Rave Restaurant Group - 10-Q quarterly report FY

 

     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 No o

     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 2, 2009, 8,528,076 shares of the issuer’s common stock were outstanding.

The accompanying condensed consolidated financial statements of Pizza Inn, Inc. (the “Company”) have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the financial statements have been omitted pursuant to such rules and regulations. The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended June 29, 2008.

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. Except as noted, all adjustments contained herein are of a normal recurring nature. Results of operations for the fiscal periods presented herein are not necessarily indicative of fiscal year-end results.

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.

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

Fiscal second quarters ended December 28, 2008 and December 23, 2007 both contained 13 weeks and fiscal years to date ended December 28, 2008 and December 23, 2007 both contained 26 weeks.

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 revenue are recognized upon delivery of the product. Equipment that is sold requires acceptance prior to installation. Recognition of revenue for equipment sales occurs upon acceptance of such equipment. Other than for large remodel projects, delivery date and acceptance date are the same. Norco sales are reflected under the caption “Food and supply sales.” Shipping and handling costs billed to customers are recognized as revenue.

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 both the franchisee and 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.

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.

The Company currently recognizes the ongoing fees and the amortization of the initial loan fees as interest expense. These costs were recorded as general and administrative expenses in the prior fiscal year and have been reclassified as interest.

In February 2007, the FASB issued SFAS No. 159, Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits entities to choose to measure many financial instruments, including employee stock option plans and operating leases accounted for in accordance with SFAS No. 13, Accounting for Leases, at their fair value. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company has chosen not to change the valuation method of any of it’s financial assets or liabilities.

In December 2007, the FASB issued SFAS No. 141 (Revised), Business Combinations. SFAS No. 141(R) improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of this Statement is not expected to have a material impact on the Company’s financial position or results of operations.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS No. 160 amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary and clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This Statement is effective for fiscal years beginning on or after December 15, 2008. The adoption of this Statement is not expected to have a material impact on the Company’s financial position or results of operations.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133. SFAS No. 161 amends SFAS No. 133 and requires entities to enhance their disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years beginning on or after November 15, 2008. The adoption of SFAS No. 161 is not expected to have a material impact on the Company’s financial position or results of operations.

On January 23, 2007, the Company and The CIT Group / Commercial Services, Inc. (“CIT”) entered into an agreement for a revolving credit facility of up to $3.5 million (the “CIT Credit Facility”). CIT may terminate the CIT Credit Facility only as of January 23, 2012 or the same date any year after, and then only by giving the Company at least 90 days prior written notice of such termination. The actual availability on the CIT Credit Facility is determined by advance rates on eligible inventory and accounts receivable. Interest on borrowings outstanding on the CIT Credit Facility is at a rate equal to the prime rate plus an interest rate margin of 0.0% to 0.5% or, at the Company’s option, at the LIBOR rate plus an interest rate margin of 2.0% to 3.0%. The specific interest rate margin is based on the Company’s performance under certain financial ratio tests. An annual commitment fee is payable on any unused portion of the CIT Credit Facility at a rate of 0.375%. All of the Company’s (and its subsidiaries’) personal property assets (including, but not limited to, accounts receivable, inventory, equipment, and intellectual property) have been pledged to secure payment and performance of the CIT Credit Facility, which is subject to customary covenants for asset-based loans.

On June 27, 2007, the Company and CIT entered into an agreement to amend the CIT Credit Facility to (i) allow the Company to repurchase Company stock in an amount up to $3,000,000, (ii) allow the Company to make permitted cash distributions or cash dividend payments to the Company’s shareholders in the ordinary course of business and (iii) increase the aggregate capital expenditure limit from $750,000 to $3,000,000 per fiscal year. On May 30, 2008, the Company again amended the CIT Credit Facility to permit the Company to repurchase up to $7,000,000 of the Company’s common stock. As of December 28, 2008, $992,000 was outstanding on the CIT Credit Facility at an interest rate of 3.5% and one letter of credit for approximately $230,000 was outstanding to reinsurers to secure loss reserves.

