Rave Restaurant Group - 10-Q quarterly report FY

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 March 28, 2010

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

Commission File Number: 0-12919

PIZZA INN, INC.

(Exact name of registrant as specified in its charter)

Missouri	47-0654575
(State or other jurisdiction of	(I.R.S. Employer
Incorporation or organization)	Identification No.)

3551 Plano Parkway

The Colony, Texas 75056

(Address of principal executive offices)

(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 No o

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 ___ No ___

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 o Smaller 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 May 7, 2010, 8,010,919 shares of the issuer’s common stock were outstanding.

PIZZA INN, INC.

Index

PART I. FINANCIAL INFORMATION


Item 1.	Financial Statements	Page

	Condensed Consolidated Statements of Operations for the three months and nine months ended March 28, 2010 and March 29, 2009 (unaudited)	4

	Condensed Consolidated Balance Sheets at March 28, 2010 (unaudited) and June 28, 2009	5

	Condensed Consolidated Statements of Cash Flows for the nine months ended March 28, 2010 and March 29, 2009 (unaudited)	6

	Supplemental Disclosures of Cash Flow Information for the nine months ended March 28, 2010 and March 29, 2009 (unaudited)	7

	Notes to Unaudited Condensed Consolidated Financial Statements	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23

Item 4T.	Controls and Procedures	23

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 2.		24
Item 3.	Defaults Upon Senior Securities	24
Item 4.	(Removed and Reserved)	24
Item 5.	Other Information	24
Item 6.	Exhibits	24

	Signatures	25
	Exhibit 31.1	26
	Exhibit 31.2	27
	Exhibit 32.1	28
	Exhibit 32.2	29

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PIZZA INN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)



	Three Months Ended						Nine Months Ended
	March 28,			March 29,			March 28,			March 29,
REVENUES:	2010			2009			2010			2009

Food and supply sales	$	8,378		$	9,136		$	25,389		$	28,915
Franchise revenue		1,041			1,056			3,107			3,164
Restaurant sales		760			565			2,094			1,344

		10,179			10,757			30,590			33,423

COSTS AND EXPENSES:
Cost of sales		8,163			8,829			24,740			27,860
Franchise expenses		524			497			1,421			1,446
General and administrative expenses		868			793			2,483			2,336
Severance		-			12			-			49
Bad debt		15			15			55			60
Provision for litigation costs		-			-			-			263
Interest expense		26			17			52			45
		9,596			10,163			28,751			32,059

INCOME FROM CONTINUING OPERATIONS BEFORE TAXES		583			594			1,839			1,364
Income taxes		183			203			606			438
INCOME FROM CONTINUING OPERATIONS		400			391			1,233			926

Loss from discontinued operations, net of taxes		(38	)		(30	)		(118	)		(136	)
NET INCOME	$	362		$	361		$	1,115		$	790

EARNINGS PER SHARE OF COMMON STOCK - BASIC:
Income from continuing operations	$	0.05		$	0.05		$	0.15		$	0.11
Loss from discontinued operations		-			-			(0.01	)		(0.02	)
Net income	$	0.05		$	0.05		$	0.14		$	0.09

EARNINGS PER SHARE OF COMMON STOCK - DILUTED:

Income from continuing operations	$	0.05		$	0.05		$	0.15		$	0.11
Loss from discontinued operations		-			-			(0.01	)		(0.02	)
Net income	$	0.05		$	0.05		$	0.14		$	0.09

Weighted average common shares outstanding - basic		8,011			8,522			8,011			8,725

Weighted average common and
potential dilutive common shares outstanding		8,011			8,522			8,011			8,725


See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

PIZZA INN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)

	March 28,			June 28,
ASSETS	2009 (unaudited)			2009

CURRENT ASSETS
Cash and cash equivalents	$	579		$	274
Accounts receivable, less allowance for bad debts
of $132 and $203, respectively		3,236			2,559
Income tax receivable		-			80
Inventories		1,563			1,371
Property held for sale		16			17
Deferred income tax assets		618			618
Prepaid expenses and other		331			233
Total current assets		6,343			5,152

LONG-TERM ASSETS
Property, plant and equipment, net		2,139			1,743
Deferred income tax assets		86			86
Deposits and other		154			81
	$	8,722		$	7,062
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade	$	1,706		$	1,806
Deferred revenues		292			132
Accrued expenses		1,721			1,009
Short-term bank debt		110			-
Total current liabilities		3,829			2,947

LONG-TERM LIABILITIES
Deferred gain on sale of property		140			159
Deferred revenues		217			246
Bank debt		220			621
Other long-term liabilities		27			37
Total liabilities		4,433			4,010

COMMITMENTS AND CONTINGENCIES (See Note 3)

SHAREHOLDERS' EQUITY
Common stock, $.01 par value; authorized 26,000,000
shares; issued 15,130,319 and 15,130,319 shares, respectively;
outstanding 8,010,919 and 8,010,919 shares, respectively		151			151
Additional paid-in capital		8,863			8,741
Retained earnings		19,911			18,796
Treasury stock at cost
Shares in treasury: 7,119,400 and 7,119,400, respectively		(24,636	)		(24,636	)
Total shareholders' equity		4,289			3,052
	$	8,722		$	7,062


See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

PIZZA INN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

	Nine Months Ended
	March 28,			March 29,
	2010			2009

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income	$	1,115		$	790
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization		258			222
Stock compensation expense		122			150
Provision for litigation costs		-			263
Provision for bad debts		55			60
Changes in operating assets and liabilities:
Notes and accounts receivable		(652	)		438
Inventories		(192	)		129
Accounts payable - trade		(100	)		(701	)
Accrued expenses		712			(238	)
Deferred revenue		160			-
Prepaid expenses and other		(232	)		(8	)
Cash provided by operating activities		1,246			1,105

CASH FLOWS FROM INVESTING ACTIVITIES:

Capital expenditures		(650	)		(984	)
Cash used by investing activities		(650	)		(984	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Change in line of credit, net		(291	)		527
Repurchase of common stock		-			(1,466	)
Cash used for financing activities		(291	)		(939	)

Net increase (decrease) in cash and cash equivalents		305			(818	)
Cash and cash equivalents, beginning of period		274			1,157
Cash and cash equivalents, end of period	$	579		$	339


See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

PIZZA INN, INC.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
(In thousands)
(Unaudited)

	Nine Months Ended
	March 28,		March 29,
	2010		2009

CASH PAYMENTS FOR:

Interest	$	52	$	41
Income taxes		346		220


See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

PIZZA INN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 (“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 our Annual Report on Form 10-K for the fiscal year ended June 28, 2009.

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 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.

(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

Fiscal third quarters ended March 28, 2010 and March 29, 2009 both contained 13 weeks and fiscal year to date ended March 28, 2010 and March 29, 2009 both contained 39 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 revenue are recognized upon delivery of the product. 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.

Stock-Based Compensation

We account 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.

(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.

The Company may borrow, repay and reborrow under the revolving credit facility through January 11, 2013, 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, and the Company is required to maintain a zero balance on the revolving credit facility for at least 30 consecutive days each year. Interest on indebtedness from time to time outstanding under the revolving credit facility is computed at Amegy’s prime rate and is payable monthly. A quarterly commitment fee of 0.25% is payable on the average unused portion of the revolving credit facility.

Through January 11, 2011, Amegy has agreed to make up to four term loans under the term facility. Advances for such term loans are limited by a percentage of the costs of equipment and leasehold improvements for new restaurant locations of the Company and may not be reborrowed after repayment. Interest only is payable monthly on each term loan for up to 120 days after the initial advance. Thereafter, each term loan is payable in 36 equal monthly installments of principal plus accrued interest. Interest on each term loan accrues at Amegy’s prime rate plus 1% or, at the Company’s option, a fixed rate determined by Amegy. A fee of 0.5% of the total term loan facility was paid at closing.

