RAVE RESTAURANT GROUP, INC. - Quarter Report: 2009 March (Form 10-Q)

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One)

     Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company þ     

   Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No þ

     As of May 4, 2009, 8,136,884 shares of the issuer’s common stock were outstanding.

PIZZA INN, INC.

Index

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PIZZA INN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements.

PIZZA INN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements.

PIZZA INN, INC.

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

(In thousands)

(Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements.

PIZZA INN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying condensed consolidated financial statements of Pizza Inn, Inc. (the "Company") have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the financial statements have been omitted pursuant to such rules and regulations. The unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended June 29, 2008.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to fairly present the Company's financial position and results of operations for the interim periods reflected. Except as noted, all adjustments contained herein are of a normal recurring nature. Results of operations for the fiscal periods presented herein are not necessarily indicative of fiscal year-end results.

(1)       Summary of Significant Accounting Policies

            Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All appropriate intercompany balances and transactions have been eliminated.

            Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Fiscal Year

Fiscal third quarters ended March 29, 2009 and March 23, 2008 both contained 13 weeks and fiscal years to date ended March 29, 2009 and March 23, 2008 both contained 39 weeks.

Revenue Recognition

The Company recognizes revenue when products are delivered and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. The Company's Norco division sells food and supplies to franchisees on trade accounts under terms common in the industry. Food and supply revenue are recognized upon delivery of the product. Equipment that is sold requires acceptance prior to installation. Recognition of revenue for equipment sales occurs upon acceptance of such equipment. Other than for large remodel projects, delivery date and acceptance date are the same. Norco sales are reflected under the caption "Food and supply sales." Shipping and handling costs billed to customers are recognized as revenue.

Franchise revenue consists of income from license fees, royalties, and area development and foreign master license fees. License fees are recognized as income when there has been substantial performance under the agreement by both the franchisee and the Company. Domestic license fees are generally recognized at the time the restaurant is opened. Foreign master license fees are generally recognized upon execution of the agreement as all material services relating to the sale have been substantially performed by the Company and the fee has been collected. Royalties are recognized as income when earned.
 

Stock-Based Compensation

The Company adopted Statement of Financial Accounting Standards No. 123R, “Share Based Payment” (“SFAS No. 123R”), as of June 27, 2005, using the modified prospective method for all stock options granted prior to June 26, 2005 that were outstanding as of that date. Under this transition method, compensation cost is recognized for the unvested portion of stock option grants outstanding at June 26, 2005 over the remaining requisite service period using the fair value for these options as estimated at the date of grant using the Black-Scholes option-pricing model under the original provisions of SFAS No. 123 for pro-forma disclosure purposes. The Company recognizes stock-based compensation for all stock options granted after the adoption of SFAS No. 123R over the requisite service period using the fair value for the options as estimated at the date of grant using the Black-Scholes option-pricing model.

Use of Management Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company’s management to make estimates and assumptions that affect its reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent liabilities. The Company bases its estimates on historical experience and other various assumptions that it believes are reasonable under the circumstances. Estimates and assumptions are reviewed periodically and actual results could differ materially from estimates.

Reclassification

The Company currently recognizes ongoing loan fees and the amortization of initial loan fees as interest expense. These costs were recorded as general and administrative expenses in the prior fiscal year and have been reclassified as interest.

New Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits entities to choose to measure many financial instruments, including employee stock option plans and operating leases accounted for in accordance with SFAS No. 13, Accounting for Leases, at their fair value. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company has chosen not to change the valuation method of any of it’s financial assets or liabilities.

In December 2007, the FASB issued SFAS No. 141 (Revised), Business Combinations. SFAS No. 141(R) improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of this Statement is not expected to have a material impact on the Company’s financial position or results of operations.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS No. 160 amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary and clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This Statement is effective for fiscal years beginning on or after December 15, 2008. The adoption of this Statement is not expected to have a material impact on the Company’s financial position or results of operations.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133. SFAS No. 161 amends SFAS No. 133 and requires entities to enhance their disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years beginning on or after November 15, 2008. The adoption of SFAS No. 161 is not expected to have a material impact on the Company’s financial position or results of operations.

