Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - PIZZA INN HOLDINGS, INC /MO/Financial_Report.xls
XML - IDEA: XBRL DOCUMENT - PIZZA INN HOLDINGS, INC /MO/R7.htm
XML - IDEA: XBRL DOCUMENT - PIZZA INN HOLDINGS, INC /MO/R8.htm
XML - IDEA: XBRL DOCUMENT - PIZZA INN HOLDINGS, INC /MO/R4.htm
XML - IDEA: XBRL DOCUMENT - PIZZA INN HOLDINGS, INC /MO/R6.htm
XML - IDEA: XBRL DOCUMENT - PIZZA INN HOLDINGS, INC /MO/R2.htm
XML - IDEA: XBRL DOCUMENT - PIZZA INN HOLDINGS, INC /MO/R9.htm
XML - IDEA: XBRL DOCUMENT - PIZZA INN HOLDINGS, INC /MO/R3.htm
XML - IDEA: XBRL DOCUMENT - PIZZA INN HOLDINGS, INC /MO/R1.htm
XML - IDEA: XBRL DOCUMENT - PIZZA INN HOLDINGS, INC /MO/R22.htm
XML - IDEA: XBRL DOCUMENT - PIZZA INN HOLDINGS, INC /MO/R25.htm
XML - IDEA: XBRL DOCUMENT - PIZZA INN HOLDINGS, INC /MO/R17.htm
XML - IDEA: XBRL DOCUMENT - PIZZA INN HOLDINGS, INC /MO/R18.htm
XML - IDEA: XBRL DOCUMENT - PIZZA INN HOLDINGS, INC /MO/R12.htm
XML - IDEA: XBRL DOCUMENT - PIZZA INN HOLDINGS, INC /MO/R24.htm
EX-32.1 - PIZZA INN HOLDINGS, INC /MO/pizza10qex321122312.htm
EX-32.2 - PIZZA INN HOLDINGS, INC /MO/pizza10qex322122312.htm
EX-31.1 - PIZZA INN HOLDINGS, INC /MO/pizza10qex311122312.htm
EX-31.2 - PIZZA INN HOLDINGS, INC /MO/pizza10qex312122312.htm
XML - IDEA: XBRL DOCUMENT - PIZZA INN HOLDINGS, INC /MO/R5.htm
XML - IDEA: XBRL DOCUMENT - PIZZA INN HOLDINGS, INC /MO/R15.htm
XML - IDEA: XBRL DOCUMENT - PIZZA INN HOLDINGS, INC /MO/R20.htm
XML - IDEA: XBRL DOCUMENT - PIZZA INN HOLDINGS, INC /MO/R23.htm
XML - IDEA: XBRL DOCUMENT - PIZZA INN HOLDINGS, INC /MO/R11.htm
XML - IDEA: XBRL DOCUMENT - PIZZA INN HOLDINGS, INC /MO/R19.htm
XML - IDEA: XBRL DOCUMENT - PIZZA INN HOLDINGS, INC /MO/R16.htm
XML - IDEA: XBRL DOCUMENT - PIZZA INN HOLDINGS, INC /MO/R13.htm
XML - IDEA: XBRL DOCUMENT - PIZZA INN HOLDINGS, INC /MO/R21.htm
XML - IDEA: XBRL DOCUMENT - PIZZA INN HOLDINGS, INC /MO/R10.htm
XML - IDEA: XBRL DOCUMENT - PIZZA INN HOLDINGS, INC /MO/R14.htm
 


SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.  20549

FORM 10-Q
(Mark One)

þ             Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended December 23, 2012

o            Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number:0-12919

PIZZA INN HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

Missouri
45-3189287
(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)


(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 for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ  Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ  Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check One)
 
Large accelerated filer o Accelerated filer o Non-accelerated filer oSmaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No þ

As of February 6, 2013, 8,020,919 shares of the issuer’s common stock were outstanding.
 
 
 
 

 
 
 

PIZZA INN HOLDINGS, INC.

Index

PART I.    FINANCIAL INFORMATION
     
Item 1.
Financial Statements
Page
     
 
Condensed Consolidated Statements of Operations for the three months and six months
ended December 23, 2012 and December 25, 2011 (unaudited)
3
     
 
Condensed Consolidated Balance Sheets at December 23, 2012 (unaudited)
and June 24, 2012
4
     
 
Condensed Consolidated Statements of Cash Flows for the six months
ended December 23, 2012 and December 25, 2011 (unaudited)
5
     
 
Supplemental Disclosure of Cash Flow Information for the six months
ended December 23, 2012 and December 25, 2011 (unaudited)
5
     
 
Notes to Unaudited Condensed Consolidated Financial Statements
6
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
11
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
22
     
Item 4.
Controls and Procedures
22
 
PART II.   OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
23
     
   Item 1A.
Risk Factors
23
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
23
     
Item 3.
Defaults Upon Senior Securities
23
     
Item 4.
Mine Safety Disclosures
23
     
Item 5.
Other Information
23
     
Item 6.
Exhibits
24
     
 
Signatures
25
 
 
 
 
2

 
 
 
PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements
 
PIZZA INN HOLDINGS, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
(In thousands, except per share amounts)
 
(Unaudited)
 
                         
                         
                         
   
Three Months Ended
   
Six Months Ended
 
   
December 23,
   
December 25,
   
December 23,
   
December 25,
 
   
2012
   
2011
   
2012
   
2011
 
                         
                         
REVENUES:
  $ 10,548     $ 10,336     $ 20,986     $ 21,483  
                                 
COSTS AND EXPENSES:
                               
Cost of sales
    8,875       8,611       17,667       17,861  
General and administrative expenses
    1,153       898       2,158       1,793  
Franchise expenses
    566       521       1,067       973  
Pre-opening expenses
    85       164       164       176  
Bad debt
    45       15       90       30  
Interest expense
    35       17       139       33  
      10,759       10,226       21,285       20,866  
                                 
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE TAXES
    (211 )     110       (299 )     617  
Income tax (benefit) expense
    (103 )     39       (148 )     217  
(LOSS) INCOME FROM CONTINUING OPERATIONS
    (108 )     71       (151 )     400  
                                 
Loss from discontinued operations, net of taxes
    (12 )     (15 )     (27 )     (31 )
NET (LOSS) INCOME
  $ (120 )   $ 56     $ (178 )   $ 369  
                                 
EARNINGS PER SHARE OF COMMON STOCK - BASIC:
                               
