Pizza Inn fights back

Dec. 19, 2004

Just three days after 410-unit Pizza Inn fired President and CEO Ronald Parker on Dec. 11, the company has named him as a defendant in an amended lawsuit against its former law firm, Akin Gump.

The original suit, filed in October, accuses the firm of breaching fiduciary duties by colluding with top Pizza Inn executives to rewrite employment agreements and alter company bylaws to solidify their positions within the struggling chain.

The amended suit, filed on Dec. 14, takes direct aim at Parker and his leadership role in an effort that could have gutted Pizza Inn financially, while lining the pockets of Parker and three top executives.

Based in The Colony, Texas, Pizza Inn claims the changes enriched Akin Gump through the accumulation of six-figure bills for legal fees and positioned the officers to receive massive payouts should the company undergo a change of control.

Parker also is accused of the November removal of documents from Pizza Inn headquarters, items that may prove his wrongdoing while in charge of the chain.

Though not a defendant in the suit, Keith Clark, Pizza Inn's former general counsel and senior vice president of corporate development, is named along with Parker as closely assisting Akin Gump (Clark's former employer) in revising the agreements and bylaws.

The employment agreements of CFO Shawn Preator and senior vice president of franchise operations Ward Olgreen also were changed with Akin Gump's assistance. Both men remain employed by the company and are not defendants in the suit.

In the complaint, Pizza Inn is demanding a jury trial, seeking actual, compensatory and consequential damages, plus the return of all fees paid to Akin Gump.

It also wants the return of all compensation and benefits paid to Parker and Clark after the revision of their employment agreements.

Calls to Parker's lawyers, as well as Pizza Inn and its lawyers, were not returned.

Parker's house

The August 2002 resignation of then-CEO Jeffrey Rogers opened the door for Parker's ascension to the Pizza Inn throne. Previously, Rogers had borrowed $1.9 million from the chain to buy a

What's Important

Pizza Inn has fired President and CEO Ronnie Parker; it also is suing him for breach of fiduciary duties.

Pizza Inn has accused Parker, three of his closest executives and the law firm of Akin Gump of colluding to change the company's bylaws and develop enormous severance packages for the executives.

Pizza Inn also has accused Parker of removing from company premises documents that could prove his wrongdoing. He has refused to return them.

large portion of its stock, but its value plummeted and left Rogers' investment under water. Believing he would default on the loan, the company showed him the door.

On Dec. 6 of that same year, Rogers sold 2.7 million shares (27 percent) of Pizza Inn stock to raise the cash to pay off his loan. Newcastle Partners, a Dallas-based hedge fund management firm and a 5 percent owner of Pizza Inn, bought Roger's shares and became the company's majority owner. Fearing Newcastle's strengthened position could threaten their jobs, Parker, Clark, Olgreen and Preator met with Akin Gump's lawyers to rewrite portions of the company's bylaws and their employment agreements.

Designed to entrench themselves in their positions, the bylaws were rewritten to severely limit shareholder participation in company meetings, while changes in their employment agreements widened protective buffers around the four executives in case Newcastle gained control of Pizza Inn's board. Additionally, should any of the four leave the company within 12 months of a change of control, each would receive large parachute payouts totaling $7.4 million -- more than three times the chain's 2004 profit of $2.2 million. Parker's cut alone would be $5.4 million: four times his highest salary and largest-ever bonus.

To Newcastle's chagrin, Pizza Inn's board approved the changes on Dec. 18.

Throughout 2003, Newcastle sought board representation reflective of its ownership and submitted nearly two dozen nominees. According to filings with the Securities and Exchange Commission, the chain's sitting board refused to consider them. Frustrated, Newcastle launched a shareholder proxy contest to elect its nominees, which Pizza Inn's board worked vigorously to block.

In what was a thinly veiled threat to shareholders, Pizza Inn's board warned in regulatory filings that a change in its make-up could "have a material adverse effect on the Company's financial position" if the executives' parachute payouts were triggered. Other regulatory filings made clear that Pizza Inn was in no position to make such payouts and would be threatened as a going concern were it forced to do so.

Two postponements of Pizza Inn's annual shareholders meeting -- always held in December -- followed before the gathering convened on Feb. 11, 2004. When the shareholders' proxies were tallied, Newcastle's nominees received 87 percent of the votes. (Not ironically, about 10 percent of the 13 percent of all votes against the Newcastle slate were represented by shares owned by Parker [9.5 percent], Clark, Olgreen and Preator [less than 1 percent each]).

