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Mail Stop 03-08
February 14, 2005
By Facsimile and U.S. Mail
Mr. Shawn M. Preator
Chief Financial Officer
Pizza Inn, Inc.
3551 Plano Parkway
The Colony, Texas 75056
RE: Form 10-K for the fiscal year ended June 27, 2004
File Date: September 24, 2004
File No. 0-12919
Forms 10-Q for the periods ended September 26 and December 26,
2004
Dear Mr. Preator:
We have reviewed your filings and have the following
comments.
We have limited our review to only your financial statements and
related disclosures and will make no further review of your
documents. Where indicated, we think you should revise your
disclosures in future filings in response to these comments. If
you
disagree, we will consider your explanation as to why our comment
is
inapplicable or a revision is unnecessary. Please be as detailed
as
necessary in your explanation. In some of our comments, we may
ask
you to provide us with supplemental information so we may better
understand your disclosure. After reviewing this information, we
may
or may not raise additional comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your
filings.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
Form 10-K for the Fiscal Year Ended June 27, 2004
Item 7. Management`s Discussion and Analysis of Financial
Condition
and Results of Operations
Results of Operations
Fiscal 2004 Compared to Fiscal 2003
1. In future filings please consider including an overview section
that adds context for the remainder of the discussion by providing
a
balanced, executive-level discussion that identifies the most
important themes or other significant matters with which
management
is concerned primarily in evaluating the company`s financial
condition and operating results. See Section III.A of SEC Release
33-8350.
2. Throughout this section, you refer to two or more factors that
contributed to material changes over the reported periods of the
various components of your results of operations. In future
filings
rather than simply using the term "primarily" in describing
changes,
quantify the amount of the change that is attributable to the
primary
source you identify as they relate to these components. In
addition
to quantifying the dollar effect of the various contributing
factors
ensure that you provide information about the quality of and
potential variability of your earnings, so that investors can
ascertain the likelihood that past performance is indicative of
future performance. See Section III.D of SEC Release 33-6835.
3. We note that 34 new franchise units were opened and 39 units
were
closed during fiscal 2004. Please tell us and disclose in future
filings what impact these events had on your operations as well as
the impact, if any, on collectibility of any outstanding
receivables
and royalties due to the company. Additionally, please consider
including a rollforward within your MD&A to show beginning units,
units closed, new units and ending units for all applicable years
to
supplement your discussion of results of operations and to enhance
the ability to evaluate trends in franchise operations. This
disclosure should cover each franchise format (e.g., Buffet`s,
Delco`s and Express locations). If you believe other information
is
more meaningful or appropriate, please advise.
4. It appears that at least 10% of your franchised locations have
closed in each of the past two years. Tell us, and revise your
MD&A
in future filings to address, whether this level of store turnover
is
consistent with management`s expectations. If the level of store
closures is above the level you have experienced historically,
please
discuss the reasons, if known, for the high level of turnover and
the
potential impact on your future prospects.
Contractual Obligations and Commitments
5. In future filings please revise your contractual obligations
table
to include estimated interest payments on your debt. Because the
table is aimed at increasing transparency of cash flow, we believe
these payments should be included in the table. If you choose not
to
include these payments, a footnote to the table should clearly
identify the excluded items and provide any additional information
that is material to an understanding of your cash requirements.
See
Section IV.A and footnote 46 to the Commission`s MD&A Guidance
issued
December 19, 2003 available at www.sec.gov.
Financial Statements
Consolidated Balance Sheets
6. You disclose in the proxy statement that the company expected
the
balance of the Clairday Debt of $335,318 to be paid in full
pending
completion of negotiations with Mr. Clairday. Please tell us the
status of these negotiations. In light of the age of the related
receivables and the lack of significant payment/set-off activity
in
recent years we assume that you classify any unreserved balance
associated with these receivables as a non-current asset. Please
confirm that our understanding is correct, or tell us why you
believe
that current classification is appropriate. In this regard we
refer
you to ARB 43 Chapter 3 (especially paragraphs 4 and 6).