(2)       Long-Term Debt     

On January 23, 2007, the Company and The CIT Group / Commercial Services, Inc. (“CIT”) entered into an agreement for a revolving credit facility of up to $3.5 million (the “CIT Credit Facility”). CIT may terminate the CIT Credit Facility only as of January 23, 2012 or the same date any year thereafter, and then only by giving the Company at least 90 days prior written notice of such termination. The actual availability on the CIT Credit Facility is determined by advance rates on eligible inventory and accounts receivable. Interest on borrowings outstanding on the CIT Credit Facility is at a rate equal to the prime rate plus an interest rate margin of 0.0% to 0.5% or, at the Company’s option, at the LIBOR rate plus an interest rate margin of 2.0% to 3.0%. The specific interest rate margin is based on the Company’s performance under certain

financial ratio tests. An annual commitment fee is payable on any unused portion of the CIT Credit Facility at a rate of 0.375%. All of the Company’s (and its subsidiaries’) personal property assets (including, but not limited to, accounts receivable, inventory, equipment, and intellectual property) have been pledged to secure payment and performance of the CIT Credit Facility, which is subject to customary covenants for asset-based loans.
 

On June 27, 2007, the Company and CIT entered into an agreement to amend the CIT Credit Facility to (i) allow the Company to repurchase Company stock in an amount up to $3,000,000, (ii) allow the Company to make permitted cash distributions or cash dividend payments to the Company’s shareholders in the ordinary course of business and (iii) increase the aggregate capital expenditure limit from $750,000 to $3,000,000 per fiscal year. On May 30, 2008, the Company again amended the CIT Credit Facility to permit the Company to repurchase up to $7,000,000 of the Company’s common stock. As of March 29, 2009, $527,000 was outstanding on the CIT Credit Facility at an interest rate of 3.5% and one letter of credit for approximately $230,000 was outstanding to reinsurers to secure loss reserves.

(3)       Commitments and Contingencies

On May 23, 2007, the board of directors of the Company approved a stock purchase plan authorizing the purchase of up to 1,016,000 shares of the Company’s common stock in the open market or in privately negotiated transactions. On June 2, 2008, the board of directors amended the stock repurchase plan by increasing the number of shares the Company may repurchase by 1,000,000 shares to a total of 2,016,000 shares. As of March 29, 2009, there are 230,206 shares available to be repurchased under the plan. (See note 9.)

The Company is also subject to various claims and contingencies related to employment agreements, franchise disputes, lawsuits, taxes, food product purchase contracts and other matters arising out of the normal course of business. Management believes that any such claims and actions currently pending are either covered by insurance or would not have a material adverse effect on the Company's annual results of operations or financial condition if decided in a manner that is unfavorable to us.

  (4)         Stock-Based Compensation 

For the three and nine months ended March 29, 2009, we recognized stock-based compensation of $48,000 and $150,000, respectively. As of March 29, 2009, unamortized stock-based compensation expense was $280,000.
 

The following table summarizes the Company’s outstanding stock options for the nine months ended March 29, 2009 and March 23, 2008:

(5)        Earnings per Share (EPS)

           The following table shows the reconciliation of the numerator and denominator of the basic EPS calculation to the numerator and denominator of the diluted EPS calculation (in thousands, except per share amounts).

For the quarter and nine months ended March 29, 2009, options to purchase 485,000 shares of common stock at exercise prices ranging from $2.00 to $3.17 per share were not included in the computation of diluted EPS because the options’ exercise prices were greater than the average market price of the common shares for the period. For the quarter and nine months ended March 23, 2008, options to purchase 115,000 shares of common stock at exercise prices ranging from $2.85 to $3.17 were not included in the computation of diluted EPS because the options’ exercise prices were greater than the average market price of the common shares for the period.

(6)          Closed restaurants and discontinued operations

SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, requires that discontinued operations that meet certain criteria be reflected in the statement of operations after results of continuing operations as a net amount. SFAS No. 144 also requires that the operations of the closed restaurants, including any impairment charges, be reclassified to discontinued operations for all periods presented.

     
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. This Statement also establishes that fair value is the objective for initial measurement of the liability.

The Company closed two of its restaurants in Houston, Texas during the quarter ended September 23, 2007. The results of operations for these two restaurants are reported as discontinued operations in the accompanying Condensed Consolidated Statement of Operations. No provision for impairment was required to be taken at that time because the impairment taken in the fiscal year ended June 24, 2007, reduced the carrying value of the properties to their estimated net realizable value. That net realizable value remains unchanged. The two properties are on the market for sub-lease and have received a number of site visits. Because we believe that the properties will sub-lease at or above the current lease rates, we have not reserved any additional costs related to our obligations under these non-cancelable leases.

