Rave Restaurant Group - 10-Q quarterly report FY

Washington, D. C.  20549

FORM 10-Q

(Mark One)

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)

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

 

 

 

 

PART I.    FINANCIAL INFORMATION

PART II.   OTHER INFORMATION

 

 

 

PART I.  FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

 

 

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 27, 2010.

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.

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 26, 2010 and December 27, 2009, both contained 13 weeks and fiscal year to date ended December 26, 2010 and December 27, 2009 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.  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.

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.

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.

On January 11, 2010, the Company entered into a Loan Agreement with Amegy Bank National Association (“Amegy”) providing for a $2.0 million revolving credit facility (with a $250 thousand letter of credit subfacility) and a $1.0 million term loan facility.  On January 10, 2011, the Company and Amegy entered into a First Amendment to Loan Agreement increasing the Company's term loan facility and amending certain other provisions of the Loan Agreement. As amended, the Amegy credit facility provides for a $2.0 million revolving credit facility (with a $250 thousand letter of credit subfacility) and a $2.56 million term loan facility.

The Company may borrow, repay and reborrow under the Amegy 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. 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.

Amegy has agreed to make term loans under the term facility through January 11, 2012.  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 December 26, 2010 the balance on the term loan facility was $0.9 million with an interest rate of 6% and the balance on the revolving credit facility was zero with an interest rate of 5%.

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 December 26, 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 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 six months ended December 26, 2010, we recognized stock-based compensation expense of $30,000 and $60,000.  As of December 26, 2010, unamortized stock-based compensation expense was $0.1 million.

The following table summarizes the Company’s outstanding stock options for the six months ended December 26, 2010 and December 27, 2009:

 

 

 

For the three and six months ended December 26, 2010, options to purchase 425,000 shares of common stock at exercise prices ranging from $2.00 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.  For the three and six months ended December 27, 2009, 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.

(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 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 (proceeds less cost to sell).  During the fourth quarter of fiscal 2010, the Company entered into a lease buy-out of one of these locations for $150,000 which eliminated all future obligations under this lease.  The estimated net realizable value for the remaining location remains unchanged.  This property is on the market for sub - -lease.  Because we believe that the property will sub-lease at or above the current lease rates, we have not reserved any additional costs related to our obligations under this non-cancelable 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 $0.9 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 six months ended December 26, 2010, the Company provided $205,000 and $277,000, 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.

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 26, 2010, the Company had approximately $16,000 of assets classified as held for sale, representing miscellaneous transportation equipment.

 

 

 

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 27, 2010, 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 27, 2010.  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.

Overview

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 26, 2010, there were 307 domestic and international Pizza Inn restaurants, consisting of five Company-owned domestic restaurants, 226 franchised domestic restaurants, and 76 franchised international restaurants.  The 231 domestic restaurants consisted of: (i) 150 restaurants that offer dine-in, carry-out, and in many cases, delivery services (“Buffet Units”); (ii) 33 restaurants that offer delivery and carry-out services only (“Delco Units”); and (iii) 48 restaurants that are typically located within a conve nience store, college campus building, airport terminal, or other commercial facility and offer quick carry-out service from a limited menu (“Express Units”).  The 231 domestic restaurants were located in 18 states predominately situated in the southern half of the United States.  The 76 international restaurants were located in eleven foreign countries.

           Basic and diluted income per common share remained flat at $0.05 for the three month period ended December 26, 2010 compared to the comparable period in the prior fiscal year.  Net income for the three month period ended December 26, 2010 remained flat at $0.4 million compared to the comparable period in the prior fiscal year, on revenues of $10.4 million for both the three month period ended December 26, 2010 and the comparable period in the prior fiscal year.  Basic and diluted income per common share decreased to $0.06 for the six month periods ended December 26, 2010 compared to $0.09 for the comparable period ended December 27, 2009.  Net income for the six month period ended December 26, 2010 decreased $0.3 million to $0.5 million from $0.8 mill ion for the comparable period in the prior fiscal year, on revenues of $21.0 million for the six month period ended December 26, 2010 and $20.4 million for the comparable period in the prior fiscal year.  The decrease in net income during the six month period ended December 27, 2010 is primarily due to a $0.3 million non-recurring entry to record final amortization and depreciation on a Company restaurant that was closed during the first quarter of fiscal 2011.

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.