On May 23, 2007, the board of directors of the Company approved a stock purchase plan (the “2007 Stock Purchase Plan”) authorizing the purchase, on our behalf, of up to 1,016,000 shares of our common stock in the open market or in privately negotiated transactions. On June 2, 2008, the Company announced that its Board of Directors had amended the stock repurchase plan authorized on May 23, 2007 increasing the number of shares of common stock the Company may repurchase by 1,000,000 shares to a total of 2,016,000. As of December 28, 2008, there are 453,265 shares available to be repurchased under the plan.

The Company is also subject to various claims and contingencies related to employment agreements, franchise disputes, lawsuits, taxes, food product purchase contracts and other matters arising out of the normal course of business. Management believes that any such claims and actions currently pending are either covered by insurance or would not have a material adverse effect on the Company’s annual results of operations or financial condition if decided in a manner that is unfavorable to us.

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).

For the quarter and six months ended December 28, 2008, options to purchase 465,000 and 225,000 shares of common stock, respectively, at exercise prices ranging from $2.23 to $3.17 and $2.51 to $3.17 per share, respectively, were not included in the computation of diluted EPS because the options’ exercise prices were greater than the average market price of the common shares for the period. For the quarter and six months ended December 23, 2007, options to purchase 115,000 shares of common stock at exercise prices ranging from $2.91 to $3.17 were not included in the computation of diluted EPS because the options’ exercise prices were greater than the average market price of the common shares for the period.

SFAS No. 144, 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. SFAS No. 144 also requires that the operations of the closed restaurants, including any impairment charges, be reclassified to discontinued operations for all periods presented.

SFAS No. 146, 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 Statement also establishes that fair value is the objective for initial measurement of the liability.

The Company closed two of its restaurants in Houston, Texas during the quarter ended September 23, 2007. The results of operations for these two restaurants are reported as discontinued operations in the accompanying Condensed Consolidated Statement of Operations. No provision for impairment was required to be taken at that time because the impairment taken in the fiscal year ended June 24, 2007, reduced the carrying value of the properties to their estimated net realizable value. That net realizable value remains unchanged. The two properties are on the market for sub-lease and have received a number of site visits. Because we believe that the properties will sub-lease at or above the current lease rates, we have not reserved any additional costs related to our obligations under these non-cancelable leases.

A summary of discontinued operations is as follows in (thousands):

Management re-evaluates the deferred tax asset each quarter and believes that it is more likely than not that the net deferred tax asset of $792,000 will be fully realized based on the Company’s recent history of pre-tax profits and the expectation of future taxable income as well as the future reversal of existing temporary differences. During the three and six months ended December 28, 2008, the Company has provided $74,000 and $235,000 in net tax expense. In determining these amounts, the Company makes its best estimate of the effective tax rate expected to be applicable for the full fiscal year. The rate so determined is used to provide for income taxes on a current year to date basis.

Assets that are to be disposed of by sale are recognized in the consolidated financial statements at the lower of carrying amount or estimated net realizable value (proceeds less cost to sell), and are not depreciated after being classified as held for sale. In order for an asset to be classified as held for sale, the asset must be actively marketed, be available for immediate sale and meet certain other specified criteria. At December 28, 2008, the Company had approximately $311,000 of assets classified as held for sale. As of December 28, 2008, approximately $304,000 of such amount represents the carrying value of the Company’s real estate and equipment located in Little Elm, Texas. As of December 28, 2008, the remaining $7,000 of assets held for sale represents miscellaneous trailers and other transportation equipment.

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 month and six month periods ended December 28, 2008 and December 23, 2007 (in thousands). Operating income excludes interest expense, income tax provision and discontinued operations.

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, accompanying notes and selected financial data appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended June 29, 2008 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 our franchisees, our liquidity and capital resources, the impact of our historical and potential business strategies on our business, financial condition, and operating results and the expected effects of potentially adverse litigation outcomes. 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 29, 2008. 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.

     The Company is a franchisor and food and supply distributor to a system of restaurants operating under the trade name “Pizza Inn.” Our distribution division is Norco Restaurant Services Company (“Norco”). At December 28, 2008, there were 321 domestic and international Pizza Inn restaurants, consisting of two Company-owned domestic restaurants, 251 franchised domestic restaurants, and 68 franchised international restaurants. The 253 domestic restaurants consisted of: (i) 156 restaurants that offer dine-in, carry-out, and in many cases, delivery services (“Buffet Units”); (ii) 40 restaurants that offer delivery and carry-out services only (“Delco Units”); and (iii) 57 restaurants that are typically located within a convenience store, college campus building, airport terminal, or other commercial facility and offer quick carry-out service from a limited menu (“Express Units”). The 253 domestic restaurants were located in 17 states predominately situated in the southern half of the United States. The 68 international restaurants were located in nine foreign countries.