(Loss) Income from continuing operations
  $ (0.01 )   $ 0.01     $ (0.02 )   $ 0.05  
Loss from discontinued operations
    -       -       -       -  
Net (loss) income
  $ (0.01 )   $ 0.01     $ (0.02 )   $ 0.05  
                                 
EARNINGS PER SHARE OF COMMON STOCK - DILUTED:
                               
                                 
(Loss) Income from continuing operations
  $ (0.01 )   $ 0.01     $ (0.02 )   $ 0.05  
Loss from discontinued operations
    -       -       -       -  
Net (loss) income
  $ (0.01 )   $ 0.01     $ (0.02 )   $ 0.05  
                                 
Weighted average common shares outstanding - basic
    8,021       8,013       8,021       8,012  
                                 
Weighted average common and
                               
potential dilutive common shares outstanding
    8,184       8,362       8,172       8,292  
                                 
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
 
 
 
 
 
3

 
 
PIZZA INN HOLDINGS, INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(In thousands, except share amounts)
 
             
   
December 23,
   
June 24,
 
ASSETS
 
2012 (unaudited)
   
2012
 
             
CURRENT ASSETS
           
Cash and cash equivalents
  $ 534     $ 590  
Accounts receivable, less allowance for bad debts
               
of $252 and $253, respectively
    3,303       3,098  
Inventories
    1,531       1,852  
Income tax receivable
    429       431  
Deferred income tax assets
    1,070       1,078  
Prepaid expenses and other
    436       256  
Total current assets
    7,303       7,305  
                 
LONG-TERM ASSETS
               
Property, plant and equipment, net
    5,520       4,794  
Long-term notes receivable
    115       27  
Deposits and other
    216       372  
    $ 13,154     $ 12,498  
LIABILITIES AND SHAREHOLDERS' EQUITY
               
CURRENT LIABILITIES
               
Accounts payable - trade
  $ 1,422     $ 1,562  
Accrued expenses
    1,856       1,756  
Deferred revenues
    128       200  
Bank debt
    556       765  
Total current liabilities
    3,962       4,283  
                 
LONG-TERM LIABILITIES
               
Bank debt, net of current portion
    2,219       977  
Deferred tax liability
    553       699  
Deferred revenues, net of current portion
    107       125  
Deferred gain on sale of property
    71       84  
Other long-term liabilities
    22       22  
Total liabilities
    6,934       6,190  
                 
COMMITMENTS AND CONTINGENCIES  (See Note 3)
               
                 
SHAREHOLDERS' EQUITY
               
Common stock, $.01 par value; authorized 26,000,000
               
shares; issued 15,140,319;
               
outstanding 8,020,919
    151       151  
Additional paid-in capital
    9,244       9,154  
Retained earnings
    21,461       21,639  
Treasury stock at cost
               
Shares in treasury: 7,119,400
    (24,636 )     (24,636 )
Total shareholders' equity
    6,220       6,308  
    $ 13,154     $ 12,498  
 
               
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
 
 
 
 
4

 
 
PIZZA INN HOLDINGS, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(In thousands)
 
(Unaudited)
 
             
   
Six Months Ended
 
   
December 23,
   
December 25,
 
   
2012
   
2011
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
             
Net (loss) income
  $ (178 )   $ 369  
Adjustments to reconcile net (loss) income to
               
cash provided by operating activities:
               
Depreciation and amortization
    627       389  
Stock compensation expense
    90       73  
Deferred tax
    (138 )     39  
Provision for bad debts
    1       30  
Changes in operating assets and liabilities:
               
Notes and accounts receivable
    (319 )     (282 )
Inventories
    321       105  
Accounts payable - trade
    (140 )     (8 )
Accrued expenses
    100       (169 )
Deferred revenue
    (103 )     (78 )
Prepaid expenses and other
    (26 )     (283 )
Cash provided by operating activities
    235       185  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Capital expenditures
    (1,324 )     (1,222 )
Cash used by investing activities
    (1,324 )     (1,222 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from exercise of stock options
    -       23  
Borrowings of bank debt
    3,160       741  
Repayments of bank debt
    (2,127 )     (167 )
Cash provided by financing activities
    1,033       597  
                 
Net decrease in cash and cash equivalents
    (56 )     (440 )
Cash and cash equivalents, beginning of period
    590       949  
Cash and cash equivalents, end of period
  $ 534     $ 509  
                 
                 
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
                 
                 
CASH PAYMENTS FOR:
               
                 
Interest    141      32  
Income taxes - net
    -       57  
                 
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
         
 
 
 
5

 
 
 
PIZZA INN HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying condensed consolidated financial statements of Pizza Inn Holdings, Inc. (the "Company") have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosures normally included in the financial statements have been omitted pursuant to such rules and regulations.  The unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 24, 2012.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to fairly present the Company's financial position and results of operations for the interim periods reflected.  Except as noted, all adjustments are of a normal recurring nature.  Results of operations for the fiscal periods presented are not necessarily indicative of fiscal year-end results.

(1)
Summary of Significant Accounting Policies

 
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned.  All appropriate intercompany balances and transactions have been eliminated.

 
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Fiscal Quarters
The three month periods ended December 23, 2012 and December 25, 2011, each contained 13 weeks.  The six month periods ended December 23, 2012 and December 25, 2011, each contained 26 weeks.
 
Revenue Recognition
The Company recognizes revenue when products are delivered and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable.  The Company's Norco division sells food and supplies to franchisees on trade accounts under terms common in the industry.  Food and supply sales revenues, including shipping and handling costs, are recognized upon delivery of the product. Revenue from restaurant sales is recognized when food and beverage products are sold. The Company reports revenue net of sales taxes collected from customers and remitted to governmental taxing authorities.

Franchise revenue consists of income from license fees, royalties, and area development and foreign master license fees. License fees are recognized as income when there has been substantial performance under the agreement by the Company.  Domestic license fees are generally recognized at the time the restaurant is opened.  Foreign master license fees are generally recognized upon execution of the agreement as all material services relating to the sale have been substantially performed by the Company and the fee has been collected.  Royalties are recognized as income when earned.

Stock-Based Compensation
The Company accounts for stock options using the fair value recognition provisions of the authoritative guidance on share-based payments. The Company uses the Black-Scholes formula to estimate the value of stock-based compensation for options granted to employees and directors and expects to continue to use this acceptable option valuation model in the future.  The authoritative guidance also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow.

Use of Management Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company’s management to make estimates and assumptions that affect its reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent liabilities.  The Company bases its estimates on historical experience and other various assumptions that it believes are reasonable under the circumstances.  Estimates and assumptions are reviewed periodically and actual results could differ materially from estimates.
 