This past April, Pizza Inn's board sought outside legal counsel to determine whether a change of control had occurred as a result of the increased Newcastle seats. When it was ruled a month later that board control hadn't changed, sources close to the story say the writing was on the wall: Parker and Clark would soon be held accountable for their backroom dealings.

In mid-June Clark submitted his resignation, followed by his claim a week later that he would seek a $605,000 parachute payout based on the change of control clause in his employment agreement.

The matter currently is in arbitration, and according to the amended lawsuit, "Pizza Inn has incurred and continues to incur significant expenses in connection with this matter."

In October, Pizza Inn sued Akin Gump for its role in the widening debacle. According to the lawsuit, not only did the firm orchestrate the potentially damaging changes to the pizza chain's bylaws and its executives' contracts, it billed Pizza Inn for the effort.

In November Pizza Inn made an unusual public declaration that its CEO was overpaid; Parker's $1 million annual pay package was too high compared to executives at similar-sized companies and based on Pizza Inn's poor performance during his tenure. Included in the package was a $550,000 base salary, a guaranteed 50 percent bonus of $275,000 and $176,000 for "certain defined benefits" such as a company car and insurance.

Executive betrayal

According to the amended lawsuit, among Parker's obvious fiduciary duties as its CEO are "full disclosure," "undivided loyalty," "utmost good faith, candor, and integrity."

Multiple accounts of

Former Pizza Inn President and CEO Ronald Parker chatted after speaking at the 2004 International Pizza Expo, held in March in Las Vegas.

anonymous sources close to the story say Parker modeled those qualities in the years between 1992, when Rogers handpicked him to join the company, and 2002, when his long-time colleague stepped down. It was after that point, those same sources said, that Clark and Parker turned the focus to benefiting themselves at the expense of Pizza Inn. Parker has never been the same, said one franchisee who asked not to be identified. "He really was a good man some time ago. But he got greedy, I guess."

When another franchisee suggested personally to Parker that he take a pay cut to help Pizza Inn save money, Parker "said he wouldn't because he deserved it. He said he was doing the work of two people" as CEO and president.

Parker is accused in the lawsuit of breaking a number of company rules, including "violating the independence and autonomy of the Compensation Committee and Board by participating in the discussions and approval of his own employment agreement." His guaranteed 50 percent bonus is an issue as well since, before his agreement was amended, "the amounts of any bonuses ... were set at the discretion of the board."

Parker also is charged in the suit with unlawful removal of property from Pizza Inn's headquarters in November. The lawsuit reads: "(I)n further breach of his duties, Parker has absconded with Company documents to his home, intending to deprive the Company of documents that may contain information further exposing his wrongful conduct, and knowing that the documents may be needed by the Company to prosecute its claims ... ."

According to the complaint, Parker has refused multiple requests by Pizza Inn to return the documents. And according to a report published in the Dallas Morning News, Parker has threatened to sue Pizza Inn for wrongful termination by seeking "a very large and significant sum" as compensation.

Despite their attempted money grab, it appears Parker and his allies instead could wind up losing a great deal of cash. The suit states Pizza Inn's intentions to reclaim the salaries paid to Parker and Clark after their employment agreements were rewritten, plus the disgorgement of compensation paid to Preator and Olgreen, identified only as "others under the Agreements." Based on SEC filings, such a number would total in the neighborhood of $2.5 million, the lion's share of which would go to Parker.

It also is pursuing disgorgement of fees paid to Akin Gump.

Additionally, the company said it has suffered substantially amid the scandal and that it is seeking to recover exemplary damages "of at least three times the amount of actual damages."

Sources close to the story say the retaliatory strike against the executives is being spearheaded by Newcastle President Mark Schwarz. Calls to Schwarz were not returned, but sources call him a man of serious measure "who is smart, methodical and able to execute a quiet, steady plan to see this through and give the company a new start."

Asked whether Schwarz wants to exact a measure of personal justice in the case, three sources interviewed said no. "I just think he's doing what he needs to do protect his investment," said a shareholder.

Franchisees interviewed by PizzaMarketplace said the multiple lawsuits and the looming litigation make them uneasy about the company's future. While they believe in the brand's viability, they know litigation is not only costly, but an enormous distraction to a company trying to right its ship amid a difficult business climate.

Still, said one, a corporate house cleaning is long over due, and he's hopeful for a fresh start.

"A lot of us have built good businesses that we want to hold on to," the franchisee said. "But the company hasn't always made it easy to do that. I'm just hoping we can put all this behind us and get back to focusing on growing again."

Topics: Pizza Inn

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