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PZZI > SEC Filings for PZZI > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for PIZZA INN HOLDINGS, INC /MO/

Form 10-Q for PIZZA INN HOLDINGS, INC /MO/


7-Nov-2012

Quarterly Report


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 24, 2012, 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 24, 2012. 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.

Results of Operations Overview

The Company operates and franchises pizza buffet ("Buffet Units"), delivery/carry-out ("Delco Units") and express ("Express Units") restaurants domestically and internationally under the trademark "Pizza Inn" and operates domestic fast casual pizza restaurants ("Pie Five Units") under the trademarks "Pie Five Pizza Company" or "Pie Five". 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 23, 2012, Company and franchised restaurants consisted of the following:

                  Buffet Units    Delco Units    Express Units   Pie Five Units   Total Units
 Company Owned               4              -               -                7             11

 Domestic                  126             30              46                -            202
Franchise
 International              23             52              10                -             85
Franchise
 Total Franchise           149             82              56                -            287

 Total Units               153             82              56                7            298

Domestic restaurants are located predominantly in the southern half of the United States, with Texas, North Carolina, Arkansas and Mississippi accounting for approximately 33%, 18%, 9% and 8%, respectively, of the total number of domestic restaurants. International restaurants are located in twelve foreign countries.

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 branded Company-owned restaurants.

Basic and diluted income per common share decreased $0.05 to a loss of $0.01 for the three month period ended September 23, 2012 compared to income of $0.04 in the comparable period in the prior fiscal year. The Company had a net loss for the three month period ended September 23, 2012 of $58,000 compared to net income of $0.3 million for the comparable period in the prior fiscal year, on revenues of $10.4 million for the three month period ended September 23, 2012 compared to $11.1 million in the comparable period in the prior fiscal year. Earnings before interest, taxes, depreciation and amortization ("EBITDA") for the three month period ended September 23, 2012 decreased 57.2%, or $0.4 million, to $0.3 million compared to $0.7 million for the comparable period in the prior fiscal year.

The reduction in net income from prior year is primarily due to lower revenue earned from franchising and food and supply sales and higher costs related to the continued development of the Pie Five concept. The total increased costs associated with the Pie Five development were approximately $0.2 million for the three months ended September 23, 2012.

Management believes that key performance indicators in evaluating financial results include domestic and international franchisee retail sales and the number and type of operating restaurants. The following tables summarize these key performance indicators for franchise locations. All amounts are in thousands except the average number of units.

Franchise Stores - Total Stores                         Three Months Ended
(in thousands, except average data)              September 23,       September 25,
                                                     2012                2011
Domestic retail sales of Buffet Units           $        22,891     $        25,375
Domestic retail sales of Delco Units                      1,705               1,816
Domestic retail sales of Express Units                      859                 917
Total domestic retail sales                     $        25,455     $        28,108

Average number of domestic Buffet Units                     127                 135
Average number of domestic Delco Units                       29                  31
Average number of domestic Express Units                     46                  45


                                                        Three Months Ended
                                                 September 23,       September 25,
                                                       2012                2011
International retail sales of Buffet Units      $         1,431     $           751
International retail sales of Delco Units                 2,461               2,629
International retail sales of Express Units                 290                 521
Total International retail sales                $         4,182     $         3,901

Average number of International Buffet Units                 16                  11
Average number of International Delco Units                  47                  49
Average number of International Express Units                 8                   8


Total domestic chain-wide franchisee retail sales decreased $2.7 million, or 9.4%, and international chain-wide retail sales increased $0.3 million, or 7.2%, for the three months ended September 23, 2012 when compared to the same period of the prior year.

Management also believes that a comparison of period-to-period retail sales by restaurants open throughout both periods is an important performance measure in evaluating financial results. The following tables summarize franchisee same store retail sales for the periods presented:

Franchise Stores - Comparable Stores                                   Three Months Ended
(in thousands)                                                  September 23,       September 25,
                                                                    2012                2011
 Domestic retail sales of same store Buffet Units              $        22,037     $        23,616
 Domestic retail sales of same store Delco Units                         1,487               1,590
 Domestic retail sales of same store Express Units                         759                 855
       Total domestic same store retail sales                  $        24,283     $        26,061

 International retail sales of same store Buffet Units         $           728     $           902
 International retail sales of same store Delco Units                    2,461               2,564
 International retail sales of same store Express Units                    278                 368
       Total International same store retail sales             $         3,467     $         3,834

Domestic same store franchisee retail sales decreased $1.8 million, or 6.8%, for the three months ended September 23, 2012 when compared to the same period of the prior year. International same store franchisee retail sales decreased $0.4 million, or 9.6% for the three months ended September 23, 2012 when compared to the same period of the prior year.