Consolidated Statement of Operations
7. The company discloses that it has a wholly-owned insurance
operation (PIBCO Ltd). Tell us, with a view towards future
disclosure, whether this is a captive insurance operation for the
purpose of managing the company`s self-insured risk exposures and
tax
planning or an operating insurance enterprise that serves third-
party
customers. To the extent that PIBCO Ltd. serves third party
customers, tell us:
* the nature of the insurance operations (e.g., types of risks
insured, duration of policies, nature of customers, etc.);
* gross dollar amount of coverage outstanding for policies in
force
and, to the extent applicable, the extent to which risk associated
with policies in force has been assumed by reinsurance
arrangements;
* the amount of premium revenues and associated expenses reflected
for each period presented;
* where revenues and related costs of insurance operations are
classified on the consolidated statement of operations; and
* where insurance related obligations are classified on the
balance
sheet.
Note A - Organization and Summary of Significant Accounting
Policies
Revenue Recognition
8. Please confirm for us supplementally and revise your future
disclosure to specify, if true, that title and risk of loss
transfer
upon shipment in accordance with the terms of your agreements with
your franchisees, or tell us why recognition of revenue upon
shipment
is appropriate. Clarify whether equipment sales require
installation
or testing prior to franchisee acceptance. Refer to SAB 104 for
guidance.
Note I - Commitments and Contingencies
9. With respect to store closings, openings and territory sales,
please address the disclosure requirements of paragraph 20 of SFAS
45
or tell us why such disclosure is not required.
Schedule II
10. We note that your write-offs of receivables are net of
recoveries. Please tell us supplementally, and disclose in
future
filings, the amount of write-offs and recoveries on a gross basis.
Form 10-Q for the Quarter Ended December 26, 2004
Item 2. Management`s Discussion and Analysis of Financial
Condition
and Results of Operations
Results of Operations
11. Please tell us, with a view towards future disclosure, more
about
the specific nature and amount of factors leading to the adverse
changes in gross margin over the past several quarters. For
example,
in your Form 10-K for the fiscal year ended June 27, 2004 you
attribute increased costs to an increase in block cheese prices.
It
is unclear whether the company has the intent or ability to raise
prices to compensate for the increases in product costs you
mention.
Based on the increased inventory levels on your balance sheet, we
assume the recognition of increased product costs will persist as
you
sell product in future quarters. Identify any known or likely
trend
in costs, to the extent applicable.
12. You include "Other Income" in revenues on your statement of
operations. It appears that this line item includes several non-
revenue items, such as, interest income, gains on asset sales,
etc.
Also, your references to "third-party commissions" and "vendor
incentives" also suggest that revenue classification may not be
appropriate. Please tell us the nature and amount of each item
included in "Other Income" for fiscal years 2002, 2003 and 2004
and
for the quarters ended September 26, 2004 and December 26, 2004
and
how you determined that revenue classification was appropriate.
Please provide references to authoritative literature supporting
your
classification, to the extent possible. In this regard we refer
you
to Rule 5-03(b) of Regulation S-X and remind you that other
income,
interest income and similar transactions must be classified as
non-
operating income rather than revenues. Please refer to EITF 02-16
for guidance on accounting for vendor incentives. We may have
further comments after reviewing your response.
*******
As appropriate, please respond to these comments within 10
business
days or tell us when you will provide us with a response. Please
furnish a letter that keys your responses to our comments and
provides any requested supplemental information. Detailed
response
letters greatly facilitate our review. Please file your response
letter on EDGAR. Please understand that we may have additional
comments after reviewing your responses to our comments.
We urge all persons who are responsible for the accuracy and
adequacy
of the disclosure in the filings reviewed by the staff to be
certain
that they have provided all information investors require for an
informed decision. Since the company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures they
have made.
In connection with responding to our comments, please provide, in
writing, a statement from the company acknowledging that:
* The company is responsible for the adequacy and accuracy of the
disclosure in the filings;
* Staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with
respect to the filings; and
* The company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of Enforcement
has
access to all information you provide to the staff of the Division
of
Corporation Finance in our review of your filings or in response
to
our comments on your filings.
If you have any questions regarding these comments, please direct
them to Staff Accountant David DiGiacomo at (202) 824-5493. Any
other questions may be directed to me at (202) 942-2905.
Sincerely,
George F. Ohsiek, Jr.
Branch Chief
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Mr. Shawn M. Preator
Chief Financial Officer
Pizza Inn, Inc.
February 14, 2005
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