     Diluted income per common share decreased to $0.02 for the three month period ended December 28, 2008 compared to $0.08 for the comparable period ended December 23, 2007.  Net income for the three month period ended December 28, 2008 decreased $717,000 to $136,000 from $853,000 for the comparable period in the prior fiscal year, on revenues of $11,278,000 for the three month period ended December 28, 2008 and $12,695,000 for the comparable period in the prior fiscal year. Diluted income per common share decreased to $0.05 for the six month period ended December 28, 2008 compared to $0.12 for the comparable period ended December 23, 2007.  Net income for the six month period ended December 28, 2008 decreased $769,000 to $429,000 from $1,198,000 for the comparable period in the prior fiscal year, on revenues of $22,666,000 for the six month period ended December 28, 2008 and $24,773,000 for the comparable period in the prior fiscal year. 

     The decrease in net income during the three and six month period ended December 28, 2008, was primarily due to income tax expense and a non-recurring legal settlement of $263,000 in the current fiscal year, compared to no income tax expense and a legal settlement recovered in the prior year of $284,000. In the absence of these items, net income would have been $473,000, or $.05 per share, for the three months ended December 28, 2008 compared to $569,000, or $.06 per share, for the same period in the prior year, and $927,000, or $.11 per share, for the six months ended December 28, 2008 compared to $914,000, or $.09 per share, for the same period in the prior year.

     Management believes that key performance indicators in evaluating financial results include domestic chain-wide retail sales and the number and type of operating restaurants. The following table summarizes these key performance indicators.

     Currently our revenues are primarily derived from sales of food, paper products and supplies by Norco to franchisees, franchise royalties and franchise fees. Our financial results are dependent in large part upon the pricing and cost of these products and supplies to franchisees, and the level of chain-wide retail sales, which are driven by changes in same store sales and restaurant count. In prior years, our revenues also included the sale of equipment to franchisees.

     Food and supply sales by Norco include food and paper products, equipment and other distribution revenues.  Food and supply sales for the three month period ended December 28, 2008 decreased 14%, or $1,529,000, to $9,645,000 from $11,174,000 compared to the same period in the prior fiscal year.  During the three month period ended December 28, 2008, international sales and equipment sales decreased by $509,000. For the three month period ended December 28, 2008, total domestic chain-wide retail sales decreased 6%, or $1,903,000, compared to the same period in the prior fiscal year due to a lower store count and lower comparable sales. As a result of this decrease in retail sales and a 7.5% decrease in cheese prices, domestic food and paper sales decreased 9%, or $986,000, compared to the same period in the prior fiscal year.

     Food and supply sales for the six month period ended December 28, 2008 decreased 10% or $2,174,000, to $19,779,000 from $21,953,000 compared to the same period in the prior fiscal year. During the six month period ended December 28, 2008, international sales and equipment sales decreased by $816,000. For the six month period ended December 28, 2008, total domestic chain-wide retail sales decreased 5%, or $3,005,000, compared to the same period in the prior fiscal year due to a lower store count and lower comparable sales. As a result of this decrease in retail sales and a 4.6% decrease in cheese prices, domestic food and paper sales decreased 6%, or $1,262,000, compared to the same period in the prior fiscal year.

     Franchise revenue, which includes income from royalties, license fees and area development and foreign master license sales, decreased 22%, or $302,000, to $1,044,000 for the three month period ended December 28, 2008 compared to $1,346,000 in the comparable period for the prior fiscal year. This decrease is primarily attributable to lower international franchise fees and lower domestic royalties resulting from lower retail sales compared to the comparable period in the prior fiscal year. Franchise revenues decreased 14%, or $354,000, to $2,108,000 for the six month period ended December 28, 2008 compared to $2,462,000 for the comparable period in the prior fiscal year. This decrease is also primarily attributable to lower international franchise fees and lower domestic royalties resulting from lower retail sales compared to the comparable period in the prior fiscal year. The following chart summarizes the major components of franchise revenue (in thousands):

     Restaurant sales, which consist of revenue generated by the two Company-owned restaurants, increased 237%, or $414,000, to $589,000 for the three month period ended December 28, 2008 compared to $175,000 for the comparable period in the prior fiscal year. Restaurant sales increased 118%, or $421,000, to $779,000 for the six month period ended December 28, 2008 compared to $358,000 for the comparable period in the prior fiscal year. The Company opened a new store in Denton, Texas on October 15, 2008 accounting for $412,000 of the increases over the prior year.

