RAVE

Business Context and Reporting Period

Company: Pizza Inn, Inc. (RAVE Restaurant Group, Inc.)
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 29, 2009 (Fiscal Third Quarter)
Business Overview: The Company operates as a franchisor and food/supply distributor (Norco) for the Pizza Inn restaurant system. As of March 29, 2009, the system included 316 restaurants (2 company-owned, 246 domestic franchisees, 68 international franchisees) across 17 U.S. states and 10 foreign countries.

Key Financial Metrics

Note: Cash flow data provided in the filing is for the nine-month period only.

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 7.8% for the quarter and 8.3% for the nine-month period compared to the prior year. This was driven by a 11% drop in food and supply sales (due to lower chain-wide retail sales and a 34% decrease in cheese prices) and an 11% drop in franchise revenue (due to lower royalties).
• Profitability Drop: Net income fell 60% for the quarter and 62% for the nine-month period. The decline was primarily attributed to a shift from an income tax benefit in the prior year to an income tax expense in the current year, and a $263,000 non-recurring legal settlement provision in the current nine-month period (compared to a $284,000 recovery in the prior year).
• Expense Fluctuations: General and administrative expenses increased 22% for the quarter, largely due to costs associated with a new company-owned store in Denton, Texas, and increased stock compensation. Conversely, franchise expenses decreased 20% due to reduced payroll and travel.
• Liquidity Position: Cash and cash equivalents decreased from $1,157,000 (June 29, 2008) to $339,000 (March 29, 2009). The Company utilized its revolving credit facility, with $527,000 outstanding as of the period end.

Outlook, Risks, and Unusual Items

• Unusual Items: The nine-month results included a $263,000 provision for litigation costs related to a franchisee dispute settled in January 2009. Management noted that excluding tax and litigation impacts, adjusted net income would have been $1,491,000 for the nine months ended March 29, 2009.
• Capital Allocation: The Company continued its stock repurchase program, spending $1,466,000 on share buybacks during the nine-month period. On April 22, 2009 (subsequent to period end), the Board increased the authorized repurchase limit to 3,016,000 shares.
• Restaurant Activity: The Company opened one new company-owned store (Denton, TX) and saw franchisees open 5 units while closing 10 units during the quarter. Total domestic retail sales declined 3% for the quarter and 4% for the nine-month period.
• Liquidity Outlook: Management believes cash on hand, operating cash flows, and the $3.5 million CIT Credit Facility are sufficient to fund operations for the next 12 months.
• Risks: Key risks include the collectibility of receivables from franchisees, commodity price volatility (specifically cheese), and the impact of restaurant closures on royalty revenue.

Investor Verification Checklist

• Legal Settlement Impact: Verify the final terms and any remaining liabilities regarding the $209,834 franchisee settlement paid in January 2009.
• Deferred Tax Assets: Confirm the realization of the $792,000 net deferred tax asset, which relies on future profitability projections.
• Stock Repurchase Activity: Monitor the execution of the expanded stock repurchase plan authorized in April 2009 and its impact on cash reserves.
• Franchisee Health: Assess the trend of restaurant closures (10 closed vs. 5 opened in the quarter) and its effect on future royalty streams.
• Debt Covenants: Review compliance with the CIT Credit Facility covenants, given the reliance on this facility for liquidity.