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| PZZI > SEC Filings for PZZI > Form 10-K on 24-Sep-2012 | All Recent SEC Filings |
24-Sep-2012
Annual Report
The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes appearing elsewhere in this Annual Report on Form 10-K and may contain certain forward-looking statements. See "Risks Associated with Forward-Looking Statements."
Overview
The Company operates and franchises pizza buffet, delivery/carry-out and express restaurants domestically and internationally under the trademark "Pizza Inn" and operates domestic fast casual pizza restaurants under the trademarks "Pie Five Pizza Company" or "Pie Five". We provide or facilitate food, equipment and supply distribution to our domestic and international system of restaurants through our Norco Restaurant Services Company division and through agreements with third party distributors. At June 24, 2012, Company and franchised restaurants consisted of the following:
Buffet Units Delco Units Express Units Pie Five Units Total Units
Company Owned 4 - - 6 10
Domestic Franchise 131 29 47 - 207
International Franchise 19 52 10 - 81
Total Franchise 150 81 57 - 288
Total Units 154 81 57 6 298
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The domestic restaurants were located in 16 states predominately situated in the southern half of the United States and the international restaurants were located in twelve foreign countries.
Basic and diluted income per common share decreased $0.13 to $0.04 for fiscal 2012 compared to $0.17 in the prior fiscal year. Net income decreased $1.0 million to $0.3 million compared to $1.3 million for the prior fiscal year, on revenues of $43.0 million for both years. Earnings before interest, taxes, depreciation and amortization ("EBITDA") for fiscal 2012 decreased 37.9%, or $1.1 million, to $1.8 million compared to $2.9 million for the prior fiscal year.
The reduction in net income from prior year is primarily due to lower revenue earned from franchising and food and supply sales and higher costs related to 1) the continued development of the Pie Five concept, 2) the corporate reorganization into a holding company structure, and 3) the expansion of franchising into China. The total costs associated with these activities were $0.7 million during the fiscal year ended June 24, 2012.
Results of operations for fiscal 2012 and 2011 each included 52 weeks.
Management believes that key performance indicators in evaluating financial results include domestic and international franchisee retail sales and the number and type of operating restaurants. The following tables summarize these key performance indicators for franchise locations. All amounts are in thousands except the average number of units.
Fiscal Year Ended
Franchise Stores - Total Stores June 24, June 26,
2012 2011
Domestic retail sales of Buffet Units $ 97,812 $ 101,936
Domestic retail sales of Delco Units 6,755 7,041
Domestic retail sales of Express Units 3,743 3,722
Total domestic retail sales $ 108,310 $ 112,699
Average number of domestic Buffet Units 132 143
Average number of domestic Delco Units 29 31
Average number of domestic Express Units 46 47
Fiscal Year Ended
June 24, June 26,
2012 2011
International retail sales of Buffet Units $ 3,285 $ 4,153
International retail sales of Delco Units 10,765 10,917
International retail sales of Express Units 2,290 2,111
Total International retail sales $ 16,340 $ 17,181
Average number of International Buffet Units 16 17
Average number of International Delco Units 56 53
Average number of International Express Units 9 9
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Total domestic chain-wide franchisee retail sales decreased $4.4 million, or 3.9%, and international chain-wide retail sales decreased $0.8 million, or 4.9% when compared to the prior year.
Management also believes that a comparison of period-to-period retail sales by restaurants open throughout both periods is an important performance measure in evaluating financial results. The following tables summarize franchise same store retail sales for the periods presented:
Fiscal Year Ended
Franchise Stores - Comparable Stores June 24, June 26,
2012 2011
Domestic retail sales of same store Buffet Units $ 92,804 $ 93,732
Domestic retail sales of same store Delco Units 5,383 5,649
Domestic retail sales of same store Express Units 3,481 3,493
Total domestic same store retail sales $ 101,668 $ 102,874
International retail sales of same store Buffet Units $ 3,009 $ 3,349
International retail sales of same store Delco Units 9,402 9,627
International retail sales of same store Express Units 2,276 2,101
Total International same store retail sales $ 14,687 $ 15,077
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Domestic same store franchisee retail sales decreased $1.2 million, or 1.2% when compared to the prior year. International same store franchisee retail sales decreased $0.4 million, or 2.6% when compared to the prior year.
The following table summarizes the results and key performance indicators for the Pie Five and Pizza Inn Company-owned restaurants. We believe this information is useful to management and investors to measure the performance of the Company-owned restaurants. These indicators provide performance trend information as well as the cash flow of the restaurants before pre-opening costs and allocated corporate administration and other expenses. This information is important in evaluating the effectiveness of our business strategies and for planning and budgeting purposes. Restaurant operating cash flow is a non-GAAP financial measure that should not be viewed as an alternative or substitute for our reported results in accordance with U.S. generally accepted accounting principles ("GAAP"). The four quarters and fiscal year periods ended June 24, 2012 and June 26, 2011, each contained 13 weeks and 52 weeks, respectively.