 

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 December 26, 2010 remained flat at $10.4 million compared to the same period in the prior fiscal year.  Food and supply sales and franchise revenue each decreased by $0.1 million while restaurant sales increased $0.2 million primarily due to the opening and acquisition of new Company stores in fiscal 2011.  Total revenues for the six month period ended December 26, 2010 increased 2.8%, or $0.6 million, to $21.0 million from $20.4 million in the same period in the prior fiscal year primarily due to an increase in restaurant sales from the opening and acquisition of new Company stores in fiscal 2011.

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 December 26, 2010 decreased 1.5%, or $0.1 million, to $8.5 million from $8.6 million in the same period in the prior fiscal year.  Domestic food and paper sales accounted for the decrease, driven primarily by 2.0% lower retail sales compared to the same period in the prior fiscal year.  Food and supply sales for the six month period ended December 26, 2010 increased 1.1%, or $0.2 million, to $17.2 million from $17.0 million in the same period in the prior fiscal year.  Domestic food and paper sales accounted for the increase, driven primarily by higher commodity prices compared to the same period in the prior fiscal year.

 

 

Franchise revenue, which includes income from domestic and international royalties and license fees, decreased 8.7%, or $87,000, for the three month period ended December 26, 2010 compared to the comparable period for the prior fiscal year.  The decrease was primarily due to a decrease in domestic royalties of 6.7%, or $54,000, driven primarily by a 2.6% decrease in comparable store sales.  Domestic royalties were also impacted by the 0% First Year Royalties incentive program the Company has in place for new franchised Buffet Units opened during the past two fiscal years.  The program provides for zero royalties to be paid in the first year of operation, 2% royalties in the second year of operation and then the standard 4% royalties for the remainder of the 20 year franchise agreement.  This program was implemented to stimulate demand for the Company’s new buffet concept at a time when franchise development activities had declined due to overall economic conditions.  In fiscal years 2010 and 2011, there were seven new domestic Buffet Units opened that benefitted from the incentive.  Royalties waived under the incentive program increased $38,000 to $58,000 for the three months ended December 26, 2010 compared to $20,000 in the same period last year. For the six months ended December 26, 2010 franchise revenue decreased 6.0%, or $124,000, compared to the comparable period for the prior fiscal year.  The decrease was primarily due to a decrease in domestic royalties of 8.0%, or $133,000, as a result of a 3.8% decrease in comparable store sales.  In addition, the Company received a one time benefit in the prior year due to a $44,000 royalty buy-out.  These lower royalty amounts were offset by higher franchise fees, including the signing of a new area development agreement with an existing franchise area developer.  Royalties waived under the 0% First Year Royalties incentive program increased $96,000 to $131,000 for the six months ended December 26, 2010 compared to $35,000 in the same period last year.

Restaurant sales, which consist of revenue generated by Company-owned restaurants, increased 20.0%, or $158,000, to $949,000 for the three month period ended December 26, 2010 compared to $791,000 for the comparable period in the prior fiscal year.  Restaurant sales increased 39.0%, or $0.6 million, to $1.9 million for the six month period ended December 26, 2010 compared to $1.3 million for the comparable period in the prior fiscal year.  These increases were primarily due to the opening of two new stores in Fort Worth, Texas and Lewisville, Texas in August, 2010 and December, 2010, respectively.  The Company also acquired a new Delco store in Fort Worth, Texas in September, 2010.  The Company store located in Plano, Texas closed in September, 2010.

Costs and Expenses

Cost of sales, which primarily includes direct materials, distribution fees, labor and general and administrative expenses directly related to food and supply sales and restaurant sales, remained flat at $8.5 million for the three month period ended December 26, 2010 compared to the comparable period for the prior fiscal year.  An increase in costs associated with the new Company stores opened in August, 2010 and December, 2010 was offset by lower direct costs associated with food and supply sales.  Cost of sales increased 3.6%, or $0.6 million, for the six month period ended December 26, 2010 compared to the comparable period for the prior fiscal year, primarily due to an increase in commodity costs over the comparable period in the prior year and costs associated with the new Company stores opened in fiscal 2011.

Franchise expenses include selling, general and administrative expenses directly related to the sale and continuing service of domestic and international franchises.  These expenses remained flat at $0.4 million for the three month period ended December 26, 2010 compared to the comparable period in the prior fiscal year and remained flat at $0.9 million for the six month period ended December 26, 2010 compared to the comparable period in the prior fiscal year.

