Rave Restaurant Group - 10-Q quarterly report FY2012 Q1

SECURITIES AND EXCHANGE COMMISSION

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 HOLDINGS, 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  Noo

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

Large accelerated filer o Accelerated filer o Non-accelerated filer oSmaller reporting company þ

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

PIZZA INN HOLDINGS, INC.

PART I.    FINANCIAL INFORMATION

PART II.   OTHER INFORMATION

 

 

 

 

PART I.  FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

 

 

 

 

 

PIZZA INN HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying condensed consolidated financial statements of Pizza Inn Holdings, Inc. (the "Company") have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosures normally included in the financial statements have been omitted pursuant to such rules and regulations.  The unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended June 26, 2011.

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 first quarters ended September 25, 2011 and September 26, 2010,both contained 13 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.

 

 

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

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

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 commitment fee of 0.25% per annum is payable quarterly on the average unused portion of the revolving credit facility.

Amegy has agreed to make term loans under the term facility through October 31, 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 guaranteed by each of the subsidiaries of the Company and are secured by a pledge of all of the stock of such subsidiaries as well as security interests in substantially all of the assets of the Company and its subsidiaries including, but not limited to, accounts receivable, inventory and equipment.  The Amended and Restated 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 Amended and Restated 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.  The Company is in compliance with all covenants as of the reporting date.  If an event of default occurs under the Amended and Restated Loan Agreement, Amegy may terminate all commitments under the credit facilities and declare all unpaid principal, interest and other amounts owing under the credit facilities to be immediately due and payable.  As of September 25, 2011 the balance on the term loan facility was $0.7 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 to a total of 3,016,000 shares.  As of September 25, 2011, there were 848,425shares available to be repurchased under the plan.

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

The following table summarizes the Company’s outstanding stock options for the three months ended September 25, 2011 and September 26, 2010:

 

 

For the three months ended September 25, 2011,options to purchase 40,000 shares of common stock at exercise prices of $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 quarter ended September 26, 2010, options to purchase 565,510 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.

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.

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 $0.8 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 months ended September 25, 2011 and September 26, 2010, the Company provided $170,000 and $75,000, 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.

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 26, 2011, and may contain certain forward-looking statements that are based on current management expectations.  Generally, verbs in the future tense and the words “believe,” “expect,” “anticipate,” “estimate,” “intends,” “opinion,” “potential” and similar expressions identify forward-looking statements.  Forward-looking statements in this report include, without limitation, statements relating to our business objectives, our customers and franchisees, our liquidity and capital resources, and the impact of our historical and potential business strategies on our business, financial condition, and operating results.  Our actual results could differ materially from our expectations.  Further information concerning our business, including additional factors that could cause actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q, are set forth in our Annual Report on Form 10-K for the year ended June 26, 2011.  These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.  The forward-looking statements contained herein speak only as of the date of this Quarterly Report on Form 10-Q and, except as may be required by applicable law, we do not undertake, and specifically disclaim any obligation to, publicly update or revise such statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Overview

The Company operates and franchises pizza buffet, delivery/carry-out and express restaurants domestically and internationally under the trademark “Pizza Inn” and operates one domestic fast casual restaurant (“Pie Five Units”) under the trademark “Pie Five Pizza Company.”  We provide or facilitate food, equipment and supply distribution to our domestic and international system of restaurants through our Norco Restaurant Services Company (“Norco”) division and through agreements with third party distributors.  At September 25, 2011, the Pizza Inn trademarked system consisted of 297 restaurants, including four Company-owned restaurants and 293 franchised restaurants.  The 217 domestic restaurants were comprised of 141 buffet restaurants (“Buffet Units”), 31 delivery/carry-out restaurants (“Delco Units”) and 45 express restaurants (“Express Units”).  The 80 international franchised restaurants were comprised of 17 buffet restaurants, 54 delivery/carry-out restaurants and 9 express restaurants.  Domestic restaurants were located predominantly in the southern half of the United States, with Texas, North Carolina, Arkansas and Mississippi accounting for approximately 34%, 17%, 9% and 8%, respectively, of the total number of domestic restaurants.