The following table summarizes the results and key performance indicators for the Pie Five and Pizza Inn Company-owned restaurants. We believe this information is useful to management and investors to measure the performance of the Company-owned restaurants. These indicators provide performance trend information as well as the cash flow of the restaurants before pre-opening costs and allocated corporate administration and other expenses. This information is important in evaluating the effectiveness of our business strategies and for planning and budgeting purposes. These non-GAAP financial measures should not be viewed as an alternative or substitute for our reported GAAP results. The three month period ended September 23, 2012 and September 25, 2011, each contained 13 weeks. All amounts are in thousands except the store weeks, average weekly sales and the average number of units.

Pie Five - Company-Owned Restaurants                                   Three Months Ended
 (in thousands, except store weeks and average data)            September 23,       September 25,
                                                                    2012                2011
 Store weeks                                                                82                  13
 Average weekly sales                                                   11,725              17,923
 Average number of units                                                     6                   1

 Restaurant sales                                                          962                 233

 Restaurant operating cash flow                                             62                  65
 Depreciation/amortization expense                                        (122 )               (12 )
 Pre-opening expenses                                                      (79 )               (12 )
 Allocated corporate administration and other expenses                     (26 )               (23 )
 (Loss) income from continuing operations before taxes                    (165 )                18

Pizza Inn - Company-Owned Restaurants                                  Three Months Ended
 (in thousands, except store weeks and average data)            September 23,       September 25,
                                                                      2012                2011
 Store weeks                                                                52                  62
 Average weekly sales                                                   16,559              17,065
 Average number of units                                                     4                   5

 Restaurant sales                                                          864               1,058

 Restaurant operating cash flow                                             36                  57
 Depreciation/amortization expense                                        (102 )              (104 )
 Pre-opening expenses                                                        -                   -
 Allocated corporate administration and other expenses                     (31 )               (77 )
 Loss from continuing operations before taxes                              (97 )              (124 )

Store weeks represent the total number of weeks Company-owned restaurants were open during the period. Average weekly sales represents the average weekly revenues earned by the Company-owned restaurants that were open during the period. Restaurant operating cash flow represents the income earned by Company-owned restaurants plus (1) depreciation and amortization, (2) pre-opening expenses, and (3) allocated corporate administration and other expenses. Pre-opening expenses consist primarily of certain costs incurred prior to the opening of a restaurant, including: (1) marketing and promotional expenses, (2) accrued rent, and (3) manager salaries, employee payroll and related training costs.


Revenues

Revenues are derived from (1) sales of food, paper products and supplies from Norco to franchisees, (2) franchise royalties and franchise fees, and (3) Company-owned restaurant operations. Financial results are dependent in large part upon the volume, pricing and cost of the products and supplies sold to franchisees. The volume of products sold by Norco to franchisees is dependent on the level of franchisee chain-wide retail sales, which are impacted by changes in same store sales and restaurant count, and the products sold to franchisees through Norco rather than through third-party food distributors.

Total revenues for the three month period ended September 23, 2012 and for the same period in the prior fiscal year were $10.4 million and $11.1 million, respectively. Revenue consisted of the following:

                                Three Months Ended
                         September 23,       September 25,
                             2012                2011
Food and supply sales   $         7,710     $         8,907
Franchise revenue                   902                 949
Restaurant sales                  1,826               1,291
Total revenue           $        10,438     $        11,147

Food and Supply Sales

Food and supply sales by Norco include food and paper products and other distribution revenues. For the three month period ended September 23, 2012, food and supply sales decreased to $7.7 million compared to $8.9 million the same period in the prior fiscal year due primarily to a decrease in sales to franchisees as a result of a $2.7 million, or 9.4%, decrease in domestic franchisee retail sales primarily attributable to a reduction in the average number of stores open and a decrease in same store sales in the current year when compared to the prior year. In addition, the average volume of products sold to franchisees has decreased disproportionally from the decrease in franchisee retail sales as a result of some of our franchisees increasing their purchases of certain non-proprietary items from third party food distributors and a 13.9% decrease in the price of cheese compared to the same period in the prior year.

Franchise Revenue

Franchise revenue, which includes income from domestic and international royalties and license fees, decreased by $47,000 for the three month period ended September 23, 2012 compared to the same period in the prior fiscal year as the result of lower royalties resulting from lower franchisee retail sales.

Restaurant Sales

Restaurant sales, which consist of revenue generated by Company-owned restaurants, increased 41.4%, or $0.5 million, to $1.8 million for the three month period ended September 23, 2012, compared to $1.3 million for the comparable period in the prior year. This increase was primarily due to the opening of five new Company-owned restaurants in fiscal 2012 and one new Company-owned restaurant during the three months ended September 23, 2012, partially offset by the closing of one Company-owned Delco restaurant in the first fiscal quarter of 2012.