     Cost of sales, which includes primarily direct materials, distribution fees and labor directly related to food and supply sales, decreased 11%, or $1,154,000, for the three month period ended December 28, 2008 compared to the comparable period for the prior fiscal year. Cost of sales decreased 8%, or $1,571,000, for the six month period ended December 28, 2008 compared to the comparable period in the prior fiscal year. These decreases were primarily the result of lower food and supply sales, distribution fees and payroll costs, as well as increased purchase discounts.

     Franchise expenses include selling, general and administrative expenses directly related to the sale and continuing service of domestic and international franchises. These expenses decreased 33%, or $236,000 for the three month period ended December 28, 2008 compared to the comparable period in the prior fiscal year. These expenses decreased 28%, or $377,000 for the six month period ended December 28, 2008 compared to the comparable period for the prior fiscal year. These savings were primarily the result of lower payroll and travel expenses due to unfilled positions compared to the same periods in the prior fiscal year. The following chart summarizes the major components of franchise expenses (in thousands):

     General and administrative expenses increased 22%, or $152,000, to $856,000 for the three month period ended December 28, 2008 compared to $704,000 for the comparable period for the prior fiscal year. General and administrative expenses increased 16%, or $216,000, to $1,543,000 for the six month period ended December 28, 2008 compared to $1,327,000 for the comparable period for the prior fiscal year. The following chart summarizes the major components of general and administrative expenses (in thousands):

     The increase in general and administrative expenses during the three month and six month periods ended December 28, 2008 was primarily due to the addition of general and administrative expenses from the opening of the new Denton, Texas store, including pre opening and marketing costs of $87,000, and reduced allocation of overhead to the revenue producing units.

     Provision for bad debt expense decreased to $30,000 for the three month period ended December 28, 2008 compared to $35,000 for the comparable period in the prior fiscal year. Provision for bad debt expense decreased to $45,000 for the six month period ended December 28, 2008 compared to $58,000 for the comparable period for the prior fiscal year due to improved collection results.

     Interest expense was relatively unchanged for the three month and six month periods ended December 28, 2008 from the comparable periods in the prior fiscal year.

     For the three month and six month periods ended December 28, 2008, income tax expense of $74,000 and $235,000, respectively, are calculated on an effective income tax rate that is consistent with the statutory U.S. federal income tax rate of 34% adjusted for the 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 $792,000. Income tax expense was $0 for the three month and six month periods ended December 23, 2007 due to a full valuation allowance of the net deferred tax asset.

     Discontinued operations includes losses from the two Company-owned stores closed in Houston, Texas during the quarter ended September 23, 2007. Below is a summary of discontinued operations (in thousands):

     During the three month period ended December 28, 2008, two new Buffet Units were opened by a Pizza Inn franchisees and one Buffet Unit was opened by the Company. Franchisees opened one Delco Unit and three Express Units. Five domestic restaurants were closed by franchisees (two Buffet Units, two Delco Units and one Express Unit), typically because of unsatisfactory standards of operation or poor performance. We do not believe that these closings had any material impact on the collectibility of our outstanding receivables and royalties due to us because (i) these amounts have been reserved for or are otherwise collectable and (ii) these closed restaurants were generally lower volume restaurants whose financial impact on our business as a whole was not significant. For those 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 for on delivery and/or with certified funds and royalty and advertising fees are collected as add-ons to the delivered price of weekly food orders.

     The following charts summarize restaurant activity for the three month and six periods ended December 28, 2008 and December 23, 2007:

Three months ended December 28, 2008

Three months ended December 23, 2007

Six months ended December 28, 2008

Six months ended December 23, 2007

     Our primary sources of liquidity are cash flows from operating activities and use of our credit facilities from time to time.