A summary of discontinued operations is as follows (in thousands):

   (7)        Provision for Income Tax

Management re-evaluates the deferred tax asset each quarter and believes that it is more likely than not that the net deferred tax asset of $792,000 will be fully realized based on the Company’s recent history of pre-tax profits and the expectation of future taxable income as well as the future reversal of existing temporary differences. During the three and nine months ended March 29, 2009, the Company has provided $203,000 and $438,000 in net tax expense. In determining these amounts, the Company makes its best estimate of the effective tax rate expected to be applicable for the full fiscal year. The rate so determined is used to provide for income taxes on a current year to date basis.

(8)        Property Held for Sale

Assets that are to be disposed of by sale are recognized in the condensed consolidated financial statements at the lower of carrying amount or estimated net realizable value (proceeds less cost to sell), and are not depreciated after being classified as held for sale. In order for an asset to be classified as held for sale, the asset must be actively marketed, be available for immediate sale and meet certain other specified criteria. At March 29, 2009, the Company had approximately $311,000 of assets classified as held for sale. As of March 29, 2009, approximately $304,000 of such amount represents the carrying value of the Company’s real estate and equipment located in Little Elm, Texas. As of March 29, 2009, the remaining $7,000 of assets held for sale represents miscellaneous trailers and other transportation equipment.

(9)        Subsequent Events

            On April 22, 2009, the board of directors of the Company amended the stock repurchase plan first authorized on May 23, 2007, and previously amended on June 2, 2008, by increasing the aggregate number of shares of common stock the Company may repurchase under the plan by 1,000,000 shares to a total of 3,016,000 shares. (See note 3.)

  (10)      Segment Reporting

 Summarized in the following tables are net sales and operating revenues, operating income and geographic information (revenues) for the Company’s reportable segments for the three month and nine month periods ended March 29, 2009 and March 23, 2008 (in thousands). Operating income reported below excludes income tax provision and discontinued operations.

(1)   Does not include full allocation of corporate administration.

(2)   Company stores that were closed are included in discontinued

       operations in the accompanying Condensed Consolidated Statement of Operations.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

     The following discussion should be read in conjunction with the consolidated financial statements, accompanying notes and selected financial data appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended June 29, 2008, and may contain certain forward-looking statements that are based on current management expectations. Generally, verbs in the future tense and the words “believe,” “expect,” “anticipate,” “estimate,” “intends,” “opinion,” “potential” and similar expressions identify forward-looking statements. Forward-looking statements in this report include, without limitation, statements relating to our business objectives, our customers and our franchisees, our liquidity and capital resources, the impact of our historical and potential business strategies on our business, financial condition, and operating results and the expected effects of potentially adverse litigation outcomes. Our actual results could differ materially from our expectations. Further information concerning our business, including additional factors that could cause actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q, are set forth in our Annual Report on Form 10-K for the year ended June 29, 2008. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The forward-looking statements contained herein speak only as of the date of this Quarterly Report on Form 10-Q and, except as may be required by applicable law, we do not undertake, and specifically disclaim any obligation to, publicly update or revise such statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Results of Operations

Overview 

     The Company is a franchisor and food and supply distributor to a system of restaurants operating under the trade name "Pizza Inn." Our distribution division is Norco Restaurant Services Company (“Norco”). At March 29, 2009, there were 316 domestic and international Pizza Inn restaurants, consisting of two Company-owned domestic restaurants, 246 franchised domestic restaurants, and 68 franchised international restaurants. The 248 domestic restaurants consisted of: (i) 152 restaurants that offer dine-in, carry-out, and in many cases, delivery services (“Buffet Units”); (ii) 40 restaurants that offer delivery and carry-out services only (“Delco Units”); and (iii) 56 restaurants that are typically located within a convenience store, college campus building, airport terminal, or other commercial facility and offer quick carry-out service from a limited menu (“Express Units”). The 248 domestic restaurants were located in 17 states predominately situated in the southern half of the United States. The 68 international restaurants were located in 10 foreign countries.

     Diluted income per common share decreased to $0.05 for the three month period ended March 29, 2009 compared to $0.09 for the comparable period ended March 23, 2008.  Net income for the three month period ended March 29, 2009 decreased $537,000 to $361,000 from $898,000 for the comparable period in the prior fiscal year, on revenues of $10,757,000 for the three month period ended March 29, 2009 and $11,668,000 for the comparable period in the prior fiscal year. Diluted income per common share decreased to $0.09 for the nine month period ended March 29, 2009 compared to $0.21 for the comparable period ended March 23, 2008.  Net income for the nine month period ended March 29, 2009 decreased $1,306,000 to $790,000 from $2,096,000 for the comparable period in the prior fiscal year, on revenues of $33,423,000 for the nine month period ended March 29, 2009 and $36,441,000 for the comparable period in the prior fiscal year.  