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

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

           Basic and diluted income per common share increased $0.02to $0.04 for the three month period ended September 25, 2011 compared to the $0.02 in the comparable period in the prior fiscal year.  Net income for the three month period ended September 25, 2011 increased $0.2 million to $0.3 million compared to the comparable period in the prior fiscal year, on revenues of $11.1 million for the three month period ended September 25, 2011 and $10.6 million for the comparable period in the prior fiscal year.  Earnings before interest, taxes, depreciation and amortization (“EBITDA”) increased 5.4%, or $35,000, to $683,000 compared to $648,000 for the comparable period in the prior fiscal year.

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

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 September 25, 2011 increased 4.8%, or $0.5 million, to $11.1 million from $10.6 million the same period in the prior fiscal year.  Food and supply sales increased to $8.9 million compared to $8.7 million the same period in the prior fiscal year.  Franchise revenue decreased by $0.1 million while restaurant sales increased $0.4 million primarily due to the opening of two 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 September 25, 2011increased 2.3%, or $0.2 million, to $8.9 million from $8.7 million in the same period in the prior fiscal year.  Domestic food and paper sales accounted for the increase, driven primarily by a 24.3% increase in cheese 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 7.4%, or $0.1 million, for the three month period ended September 25, 2011 compared to the comparable period for the prior fiscal year.  The decrease was primarily due to higher franchise fees in the prior year, including the signing of a new area development agreement with an existing franchise area developer.

Restaurant sales, which consist of revenue generated by Company-owned restaurants, increased 42.8%, or $0.4 million, to $1.3 million for the three month period ended September 25, 2011 compared to $0.9 million for the comparable period in the prior fiscal year.  This increase was primarily due to the opening of three new stores in fiscal 2011, offset by the closing of one store in each of the first fiscal quarters of 2011 and 2012.  The following chart details revenues at the Company-owned restaurants by concept (in thousands):

Costs and Expenses

Cost of sales, which primarily includes materials and distribution fees directly related to food and supply sales and labor and general and administrative expenses directly related to restaurant sales, increased 6.3%, or $0.5 million, to $9.2 million for the three month period ended September 25, 2011 compared to $8.7 million for the comparable period for the prior fiscal year.  This increase in costs was associated primarily with the new Company stores opened in August, 2010, December, 2010 and June 2011 and higher direct costs associated with food and supply sales.

Franchise expenses include selling, general and administrative expenses directly related to the sale and continuing service of domestic and international franchises.  These expenses decreased $71,000 for the three month period ended September 25, 2011, compared to the comparable periods in the prior fiscal year primarily due to lower training costs and a reduction in outside services.

General and administrative expenses increased $0.1 million to $0.9 million, for the three month period ended September 25, 2011 compared to $0.8 million for the comparable period for the prior fiscal year primarily as the result of legal and other expenses relating to the Company reorganization into a holding company structure.

The Company closed its Plano, Texas location during the first fiscal quarter of fiscal 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 continued 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 new Lewisville store is located in a demographically more desirable area and has more favorable lease terms than the closed Plano location.

Provision for bad debt expense remained unchanged at $15,000 for the three month period ended September 25, 2011 compared to the same period of the prior year.

Interest expense increased $6,000 for the three month period ended September 25, 2011 compared to the comparable periods in the prior fiscal year due to a higher average balance on term loans used to finish out new Company stores.

