Rave Restaurant Group - 10-Q quarterly report FY2012 Q2

(Mark One)

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

For the quarterly period ended December 25, 2011

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  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 þ  No  o

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

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

 

Cash and Cash Equivalents

Fiscal Quarters

 

Revenue Recognition

Stock-Based Compensation

Use of Management Estimates

 

 

Reclassification

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 four domestic fast casual restaurants (“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 December 25, 2011, the Pizza Inn trademarked system consisted of 295 restaurants, including four Company-owned restaurants and 291 franchised restaurants.  The 213 domestic Pizza Inn restaurants were comprised of 136 buffet restaurants (“Buffet Units”), 30 delivery/carry-out restaurants (“Delco Units”) and 47 express restaurants (“Express Units”).  The 82 international Pizza Inn franchised restaurants were comprised of 19 buffet restaurants, 53 delivery/carry-out restaurants and 10 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%, 10% 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 decreased $0.04 to $0.01 for the three month period ended December 25, 2011 compared to $0.05 in the comparable period in the prior fiscal year.  Net income for the three month period ended December 25, 2011 decreased $0.3 million to $0.1 million compared to $0.4 million for the comparable period in the prior fiscal year, on revenues of $10.3 million for the both periods.  Earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the second quarter of fiscal 2012 decreased 56.3%, or $0.4 million, to $0.3 million compared to $0.7 million for the comparable period in the prior fiscal year.  Basic and diluted income per common share decreased $0.01 to $0.05 for the six month period ended December 25, 2011 compared to $0.06 in the comparable period in the prior fiscal year.  Net income for the six month period ended December 25, 2011 decreased $0.1 million to $0.4 million compared to $0.5 million for the comparable period in the prior fiscal year, on revenues of $21.5 million for the six month period ended December 25, 2011 and $21.0 million for the comparable period in the prior fiscal year.  EBITDA for the first half of fiscal 2012 decreased 26.7%, or $0.4 million, to $1.0 million compared to $1.4 million for the comparable period in the prior fiscal year.

The change in results from prior year is primarily due to costs related to the continued development of the Pie Five concept, costs associated with the Company reorganization and the expansion into China. In addition to the corporate reorganization during the first quarter of fiscal 2012, during the second quarter of fiscal 2012 the Company opened three new Pie Five units and worked with its master franchisee to open the first Pizza Inn restaurant in China. The total costs associated with these activities were approximately $0.3 million for the three and six month periods ended December 25, 2011.
 

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

 

 

 

 

Total domestic chain-wide retail sales decreased 2.4% and 1.1%, and international chain-wide retail sales decreased 0.9% and 5.3%, for the three and six months ended December 25, 2011, respectively, when compared to the prior year.  Domestic same store retail sales decreased 0.2% for the three months ended December 25, 2011 and increased 1.1% for the six months ended December 25, 2011 when compared to the prior year.  International same store retail sales decreased 0.2% for the three months ended December 25, 2011 and increased 0.9% for the six months ended December 25, 2011 when compared to the prior year.

Revenues

Revenues are derived from restaurant operations, sales of food, paper products and supplies by Norco to franchisees, franchise royalties and franchise fees.  Financial results are dependent in large part upon the pricing and cost of the products and supplies sold 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 25, 2011 and for the same period in the prior fiscal year were $10.3 million.  Total revenues for the six month period ended December 25, 2011 increased 2.4%, or $0.5 million, to $21.5 million during the current six month period ended December 25, 2011 compared to $21.0 million the same period in the prior fiscal year.

Food and supply sales by Norco include food and paper products and other distribution revenues.  For the three month period ended December 25, 2011, food and supply sales decreased to $8.1 million compared to $8.5 million the same period in the prior fiscal year due primarily to a decrease in sales to franchisees as a result of a 3.7% decrease in domestic franchisee retail sales primarily attributable to a reduction in the average number of stores open. Partially offsetting this reduction in sales were price increases of approximately 6.3% due primarily to increases in certain food commodity costs.  For the six month period ended December 25, 2011, food and supply sales decreased to $17.0 million compared to $17.2 million the same period in the prior fiscal year primarily due to a decrease in sales to franchisees as a result of a 2.4% decrease in domestic franchisee retail sales primarily attributable to a reduction in the average number of stores open. Partially offsetting this reduction in sales were price increases of approximately 7.8% due primarily to increases in certain food commodity costs.

 Franchise revenue, which includes income from domestic and international royalties and license fees, was essentially unchanged at $0.9 million and $1.9 million for the three and six month periods ended December 25, 2011, respectively, compared to the comparable periods for the prior fiscal year.  Royalties from increased domestic same store sales of 1.1% year to date were offset by fewer average locations compared to prior year.
 