Pie Five - Company-Owned Fiscal Year
Restaurants Three Months Ended Ended
(in thousands, except store
weeks and average data) Sept 25, Dec 25, March 25, June 24, June 24,
2011 2011 2012 2012 2012
Store weeks 13 29 60 77 179
Average weekly sales 17,923 11,966 12,079 12,429 12,637
Average number of units 1 2 5 6 3
Restaurant sales 233 347 725 957 2,262
Restaurant operating cash flow 65 26 105 128 324
Depreciation/amortization
expense (12 ) (42 ) (92 ) (116 ) (262 )
Pre-opening costs (12 ) (164 ) (70 ) (19 ) (265 )
Allocated corporate
administration and other
expenses (2 ) (25 ) (38 ) (24 ) (89 )
Income (loss) from continuing
operations before taxes 39 (205 ) (95 ) (31 ) (292 )
Fiscal Year
Three Months Ended Ended
Sept 26, Dec 26, March 27, June 26, June 26,
2010 2010 2011 2011 2011
Store weeks - - - 4 4
Average weekly sales - - - 14,250 14,250
Average number of units - - - 1 1
Restaurant sales - - - 57 57
Restaurant operating cash flow - - - 18 18
Depreciation/amortization
expense - - - (5 ) (5 )
Pre-opening costs - - - (33 ) (33 )
Allocated corporate
administration and other
expenses - - - - -
Income (loss) from continuing
operations before taxes - - - (20 ) (20 )
Pizza Inn - Company-Owned Fiscal Year
Restaurants Three Months Ended Ended
(in thousands, except store
weeks and average data) Sept 25, Dec 25, March 25, June 24, June 24,
2011 2011 2012 2012 2012
Store weeks 62 52 52 52 218
Average weekly sales 17,065 17,481 17,776 17,654 17,491
Average number of units 5 4 4 4 4
Restaurant sales 1,058 909 928 918 3,813
Restaurant operating cash flow 57 40 52 41 190
Depreciation/amortization
expense (104 ) (103 ) (106 ) (155 ) (468 )
Pre-opening costs - - - - -
Allocated corporate
administration and other
expenses (77 ) (46 ) (50 ) (78 ) (251 )
Income (loss) from continuing
operations before taxes (124 ) (109 ) (104 ) (192 ) (529 )
Fiscal Year
Three Months Ended Ended
Sept 26, Dec 26, March 27, June 26, June 26,
2010 2010 2011 2011 2011
Store weeks 48 55 65 65 233
Average weekly sales 18,854 17,255 17,371 17,200 17,622
Average number of units 4 4 5 5 4
Restaurant sales 905 949 1,134 1,118 4,106
Restaurant operating cash flow 37 73 125 102 337
Depreciation/amortization
expense (401 ) (81 ) (99 ) (103 ) (684 )
Pre-opening costs (73 ) (90 ) - - (163 )
Allocated corporate
administration and other
expenses (47 ) (82 ) (68 ) (54 ) (251 )
Income (loss) from continuing
operations before taxes (484 ) (180 ) (42 ) (55 ) (761 )
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Store weeks represent the total number of weeks Company-owned restaurants were open during the period. Average weekly sales represents the average weekly revenues earned by the Company-owned restaurants that were open during the period. Restaurant operating cash flow represents the income earned by Company-owned restaurants plus 1) depreciation and amortization, 2) pre-opening expenses, and 3) allocated corporate administration and other expenses. Pre-opening expenses consist primarily of certain costs incurred prior to the opening of a restaurant, including: 1) marketing and promotional expenses, 2) accrued rent, and 3) manager salaries, employee payroll and related training costs.
Revenues
Revenues are derived from 1) sales of food, paper products and supplies from Norco to franchisees, 2) franchise royalties and franchise fees, and 3) Company-owned restaurant operations. Financial results are dependent in large part upon the volume, pricing and cost of the products and supplies sold to franchisees. The volume of products sold by Norco to franchisees is dependent on the level of franchisee chain-wide retail sales, which are impacted by changes in same store sales and restaurant count, and the products sold to franchisees through Norco rather than through third-party food distributors.