For the three month period ended September 25, 2011, income tax expense of $0.2 million 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 $0.8 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 period ended September 25, 2011 and September 26, 2010:

 

 

 

Non-GAAP Financial Measures

 

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

Cash flows from operating activities generally reflect net income adjusted for certain non-cash items including depreciation and amortization, changes in deferred tax assets, share based compensation, and changes in working capital.  In the three month period ended September 25, 2011, cash provided by operating activities was $0.1 million compared to cash provided by operating activities of $0.3 million in the comparable period for the prior year.  This $0.2 million decrease in cash provided by operating activities consisted of a $148,000 reduction in cash from changes in operating assets and liabilities and a $37,000 decrease in net income adjusted for non-cash items.

Cash flows from investing activities generally reflect capital expenditures for the purchase of Company assets.  The Company used cash of $0.1 million for the three month period ended September 25, 2011, primarily for new Company stores that will open in the Dallas/Fort Worth, Texas area.  This compares to cash used by investing activities of $0.5 million during the  in the prior fiscal year attributable to a store that opened in Fort Worth, Texas.

Cash flows from financing activities generally reflect changes in the Company's borrowing during the period.  Net cash used for financing activities was $0.1 million for the three month period ended September 25, 2011 compared to net cash provided by financing activities of $0.3 million for the comparable period in the prior fiscal year.

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 $0.8 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. On October 26, 2011, the Company and Amegy entered into an Amended and Restated Loan Agreement further increasing the Company’s term loan facility and amending certain other provisions of the Loan Agreement.  As amended, the Amegy credit facility provides a $2.0 million revolving credit facility (with a $250 thousand letter of credit subfacility) and a $4.0 million term loan facility, in addition to $0.7 million in existing term loans.

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 commitment fee of 0.25% per annum is payable quarterly on the average unused portion of the revolving credit facility.

Amegy has agreed to make term loans under the term facility through October31, 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 guaranteed by each of the subsidiaries of the Company and are secured by a pledge of all of the stock of such subsidiaries as well as security interests in substantially all of the assets of the Company and its subsidiaries including, but not limited to, accounts receivable, inventory and equipment.  The Amended and Restated 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 Amended and Restated 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.  The Company is in compliance with all covenants as of the reporting date.  If an event of default occurs under the Amended and Restated Loan Agreement, Amegy may terminate all commitments under the credit facilities and declare all unpaid principal, interest and other amounts owing under the credit facilities to be immediately due and payable.  As of September 25, 2011 the balance on the term loan facility was $0.7 million with an interest rate of 6% and the balance on the revolving credit facility was zero with an interest rate of 5%.

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 negative impact on the Company’s gross margin.

As of June 24, 2007,the Company had recorded a valuation allowance based on its assessment that the realization of a portion of its 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

In July, 2008, the Company filed a complaint against a former franchisee that had operated one restaurant in the Sherman, Texas market from 2003 to 2008 for breach of contract, misappropriation of trade secrets and trademark infringement.  The former franchisee filed a counterclaim alleging racial discrimination, retaliation and breach of contract.  The case went to trial in June, 2010 and the Company prevailed on its breach of contract, misappropriation of trade secrets and trademark infringement claims and successfully defended against the racial discrimination allegation, but was unsuccessful in defending the retaliation claim.  Both parties submitted post-trial briefings for recovery of interest, attorneys’ fees and costs and recovery of statutory damages.  In March, 2011, the Court entered its Order on the issues submitted in the post-trial briefings and entered a final net judgment against the Company for $255,183. In April, 2011, the Company filed additional motions with the Court to set aside the jury’s findings on several grounds and to amend the Court’s award of attorneys’ fees.  In May, 2011, the former franchisee filed his response to the Company’s motions and subsequently the Company filed its response.  On May 24, 2011 the judge rejected the motions filed by the Company and the Company subsequently filed an appeal with the Fifth Circuit U.S. Court of Appeals.  In August, 2011, the Company fully and finally settled the matter for a cash payment less than the judgment amount and the parties exchanged mutual releases.

 

 

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

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.  There were no stock purchases in the three months ending September 25, 2011.  As of September 25, 2011, 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:  November 9, 2011