONTRADICTED OR VARIED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS
OF THE PARTIES HERETO. THERE ARE NO ORAL AGREEMENT AMONG THE PARTIES HERETO.
[Remainder of Page Intentionally Left Blank]
Executed as of the date first written above.
Borrower:
PIZZA INN, INC.
By: /s/ Ronald W. Parker
Ronald W. Parker
President
BANK:
WELLS FARGO BANK TEXAS,
NATIONAL ASSOCATION
By: /s/ Austin D. Nettle
Austin D. Nettle
Vice President
Each of the Guarantors hereby consents and agrees to this Amendment and agrees
that the Guaranty shall remain in full force and effect and shall continue to be
the legal, valid and binding obligation of such Guarantor enforceable against
such Guarantor in accordance with its terms.
Guarantors:
BARKO REALTY, INC.
R-CHECK, INC.
PIZZA INN OF DELAWARE, INC.
By: /s/ Ronald W. Parker
Ronald W. Parker
President
EXHIBIT A
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FORM OF REVOLVING CREDIT NOTE
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FIFTH AMENDED AND RESTATED REVOLVING CREDIT NOTE
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$9,500,000.00 Dallas, Texas January 31, 2002
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FOR VALUE RECEIVED, the undersigned, PIZZA INN, INC., a Missouri
corporation (the "BORROWER"), hereby promises to pay to the order of WELLS FARGO
BANK (TEXAS), NATIONAL ASSOCIATION, a national banking association formerly
known as First Interstate Bank of Texas, N.A. (the "BANK"), at its office
located at 1445 Ross Avenue, Dallas, Texas 75265, on or before December 31,
2003, in lawful money of the United States of America and in immediately
available funds, the principal sum of Nine Million Five Hundred Thousand and
No/100 Dollars ($9,500,000.00) or such lesser amount as shall equal the
aggregate unpaid principal amount of the Existing Loans and any additional
Advances made by the Bank to the Borrower under Article II of the Loan Agreement
referred to below, and to pay interest on the amount of each such Advance, at
such office, in like money and funds, for the period commencing on the date of
such Advance until such Advance shall be paid in full, at the rates per annum
and on the dates provided in the Loan Agreement.
The Borrower hereby authorizes the Bank to endorse on the Schedule annexed to
this Fifth Amended and Restated Revolving Credit Note (this "NOTE") the amount
and Type of Advances made to the Borrower by the Bank and all Continuations,
Conversions, and payments of principal in respect of such Advances, which
endorsements shall, in the absence of manifest error, be conclusive as to the
outstanding principal amount of all such Advances; provided, however, that the
failure to make such notation with respect to any such Advance or payment shall
not limit or otherwise affect the obligations of the Borrower under the Loan
Agreement or this Note.
This Note is the Revolving Credit Note referred to in the Second Amended and
Restated Loan Agreement dated as of March 31, 2000, between the Borrower and the
Bank (as the same may be amended, modified, or supplemented from time to time,
being referred to herein as the "LOAN AGREEMENT"), and evidences the Existing
Loans and all additional Advances made by the Bank thereunder. The Loan
Agreement, among other things, contains provisions for acceleration of the
maturity of this Note upon the happening of certain stated events and also for
prepayments of Advances prior to the maturity of this Note upon the terms and
conditions specified in the Loan Agreement. Capitalized terms used in this Note
and not otherwise defined herein have the respective meanings assigned to them
in the Loan Agreement.
Notwithstanding anything to the contrary contained herein, no provision of this
Note shall require the payment or permit the collection of interest in excess of
the Maximum Rate. If any excess of interest in such respect is herein provided
for, or shall be adjudicated to be so provided, in this Note or otherwise in
connection with this loan transaction, the provisions of the paragraph shall
govern and prevail, and neither the Borrower nor the sureties, guarantors,
successors or assigns of the Borrower shall be obligated to pay the excess
amount of such interest, or any other excess sum paid for the use, forbearance
or detention of sums loaned pursuant hereto. If for any reason interest in
excess of the Maximum Rate shall be deemed charged, required or permitted by any
court of competent jurisdiction, any such excess shall be applied as a payment
and reduction of the principal of indebtedness evidenced by this Note; and, if
the principal amount hereof has been paid in full, any remaining excess shall
forthwith be paid to the Borrower. In determining whether or not the interest
paid or payable exceeds the Maximum Rate, the Borrower and the Bank shall, to
the extent permitted by applicable law, (i) characterize any non-principal
payment as an expense, fee, or premium rather than as interest, (ii) exclude
voluntary prepayments and the effects thereof, and (iii) amortize, prorate,
allocate, and spread in equal or unequal parts the total amount of interest
throughout the entire contemplated term of the indebtedness evidenced by this
Note so that the interest for the entire term does not exceed the Maximum Rate.
This Note shall be governed by and construed in accordance with the laws of the
State of Texas and the applicable laws of the United States of America. This
Note is performable in Dallas County, Texas.
This Note is given in renewal, extension and modification of, but not
extinquishment or novation of, the indebtedness evidenced by that certain Fourth
Amended and Restated Revolving Credit Note dated as of March 31, 2000 in the
original principal amount of $9,500,000 executed by the Borrower and payable to
the order of the Bank, which in turn was given in renewal, extension and
modification of, but not in extinguishment or novation of, the indebtedness
evidenced by that certain Third Amended and Restated Revolving Credit Note dated
as of August 31, 1999 in the original principal amount of $9,500,000 executed by
the Borrower and payable to the order of the Bank, which in turn was given in
renewal, extension and modification of, but not in extinguishment or novation
of, the indebtedness evidenced by that certain Second Amended and Restated
Revolving Credit Note dated as of September 14, 1998 in the original principal
amount of $9,500,000 executed by the Borrower and payable to the order of the
Bank, which in turn was given in renewal, extension and modification of, but not
extinguishment or novation of, the indebtedness evidenced by that certain
Amended and Restated Revolving Credit Note dated as of August 28, 1997 in the
original principal amount of $9,500,000 executed by the Borrower and payable to
the order of the Bank.
The Borrower and each surety, guarantor, endorser, and other party ever liable
for payment of any sums of money payable on this Note jointly and severally
waive notice, presentment, demand for payment, protest, notice of protest and
non-payment or dishonor, notice of acceleration, notice of intent to accelerate,
notice of intent to demand, diligence in collecting, grace, and all other
formalities of any kind, and consent to all extensions without notice for any
period or periods of time and partial payments, before or after maturity, and
any impairment of any collateral securing this Note, all without prejudice to
the holder. The holder shall similarly have the right to deal in any way, at
any time, with one or more of the foregoing parties without notice to any other
party, and to grant any such party any extensions of time for payment of any of
said indebtedness, or to release or substitute part of all of the collateral
securing this Note, or to grant any other indulgences or forebearances
whatsoever, without notice to any other party and without in any way affecting
the personal liability of any party hereunder.
PIZZA INN, INC.
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By: /s/ Ronald W. Parker
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Ronald W. Parker
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President
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