Restaurant sales, which consist of revenue generated by Company-owned restaurants, increased 32.2%, or $0.3 million, to $1.3 million for the three month period ended December 25, 2011, and 37.4%, or $0.7 million, to $2.5 million for the six month period ended December 25, 2011, compared to $0.9 million and $1.9 million, respectively, for the comparable periods in the prior fiscal year.  These increases were primarily due to the opening of three new Company stores in fiscal 2011 and three new Company owned stores during the six months ended December 25, 2011, partially offset by the closing of one Company owned 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 food and supply costs, distribution fees, and labor and general and administrative expenses directly related to restaurant sales, increased 1.6%, or $0.1 million, to $8.6 million for the three month period ended December 25, 2011 compared to $8.5 million for the comparable period for the prior fiscal year.  Cost of sales increased 4.0%, or $0.7 million, to $17.9 million for the six month period ended December 25, 2011 compared to $17.2 million for the comparable period for the prior fiscal year.  The increases in costs were associated primarily with the new Company stores and higher direct costs associated with food and supply sales as a result of increases in commodity prices, offset by lower costs due to reduced 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 increased $0.2 million for the three and six month periods ended December 25, 2011, compared to the comparable periods in the prior fiscal year primarily due to $48,000 and $97,000, respectively, in costs associated with opening a new franchise location in China as well as $19,000 and $58,000, respectively, of higher payroll expense.  The higher payroll costs during the three and six month periods ended December 25, 2011 were a result of the addition of management resources during fiscal 2012 to build the necessary infrastructure to continue to develop and expand the Pie Five concept.

General and administrative expenses increased $0.2 million to $1.1 million, for the three month period ended December 25, 2011 compared to $0.9 million for the comparable period for the prior fiscal year primarily due to pre-opening and other operating expenses associated with the three new Company owned Pie Five stores.  General and administrative expenses increased $0.2 million to $2.0 million for the six month period ended December 25, 2011 compared to $1.8 million for the comparable period for the prior fiscal year primarily due to pre-opening expenses and other operating expenses for the three new Company owned Pie Five stores, and legal and other expenses of approximately $67,000 relating to the Company reorganization into a holding company structure. Pre-opening expenses for the new Company owned Pie Five stores were approximately $164,000 and $177,000 for the three and six months ended December 25, 2011, respectively.

 

 

The Company closed its Plano, Texas location during the first fiscal quarter of fiscal 2011 when the initial lease term expired and recorded a $0.3 million non-recurring expense attributable to a change in estimated useful life of the equipment and leasehold improvements.

For the three and six month periods ended December 25, 2011, income tax expense of $39,000 and $217,000, respectively, was calculated on an effective income tax rate that is consistent with the statutory U.S. federal income tax rate of 34% adjusted for state income tax effects and permanent difference items.  Management believes that future operations will generate sufficient taxable income, along with the reversal of temporary differences, to fully realize the net deferred tax asset of $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 and six month periods ended December 25, 2011 and December 26, 2010:

 

 

 

Non-GAAP Financial Measures

We report and discuss our operating results using financial measures consistent with U.S. generally accepted accounting principles ("GAAP").  From time to time we disclose certain non-GAAP financial measures such as the EBITDA presented below.  We believe EBITDA is useful to investors as a widely used measure of operating performance without regard to items that can vary substantially depending upon financing and accounting methods, book value of assets, capital structures and methods by which assets have been acquired.  In addition, our management uses EBITDA in evaluating the effectiveness of our business strategies and for planning and budgeting purposes.  However, this non-GAAP financial measure should not be viewed as an alternative or substitute for our reported GAAP results.

The following table sets forth a reconciliation of net income to EBITDA for the periods shown:

 

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 six month period ended December 25, 2011, cash provided by operating activities was $0.2 million compared to cash provided by operating activities of $0.3 million in the comparable period for the prior year.

 

Cash flows from investing activities generally reflect capital expenditures for the purchase of Company assets.  The Company used cash of $1.2 million for the six month period ended December 25, 2011, primarily for new Company stores that opened or will open in the Dallas/Fort Worth, Texas area.  This compares to cash used by investing activities of $1.3 million during the  in the prior fiscal year attributable to two stores that opened in Dallas/Fort Worth, Texas area.

Cash flows from financing activities generally reflect changes in the Company's borrowings during the period.  Net cash provided by financing activities was $0.6 million for the six month period ended December 25, 2011 and for the comparable period in the prior fiscal year.

 

 

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 re-borrow 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 the greater of Amegy’s prime rate or 5% 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.

The Company may borrow under the term loan 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. 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 either (a) the greater of 6% or Amegy’s prime rate plus 1% or (b) 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 December 25, 2011 the balance on the term loan facility was $1.4 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 the 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.

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.  As a result, the effective federal tax rate for fiscal 2012 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.

 

 

 

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 or six months ending December 25, 2011.  As of December 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:  February 8, 2012