     Cash flows from operating activities generally reflect net income adjusted for depreciation and amortization, changes in working capital and accrued expenses. In the six month period ended December 28, 2008 cash used by operations was $296,000 as compared to cash provided by operating activities of $164,000 in the comparable period for the prior year. This increase in cash used for operating activities was primarily due to lower adjusted net income and a decrease in the Company’s trade payables and accrued expense balances offset by a reduction in the increase in accounts receivable from the prior year.

     Cash flows from investing activities generally reflect capital expenditures for the purchase of Company assets. The Company used cash of $832,000 for the six month period ended December 28, 2008, primarily for a new Company store that opened in Denton, Texas and for computer upgrades to its corporate systems. This compares to cash provided by investing activities of $23,000 from the proceeds of assets sold of $92,000 less expenditures of $69,000 for computer and related equipment for the same period in the prior fiscal year.

     Cash flows from financing activities generally reflect changes in the Company’s borrowings during the period and repurchases of outstanding shares of our common stock. Net cash provided by financing activities was $121,000 in the six month period ended December 28, 2008 compared to cash used of $886,000 for the comparable period in the prior fiscal year. This change in cash provided by financing activities was due to outstanding checks in excess of cash in bank of $302,000 and increased bank debt of $992,000, partially offset by repurchases of outstanding stock outstanding.

     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 $792,000 without reliance on material non-routine income.

     On January 23, 2007, the Company and The CIT Group / Commercial Services, Inc. (“CIT”) entered into an agreement for a revolving credit facility of up to $3.5 million (the “CIT Credit Facility”). CIT may terminate the CIT Credit Facility only as of January 23, 2012 or the same date any year after, and then only by giving the Company at least 90 days prior written notice of such termination. The actual availability on the CIT Credit Facility is determined by advance rates on eligible inventory and accounts receivable. Interest on borrowings outstanding on the CIT Credit Facility is at a rate equal to the prime rate plus an interest rate margin of 0.0% to 0.5% or, at the Company’s option, at the LIBOR rate plus an interest rate margin of 2.0% to 3.0%. The specific interest rate margin is based on the Company’s performance under certain financial ratio tests. An annual commitment fee is payable on any unused portion of the CIT Credit Facility at a rate of 0.375%. All of the Company’s (and its subsidiaries’) personal property assets (including, but not limited to, accounts receivable, inventory, equipment, and intellectual property) have been pledged to secure payment and performance of the CIT Credit Facility, which is subject to customary covenants for asset-based loans.

     On June 27, 2007, the Company and CIT entered into an agreement to amend the CIT Credit Facility to (i) allow the Company to repurchase Company stock in an amount up to $3,000,000, (ii) allow the Company to make permitted cash distributions or cash dividend payments to the Company’s shareholders in the ordinary course of business and (iii) increase the aggregate capital expenditure limit from $750,000 to $3,000,000 per fiscal year. On May 30, 2008, the Company again amended the CIT Credit Facility to permit the Company to repurchase up to $7,000,000 of the Company’s common stock. As of December 28, 2008, $992,000 was outstanding on the CIT Credit Facility at an interest rate of 3.5% and one letter of credit for approximately $230,000 was outstanding to reinsurers to secure loss reserves.

     Management believes the cash on hand, combined with cash from operations and available bank debt is sufficient to fund operations through fiscal year 2009.

     On August 15, 2007, the Company’s then President and CEO, Tim Taft, submitted to the Company’s Board of Directors his written notice of resignation as a director and officer of the Company, effective immediately. In connection with Mr. Taft’s separation from the Company, the Company agreed to pay severance of $300,000 (representing one year of salary), in twelve equal monthly installments. This amount was recorded as severance expense in the quarter ended September 23, 2007.

     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 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 an allowance for doubtful receivables to allow for any amounts which may be uncollectible based upon an analysis of the Company’s prior collection experience, general customer creditworthiness and the franchisee’s ability to pay, as reflected by the franchisee’s sales and operating results and other general and local economic trends. Actual realization of amounts 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 distributors, 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 additional inventory, which would have a negative impact on the Company’s gross margin.