 
 
6

 

Reclassification
Certain items have been reclassified in the prior year financial statements to conform to current year presentation.

(2)
Long-Term Debt

On January 11, 2010, the Company entered into a Loan Agreement with Amegy Bank National Association (“Amegy”) providing for a $2.0 million revolving credit facility (with a $250 thousand letter of credit subfacility) and a $1.0 million term loan facility.  On January 10, 2011, the Company and Amegy entered into a First Amendment to Loan Agreement increasing the Company's term loan facility and amending certain other provisions of the Loan Agreement. On October 26, 2011, the Company and Amegy entered into an Amended and Restated Loan Agreement further increasing the Company’s term loan facility and amending certain other provisions of the Loan Agreement.  On June 1, 2012, the Company and Amegy entered into a First Amendment to the Amended and Restated Loan Agreement which revised certain definitions and financial covenants contained in the Company’s credit facilities with Amegy. As amended, the Amegy credit facility ultimately consisted of a $2.0 million revolving credit facility (with a $250 thousand letter of credit subfacility) and a $4.0 million term loan facility, in addition to $0.7 million in existing term loans.

Interest on indebtedness from time to time outstanding under the Amegy revolving credit facility was computed at the greater of Amegy’s prime rate or 5% and was payable monthly.  A commitment fee of 0.25% per annum was payable quarterly on the average unused portion of the revolving credit facility. Interest on each term loan accrued at the greater of 6% or Amegy’s prime rate plus 1%. A fee of 0.5% of the total term loan facility was paid at closing.

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 F&M 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 F&M Loan Agreement were used to repay amounts borrowed under the Amegy credit facility 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 restaurants 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%.
 
 
 
7

 

As security for the credit facilities, the Company has pledged substantially all of its assets including, but not limited to, accounts receivable, inventory and equipment.  The F&M Loan Agreement contains various affirmative covenants which, among other things, require the Company to provide F&M with certain financial statements, compliance statements, reports and other information. The F&M Loan Agreement also contains various negative covenants which, among other things, require the Company to maintain certain financial ratios and restrict the ability of the Company to engage in certain activities.  If an event of default occurs under the F&M Loan Agreement and any cure periods have expired, F&M may terminate all commitments under the credit facilities and declare all unpaid principal, interest and other amounts owing under the credit facilities to be immediately due and payable.  As of December 23, 2012, the total outstanding borrowings under the F&M Loan Agreement were $2.8 million. As of December 23, 2012, the Company had additional borrowing availability of $1.8 million under the revolving credit facility and $5.1 million under the advancing term loan facility, subject to the terms and conditions of the F&M Loan Agreement.
 
 
(3)
Commitments and Contingencies

On April 22, 2009, the Company’s board of directors amended the stock purchase plan first adopted on May 23, 2007, and previously amended on June 2, 2008, to increase the number of shares of common stock the Company may repurchase to a total of 3,016,000 shares.  As of December 23, 2012, up to an additional 848,425 shares could be purchased under the plan.

The Company is subject to various claims and legal actions in the ordinary course of its business.  The Company believes that all such claims and actions currently pending against it are either adequately covered by insurance or would not have a material adverse effect on the Company’s annual results of operations, cash flows or financial condition if decided in a manner that is unfavorable to the Company.

 (4)         Stock-Based Compensation

For the three months and six months ended December 23, 2012, the Company recognized stock-based compensation expense of $45,000 and $90,000, respectively.  As of December 23, 2012, unamortized stock-based compensation expense was $0.3 million.

The following table summarizes the number of shares of the Company’s common stock subject to outstanding stock options:
 
 
 
 
Six Months Ended
 
 
 
 
December 23, 2012
   
December 25, 2011
 
               
 
Outstanding at beginning of year
    486,506       604,036  
                   
 
Granted
    414,800       94,032  
 
Exercised
    -       (10,000 )
 
Forfeited/Canceled/Expired
    -       (15,000 )
                   
 
Outstanding at end of period
    901,306       673,068  
                   
 
Exercisable at end of period
    380,706       511,702  
 
 

 
 
8

 

(5)
Earnings per Share (EPS)
 
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).
 
                         
   
Three Months Ended
 
   
December 23, 2012
   
December 25, 2011
 
   
Diluted
   
Basic
   
Diluted
   
Basic
 
                         
(Loss) income from continuing operations
  $ (108 )   $ (108 )   $ 71     $ 71  
Discontinued operations
    (12 )     (12 )     (15 )     (15 )
Net (loss) income available to common stockholders
  $ (120 )   $ (120 )   $ 56     $ 56  
                                 
Weighted average common shares
    8,021       8,021       8,013       8,013  
Dilutive stock options
    163       -       349       -  
Average common shares outstanding
    8,184       8,021       8,362       8,013  
                                 
(Loss) income from continuing operations per share
  $ (0.01 )   $ (0.01 )   $ 0.01     $ 0.01  
Discontinued operations loss per common share
    -       -       -       -  
Net (loss) income available to common stockholders
  $ (0.01 )   $ (0.01 )   $ 0.01     $ 0.01  
                                 
                                 
   
Six Months Ended
 
   
December 23, 2012
   
December 25, 2011
 
   
Diluted
   
Basic
   
Diluted
   
Basic
 
                                 
(Loss) income from continuing operations
  $ (151 )   $ (151 )   $ 400     $ 400  
Discontinued operations
    (27 )     (27 )     (31 )     (31 )
Net (loss) income available to common stockholders
  $ (178 )   $ (178 )   $ 369     $ 369  
                                 
Weighted average common shares
    8,021       8,021       8,012       8,012  
Dilutive stock options
    151       -       280       -  
Average common shares outstanding
    8,172       8,021       8,292       8,012  
                                 
(Loss) income from continuing operations per share
  $ (0.02 )   $ (0.02 )   $ 0.05     $ 0.05  
Discontinued operations loss per common share
    -       -       -       -  
Net (loss) income available to common stockholders
  $ (0.02 )   $ (0.02 )   $ 0.05     $ 0.05  
 
 

For the three and six months ended December 23, 2012, options to purchase 206,000 shares of common stock at exercise prices ranging from $3.11 to $5.51 were excluded from the computation of diluted EPS because the options’ exercise prices exceeded the average market price of the common shares for the period.