     The decrease in net income during the three month period ended March 29, 2009, was primarily due to income tax expense in the current fiscal year compared to an income tax benefit in the prior year. The decrease in net income during the nine month period ended March 29, 2009, was primarily due to income tax expense and a non-recurring legal settlement of $263,000 in the current fiscal year, compared to an income tax benefit and a legal settlement recovered in the prior year of $284,000. In the absence of these items, net income would have been $564,000, or $.07 per share, for the three months ended March 29, 2009 compared to $682,000, or $.07 per share, for the same period in the prior year and $1,491,000, or $0.17 per share, for the nine months ended March 29, 2009 compared to $1,596,000, or $0.16 per share, for the same period in the prior year.

     Management believes that key performance indicators in evaluating financial results include domestic chain-wide retail sales and the number and type of operating restaurants. The following table summarizes these key performance indicators.

Revenues

     Currently our revenues are derived from restaurant operations, sales of food, paper products and supplies by Norco to franchisees, franchise royalties and franchise fees. Our financial results are dependent in large part upon the pricing and cost of these products and supplies to franchisees, and the level of chain-wide retail sales, which are driven by changes in same store sales and restaurant count. In prior years, our revenues also included the sale of equipment to franchisees.

Food and Supply Sales

Food and supply sales by Norco include food and paper products, equipment and other distribution revenues.  Food and supply sales for the three month period ended March 29, 2009 decreased 11%, or $1,180,000, to $9,136,000 from $10,316,000 compared to the same period in the prior fiscal year.  For the three month period ended March 29, 2009, total domestic chain-wide retail sales decreased 3%, or $979,000, compared to the same period in the prior fiscal year due to a lower store count and lower comparable sales. As a result of this decrease in retail sales and a 34% decrease in cheese prices, domestic food and paper sales decreased 11%, or $1,170,000, compared to the same period in the prior fiscal year.

Food and supply sales for the nine month period ended March 29, 2009 decreased 10% or $3,354,000, to $28,915,000 from $32,269,000 compared to the same period in the prior fiscal year. During the nine month period ended March 29, 2009, international sales and equipment sales decreased by $830,000. For the nine month period ended March 29, 2009, total domestic chain-wide retail sales decreased 4%, or $3,985,000, compared to the same period in the prior fiscal year due to a lower store count and lower comparable sales. As a result of this decrease in retail sales and a 14% decrease in cheese prices, domestic food and paper sales decreased 7%, or $2,303,000, compared to the same period in the prior fiscal year.

Franchise Revenue

     Franchise revenue, which includes income from royalties, license fees and area development and foreign master license sales, decreased 11%, or $125,000, to $1,056,000 for the three month period ended March 29, 2009 compared to $1,181,000 in the comparable period for the prior fiscal year. This decrease is primarily attributable to lower domestic royalties resulting from lower retail sales compared to the comparable period in the prior fiscal year. Franchise revenues decreased 13%, or $479,000, to $3,164,000 for the nine month period ended March 29, 2009 compared to $3,643,000 for the comparable period in the prior fiscal year. This decrease is primarily attributable to lower international franchise fees and lower domestic royalties resulting from lower retail sales compared to the comparable period in the prior fiscal year. The following chart summarizes the major components of franchise revenue (in thousands):

Restaurant Sales

Restaurant sales, which consist of revenue generated by Company-owned restaurants, increased 230%, or $394,000, to $565,000 for the three month period ended March 29, 2009 compared to $171,000 for the comparable period in the prior fiscal year. Restaurant sales increased 154%, or $815,000, to $1,344,000 for the nine month period ended March 29, 2009 compared to $529,000 for the comparable period in the prior fiscal year. The Company opened a new store in Denton, Texas on October 15, 2008 accounting for $391,000 of the increase over the same quarter in the prior year and $804,000 of the increase over the prior year to date.

Costs and Expenses

Cost of Sales

Cost of sales, which includes primarily direct materials, distribution fees and labor directly related to food and supply sales and restaurant sales, decreased 8%, or $725,000, for the three month period ended March 29, 2009 compared to the comparable period for the prior fiscal year. Cost of sales decreased 8%, or $2,296,000, for the nine month period ended March 29, 2009 compared to the comparable period in the prior fiscal year. These decreases were primarily the result of lower food and supply sales, distribution fees and payroll costs, as well as lower commodity costs.