Total revenues for fiscal 2012 and for the same period in the prior fiscal year were unchanged at $43.0 million. Revenue for these periods consisted of the following:
June 24, June 26,
2012 2011
Food and supply sales $ 33,253 $ 34,939
Franchise revenue 3,673 3,934
Restaurant sales 6,075 4,163
Total revenue $ 43,001 $ 43,036
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Food and Supply Sales
Food and supply sales by Norco include food and paper products and other distribution revenues. For fiscal 2012, food and supply sales decreased to $33.3 million compared to $35.0 million for the prior fiscal year due primarily to a decrease in sales to franchisees as a result of a $4.4 million, or 3.9%, decrease in domestic franchisee retail sales primarily attributable to a reduction in the average number of stores open and a decrease in same store sales in the current year when compared the prior year. In addition, some of our franchisees increased their purchases of some non-proprietary items from third party food distributors. In response, the Company has worked collaboratively with franchisees to develop new specifications for certain impacted products, which we believe should support a return to our historical levels of sales of products to franchisees relative to franchisee retail sales.
Franchise Revenue
Franchise revenue, which includes income from domestic and international royalties and license fees, decreased to $3.7 million for fiscal 2012 compared to $3.9 million for the prior fiscal year as the result of lower royalties resulting from lower franchisee retail sales and lower area developer fees and franchise fees as a result of fewer new franchise store openings.
Restaurant Sales
Restaurant sales, which consist of revenue generated by Company-owned restaurants, increased 45.9%, or $1.9 million, to $6.1 million for fiscal 2012, compared to $4.2 million for the prior fiscal year. These increases were primarily due to the opening of three new Company-owned restaurants in fiscal 2011 and five new Company-owned restaurants during fiscal 2012, partially offset by the closing of one Company-owned restaurant in each of fiscal 2011 and 2012.
Costs and Expenses
Cost of Sales
Cost of sales, which primarily includes food and supply costs, distribution fees, labor and general and administrative expenses directly related to restaurant sales, increased 2.3%, or $0.8 million, to $35.8 million for fiscal 2012 compared to $35.0 million for the prior fiscal year. The increases in costs were associated primarily with the new Company-owned restaurants and higher direct costs associated with food and supply sales as a result of increases in commodity prices, offset by lower costs due to reduced food and supply sales.
Franchise Expenses
Franchise expenses include selling, general and administrative expenses directly related to the sale and continuing service of domestic and international franchises. These expenses increased to $2.1 million from $1.8 million in the prior fiscal year primarily due to higher payroll costs during fiscal 2012 as a result of the addition of management resources to build the necessary infrastructure to continue to develop, franchise and expand the Pie Five brand.
General and Administrative Expenses
General and administrative expenses increased $0.7 million to $4.1 million, for fiscal 2012 compared to $3.4 million for the prior fiscal year primarily due to pre-opening and other operating expenses associated with the new Company-owned Pie Five Units and legal and other expenses of approximately $67,000 relating to the Company reorganization into a holding company structure. Pre-opening expenses for the new Company-owned Pie Five Units were approximately $265,000 during fiscal 2012.
Costs Associated with Store Closure
The Company closed its Plano, Texas location during the first quarter of fiscal 2011 when the initial lease term expired and recorded a $0.3 million non-recurring expense attributable to a change in estimated useful life of the equipment and leasehold improvements.
Settlement Costs
Fiscal 2011 included a settlement payment and associated legal fees of $0.3 million.
Provision for Bad Debt
Bad debt provision related to accounts receivable from franchisees increased by $10,000 to $95,000 in fiscal 2012 compared to $85,000 in the prior year. The Company believes that this provision and related allowance for doubtful accounts adequately reserve for outstanding receivables due from franchisees whose restaurants closed in fiscal 2012 or those that may close subsequent to June 24, 2012. For restaurants that are anticipated to close or are exhibiting signs of financial distress, credit terms are typically restricted, weekly food orders are required to be paid prior to delivery and royalty and advertising fees are collected as add-ons to the delivered price of weekly food orders.
Interest Expense
Interest expense increased $45,000 for the year ended June 24, 2012, compared to prior year due to higher average borrowings on the Company's credit facilities in the current year primarily related to the opening of new Company-owned Pie Five Units in fiscal 2012.
Provision for Income Tax
Income tax expense decreased $0.2 million to $0.4 million and was calculated on an effective income tax rate that is consistent with the statutory U.S. federal income tax rate of 34% adjusted for state income tax effects and permanent difference items. The effective tax rate increased to 52.2% in fiscal 2012 from 30.4% in fiscal 2011 due primarily to higher permanent tax differences associated with the tax benefit of cancelled stock options during fiscal 2012 and the establishment of deferred tax benefits in fiscal 2011 associated with foreign income tax credits. Management believes that future operations will generate sufficient taxable income, along with the reversal of temporary differences, to fully realize the net deferred tax asset of $0.4 million.