Costs and Expenses

Cost of Sales

Cost of sales, which primarily includes food and supply costs, distribution fees, and labor and general and administrative expenses directly related to restaurant sales, decreased 5.0%, or $0.5 million, to $8.8 million for the three month period ended September 23, 2012 compared to $9.3 million for the comparable period for the prior fiscal year. The decreases in costs were the direct result of lower food and paper product sales and decreased cheese costs partially offset by higher costs associated primarily with new Company-owned restaurants.

General and Administrative Expenses

General and administrative expenses increased $0.1 million to $1.0 million for the three month period ended September 23, 2012 compared to $0.9 million for the comparable period for the prior fiscal year primarily due to additional operating expenses associated with the new Company-owned Pie Five Units and $0.1 million of recruiting fees incurred for the Company's search for a new Chief Executive Officer. Included in the prior year period expenses were approximately $0.1 million of legal fees incurred relating to the Company reorganization into a holding company structure.

Franchise Expenses

Franchise expenses include selling, general and administrative expenses directly related to the sale and continuing service of domestic and international franchises. These expenses increased $49,000 for the three month period ended September 23, 2012, when compared to the comparable period in the prior fiscal year primarily due to higher payroll and franchise marketing expenses associated with the Company's Pie Five franchising efforts and higher expenses associated with development and testing of a pipeline of new menu items.

Pre-Opening Expenses

Pre-opening expenses consist primarily of certain costs incurred prior to the opening of a restaurant, including: (1) marketing and promotional expenses, (2) accrued rent, and (3) manager salaries, employee payroll and related training costs. Pre-opening expenses increased $67,000 for the three month period ended September 23, 2012, compared to the prior year comparable period due to the opening of one new Pie Five Unit during the current year period and another Pie Five Unit opened in October 2012.

Interest Expense

Interest expense increased $0.1 million to for the three month period ended September 23, 2012, compared to the same period of the prior year due to higher average borrowings on the Company's credit facilities in the current year primarily related to the opening of new Company-owned Pie Five Units in fiscal 2012 and to the write-off of capitalized loan origination costs during the three months ended September 23, 2012 as a result of the refinancing of the Company's bank credit facilities.

Provision for Income Tax

For the three month period ended September 23, 2012, an income tax benefit of $45,000 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 $1.3 million.


Discontinued Operations

Discontinued operations include losses from a Company-owned restaurant 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 periods
ended September 23, 2012 and September 25, 2011:

 Three months ended September 23, 2012

                               Beginning                                  End of
                               of Period        Opened       Closed       Period
 Domestic:
    Buffet Units                        135            -            5         130
    Delco Units                          29            1            -          30
    Express Units                        47            -            1          46
    Pie Five Units                        6            1            -           7
 International Units                     81            4            -          85
 Total                                  298            6            6         298

Three months ended September 25, 2011

                               Beginning                                  End of
                               of Period        Opened       Closed       Period
 Domestic:
    Buffet Units                        141            1            1         141
    Delco Units                          32            1            2          31
    Express Units                        45            -            -          45
    Pie Five Units                        1            -            -           1
 International Units                     79            2            1          80
 Total                                  298            4            4         298

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 (in thousands):

                                            Three Months Ended
                                    September 23,         September 25,
                                        2012                  2011
   Net (loss) income               $           (58 )     $           313
   Interest expense                            104                    16
   Taxes                                       (45 )                 178
   Depreciation and amortization               291                   176
   EBITDA                          $           292       $           683

Liquidity and Capital Resources

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. Cash provided by operating activities increased $0.3 million to $0.4 million for the three month period ended September 23, 2012 compared to $0.1 million for the three months ended September 25, 2011. This increase was primarily due to a decrease of approximately $0.6 million in cash invested in working capital in the current year period when compared to the prior year period which was partially offset by a decrease in net income adjusted for noncash items of approximately $0.3 million in the current year period when compared to the prior year period.

Cash flows from investing activities generally reflect capital expenditures for the purchase of Company assets. The Company used cash of $0.4 million for the three month period ended September 23, 2012, primarily for new Company-owned restaurants that opened or will open in the Dallas/Fort Worth, Texas area, a new phone system and upgrades to existing Company stores. This compares to cash used by investing activities of $0.1 million during the same period in the prior fiscal year attributable to Company-owned restaurants that opened in the 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 three month period ended September 23, 2012 compared to net cash used of $0.1 million 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. On June 1, 2012, the Company and Amegy entered into a First Amendment to the Amended and Restated Loan Agreement which revised certain definitions and financial covenants contained in the Company's credit facilities with Amegy. As amended, the Amegy credit facility provided 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.

Interest on indebtedness from time to time outstanding under the revolving credit facility was computed at the greater of Amegy's prime rate or 5% and was payable monthly. A commitment fee of 0.25% per annum was payable quarterly on the average unused portion of the revolving credit facility. Interest on each . . .

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