Pizza Inn, Inc.

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Pizza Inn, Inc.

3551 Plano Parkway
The Colony, Texas 75056
U.S.A.
Telephone: (469)384-5000
Fax:
Web site: http://www.pizzainn.com

Public Company Incorporated: 1961
Employees: 211
Sales: $63.5 million (2001)
Stock Exchanges: NASDAQ
Ticker Symbol: PZZI
NAIC: 422490 Other Grocery and Related Products Wholesalers

With its corporate headquarters located near Dallas, Pizza Inn, Inc. franchises and services some 450 Pizza Inn Restaurants, both in the United States and overseas. Domestically, Pizza Inns are found in 21 states, primarily in the south, with strong concentrations in Texas, Arkansas, and North Carolina. Only three of the restaurants are company owned, all located in Dallas, where they are used to train new employees and franchisees, as well as for research purposes. Pizza Inn has been especially aggressive in franchising outside of the United States, with restaurants located in 12 countries, from Iceland to the Philippines. Pizza Inn features four types of restaurants. Full service Pizza Inns seat 130 to 185 customers, and generally offer additional carry out and delivery services. In addition to pizza, these operations offer pasta, sandwiches, and desserts, as well as beer and wine in select locations. A second category of Pizza Inns are dedicated solely to pizza delivery and carry-out. Some Pizza Inns employ a self-serve buffet concept, offering essentially the same items as the full service restaurants, but seating between 60 to 70 customers. These units also offer pizza delivery and carry out. A final type of Pizza Inn operation is the Express Serve unit, which can be found in a convenience store, airport terminal, or within a college campus facility. Seating is limited if offered at all, and the menu is kept to a minimum. Eschewing delivery, the express operation focuses on quick carry-out service. In addition to franchise fees, Pizza Inn makes money through its Norco Distributing Co. unit, which sells food and paper products and restaurant equipment to its chain of restaurants.

Pizza Inn’s 1960s Origins

Although pizza had been offered for a number of years, mostly in the major East Coast cities with large concentrations of Italian-Americans, a pizza craze swept the country after World War II, resulting in a large number of mom-and-pop operations and eventually entrepreneurs with bigger plans. In 1958, Frank and Dan Carney opened the first Pizza Hut in Wichita, Kansas, and a year later they incorporated and opened their first franchise unit in Topeka, Kansas. While Pizza Hut was devoted to a table and chairs concept for pizza, Detroit native Tom Monaghan founded Domino’s Pizza in 1960 and pioneered the delivery chain. A short time later Michael Hitch, also from Detroit, founded Little Caesars, which focused on the carry-out of inexpensive pizza. Each of the three future pizza magnates unknowingly carved out a unique share of the future market and for many years were dominant among pizza chains. Pizza Inn, another early entrant in the industry, competed with Pizza Hut in the restaurant category. The company originated in Dallas, Texas, in 1961, a year after one of its co-founders, Francis J. Spillman, had opened a storefront pizza business close to the campus of Southern Methodist University. Before entering the restaurant business, Spillman had worked for Boeing Aircraft and American National Insurance Company. The company began franchising in 1963, employing a territorial concept that permitted franchisees to operate a minimum number of Pizza Inns in a particular area.

Pizza Inn grew at a steady rate over the next several years, so that by 1970 the company owned approximately 100 restaurants while franchising another 125. In addition to Pizza Inns, the company operated and franchised a small number of Papa’s Pizza Parlors, Pepe Taco Restaurants, and der Chees n’ Wurst outlets. Pizza Inns’ efforts to achieve rapid expansion, however, were derailed when the U.S. economy began to sputter in the early 1970s. Pizza Inn’s poor financial health, in fact, precipitated a March 1971 merger agreement with Pizza Hut. Under terms of the proposed deal, eight Pizza Inn shares of common stock would be exchanged for one Pizza Hut share. Two months later, after Pizza Inn and its franchisees were unable to resolved some territorial conflicts with Pizza Hut, the deal was scuttled. To alleviate its poor financial condition, Pizza Inn management was forced to institute a cost reduction program. The company sold off the Kubler Sausage Company and 11 restaurant operations, and closed another ten, including all of its Pepe Taco restaurants. To pay off a loan that Pizza Hut had made in anticipation of the two companies merging, Pizza Inn transferred 21 restaurants it owned through subsidiaries. Moreover, the company cut staff and agreed to a repayment plan with creditors that would greatly restrict its ability to merge, borrow additional money, or increase compensation to officers. As a result of all these changes in 1971, Pizza Inn posted a net loss of nearly $500,000, despite generating record sales of nearly $12 million.

Pizza Inn Rebounds in the 1970s

Pizza Inn recovered quickly and renewed its pattern of growth through the rest of the 1970s. Annual revenues topped $50 million in 1976 and $100 million by 1978, while net profits ranged from $1.7 million to $2.3 million. The number of new restaurant openings also kept pace, so that by the end of the decade Pizza Inn, which totaled 745 units, was second only to Pizza Hut among U.S. pizza restaurant chains. Pizza Inns could be found in 33 states, mostly in the South, with a third of the units located in Texas. Nearly 350 of the restaurants were company owned, including two in Monterrey, Mexico. Furthermore, Pizza Inn now had other franchised restaurants located in Mexico, as well as Puerto Rico, Japan, the Philippines, and South Africa. Pizza Inn first became involved with franchising outside of North America when it opened units in U.S. military bases in Japan.