     As of June 24, 2007 we had recorded a valuation allowance based on our assessment that the realization of a portion of our net deferred tax assets did not meet the “more likely than not” criterion under SFAS No. 109, “Accounting for Income Taxes.” During the third quarter of fiscal 2008, we determined that based upon a number of factors, including our cumulative taxable income in recent quarters and our expected profitability in future years, substantially all of our net deferred tax assets are “more likely than not” realizable through future earnings. The entire valuation allowance was released as a result of the determination.

     The Company assesses its exposures to loss contingencies, including legal matters, based upon factors such as the current status of the cases and consultations with external counsel and accrues a reserve if a loss 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 impacted.

     In February 2007, the FASB issued SFAS No. 159, Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits entities to choose to measure many financial instruments, including employee stock option plans and operating leases accounted for in accordance with SFAS No. 13, Accounting for Leases, at their fair value. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company has chosen not to change the valuation method of any of it’s financial assets or liabilities.

     In December 2007, the FASB issued SFAS No. 141 (Revised), Business Combinations. SFAS No. 141(R) improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of this Statement is not expected to have a material impact on the Company’s financial position or results of operations.

     In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS No. 160 amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary and clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This statement is effective for fiscal years beginning on or after December 15, 2008. The adoption of this Statement is not expected to have a material impact on the Company’s financial position or results of operations.

     In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133. SFAS No. 161 amends SFAS No. 133 and requires entities to enhance their disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years beginning on or after November 15, 2008. The adoption of this Statement is not expected to have a material impact on the Company’s financial position or results of operations.

Not applicable to smaller reporting company.

     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, our internal control over financial reporting.

     In August 2006, a franchisee and its guarantors, who operated one franchise in Harlingen, Texas in 2003 and 2004, filed an initial action against the Company in the Eastern District Court of Texas, Marshall Division. The action was styled William F. Hull, et al. v. Pizza Inn, Inc., et al.  The Company moved for, and the Eastern District granted, a transfer of the action to U.S. District Court, Northern District of Texas, Dallas Division.   Once in the Northern District Court, the parties filed (and the Court entered) an Agreed Stipulation of Dismissal.  On February 1, 2008, Plaintiffs re-filed their lawsuit in the 44th Judicial District County, in Dallas County, Texas. In their amended petition, Plaintiffs asserted a breach of contract claim against the Company, alleging that the Company breached its franchise agreement by not allowing Plaintiffs to use alternative building materials and equipment used to finish out Plaintiffs’ restaurant. Plaintiffs sought approximately $768,000 in damages from the Company. The Company answered, denying all claims, and filed a counterclaim against Plaintiffs for (i) breach of the franchise agreement., (ii) breach of guaranty and (iii) recovery of attorney fees.  Effective January 12, 2009, we entered into an agreement to settle all claims, whereby the Company paid $209,834.12 to Plaintiffs, and the parties exchanged mutual releases. This settlement is awaiting an order from the court entering the parties’ joint motion to dismiss all claims with prejudice.

          Except as reported herein, there have been no material developments in the six month period ended December 28, 2008 in any material pending legal proceedings to which the Company or any of its subsidiaries is a party or of which any of their property is subject.

Not applicable to smaller reporting company.

          On May 23, 2007, the board of directors of the Company approved a stock purchase plan (the “2007 Stock Purchase Plan”) authorizing the purchase, on our behalf, of up to 1,016,000 shares of our 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 of common stock the Company may repurchase by 1,000,000 shares to a total of 2,016,000 shares. The 2007 Stock Purchase Plan does not have an expiration date. The following table furnishes information for purchases made pursuant to the 2007 Stock Purchase Plan during the second quarter of fiscal 2009:

          The Company’s ability to purchase shares of its common stock is subject to various laws, regulations and policies as well as the rules and regulations of the Securities and Exchange Commission. Subsequent to December 28, 2008, the Company has purchased 88,413 shares at an average price of $1.65 per share.

          Not applicable.

          At the Company’s 2008 Annual Meeting of Shareholders held on December 17, 2008, the shareholders of the Company elected the following directors, constituting the entire Board of Directors of the Company, to serve terms expiring at the Company’s 2009 Annual Meeting of Shareholders.

          At the Company’s 2008 Annual Meeting of Shareholders held on December 17, 2008, the shareholders of the Company also ratified the appointment of BDO Seidman, LLP as the Company’s independent registered public accounting firm for fiscal year 2009 as follows:

     Not applicable.

     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.

Dated: February 10, 2009