(6)           Closed restaurants and discontinued operations

The authoritative guidance on “Accounting for the Impairment or Disposal of Long-Lived Assets,” requires that discontinued operations that meet certain criteria be reflected in the statement of operations after results of continuing operations as a net amount.  This guidance also requires that the operations of the closed restaurants, including any impairment charges, be reclassified to discontinued operations for all periods presented.

The authoritative guidance on “Accounting for Costs Associated with Exit or Disposal Activities,” requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred.  This authoritative guidance also establishes that fair value is the objective for initial measurement of the liability.
 
 
 
9

 
 
Loss from discontinued operations reflects costs associated with a former Company-owned restaurant in Houston, Texas that was closed during the quarter ended September 23, 2007. This property is on the market for sub-lease. Because we believe that the property will sub-lease at or above the contracted lease rates, we have not reserved any additional costs related to our obligations under this non-cancelable lease.

(7)           Income Taxes

For the three and six months ended December 23, 2012, income tax benefit of $103,000 and $148,000, respectively, 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. 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 $1.1 million.
 
(8)
Segment Reporting

Summarized in the following tables are net sales and operating revenues, operating income and geographic information (revenues) for the Company’s reportable segments for the three and six months ended December 23, 2012 and December 25, 2011 (in thousands).  Operating income reported below excludes income tax provision and discontinued operations.
 
                         
   
Three Months Ended
   
Six Months Ended
 
 
 
September 23,
   
September 25,
   
December 23,
   
December 25,
 
   
2012
   
2011
   
2012
   
2011
 
 Revenue:
                       
 Franchising and food and supply distribution
  $ 8,591     $ 9,080     $ 17,203     $ 18,936  
 Company-owned restaurants (1)
    1,957       1,256       3,783       2,547  
 Consolidated revenues
  $ 10,548     $ 10,336     $ 20,986     $ 21,483  
                                 
 Depreciation and amortization:
                               
 Franchising and food and supply distribution
  $ -     $ -     $ -     $ -  
 Company-owned restaurants (1)
    259       145       483       261  
 Combined
    259       145       483       261  
 Corporate administration and other
    67       61       144       128  
 Depreciation and amortization
  $ 326     $ 206     $ 627     $ 389  
                                 
 Income (loss) from continuing operations before taxes:
                               
 Franchising and food and supply distribution (2)
  $ 605     $ 695     $ 1,281     $ 1,711  
 Company-owned restaurants (1) (2)
    (337 )     (314 )     (599 )     (420 )
 Combined
    268       381       682       1,291  
 Corporate administration and other (2)
    (479 )     (271 )     (981 )     (674 )
 Operating income (loss)
  $ (211 )   $ 110     $ (299 )   $ 617  
                                 
 Geographic information (revenues):
                               
 United States
  $ 10,298     $ 10,020     $ 20,430     $ 20,921  
 Foreign countries
    250       316       556       562  
 Consolidated total
  $ 10,548     $ 10,336     $ 20,986     $ 21,483  
 
   (1)
 Company stores that were closed are included in discontinued
             
 
 operations in the accompanying Condensed Consolidated Statement
           
 
 of Operations.
             
                   
   (2)
 Portions of corporate administration and other have been allocated to segments.
       
                   
 
 
 
10

 
 
Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended June 24, 2012, and may contain certain forward-looking statements that are based on current management expectations.  Generally, verbs in the future tense and the words “believe,” “expect,” “anticipate,” “estimate,” “intends,” “opinion,” “potential” and similar expressions identify forward-looking statements.  Forward-looking statements in this report include, without limitation, statements relating to our business objectives, our customers and franchisees, our liquidity and capital resources, and the impact of our historical and potential business strategies on our business, financial condition, and operating results.  Our actual results could differ materially from our expectations.  Further information concerning our business, including additional factors  that could cause actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q, are set forth in our Annual Report on Form 10-K for the year ended June 24, 2012.  These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.  The forward-looking statements contained herein speak only as of the date of this Quarterly Report on Form 10-Q and, except as may be required by applicable law, we do not undertake, and specifically disclaim any obligation to, publicly update or revise such statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Results of Operations
Overview

The Company operates and franchises pizza buffet (“Buffet Units”), delivery/carry-out (“Delco Units”) and express (“Express Units”) restaurants domestically and internationally under the trademark “Pizza Inn” and operates domestic fast casual pizza restaurants (“Pie Five Units”) 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 (“Norco”) division and through agreements with third party distributors. At December 23, 2012, Company and franchised restaurants consisted of the following:

                               
   
Buffet Units
   
Delco Units
   
Express Units
   
Pie Five Units
   
Total Units
 
 Company Owned
    4       -       -       8       12  
                                         
 Domestic Franchise
    122       31       45       -       198  
 International Franchise
    20       51       9       -       80  
 Total Franchise
    142       82       54       -       278  
                                         
 Total Units
    146       82       54       8       290  
 
Domestic restaurants are located predominantly in the southern half of the United States, with Texas, North Carolina, Arkansas and Mississippi accounting for approximately 34%, 17%, 9% and 8%, respectively, of the total number of domestic restaurants.  International restaurants are located in twelve foreign countries.


 
11

 

On September 25, 2011, we completed a corporate reorganization creating a holding company structure. The reorganization was implemented through an agreement and plan of merger under Section 351.448 of The General Corporation Law of the State of Missouri, which did not require a vote of the shareholders. As a result of the reorganization, the previous parent company, Pizza Inn, Inc., is now a wholly owned subsidiary of the new parent company, Pizza Inn Holdings, Inc.  In the reorganization, each issued and outstanding share of common stock of Pizza Inn, Inc. was converted into a share of common stock of the Company, with the same designations, rights, qualifications, powers, preferences, qualifications, limitations and restrictions, and without any action being required on the part of holders of shares of Pizza Inn, Inc. common stock or any exchange of stock certificates. Shares of the Company’s common stock were substituted for the shares of common stock of Pizza Inn, Inc. listed on the NASDAQ Capital Market and continue to trade under the same “PZZI” symbol but with a new CUSIP Number (725846109).

In connection with the reorganization, Pie Five Pizza Company, Inc. and PIBC Holdings, Inc. were also organized as direct subsidiaries of the new holding company.  Pie Five Pizza Company, Inc. was created to provide separation of the operating concepts and provide a platform for franchising the Pie Five concept.  PIBC Holdings, Inc. will hold, through its subsidiaries, the liquor licenses for both the Pizza Inn and Pie Five branded Company-owned restaurants.

