Business Context and Reporting Period
This filing is a Form 10-K for Pizza Inn Holdings, Inc., although the request metadata identifies Rave Restaurant Group, Inc. The report covers the 52-week fiscal year ended June 24, 2012, compared with the year ended June 26, 2011. The company operates and franchises Pizza Inn buffet, delivery/carry-out and express restaurants and operates company-owned Pie Five fast-casual restaurants. It also distributes food, equipment and supplies through Norco.
At year-end, the system had 298 restaurants: 10 company-owned units, 207 domestic franchised units and 81 international franchised units. Company-owned units consisted of four Pizza Inn buffet restaurants and six Pie Five restaurants.
Key Financial Metrics
| Metric | Fiscal 2012 | Fiscal 2011 | Change |
|---|---|---|---|
| Revenue | $43.001 million | $43.036 million | Essentially flat |
| Net income | $0.322 million | $1.357 million | Down $1.035 million |
| Income from continuing operations | $0.383 million | $1.419 million | Down $1.036 million |
| Basic and diluted EPS | $0.04 | $0.17 | Down $0.13 |
| EBITDA | $1.797 million | $2.894 million | Down 37.9% |
| Cash flow from operations | $1.172 million | $1.568 million | Down $0.396 million |
| Capital expenditures | $2.482 million | $1.865 million | Up $0.617 million |
| Cash and equivalents | $0.590 million | $0.949 million | Down $0.359 million |
| Bank debt | $1.742 million | $0.815 million | Up $0.927 million |
Revenue consisted of $33.253 million of food and supply sales, $3.673 million of franchise revenue and $6.075 million of company-owned restaurant sales. Company-owned restaurant sales increased 45.9%, but this was offset by lower food and supply and franchise revenue.
Reported net margin was approximately 0.7%, continuing-operations pretax margin approximately 1.9%, and EBITDA margin approximately 4.2%. Cost of sales increased to $35.828 million from $35.021 million, franchise expenses increased to $2.072 million from $1.834 million, and general and administrative expenses increased to $4.094 million from $3.372 million.
At June 24, 2012, total assets were $12.498 million and shareholders’ equity was $6.308 million. Current assets were $7.305 million versus current liabilities of $4.283 million. The company reported a $0.4 million net deferred tax asset and believed it was realizable.
Material Changes Versus the Prior Comparable Period
- Domestic franchisee retail sales decreased 3.9% to $108.310 million, while international franchisee retail sales decreased 4.9% to $16.340 million.
- Domestic same-store franchisee sales declined 1.2%; international same-store sales declined 2.6%.
- Domestic restaurant count declined from 219 to 217, while international units increased from 79 to 81. Total system units remained 298 because Pie Five expanded from one to six units.
- Food and supply sales declined 4.8% to $33.253 million, primarily from lower franchisee sales, fewer average domestic units and increased purchases of some non-proprietary products from third-party distributors.
- Franchise revenue declined 6.6% to $3.673 million because of lower royalties, area developer fees and franchise fees.
- Company-owned restaurant sales rose $1.912 million, primarily from five new company-owned Pie Five restaurants, partly offset by restaurant closures.
- Management attributed the decline in earnings primarily to lower franchising and distribution revenue and approximately $0.7 million of costs associated with Pie Five development, the holding-company reorganization and expansion of franchising into China.
- Fiscal 2011 included $0.319 million of store-closure costs and $0.300 million of settlement costs that did not recur in fiscal 2012; fiscal 2012 nevertheless produced substantially lower earnings because of operating and expansion costs.
Liquidity, Debt and Cash Flow
Operating cash flow of $1.172 million was insufficient to fund $2.482 million of capital expenditures, primarily for five new company-owned Pie Five restaurants. Financing activities provided $0.951 million, including $1.795 million of borrowings and $0.868 million of repayments.
At June 24, 2012, the Amegy facility had $1.742 million outstanding under term loans, no revolving borrowings and a $0.2 million letter of credit. Scheduled principal payments were approximately $0.765 million in fiscal 2013, $0.580 million in fiscal 2014 and $0.397 million in fiscal 2015. The company stated that it was in compliance with its covenants.
After year-end, on August 28, 2012, the company entered into a new F&M facility comprising a $2.0 million revolving line, a $2.0 million fully funded term loan and up to $6.0 million of additional advancing term loans. The facility is secured by substantially all company assets and includes financial and other covenants. Management stated that operating cash flow and available credit were expected to fund fiscal 2013 operations, planned capital expenditures and new restaurant openings.
Guidance, Outlook, Risks and Unusual Items
- Management planned to continue developing company-owned Pie Five restaurants in fiscal 2013 and begin domestic franchising of the Pie Five concept.
- Pizza Inn growth was expected to rely primarily on new franchised restaurants, with continued evaluation of company-owned development, acquisitions and re-franchising.
- Expansion depends on suitable sites, qualified and adequately capitalized franchisees, financing, construction execution, staffing and training.
- Key risks include intense restaurant competition, declining same-store sales, commodity-price volatility, franchisee financial distress, reliance on franchisee purchases through Norco, regulatory and franchise-law requirements, lease obligations and compliance with credit-facility covenants.
- The company had approximately $8.214 million of future minimum operating lease payments, net of subleases, at year-end.
- Legal claims arising in the ordinary course were considered insured or not expected to have a material adverse effect. The filing does not identify a material pending litigation loss.
- The company paid no dividends and stated that it had no current intention to pay dividends. Its credit facility restricts dividends and other distributions.
- Management reported effective disclosure controls and effective internal control over financial reporting; the company was not required to obtain an auditor’s opinion on internal control effectiveness.
Investor Verification Items
- Verify the issuer identity and period: the supplied filing is for Pizza Inn Holdings, Inc. and fiscal 2012, not Rave Restaurant Group, Inc. or 2011 Q4.
- Review the audited financial statements for the balance-sheet composition, debt maturities, deferred tax assets and working-capital trends.
- Assess whether Pie Five company-owned restaurants can achieve positive store-level and consolidated profitability as expansion continues.
- Evaluate the effect of declining domestic and international franchisee sales on royalties, distribution volume and franchisee credit quality.
- Review the August 2012 F&M refinancing, borrowing availability, collateral requirements, financial covenants and repayment schedule.
- Reconcile restaurant counts and openings and closures, as the filing presents both Pizza Inn-only counts and total system counts.