Franchise Expenses

Franchise expenses include selling, general and administrative expenses directly related to the sale and continuing service of domestic and international franchises. These expenses decreased 20%, or $126,000 for the three month period ended March 29, 2009 compared to the comparable period in the prior fiscal year. These expenses decreased 26%, or $503,000 for the nine month period ended March 29, 2009 compared to the comparable period for the prior fiscal year. These savings were primarily the result of lower payroll and travel expenses due to eliminated or unfilled positions compared to the same periods in the prior fiscal year. The following chart summarizes the major components of franchise expenses (in thousands):

General and Administrative Expenses

General and administrative expenses increased 22%, or $144,000, to $793,000 for the three month period ended March 29, 2009 compared to $649,000 for the comparable period for the prior fiscal year. General and administrative expenses increased 18%, or $359,000, to $2,336,000 for the nine month period ended March 29, 2009 compared to $1,977,000 for the comparable period for the prior fiscal year. The following chart summarizes the major components of general and administrative expenses (in thousands):

The increase in general and administrative expenses during the three months ended March 29, 2009 was primarily due to the addition of general and administrative expenses associated with the new Company owned store in Denton, Texas, an increase in other professional fees resulting from outsourced purchasing services and the utilization of a site selection service, an increase in stock compensation expense related to stock option grants and a reduction in the allocation of overhead to the revenue producing units. These increases were offset by a reduction in payroll due to open and eliminated positions, and reductions in insurance and tax expenses

The increase in general and administrative expenses during the nine months ended March 29, 2009 was primarily due to the addition of general and administrative expenses associated with the new Company owned store in Denton, Texas (including pre opening and marketing costs of $87,000), an increase in other professional fees resulting from outsourced purchasing services and the utilization of a site selection service, an increase in stock compensation expense related to stock option grants and a reduction in the allocation of overhead to the revenue producing units. These increases were offset by a reduction in payroll due to open and eliminated positions, and a decrease in legal fees.

Provision for Bad Debts

Provision for bad debt expense decreased 85%, or $85,000, to $15,000 for the three month period ended March 29, 2009 compared to $100,000 for the comparable period in the prior fiscal year. Provision for bad debt expense decreased 62%, or $98,000, to $60,000 for the nine month period ended March 29, 2009 compared to $158,000 for the comparable period for the prior fiscal year. The decrease is primarily due to the recording of an additional allowance in the quarter ended March 23, 2008 for a receivable obtained by a default judgment that management determined to be unrealizable.

Interest Expense

Interest expense was relatively unchanged for the three month and nine month periods ended March 29, 2009 from the comparable periods in the prior fiscal year.

Provision for Income Tax

For the three month and nine month periods ended March 29, 2009, income tax expense of $203,000 and $438,000, respectively, are calculated on an effective income tax rate that is consistent with the statutory U.S. federal income tax rate of 34% adjusted for the state income tax effects and permanent difference items. Management believes that future operations will generate sufficient taxable income, along with the reversal of temporary differences, to fully realize the net deferred tax asset of $792,000. The $216,000 net income tax benefit recorded during the three months ended March 23, 2008 was due to the release of a valuation allowance offset by the provision for the 2008 federal and state income tax obligations and the utilization of the Company’s net operating loss.

Discontinued Operations

     Discontinued operations includes losses from two Company-owned stores closed in Houston, Texas during the quarter ended September 23, 2007. Below is a summary of discontinued operations (in thousands):

Restaurant Openings and Closings

     During the three month period ended March 29, 2009, two new domestic Express Units and three international Units were opened by Pizza Inn franchisees. Seven domestic restaurants were closed by franchisees (four Buffet Units and three Express Units) and three international restaurants were closed, typically because of unsatisfactory standards of operation or poor performance. We do not believe that these closings had any material impact on the collectibility of our outstanding receivables and royalties due to us because (i) these amounts have been reserved for or are otherwise collectable and (ii) these closed restaurants were generally lower volume restaurants whose financial impact on our business as a whole was not significant. For those restaurants that are anticipated to close or are exhibiting signs of financial distress, credit terms are typically restricted, weekly food orders are required to be paid for on delivery and/or with certified funds and royalty and advertising fees are collected as add-ons to the delivered price of weekly food orders.

The following charts summarize restaurant activity for the three and nine month periods ended March 29, 2009 and March 23, 2008: