<B>2Q profits down at beleaguered Pizza Inn</B>

Feb. 9, 2005

THE COLONY, Texas — Financial, sales and legal woes continue at 400-plus-unit Pizza Inn.

On Feb. 9 it reported a sizable drop in profits for its second quarter (fiscal 2005), ended Dec. 26, 2004. According to a regulatory filing, net income was $51,000, compared to $558,000 in the comparable period in 2003. (Earnings-per-share was 1 cent.) Revenues were $13.8 million, down nearly 7 percent from $14.8 million in the comparable period (read also Q1 '05 revenues and profit tumble at Pizza Inn).

For the first six months of its fiscal year (which ends in June), net income was $336,000, compared to $1 million in the comparable period. Revenues were $28.2 million, down from $30.1 million.

Same-store sales at company-owned training units plummeted 35 percent for the quarter, and 36 percent for the first half of its fiscal year. The company blamed the decline on the sale of a buffet unit, which was replaced by a delivery-carryout unit, plus lower comps at another company store.

The chain did not report same-store sales numbers for franchised units in either period, nor did it mention company-owned or franchised unit counts.

Food and supply sales for the most recent quarter at the Pizza Inn's Norco division fell 6 percent. The company attributed the loss to "reduced prices on certain key ingredients and lower overall chainwide retail sales."

Franchise revenue was down 3 percent for Q2, and 6 percent for the first six months of its fiscal year.

According to the filing, the company is concerned over current and coming arbitration over possible employment contract payouts to former and present executives. A potential payout would exceed $7 million (read also Greed between the lines).

Last June, former vice president and legal counsel, Keith Clark, resigned from the company and claimed Pizza Inn owed him $762,000 tied to a change of control clause in his contract. Clark alleges a change of control occurred with the addition of two new members voted onto Pizza Inn's board in February 2004.

Pizza Inn's legal counsel ruled last May that no change of control occurred.

The company not only has refused to meet Clark's demands, it has filed claims against him for his role in helping rewrite his employment contract and those of three other executives. For those actions, Pizza Inn is seeking compensatory and consequential damages, and disgorgement of compensation paid to him since December of 2002, when the agreements were written.

The company is in the early stages of a legal tussle with former Chief Executive Officer and President Ronald Parker, who was fired in December (read also CEO Parker is out at Pizza Inn) for his alleged collusion with Clark in creating the questionable employment contracts.

In January, Pizza Inn instituted arbitration proceedings (read also Pizza Inn fights back) against Parker, declaring he is not entitled to severance payments or any other further compensation from the company. It also is seeking compensatory and consequential damages, and disgorgement of compensation paid to Parker since December of 2002.

On Jan. 31, 2005, Parker filed a breach of contract claim against Pizza Inn (read also Pizza Inn officially fires Parker, but lawsuit is expected), seeking payment of a severance package detailed in his contract. The package includes a $5.4 million payout for a change of control.

The employment agreements of vice presidents Shawn Preator and Ward Olgreen also were rewritten in 2002 along with Parker's and Clark's, and they also contain large change-of-control payouts. Both remain employed by Pizza Inn.

Pizza Inn said it does not expect to make payments to any of the men, but should it be forced to, it "believes that it has sufficient assets available to make any payments required by an adverse determination."

Topics: Pizza Inn, Public Companies

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