Proxy battle underway at Pizza Inn

Feb. 10, 2004

Shareholders of Pizza Inn will decide today whether Newcastle Partners, which holds a 36 percent share of the 419-unit chain, will gain two additional seats on the company's board of directors.

The meeting is the culmination of a complicated, 14-month-long battle between the two parties centering on disputes over the chain's performance, compensation for Pizza Inn's executives and those executives' employment agreements.

In multiple filings to the Securities and Exchange Commission (SEC), Newcastle, a Dallas-based investment firm, has said Pizza Inn's top executives are over-compensated relative to the chain's bottom-line results. It also accused Pizza Inn's board of amending its bylaws to protect employment contracts for its top officers. Should today's proxy vote force a change of control on the board, those officers would receive $7.4 million in payouts.

The annual meeting, originally set for December, was cancelled and rescheduled twice before the Feb. 11, 2004, meeting at Pizza Inn's headquarters in The Colony, Texas.

Dallas securities broker Sterling May, who owns a 14 percent share of Pizza Inn, said the dispute has

What's Important

A shareholder proxy vote will decide who gets control of Pizza Inn's board of directors.

Should Pizza Inn's current executives perceive "a change of control" via any board changes, its top executives could receive $7.4 million in payouts.

Some shareholders believe Pizza Inn's executives should be rewarded based on the company's performance, rather that receiving guaranteed compensation.

kept the company from improving its once-vital business. Not only are its officers focused on the board battle, its franchisees are anxious about it as well, and they don't see a clear vision for the company going forward.

"Franchisees want to know if things are OK with the company, that things are on solid ground because they're investing in this business," May said. The larger issue, he added, is fair board representation. "This is not a control issue, it's about the fair representation of all the shareholders of Pizza Inn."

A tough road to now

Until January 2004, when Pizza Inn recorded a 1.2 percent gain in comparable-store sales, the chain had reported negative sales trends for 17 consecutive months. In fiscal 2003 alone (Pizza Inn's fiscal year runs from June to June), comp-store sales slid 5.5 percent. And from 2002 to 2003, the company closed about 40 units.

Pizza Inn does generate strong cash flow and is steadily paying down its debt, but its earnings—other than an unexpected boost gained from the reversal of a special charge in fiscal 2003—have remained low. Additionally, it hasn't distributed stock dividends in years.

Still, its overall business, despite negative sales trends, is rising modestly. To make that point public, Pizza Inn CEO Ronnie Parker filed a statement with the SEC two nights before the Feb. 11 annual meeting, in which he pointed to 20 new unit openings in fiscal 2004 (though 15 others were shuttered in the same timeframe) and a year-to-date comparable sales increase of 2.1 percent at its Norco distribution arm. The company also is conducting limited-market tests of new products such as a take-and-bake pizza and a "4-Pack Sampler," similar to Pizza Hut's 4forALL.

Asked about filing the statement so closely to the start of the annual meeting, Parker said he wanted to enable the company "to speak fully to shareholders who will be at meeting" and "provide full disclosure to the public through press." Despite the fact that many of the proxy votes likely were cast before the filing was published, Parker said the report was a good story about Pizza Inn that needed to be told.

"You can look at those operating trends and see that things are extremely positive," he said. "I have consistently said ... that we are focused on working with franchisees as well as the board to make Pizza Inn better and to go forward."

Jeff Rogers, Pizza Inn's former CEO, isn't so optimistic.

Rogers, who led the company out of bankruptcy in 1989 by reinvigorating its sales and adding units, resigned from his post in 2002 when the company believed he could not repay $1.9 million (the aforementioned special charge reversal) it loaned him to purchase its stock. Four months later Rogers repaid the loan by selling his 35 percent share in Pizza Inn to Newcastle Partners.

Rogers said Pizza Inn's current management has focused too much energy on protecting its control of the board when it should work harder on growing sales.

"That's especially discouraging at a time when competition is more aggressive than ever in the pizza industry," he said.

Now the CEO of Chicago-based Heartland Group, a 131-unit Burger King franchisee, Rogers flatly denied rumors that Newcastle intends to put him in Pizza Inn's CEO seat. But he did say the investment group's ideas and talent "just might be the breath of fresh air needed to stimulate growth. I believe they would make for the best change and for the company to become a real player."

Compensation expectations

May said Pizza Inn's second turnaround in 15 years will require money invested into the company, not in its executives' pockets. Compensation, he said, "is grossly in favor of senior management," and that the top five officer's packages are too high for a company generating only $67 million a year in revenue.

"If times are tough like they've been, then cut the salaries down and put the money into growing the company," May said. "You want to see a company that's bottom line-oriented, a company that's compensating the officer corps based on performance. When performance is down, it's prudent to expect compensation would follow."

Despite the concerns of many that Pizza Inn's annual meeting will become a shouting match, May predicted otherwise.

"I think they're going to work together; I think everyone's going to be pleasant," said May, who will attend the meeting. "Let's put all this behind us and work together for the betterment of the company and the shareholders. Let's do what's morally right; let's go to work."

See related Pizza Inn stories ...
* Battle for the Board at Pizza Inn
* Pizza Inn postpones annual meeting for a second time
* SEC filing details battle for Pizza Inn board
* Pizza Inn reschedules annual meeting as proxy battle looms
* Largest Pizza Inn shareholder wants to expand board with two pizza veterans
* Pizza Inn's comp-sales drop 1.4% in second quarter

Topics: Public Companies

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