           Basic and diluted income per common share decreased $0.02 to a loss of $0.01 for the three month period ended December 23, 2012 compared to income of $0.01 in the comparable period in the prior fiscal year.  The Company had a net loss for the three month period ended December 23, 2012 of $0.1 million compared to net income of $0.1 million for the comparable period in the prior fiscal year, on revenues of $10.5 million for the three month period ended December 23, 2012 compared to $10.3 million in the comparable period in the prior fiscal year.  Earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the three month period ended December 23, 2012 decreased 56.6%, or $0.2 million, to $0.1 million compared to $0.3 million for the comparable period in 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 the continued development of the Pie Five concept.
 
 
 
12

 

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.

Franchise Stores - Total Stores
 
Three Months Ended
   
Six Months Ended
(in thousands, except average data)
 
December 23,
   
December 25,
   
December 23,
   
December 25,
 
   
2012
   
2011
   
2012
   
2011
 
Domestic retail sales of Buffet Units
  $ 21,387     $ 23,495     $ 44,278     $ 48,871  
Domestic retail sales of Delco Units
    1,606       1,651       3,257       3,403  
Domestic retail sales of Express Units
    840       969       1,753       1,950  
                                 
Total domestic retail sales
  $ 23,833     $ 26,115     $ 49,288     $ 54,224  
                                 
Average number of domestic Buffet Units
    122       133       125       134  
Average number of domestic Delco Units
    29       29       29       30  
Average number of domestic Express Units
    47       47       47       46  
                                 
                                 
   
Three Months Ended
   
Six Months Ended
 
   
December 23,
   
December 25,
   
December 23,
   
December 25,
 
      2012       2011       2012       2011  
International retail sales of Buffet Units
  $ 1,337     $ 873     $ 2,499     $ 1,624  
International retail sales of Delco Units
    4,258       2,766       7,553       5,395  
International retail sales of Express Units
    291       643       557       1,164  
Total International retail sales
  $ 5,886     $ 4,282     $ 10,609     $ 8,183  
                                 
Average number of International Buffet Units
    15       13       15       13  
Average number of International Delco Units
    53       48       53       48  
Average number of International Express Units
    8       8       8       8  
 
Total domestic chain-wide franchisee retail sales decreased $2.3 million, or 8.7%, and international chain-wide retail sales increased $1.6 million, or 37.5%, for the three months ended December 23, 2012 when compared to the same period of the prior year.  Total domestic chain-wide franchisee retail sales decreased $4.9 million, or 9.1%, and international chain-wide retail sales increased $2.4 million, or 29.6%, for the six months ended December 23, 2012 when compared to the same period of 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 franchisee same store retail sales for the periods presented:

Franchise Stores - Comparable Stores
 
Three Months Ended
   
Six Months Ended
 
(in thousands)
 
December 23,
   
December 25,
   
December 23,
   
December 25,
 
   
2012
   
2011
   
2012
   
2011
 
 Domestic retail sales of same store Buffet Units
  $ 19,753     $ 20,632     $ 40,390     $ 42,678  
 Domestic retail sales of same store Delco Units
    1,296       1,365       2,617       2,768  
 Domestic retail sales of same store Express Units
    777       869       1,581       1,780  
             Total domestic same store retail sales
  $ 21,826     $ 22,866     $ 44,588     $ 47,226  
                                 
 International retail sales of same store Buffet Units
  $ 876     $ 755     $ 1,604     $ 1,657  
 International retail sales of same store Delco Units
    3,051       2,701       5,512       5,265  
 International retail sales of same store Express Units
    274       490       552       848  
             Total International same store retail sales
  $ 4,201     $ 3,946     $ 7,668     $ 7,770  

Domestic same store franchisee retail sales decreased $1.0 million, or 4.5%, for the three months ended December 23, 2012 when compared to the same period of the prior year.  International same store franchisee retail sales increased $0.3 million, or 6.5% for the three months ended December 23, 2012 when compared to the same period of the prior year.  Domestic same store franchisee retail sales decreased $2.6 million, or 5.6%, for the six months ended December 23, 2012 when compared to the same period of the prior year.  International same store franchisee retail sales decreased $0.1 million, or 1.3% for the six months ended December 23, 2012 when compared to the same period of the prior year.
 
 
 
13

 

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. These non-GAAP financial measures should not be viewed as an alternative or substitute for our reported GAAP results. The three and six month periods ended December 23, 2012 and December 25, 2011, each contained 13 weeks and 26 weeks, respectively. All amounts are in thousands except the store weeks, average weekly sales and the average number of units.

                         
Pie Five - Company-Owned Restaurants
 
Three Months Ended
   
Six Months Ended
 
 (in thousands, except store weeks and average data)
 
December 23,
   
December 25,
   
December 23,
   
December 25,
 
   
2012
   
2011
   
2012
   
2011
 
 Store weeks
    101       29       183       42  
 Average weekly sales
    11,408       11,966       11,553       13,810  
 Average number of units
    8       2       7       2  
                                 
 Restaurant sales
    1,152       347       2,114       580  
                                 
 Restaurant operating cash flow
    95       26       157       91  
 Depreciation/amortization expense
    (157 )     (42 )     (279 )     (54 )
 Pre-opening expenses
    (85 )     (164 )     (164 )     (176 )
 Allocated corporate administration and other expenses
    (51 )     (25 )     (77 )     (48 )
 (Loss) income from continuing operations before taxes
    (198 )     (205 )     (363 )     (187 )
                                 
                                 
                                 
                                 
                                 
Pizza Inn - Company-Owned Restaurants
 
Three Months Ended
   
Six Months Ended
 
 (in thousands, except store weeks and average data)
 
December 23,
   
December 25,
   
December 23,
   
December 25,
 
      2012       2011       2012       2011  
 Store weeks
    52       52       104       114  
 Average weekly sales
    15,483       17,481       16,047       17,259  
 Average number of units
    4       4       4       4  
                                 
 Restaurant sales
    805       909       1,669       1,967  
                                 
 Restaurant operating cash flow
    1       40       37       97  
 Depreciation/amortization expense
    (102 )     (103 )     (204 )     (207 )
 Pre-opening expenses
    -       -       -       -  
 Allocated corporate administration and other expenses
    (38 )     (46 )     (69 )     (123 )
 Loss from continuing operations before taxes
    (139 )     (109 )     (236 )     (233 )
 
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.
 

 
 
14

 

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 the three month period ended December 23, 2012 and for the same period in the prior fiscal year were $10.5 million and $10.3 million, respectively.  Total revenues for the six month period ended December 23, 2012 and for the same period in the prior fiscal year were $21.0 million and $21.5 million, respectively.  Revenue consisted of the following:
 
                         
   
Three Months Ended
   
Six Months Ended
 
   
December 23,
   
December 25,
   
December 23,
   
December 25,
 
   
2012
   
2011
   
2012
   
2011
 
Food and supply sales
  $ 7,701     $ 8,137     $ 15,411     $ 17,044  
Franchise revenue
    890       943       1,792       1,892  
Restaurant sales
    1,957       1,256       3,783       2,547  
Total reveune
  $ 10,548     $ 10,336     $ 20,986     $ 21,483  

Food and Supply Sales

Food and supply sales by Norco include food and paper products and other distribution revenues. For the three month period ended December 23, 2012, food and supply sales decreased to $7.7 million compared to $8.1 million the same period in the prior fiscal year due primarily to a decrease in sales to franchisees as a result of a $2.3 million, or 8.7%, 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 to the prior year. For the six month period ended December 23, 2012, food and supply sales decreased to $15.4 million compared to $17.0 million during the same period in the prior fiscal year due primarily to a decrease in sales to franchisees as a result of a $4.9 million, or 9.1%, 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 to the prior year.

Franchise Revenue

 Franchise revenue, which includes income from domestic and international royalties and license fees, decreased by $53,000 for the three month period ended December 23, 2012 compared to the same period in the prior fiscal year as the result of lower royalties resulting from lower franchisee retail sales.  Franchise revenue decreased by $100,000 for the six month period ended December 23, 2012 compared to the same period in the prior fiscal year as the result of lower royalties resulting from lower franchisee retail sales offset by slightly higher domestic license fees.

Restaurant Sales

Restaurant sales, which consist of revenue generated by Company-owned restaurants, increased 55.8%, or $0.7 million, to $2.0 million for the three month period ended December 23, 2012, compared to $1.3 million for the comparable period in the prior year.  Restaurant sales increased 48.5%, or $1.2 million, to $3.8 million for the six month period ended December 23, 2012, compared to $2.5 million for the comparable period in the prior year.  These increases were primarily due to the opening of five new Company-owned restaurants in fiscal 2012 and two new Company-owned restaurant during the six months ended December 23, 2012, partially offset by the closing of one Company-owned Delco restaurant in the first quarter of fiscal 2012.
 
 
 
15

 

Costs and Expenses

Cost of Sales

Cost of sales, which primarily includes food and supply costs, distribution fees, and labor and general and administrative expenses directly related to restaurant sales, increased 3.1%, or $0.3 million, to $8.9 million for the three month period ended December 23, 2012 compared to $8.6 million for the comparable period for the prior fiscal year.  The increases in costs were primarily the result of higher costs associated with new Company-owned restaurants.  Cost of sales decreased 1.1%, or $0.2 million, to $17.7 million for the six month period ended December 23, 2012 compared to $17.9 million for the comparable period for the prior fiscal year, due primarily to the decrease in food and supply sales during the current period when compared to the prior year.

General and Administrative Expenses

General and administrative expenses increased $0.3 million to $1.2 million for the three month period ended December 23, 2012 compared to $0.9 million for the comparable period for the prior fiscal year primarily due to additional operating expenses associated with the new Company-owned Pie Five Units and $0.1 million of recruiting fees incurred for the Company’s search for the new Chief Executive Officer and the Vice President of Operations for  Pie Five. General and administrative expenses increased $0.4 million to $2.2 million for the six month period ended December 23, 2012 compared to $1.8 million for the comparable period for the prior fiscal year. Included in the current year expenses were approximately $0.2 million of recruiting fees and additional operating expenses associated with the new Company-owned Pie Five Units.

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 $45,000 for the three month period ended December 23, 2012, when compared to the comparable period in the prior fiscal year.  These expenses increased $94,000 for the six month period ended December 23, 2012, when compared to the comparable period in the prior fiscal year.  The increases were primarily due to higher payroll and franchise marketing expenses associated with the Company’s Pie Five franchising efforts and higher expenses associated with development and testing of a pipeline of new menu items.

Pre-Opening 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. Pre-opening expenses decreased $79,000 for the three month period ended December 23, 2012, compared to the prior year comparable period due to the opening of one new Pie Five Unit in the current year period compared with three new Pie Five Units opened in the prior year period.  Pre-opening expenses decreased $12,000 for the six month period ended December 23, 2012, compared to the prior year due to the opening of two new Pie Five Units in the current year period compared with three new Pie Five Units opened in the prior year period.
 

 
 
16

 

Bad Debt Expense

Bad debt expense increased $30,000 for the three month period ended December 23, 2012 and $60,000 for the six month period ended December 23, 2012 compared to the same periods of the prior year due to increased accruals to the allowance for bad debts associated with increased risk of collecting receivables from franchisees experiencing decreased retail sales. The Company monitors franchisee retail sales and receivable balances and adjusts credit terms when necessary to minimize the Company’s exposure to high risk accounts receivable.

Interest Expense

Interest expense increased $18,000 for the three month period ended December 23, 2012 and $106,000 for the six month period ended December 23, 2012 compared to the same periods of the 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 and to the write-off of capitalized loan origination costs during the three months ended September 23, 2012 as a result of the refinancing of the Company’s bank credit facilities.

Provision for Income Tax

For the three month and six month periods ended December 23, 2012, an income tax benefit of $103,000 and $148,000, respectively, 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.  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 $1.1 million.

Discontinued Operations

Discontinued operations include losses from a Company-owned restaurant in Houston, Texas closed during the quarter ended September 23, 2007.
 