 

 

General and administrative expenses remained flat at $0.8 million, for the three month period ended December 26, 2010 compared to the comparable period for the prior fiscal year.  Increased Company store general and administrative expenses, primarily due to pre-opening expenses associated with the newest Company owned store in Lewisville, Texas, were offset by lower legal and professional fees compared to the same period in the prior fiscal year.  General and administrative expenses increased 3.5%, or $56,000, for the six month period ended December 26, 2010 compared to the comparable period for the prior fiscal year.  The increase was primarily due to a $147,000 increase in Company store general and administrative expenses primarily due to pre-opening expenses associated with the newest Company owned sto res in Fort Worth, Texas and Lewisville, Texas , as well as a $32,000 increase in legal fees related to a franchisee lawsuit.  These increases were offset by a $65,000 decrease in payroll associated primarily with earned bonuses in the prior year, a $39,000 decrease in other professional fees and a $19,000 decrease in occupancy costs.

The Company closed its Plano, Texas location during the first fiscal quarter of 2011 and recorded a $0.3 million non-recurring entry attributable to a change in estimated useful life of the equipment and leasehold improvements.  The decision to close this location at the end of the initial lease term, rather than exercising the available extension option, was based on the unit’s weak historical financial performance driven by unfavorable lease terms and the unfavorable lease terms of the option period.  A portion of the equipment and the store management from this location were relocated to the new Company store that opened in December, 2010 in a nearby trade area in Lewisville, Texas.  The Lewisville store is located in a demographically more desirabl e area and has more favorable lease terms than the Plano location.

Provision for bad debt expense increased $15,000 for the three months and six months ended December 26, 2010 from the comparable periods in the prior fiscal year.

Interest expense was relatively unchanged for the three month and six month periods ended December 26, 2010 from the comparable periods in the prior fiscal year.

For the three and six month period ended December 26, 2010, income tax expense of $0.2 million and $0.3 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 $0.9 million.

Discontinued Operations

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

Restaurant Openings and Closings

The following charts summarize restaurant activity for the three month and six month periods ended December 26, 2010 and December 27, 2009:

 

 

 

 

Restaurants were closed 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 payment of royalty and advertising fees are required prior to the delivery of weekly food orders.

 

 

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 six month period ended December 26, 2010, cash provided by operating activities was $0.3 million compared to cash provided by operating activities of $0.4 million in the comparable period for the prior year.  This decrease in cash provided by operating activities was primarily due to a reduction in accrued expenses and trade payables in the current period compared to increases in the prior period, offset by lesser increases in accounts receivable and prepaid expenses in the current period.

Cash flows from investing activities generally reflect capital expenditures for the purchase of Company assets.  The Company used cash of $1.3 million for the six month period ended December 26, 2010, primarily for new Company stores that opened in Fort Worth, Texas and Lewisville, Texas as well as computer software.  This compares to cash used by investing activities of $0.6 million during the same period in the prior fiscal year  attributed to another store that opened in Fort Worth, Texas.

Cash flows from financing activities generally reflect changes in the Company's borrowings during the period.  Net cash provided by financing activities was $0.6 million in the six month period ended December 26, 2010 compared to $38,000 for the comparable period in the prior fiscal year.  This increase in cash provided by financing activities was due to increased net borrowings for two new company stores.

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 $0.9 million without reliance on material non-routine income.

On January 11, 2010, the Company entered into a Loan Agreement with Amegy Bank National Association (“Amegy”) providing for a $2.0 million revolving credit facility (with a $250 thousand letter of credit subfacility) and a $1.0 million term loan facility.  On January 10, 2011, the Company and Amegy entered into a First Amendment to Loan Agreement increasing the Company's term loan facility and amending certain other provisions of the Loan Agreement. As amended, the Amegy credit facility provides for a $2.0 million revolving credit facility (with a $250 thousand letter of credit subfacility) and a $2.56 million term loan facility.

The Company may borrow, repay and reborrow under the Amegy 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. 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.

 Amegy has agreed to make term loans under the term facility through January 11, 2012.  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 December 26, 2010 the balance on the term loan facility was $0.9 million with an interest rate of 6% and the balance on the revolving credit facility was zero with an interest rate of 5%.

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 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 accounts receivable could differ materially from the Company’s estimates.

Inventory, which consists primarily of food, paper products and supplies primarily warehoused by the Company’s third-party 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 2011 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.

 

 

Not required for a 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, the Company’s internal control over financial reporting.

PART II.  OTHER INFORMATION

There have been no material developments in the three and six month periods ended December 26, 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.

Not required for a 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 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 three months ending December 26, 2010.  As of December 26, 2010, up to an additional 848,425 shares could be purchased under the 2007 Stock Purchase Plan.

Not applicable.

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 9, 2011