The obligations of the Company under the Loan Agreement are secured by a pledge of substantially all of the assets of the Company and its subsidiaries including, but not limited to, accounts receivable, inventory and equipment. The Loan Agreement contains various affirmative covenants which, among other things, require the Company to provide Amegy with certain financial statements, compliance statements, reports and other information. The 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 Loan Agreement, Amegy may terminate all commitments under the credit facilities and declare all unpaid principal, int erest and other amounts owing under the credit facilities to be immediately due and payable. As of March 28, 2010 the balance on the term loan facility was $330,000 and the balance on the revolving credit facility was zero.

(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 by 1,000,000 shares to a total of 3,016,000 shares. As of March 28, 2010, there were 848,425 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 unfavorably.

(4) Stock-Based Compensation

For the quarter and nine months ended March 28, 2010, we recognized stock-based compensation of $43,000 and $122,000, respectively. As of March 28, 2010, unamortized stock-based compensation expense was $0.2 million.

The following table summarizes the Company’s outstanding stock options for the nine months ended March 28, 2010 and March 29, 2009:

	Nine Months Ended
	March 28, 2010		March 29, 2009

Outstanding at beginning of year		485,000		275,000

Granted		115,510		305,000
Exercised		-		-
Forfeited/Canceled/Expired		-		(95,000	)

Outstanding at end of period		600,510		485,000

Exercisable at end of period		260,500		86,000

(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
	March 28, 2010						March 29, 2009
	Diluted			Basic			Diluted			Basic

Income from continuing operations	$	400		$	400		$	391		$	391
Discontinued operations		(38	)		(38	)		(30	)		(30	)
Net income available to common stockholders	$	362		$	362		$	361		$	361

Weighted average common shares		8,011			8,011			8,522			8,522
Dilutive stock options		-			-			-			-
Average common shares outstanding		8,011			8,011			8,522			8,522

Income from continuing operations per share	$	0.05		$	0.05		$	0.05		$	0.05
Discontinued operations loss per common share	$	-		$	-		$	-		$	-
Net income per common share	$	0.05		$	0.05		$	0.05		$	0.05


	Nine Months Ended
	March 28, 2010						March 29, 2009
	Diluted			Basic			Diluted			Basic

Income from continuing operations	$	1,233		$	1,233		$	926		$	926
Discontinued operations		(118	)		(118	)		(136	)		(136	)
Net income available to common stockholders	$	1,115		$	1,115		$	790		$	790

Weighted average common shares		8,011			8,011			8,725			8,725
Dilutive stock options		-			-			-			-
Average common shares outstanding		8,011			8,011			8,725			8,725

Income from continuing operations per share	$	0.15		$	0.15		$	0.11		$	0.11
Discontinued operations loss per common share	$	(0.01	)	$	(0.01	)	$	(0.02	)	$	(0.02	)
Net income per common share	$	0.14		$	0.14		$	0.09		$	0.09

For the quarter and nine months ended March 28, 2010, options to purchase 600,510 shares of common stock at exercise prices ranging from $1.90 to $3.17 per share 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 nine months ended March 29, 2009, options to purchase 485,000 shares of common stock at exercise prices ranging from $2.00 to $3.17 per share 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.

(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.

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. The net realizable value remains unchanged. The two properties are on the market for sub-lease. 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.

Subsequent to quarter end, the Company entered into a lease buy-out of one of these locations for $150,000 which eliminated all future obligations under the lease.

(7) Income Taxes

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 $0.7 million 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 nine months ended March 28, 2010, the Company provided $0.2 million and $0.6 million, respectively in net tax expense. In determining this amount, the Company made its best estimate of the effective tax rate expected to be applicable for the full fiscal year. The rate so determined was used to provide for income taxes on a current year to date basis.

(8)	Property Held for Sale

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 March 28, 2010, the Company had approximately $16,000 of assets classified as held for sale, representing miscellaneous trailers and other transportation equipment.

(9)	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 month and nine month periods ended March 28, 2010 and March 29, 2009 (in thousands). Operating income reported below excludes income tax provision and discontinued operations.

		Three Months Ended						Nine Months Ended
		March 28,			March 29,			March 28,			March 29,
		2010			2009			2010			2009
Net sales and operating revenues:
Food and supply distribution		$	8,378		$	9,136		$	25,389		$	28,915
Franchise and other (2)			1,801			1,621			5,201			4,508
Intersegment revenues			233			175			694			478
Combined			10,412			10,932			31,284			33,901

Less intersegment revenues			(233	)		(175	)		(694	)		(478	)
Consolidated revenues		$	10,179		$	10,757		$	30,590		$	33,423

Depreciation and amortization:
Food and supply distribution		$	-		$	-		$	-		$	-
Franchise and other (2)			68			45			181			150
Combined			68			45			181			150
Corporate administration and other			26			34			77			72
Depreciation and amortization		$	94		$	79		$	258		$	222

Interest expense:
Food and supply distribution		$	-		$	-		$	-		$	-
Franchise and other (2)
Combined			-			-			-			-
Corporate administration and other			26			17			52			45
Interest expense		$	26		$	17		$	52		$	45

Operating income:
Food and supply distribution (1)		$	464		$	387		$	1,376		$	1,073
Franchise and other (1), (2)			512			588			1,623			1,631
Intersegment profit			58			45			178			115
Combined			1,034			1,020			3,177			2,819
Less intersegment profit			(58	)		(45	)		(178	)		(115	)
Corporate administration and other			(393	)		(381	)		(1,160	)		(1,340	)
Operating income		$	583		$	594		$	1,839		$	1,364

Geographic information (revenues):
United States		$	9,928		$	10,548		$	29,987		$	32,666
Foreign countries			251			209			603			757
Consolidated total		$	10,179		$	10,757		$	30,590		$	33,423

(1)	Does not include full allocation of corporate administration.

(2)	Company stores that were closed are included in discontinued
	operations in the accompanying Condensed Consolidated Statement of Operations.

(10)	Subsequent Events

We have evaluated events or transactions occurring after March 28, 2010, the balance sheet date, through May 11, 2010, the date the financial statements were issued, and determined there have been no such events or transactions which would impact our financial statements for the quarter ended March 28, 2010. As mentioned in Footnote 6, subsequent to quarter end the Company entered into a lease buy-out of one of it’s closed locations for $150,000 which eliminated all future obligations under the lease.

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 28, 2009, 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 cus tomers 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 28, 2009. 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 statemen ts 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 is an operator, 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 March 28, 2010, there were 311 domestic and international Pizza Inn restaurants, consisting of three Company-owned domestic restaurants, 233 franchised domestic restaurants, and 75 franchised international restaurants. The 236 domestic restaurants consisted of: (i) 152 restaurants that offer dine-in, carry-out, and in many cases, delivery services (“Buffet Units”); (ii) 37 restaurants that offer delivery and carry-out services only (“Delco Units”); and (iii) 47 restaurants that are typically located withi n 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 236 domestic restaurants were located in 17 states predominately situated in the southern half of the United States. The 75 international restaurants were located in 11 foreign countries.

Basic and diluted income per common share remained unchanged at $0.05 for the three month period ended March 28, 2010 compared to the comparable period ended March 29, 2009. Net income for the three month period ended March 28, 2010 was also flat at $0.4 million compared to the comparable period in the prior fiscal year, on revenues of $10.2 million for the three month period ended March 28, 2010 and $10.8 million for the comparable period in the prior fiscal year.

Year to date basic and diluted net income per share increased to $0.14 per share as of March 28, 2010, compared to $0.09 for the comparable period ended March 29, 2009. Year to date net income for fiscal 2010 increased to $1.1 million on revenues of $30.6 million as compared to net income of $0.8 million on revenues of $33.4 million for the similar period of fiscal 2009. The year to date increase in net income for fiscal 2010 as compared to the same period of fiscal 2009 was primarily attributable to a non-recurring legal settlement and severance payments incurred in fiscal 2009.

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.

	Three Months Ended
	March 28,		March 29,
	2010		2009
Domestic retail sales Buffet Units (in thousands)	$	25,856	$	28,297
Domestic retail sales Delco Units (in thousands)	$	2,023	$	2,578
Domestic retail sales Express Units (in thousands)	$	932	$	1,287
Total domestic retail sales (in thousands)	$	28,811	$	32,162

Average number of domestic Buffet Units		151		152
Average number of domestic Delco Units		37		40
Average number of domestic Express Units		47		56

	Nine Months Ended
	March 28,		March 29,
		2010		2009
Domestic retail sales Buffet Units (in thousands)	$	78,044	$	83,008
Domestic retail sales Delco Units (in thousands)	$	6,499	$	7,983
Domestic retail sales Express Units (in thousands)	$	2,947	$	3,826
Total domestic retail sales (in thousands)	$	87,490	$	94,817

Average number of domestic Buffet Units		152		153
Average number of domestic Delco Units		38		40
Average number of domestic Express Units		48		55

Revenues

Currently our revenues are derived from restaurant operations, 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.

Total revenues for the three month period ended March 28, 2010 decreased 5%, or $0.6 million, to $10.2 million from $10.8 million in the same period in the prior fiscal year. Food and supply sales decreased $0.8 million driven primarily by a decrease in total domestic chain-wide retail sales, while restaurant sales increased $0.2 million due to the opening of a new Company store during the current fiscal year. Total revenues for the nine month period ended March 28, 2010 decreased 8%, or $2.8 million, to $30.6 million from $33.4 million in the same period in the prior fiscal year. Food and supply sales decreased $3.5 million driven primarily by a decrease in total domestic chain-wide retail sales, while restaurant sales increased $0.8 million due to the o pening of new Company stores in the second quarters of fiscal 2009 and 2010.

Food and Supply Sales

Food and supply sales by Norco include food and paper products and other distribution revenues. Food and supply sales for the three month period ended March 28, 2010 decreased 8%, or $0.8 million, to $8.4 million from $9.1 million in the same period in the prior fiscal year. Domestic food and paper sales accounted for the decrease, driven primarily by a decrease in total domestic chain-wide retail sales of 10%, or $3.4 million, compared to the same period in the prior fiscal year. Food and supply sales for the nine month period ended March 28, 2010 decreased 12%, or $3.5 million, to $25.4 million from $28.9 million in the same period in the prior fiscal year. Domestic food and paper sales accounted for $3.3 million of the decrease, driven primarily by: (i) a 13% decrease in cheese prices; and (ii) a decreas e in total domestic chain-wide retail sales of 8%, or $7.3 million, compared to the same period in the prior fiscal year.

Franchise Revenue

Franchise revenue, which includes income from royalties, license fees and area development and foreign master license sales, decreased 1%, or $15,000, for the three month period ended March 28, 2010 compared to the comparable period for the prior fiscal year. Franchise revenues decreased 2%, or $57,000, for the nine month period ended March 28, 2010 compared to the same period of the prior year. The decrease in domestic royalties was the result of lower retail sales driven by unit closures and the decrease in comparable store sales. The decrease in domestic royalties was partially offset by higher domestic and international franchise fees and income generated from the buyout by a franchisee of an existing franchise agreement for $44,000 in the first quart er of this fiscal year. Due to the “0% First Year Royalty” incentive program the Company had in place for new franchise Buffet Units signed by the end of the prior fiscal year, new Buffet Units opened during the current fiscal year have not generated increased domestic royalties. The following chart summarizes the major components of franchise revenue (in thousands):

	Three Months Ended
	March 28,		March 29,
	2010		2009
Domestic royalties	$	794	$	912
International royalties		112		129
Domestic franchise fees		91		15
International franchise fees		44		-
Franchise revenue	$	1,041	$	1,056


	Nine Months Ended
	March 28,		March 29,
		2010		2009
Domestic royalties	$	2,448	$	2,701
Domestic royalties - buy-out		44		-
International royalties		345		379
Domestic franchise fees		185		84
International franchise fees		85		-
Franchise revenue	$	3,107	$	3,164

Restaurant Sales

Restaurant sales, which consist of revenue generated by Company-owned restaurants, increased 35%, or $0.2 million, to $0.8 million for the three month period ended March 28, 2010 compared to $0.6 million for the comparable period in the prior fiscal year. Restaurant sales increased 56%, or $0.8 million, to $2.1 million for the nine month period ended March 28, 2010 compared to $1.3 million for the comparable period in the prior fiscal year. The Company opened a new store in Denton, Texas on October 15, 2008 and a new store in Fort Worth, Texas on September 15, 2009. The following chart summarizes the sales by location (in thousands):

	Three Months Ended
	March 28,		March 29,
	2010		2009
Plano, Texas	$	179	$	174
Denton, Texas - opened October 2008		289		391
Fort Worth, Texas - opened September 2009		292		-
Restaurant sales	$	760	$	565


	Nine Months Ended
	March 28,		March 29,
		2010		2009
Plano, Texas	$	506	$	540
Denton, Texas - opened October 2008		886		804
Fort Worth, Texas - opened September 2009		702		-
Restaurant sales	$	2,094	$	1,344

Costs and Expenses

Cost of Sales

Cost of sales, which includes primarily direct materials, distribution fees and labor directly related to food and supply sales and restaurant sales, decreased 8%, or $0.7 million, for the three month period ended March 28, 2010 compared to the comparable period for the prior fiscal year. Cost of sales decreased 11%, or $3.1 million, for the nine month period ended March 28, 2010 compared to the comparable period for the prior fiscal year. These decreases were primarily the result of lower commodity costs combined with lower food and supply sales.

Franchise Expenses

Franchise expenses include selling, general and administrative expenses directly related to the sale and continuing service of domestic and international franchises. These expenses increased 5%, or $27,000, for the three month period ended March 28, 2010 compared to the comparable period in the prior fiscal year due primarily to higher international travel and international franchise sales personnel. For the nine month period ended March 28, 2010 franchise expenses decreased 2%, or $25,000, from the comparable period of the prior year. These savings were largely the result of lower amortization of a re-acquired area developer territory and reduced research and development, training material and sales related costs, offset by higher payroll for additional training and international franchise sales personnel. The following chart summarizes the major components of franchise expenses (in thousands):

	Three Months Ended
	March 28,			March 29,
	2010			2009
Payroll	$	501		$	475
Travel		74			47
Research and development		33			27
Prototype cost		13			12
Office Expense		18			13
Outside service/professional fees		18			22
Telephones		8			10
Sales Related Costs		11			3
Training Materials		5			1
Other		(4	)		5
Allocated overhead		(153	)		(118	)
Franchise expenses	$	524		$	497


	Nine Months Ended
	March 28,			March 29,
		2010			2009
Payroll	$	1,465		$	1,387
Travel		162			128
Research and development		41			65
Prototype cost		38			37
Office Expense		33			54
Outside service/professional fees		28			40
Telephones		26			26
Sales Related Costs		21			35
Training Materials		10			16
Amortize re-acquired area developer territory		-			46
Other		(28	)		(10	)
Allocated overhead		(375	)		(378	)
Franchise expenses	$	1,421		$	1,446

General and Administrative Expenses

General and administrative expenses increased 9%, or $0.1 million, to $0.9 million for the three month period ended March 28, 2010 compared to $0.8 million for the comparable period for the prior fiscal year. For the nine month period ended March 28, 2010 general and administrative expenses increased 6%, or $0.2 million, to $2.5 million from $2.3 million for the prior fiscal year. The increase in general and administrative expenses during the three and nine months ended March 28, 2010 was primarily due to higher legal fees and general and administrative expenses associated with the new Company owned store in Fort Worth, Texas, partially offset by lower accounting and other professional fees. The following chart summarizes the major components of general and administrative expenses (in thousands):

	Three Months Ended
	March 28,			March 29,
	2010			2009
Payroll	$	340		$	345
Other professional fees		120			160
Occupancy costs		107			120
Company stores		88			51
Legal fees		144			70
Insurance and taxes		72			60
Other		56			67
Board expense		46			46
Stock compensation expense		43			48
Utilities		32			43
Office expense		15			16
Travel		23			24
Repairs and maintenance		9			10
Allocated overhead		(227	)		(267	)
General and administrative expenses	$	868		$	793


	Nine Months Ended
	March 28,			March 29,
		2010			2009
Payroll	$	1,065		$	1,008
Other professional fees		381			433
Occupancy costs		322			336
Company stores		299			202
Legal fees		240			143
Insurance and taxes		226			218
Other		165			175
Board expense		138			137
Stock compensation expense		122			150
Utilities		117			143
Office expense		51			53
Travel		45			47
Repairs and maintenance		29			30
Allocated overhead		(717	)		(739	)
General and administrative expenses	$	2,483		$	2,336

Provision for Bad Debts

Provision for bad debt expense remained unchanged at $15,000, for the three month period ended March 28, 2010 compared to the same period in the prior fiscal year. Provision for bad debt expense decreased 8%, or $5,000, for the nine month period ended March 28, 2010 compared to the same period in the prior fiscal year.

Interest Expense

Interest expense increased 53%, or $9,000, for the three month period ended March 28, 2010 compared to the same period in the prior fiscal year. Interest expense increased 16%, or $7,000, for the nine month period ended March 28, 2010 compared to the same period in the prior fiscal year. The increase in interest expense is the result of fully amortizing the facility fee related to a credit facility that was repaid and terminated in January, 2010.

Provision for Income Tax

For the three month period and nine month period ended March 28, 2010, income tax expense of $0.2 million and $0.6 million, 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 $0.7 million.

Discontinued Operations

Discontinued operations includes ongoing occupancy costs associated with the two Company-owned stores closed in Houston, Texas during the first quarter of fiscal year 2008. Subsequent to quarter end, the Company entered into a lease buy-out of one of these locations for $150,000 which eliminated all future obligations under the lease.

Restaurant Openings and Closings

During the three month period ended March 28, 2010, two new domestic Buffet Units, one new Delco Unit and one international Unit were opened by Pizza Inn franchisees. Four domestic restaurants (one Buffet Unit and three Delco Units) and two international restaurants were closed by franchisees during the quarter. During the nine month period ended March 28, 2010, four new domestic Buffet Units, four new Delco Units and nine international Units were opened by Pizza Inn franchisees, with one additional domestic Buffet Unit opened as a Company store. Fourteen domestic restaurants (five Buffet Units, five Delco Units and four Express Units) and two international restaurants were closed by franchisees. Unit closures during the year were typically because of uns atisfactory standards of operation or poor performance. The territory of one of the closed Buffet Units was acquired by the Company and is adjacent to an existing Company owned Buffet Unit. 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 and six month periods ended March 28, 2010 and March 29, 2009:

Three months ended March 28, 2010

	Beginning						End of
	of Period		Opened		Closed		Period
Domestic:
Buffet Units		151		2		1		152
Delco Units		39		1		3		37
Express Units		47		-		-		47
International Units		76		1		2		75
Total		313		4		6		311


Three months ended March 29, 2009

	Beginning						End of
	of Period		Opened		Closed		Period
Domestic:
Buffet Units		156		-		4		152
Delco Units		40		-		-		40
Express Units		57		2		3		56
International Units		68		3		3		68
Total		321		5		10		316

Nine months ended March 28, 2010

	Beginning						End of
	of Period		Opened		Closed		Period
Domestic:
Buffet Units		152		5		5		152
Delco Units		38		4		5		37
Express Units		51		-		4		47
International Units		68		9		2		75
Total		309		18		16		311


Nine months ended March 29, 2009

	Beginning						End of
	of Period		Opened		Closed		Period
Domestic:
Buffet Units		158		3		9		152
Delco Units		41		1		2		40
Express Units		56		6		6		56
International Units		68		4		4		68
Total		323		14		21		316

Liquidity and Capital Resources

Cash Flows

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 depreciation and amortization, changes in working capital and accrued expenses. In the nine month period ended March 28, 2010, cash provided by operations was $1.2 million as compared to cash provided by operating activities of $1.1 million in the comparable period for the prior year. This increase in cash provided by operating activities was primarily due to (a) an increase in net income, (b) a slight decrease in trade payables in the current year compared to a significant decrease in the prior year, (c) an increase in accrued expenses in the current year primarily for deferred rent on the new Company store and the upcoming franchise convention, compared to a decrease in the prior y ear due to year end bonuses paid in the first quarter of the prior year, and (d) increased deferred franchise fee revenue. These increases in cash flow provided by operations were partially offset by increases in accounts receivable, inventory and prepaid expenses compared to decreases in these accounts in the prior year.

Cash flows from investing activities generally reflect capital expenditures for the purchase of Company assets. The Company used cash of $0.7 million during the nine month period ended March 28, 2010, primarily for a new Company store that opened in Fort Worth, Texas. This compares to cash used by investing activities of $1.0 million attributed primarily to the Denton store and corporate information technology upgrades 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 used for financing activities was $0.3 million in the nine month period ended March 28, 2010 compared to $0.9 million for the comparable period in the prior fiscal year. This decrease in cash used for financing activities was primarily due to the absence of stock repurchases in fiscal 2010, net of the repayment of bank debt.

Credit Facilities

Conclusion

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 accounting principles generally accepted in the United States of America (“US 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 or 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 n egative 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 the authoritative guidance on “Accounting for Income Taxes.” The entire valuation allowance was released in fiscal 2008. As a result, the effective tax rate for fiscal years 2009 and 2010 is estimated to be 34%.

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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable to smaller reporting company.

Item 4T. 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.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

There have been no material developments in the nine month period ended March 28, 2010 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.

Item 1A. Risk Factors

Not applicable to 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. 60;There were no stock purchases in the nine months ending March 28, 2010. As of March 28, 2010, 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. (Removed and Reserved)

Item 5. Other Information

Not applicable.

Item 6. Exhibits

	3.1	Restated Articles of Incorporation (incorporated by reference to Exhibit 3.2 to Form 10-K for the fiscal year ended June 25, 2006).

	3.2	Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to Form 10-K for the fiscal year ended June 25, 2006).

	10.1	Loan Agreement dated January 11, 2010, between Pizza Inn, Inc. and Amegy Bank National Association (incorporated by reference to Exhibit 10.1 to Form 8-K file January 15, 2010).

	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.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PIZZA INN, INC.
	(Registrant)

	By:	/s/ Charles R. Morrison
		Charles R. Morrison
		President and Chief
		Executive Officer
		(Principal Executive Officer)



	By:	/s/ Nancy Ellefson
		Nancy Ellefson
		Vice President and Principal
		Accounting Officer
		(Principal Financial Officer)

Dated: May 10, 2010

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