 
 
17

 


Restaurant Openings and Closings
 
The following charts summarize restaurant activity for the three and six month periods ended December 23, 2012 and December 25, 2011, respectively:
 
                         
Three months ended December 23, 2012
                   
                         
   
Beginning
               
End of
 
   
of Period
   
Opened
   
Closed
   
Period
 
 Domestic:
                       
 Buffet Units
    130       -       4       126  
 Delco Units
    30       1       -       31  
 Express Units
    46       -       1       45  
 Pie Five Units
    7       1       -       8  
 International Units
    85       1       6       80  
 Total
    298       3       11       290  
                                 
                                 
Three months ended December 25, 2011
                         
                                 
   
Beginning
                   
End of
 
   
of Period
   
Opened
   
Closed
   
Period
 
 Domestic:
                               
 Buffet Units
    141       -       5       136  
 Delco Units
    31       -       1       30  
 Express Units
    45       2       -       47  
 Pie Five Units
    1       3       -       4  
 International Units
    80       2       -       82  
 Total
    298       7       6       299  
                                 
                                 
Six months ended December 23, 2012
                         
                                 
   
Beginning
                   
End of
 
   
of Period
   
Opened
   
Closed
   
Period
 
 Domestic:
                               
 Buffet Units
    135       -       9       126  
 Delco Units
    29       2       -       31  
 Express Units
    47       -       2       45  
 Pie Five Units
    6       2       -       8  
 International Units
    81       5       6       80  
 Total
    298       9       17       290  
                                 
                                 
 Six months ended December 25, 2011
                               
                                 
   
Beginning
                   
End of
 
   
of Period
   
Opened
   
Closed
   
Period
 
 Domestic:
                               
 Buffet Units
    141       1       6       136  
 Delco Units
    32       1       3       30  
 Express Units
    45       2       -       47  
 Pie Five Units
    1       3       -       4  
 International Units
    79       4       1       82  
 Total
    298       11       10       299  

 
 
18

 
 
Non-GAAP Financial Measures

We report and discuss our operating results using financial measures consistent with U.S. generally accepted accounting principles ("GAAP").  From time to time we disclose certain non-GAAP financial measures such as the EBITDA presented below.  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 (in thousands):

     
Three Months Ended
   
Six Months Ended
 
     
December 23,
   
December 25,
   
December 23,
   
December 25,
 
     
2012
   
2011
   
2012
   
2011
 
 
 Net (loss) income
  $ (120 )   $ 56     $ (178 )   $ 369  
 
 Interest expense
    35       17       139       33  
 
 Taxes
    (103 )     39       (148 )     217  
 
 Depreciation and amortization
    326       206       627       389  
 
 EBITDA
  $ 138     $ 318     $ 440     $ 1,008  


Liquidity and Capital Resources

Our primary sources of liquidity are cash flows from operating activities and our credit facilities.
 
Cash flows from operating activities generally reflect net income adjusted for certain non-cash items including depreciation and amortization, changes in deferred tax assets, share based compensation, and changes in working capital.  Cash provided by operating activities increased $50,000 to $235,000 for the six month period ended December 23, 2012 compared to $185,000 for the six months ended December 25, 2011. This increase was primarily due to a decrease of approximately $0.5 million in cash invested in working capital in the current year period when compared to the prior year period substantially offset by a decrease in net income adjusted for noncash items of approximately $0.5 million in the current year period when compared to the prior year period.
 
Cash flows from investing activities generally reflect capital expenditures for the purchase of Company assets.  The Company used cash of $1.3 million for the six month period ended December 23, 2012, primarily for new Company-owned restaurants that opened or will open in the Dallas/Fort Worth, Texas area, a new phone system and upgrades to existing Company stores.  This compares to cash used by investing activities of $1.2 million during the same period in the prior fiscal year attributable to Company-owned restaurants that opened in the Dallas/Fort Worth, Texas area.

Cash flows from financing activities generally reflect changes in the Company's borrowings during the period.  Net cash provided by financing activities was $1.0 million for the six month period ended December 23, 2012 compared to net cash provided of $0.6 million for the comparable period in the prior fiscal year.
 

 
 
19

 

On January 11, 2010, the Company entered into a Loan Agreement with Amegy Bank National Association (“Amegy”) providing for a $2.0 million revolving credit facility (with a $250 thousand letter of credit subfacility) and a $1.0 million term loan facility.  On January 10, 2011, the Company and Amegy entered into a First Amendment to Loan Agreement increasing the Company's term loan facility and amending certain other provisions of the Loan Agreement. On October 26, 2011, the Company and Amegy entered into an Amended and Restated Loan Agreement further increasing the Company’s term loan facility and amending certain other provisions of the Loan Agreement.  On June 1, 2012, the Company and Amegy entered into a First Amendment to the Amended and Restated Loan Agreement which revised certain definitions and financial covenants contained in the Company’s credit facilities with Amegy. As amended, the Amegy credit facility ultimately consisted of a $2.0 million revolving credit facility (with a $250 thousand letter of credit subfacility) and a $4.0 million term loan facility, in addition to $0.7 million in existing term loans.

Interest on indebtedness from time to time outstanding under the Amegy revolving credit facility was computed at the greater of Amegy’s prime rate or 5% and was payable monthly.  A commitment fee of 0.25% per annum was payable quarterly on the average unused portion of the revolving credit facility. Interest on each term loan accrued at the greater of 6% or Amegy’s prime rate plus 1%. A fee of 0.5% of the total term loan facility was paid at closing.

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 F&M 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 F&M Loan Agreement were used to repay amounts borrowed under the Amegy credit facility 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 restaurants 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%.


 
20

 

As security for the credit facilities, the Company has pledged substantially all of its assets including, but not limited to, accounts receivable, inventory and equipment.  The F&M Loan Agreement contains various affirmative covenants which, among other things, require the Company to provide F&M with certain financial statements, compliance statements, reports and other information. The F&M Loan Agreement also contains various negative covenants which, among other things, require the Company to maintain certain financial ratios and restrict the ability of the Company to engage in certain activities.  If an event of default occurs under the F&M Loan Agreement and any cure periods have expired, F&M may terminate all commitments under the credit facilities and declare all unpaid principal, interest and other amounts owing under the credit facilities to be immediately due and payable.  As of December 23, 2012, the total outstanding borrowings under the F&M Loan Agreement were $2.8 million. As of December 23, 2012, the Company had additional borrowing availability of $1.8 million under the revolving credit facility and $5.1 million under the advancing term loan facility, subject to the terms and conditions of the F&M Loan Agreement.

Management believes the cash on hand combined with cash from operations and available credit facilities is sufficient to fund operations for the next 12 months.

Critical Accounting Policies and Estimates

           The preparation of financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent liabilities.  The Company bases its estimates on historical experience and various other assumptions that it believes are reasonable under the circumstances.  Estimates and assumptions are reviewed periodically.  Actual results could differ materially from estimates.

The Company believes the following critical accounting policies require estimates about the effect of matters that are inherently uncertain, are susceptible to change, and therefore require subjective judgments.  Changes in the estimates and judgments could significantly impact the Company’s results of operations and financial condition in future periods.

Accounts receivable consist primarily of receivables generated from food and supply sales to franchisees and franchise royalties.  The Company records a provision for doubtful receivables to allow for any amounts which may be unrecoverable based upon an analysis of the Company’s prior collection experience, customer creditworthiness and current economic trends.  Actual realization of accounts receivable could differ materially from the Company’s estimates.

Inventory, which consists primarily of food, paper products and supplies primarily warehoused by the Company’s third-party distributor, is stated at lower of cost or market, with cost determined according to the weighted average cost method.  The valuation of inventory requires us to estimate the amount of obsolete and excess inventory.  The determination of obsolete and excess inventory requires us to estimate the future demand for the Company’s products within specific time horizons, generally six months or less.  If the Company’s demand forecast for specific products is greater than actual demand and the Company fails to reduce purchasing accordingly, the Company could be required to write down inventory, which would have a negative impact on the Company’s gross margin.

The Company reviews long-lived assets for impairment when events or circumstances indicate that the carrying value of such assets may not be fully recoverable.  Impairment is evaluated based on the sum of undiscounted estimated future cash flows expected to result from use of the assets compared to their carrying value.  If impairment is recognized, the carrying value of the impaired asset is reduced to its fair value, based on discounted estimated future cash flows.  During fiscal years 2012 and 2011, the Company tested its long-lived assets for impairment and determined there was no impairment.
 

 
 
21

 

The Company periodically evaluates the realizability of its deferred tax assets based upon the Company’s analysis of existing tax credits by jurisdiction and expectations of the Company’s ability to utilize these tax assets through a review of estimated future taxable income and establishment of tax strategies.  These estimates could be materially impacted by changes in future taxable income, the results of tax strategies or changes in tax law.

The Company recognizes food and supply revenue when products are delivered and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable.  Franchise revenue consists of income from license fees, royalties, and area development and foreign master license sales.  License fees are recognized as income when there has been substantial performance of the agreement by both the franchisee and the Company, generally at the time the restaurant is opened.  Royalties are recognized as income when earned.

On June 25, 2007, the Company adopted FIN 48, which prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that it has taken or expects to take on a tax return.  FIN 48 requires that a company recognize in its financial statements the impact of tax positions that meet a “more likely than not” threshold, based on the technical merits of the position.  The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.  As of September 23, 2012 and September 25, 2011, the Company had no uncertain tax positions.

The Company assesses its exposures to loss contingencies from legal matters based upon factors such as the current status of the cases and consultations with external counsel and provides for the exposure by accruing an amount if it is judged to be probable and can be reasonably estimated. If the actual loss from a contingency differs from management’s estimate, operating results could be adversely impacted.


Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Not required for a smaller reporting company.


Item 4.  Controls and Procedures

The Company maintains disclosure controls and procedures designed to ensure that information it is required to disclose in the reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. The Company’s disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

The Company’s management, including the Company’s principal executive officer and principal financial officer, or persons performing similar functions, have evaluated the Company’s disclosure controls and procedures as of the end of the period covered by this report.  Based on such evaluation, the Company’s principal executive and principal financial officers, or persons performing similar functions, have concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.  During the most recent fiscal quarter, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 

 
 
22

 

PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

The Company is subject to claims and legal actions in the ordinary course of its business.  The Company believes that all such claims and actions currently pending against it are either adequately covered by insurance or would not have a material adverse effect on the Company’s annual results of operations, cash flows or financial condition if decided in a manner that is unfavorable to the Company.

Item 1A.  Risk Factors

Not required for a smaller reporting company.

Item 2.  Unregistered Sales of Equity Securities and the Use of Proceeds

On May 23, 2007, the board of directors of the Company approved a stock purchase plan (the “2007 Stock Purchase Plan”) authorizing the purchase of up to 1,016,000 shares of the Company’s common stock in the open market or in privately negotiated transactions.  On June 2, 2008, the Company’s board of directors amended the 2007 Stock Purchase Plan to increase the number of shares the Company may repurchase by 1,000,000 shares to a total of 2,016,000 shares.  On April 22, 2009, the board of directors further amended the 2007 Stock Purchase Plan by increasing the aggregate number of shares the Company may repurchase by 1,000,000 shares to a total of 3,016,000 shares.  The 2007 Stock Purchase Plan does not have an expiration date.  There were no stock purchases in the three months ending December 23, 2012.  As of December 23, 2012, up to an additional 848,425 shares could be purchased under the 2007 Stock Purchase Plan.


Item 3. Defaults upon Senior Securities

Not applicable.

Item 4.  Mine Safety Disclosures

Not applicable.


Item 5.  Other Information

Not applicable.
 
 
 
23

 
 
Item 6.  Exhibits
 
 
3.1
Articles of Incorporation (filed as Exhibit 3.1 to Form 8-K filed on September 23, 2011 and incorporated herein by reference). 
     
 
3.2
By-laws (filed as Exhibit 3.1 to Form 8-K filed on September 23, 2011 and incorporated herein by reference). 
     
 
10.1
Employment Letter dated November 8, 2012, between Pizza Inn Holdings, Inc. and Randall Gier (filed as Exhibit 10.1 to Form 8-K filed on November 15, 2012 and incorporated herein by reference).
     
  10.2  Incentive Stock Option Award Agreement dated November 8, 2012, between Pizza Inn Holdings, Inc. and Randall E. Gier (filed as Exhibit 10.2 to Form 8-K filed on November 15, 2012 and incorporated herein by reference). 
     
  10.3  Non-Qualified Stock Option Award Agreement dated November 8, 2012, between Pizza Inn Holdings, Inc. and Randall E. Gier (filed as Exhibit 10.3 to Form 8-K filed on November 15, 2012 and incorporated herein by reference). 
     
  10.4  Non-Qualified Stock Option Award Agreement dated November 8, 2012, between Pizza Inn Holdings, Inc. and Randall E. Gier (filed as Exhibit 10.4 to Form 8-K filed on November 15, 2012 and incorporated herein by reference). 
     
 
31.1
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer. 
     
  31.2  Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer. 
     
  32.1  Section 1350 Certification of Principal Executive Officer. 
     
  32.2  Section 1350 Certification of Principal Financial Officer. 
     
 
101
Interactive data files pursuant to Rule 405 of Regulation S-T. 
 


 
24

 


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 HOLDINGS, INC.
  (Registrant)
     
     
     
  By:  /s/ Randall E. Gier         
    President and Chief Executive Officer 
    (Principal Executive Officer)
     
     
  By:  /s/ Jerome L. Trojan III  
    Jerome L. Trojan III 
    Chief Financial Officer
    (Principal Financial Officer) 

Dated:  February 6, 2013




 
25