Discontinued Operations
Discontinued operations include losses from a leased building associated with a Company-owned restaurant in Houston, Texas that was closed during fiscal 2008.
Restaurant Openings and Closings
The following charts summarize restaurant activity for fiscal 2012 and fiscal
2011:
Fiscal year ended June 24, 2012
Beginning End of
Domestic of Period Opened Closed Period
Buffet Units 141 2 8 135
Delco Units 32 3 6 29
Express Units 45 3 1 47
Pie Five Units 1 5 - 6
International Units 79 4 2 81
Total 298 17 17 298
Fiscal year ended June 26, 2011
Beginning End of
Domestic of Period Opened Closed Period
Buffet Units 151 6 16 141
Delco Units 35 4 7 32
Express Units 49 3 7 45
Pie Five Units - 1 - 1
International Units 77 4 2 79
Total 312 18 32 298
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Non-GAAP Financial Measures
We report and discuss our operating results using financial measures consistent with GAAP. From time to time we disclose certain non-GAAP financial measures such as EBITDA. We believe EBITDA is useful to investors as a widely used measure of operating performance without regard to items that can vary substantially depending upon financing and accounting methods, book value of assets, capital structures and methods by which assets have been acquired. In addition, our management uses EBITDA in evaluating the effectiveness of our business strategies and for planning and budgeting purposes. However, this non-GAAP financial measure should not be viewed as an alternative or substitute for our reported GAAP results.
The following table sets forth a reconciliation of net income to EBITDA for the periods shown:
Fiscal Year Ended
June 24, June 26,
2012 2011
Net Income $ 322 $ 1,357
Interest Expense 110 65
Taxes 419 621
Depreciation and Amortization 946 851
EBITDA $ 1,797 $ 2,894
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Sources and Uses of Funds
Our primary sources of liquidity are cash flow from operating activities and borrowings under our credit facilities.
Cash flows from operating activities are generally the result of net income adjusted for depreciation and amortization and changes in working capital. Cash provided by operations was $1.2 million in fiscal 2012 compared to $1.6 in fiscal year 2011.
The Company used cash for investing activities of approximately $2.5 million in fiscal 2012 mainly for five new Company-owned Pie Five Units. The Company used cash for investing activities of approximately $1.9 million in fiscal 2011 mainly for three new Company stores.
Cash flows from financing activities generally reflect changes in the Company's net borrowings and stock options exercised during the period. During fiscal 2012 the Company had a net increase of $0.9 million in bank debt. During fiscal 2011, the Company had a net increase of $0.5 million in bank debt. During fiscal 2012 the Company had proceeds from the exercise of stock options of $24,000.
Credit Facilities
On August 28, 2012, the Company entered into a Loan and Security Agreement (the "F&M Loan Agreement") with The F&M Bank & Trust Company ("F&M") providing for a $2.0 million revolving credit facility (with a $500 thousand letter of credit subfacility), a $2.0 million fully funded term loan facility and a $6.0 million advancing term loan facility. An origination fee of 0.5% of the total credit facilities was paid at closing.
The Company may borrow, repay and reborrow under the revolving credit facility through August 28, 2014, at which time all amounts outstanding under the revolving credit facility mature. Availability under the revolving credit facility is limited by advance rates on eligible inventory and accounts receivable. Per annum interest on indebtedness from time to time outstanding under the revolving credit facility is computed at the Wall Street Journal prime rate plus 1.00% and is payable monthly. An unused commitment fee of 0.50% per annum is payable quarterly on the average unused portion of the revolving credit facility.
At closing, F&M funded a $2.0 million term loan payable in 48 equal monthly installments of principal plus accrued interest at a fixed rate of 4.574% per annum. Amounts repaid under this fully funded term loan may not be reborrowed. Proceeds from the $2.0 million term loan facility were used primarily to repay amounts borrowed under a prior credit facility with Amegy Bank National Association and the Amegy credit facility was canceled.
Through August 28, 2014, F&M has agreed to make up to $6.0 million in additional term loans to the Company. Advances for such additional term loans are limited by a percentage of the costs of equipment, leasehold improvements and other opening costs for new Company-owned Pie Five Units and may not be reborrowed after repayment. Interest only is payable monthly on all additional term loan advances during an annual borrowing period. At the end of each annual borrowing period, all additional term loan advances during such borrowing period become payable in 48 equal monthly installments of principal plus accrued interest. Interest on each term loan accrues at the Wall Street Journal prime rate plus 1.00% or, at the Company's option, a fixed rate equal to the Bloomberg 4-year LIBOR swap rate plus 3.90%.
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