The fortunes of Pizza Inn began to decline in the 1980s as the company faced increased competition from other pizza chains. After many years of turning a profit, Pizza Inn lost $590,000 in 1985. Its stock, which two years earlier had traded at $17.50 now fell to around $6 at the start of 1986. Spillman announced that Pizza Inn needed to open new units that focused on home delivery, as well as to remodel existing stores, but the company was already $57 million in long-term debt and simply lack the wherewithal to finance Spillman’s reported goal of opening as many as 150 restaurants in 1986. Following further losses in the first quarter of 1986, Pizza Inn sold off its meat manufacturing subsidiary, Quality Sausage Company, for $23.7 million in cash and the assumption of $5.4 million in debt. Rumors began to circulate that the company was a ripe takeover target.

Spillman’s critics accused him of mismanaging Pizza Inn, maintaining that he ran the public corporation as if it were a private firm. In the summer of 1986, Spillman assembled an investor group to, indeed, take the company private, fending off a possible takeover bid and presumably shielding it from Wall Street pressure to produce short-term results. Spillman offered to buy all Pizza Inn shares for $10.50 each. A revised price of $11 per share was subsequently approved by a special committee of two independent directors. A bid of $12 per share was also made by a pair of investors, but the offer was quickly rejected after Spillman indicated that his group would not sell their 39 percent stake in Pizza Inn, thereby preventing rival bidders from gaining the two-thirds shareholder vote required in Texas mergers. A great deal of controversy ensued, with critics charging that Spillman was underestimating the value of Pizza Inn, in particular the worth of a cheese subsidiary and the real estate on which a large number of company-own restaurants were located.

Spillman’s group increased its bid to $12.50 per share, but ultimately failed to arrange the necessary financing to close the deal. After securing an option to buy over one million Pizza Inn shares from Spillman, Pantera’s Corp., a St. Louis-based pizza restaurant operation, offered $48 million in cash and stock for the company in March 1987. Pizza Inn shareholders were set to receive approximately $14.50 in cash and Pantera’s stock. Although Spillman engineered a last-second bid, Pantera’s finally gained shareholder approval in July 1987, took over control of Pizza Inn, and assumed its corporate name. With the addition of 120 Pantera’s restaurants, the new Pizza Inn became the fourth largest overall pizza chain in the country.

It was announced that Spillman would be kept on as president of Pizza Hut under the terms of a five-year contract. In fact, he only stayed as a consultant for just three months then left to create companies to franchise Pizza Inn restaurants. When he failed to pay royalty fees for food bills, however, his relationship with Pizza Inn was severed. He changed the names of his restaurants to Oregano’s Pizza, but made only a gesture of disassociating himself from Pizza Inn, resorting to taping over Pizza Inn signs and blotting out logos on menus. Pizza Inn took Spillman to court, resulting in a two-year ban on Spillman operating a restaurant anywhere within five miles of a Pizza Inn. The presiding federal judge called Spillman’s acts “the most egregious case of deliberate trademark infringement ever heard by this court.”

Company Perspectives:

Pizza Inn’s driving force is its commitment to specialty pizzas, menu variety and value, and pizza dough quality.

Pizza Inn’s new management had more serious issues to address that its conflict with the chain’s founder. It sold off the J.T. McCord’s hamburger and chili restaurants that Spillman had created under Pizza Inn and slashed a third of the company’s administrative work force. The company also introduced a new Italian-style buffet format to a large number of units in order to distinguish Pizza Inn from the competition in the highly competitive pizza industry, which was now being rocked by price wars between Pizza Hut, Domino’s, and Little Caesars. Aside from conversion costs to a buffet operation, the debt Pantera’s incurred in acquiring Pizza Inn proved overly burdensome, so that by the summer of 1989 the company was in difficult straits. After failing to meet several deadlines to make interest payments, Pizza Inn was unable to arrange a refinancing plan and faced the prospect of selling off units in order to pay its bills. By September 1989, the bottom fell out, and Pantera’s stock fell to just 37.5 cents. With assets of $76.7 million and liabilities of $81.7 million, the company had no choice but to file for Chapter 11 bankruptcy protection. The court was instrumental in the hiring of long-time fast food executive Jeff Rogers to serve as a consultant in the liquidation of the company. After becoming familiar with Pizza Inn, he became convinced that the company’s problems were far from insurmountable, and rather than selling the operation the better course would be to attempt a turnaround. In January 1990 he was hired as Pizza Inn’s chief executive officer in order to do just that.

Rogers was well suited to rescuing an ailing fast food chain, having recently turned around the Bonanza steak restaurant business. While earning a undergraduate degree in Hotel and Restaurant Management at the University of Denver, he began his business career in the marketing department of International Industries, which was the parent company of International House of Pancakes, Orange Julius, and other franchise chains. After serving five years as International Industries’ marketing director, Rogers became president of Communications-200, a Los Angeles advertising agency that did work for A&W Restaurants and other restaurant clients. In 1979, he moved to Dallas to take over marketing for Bonanza, which had been losing money and market share. By 1983, he became president of Bonanza’s parent company, USACafes, and was instrumental in the chain tripling in value and gaining a slot on the New York Stock Exchange during the six years he was in charge. In 1989, however, Metromedia Restaurant Group acquired the Bonanza chain and Rogers was let go.

Revitalization in the 1990s

Out of work in Dallas, Rogers accepted the top position at Pizza Inn, a company that was over $32 million in debt. Even before he began the task of selling off Pizza Inn’s 190 company-owned restaurants, he arranged to have the corporate headquarters spruced up. Hallways dark from burned-out light bulbs and hallways cluttered with stacks of file boxes, dirty bathrooms, and dingy drapes were indicative of a company that had lacked leadership for a long period of time. By simply cleaning up and painting the walls, Rogers instantly boosted employee morale. “People thought I was the turnaround king strictly because I cleaned the place,” he told the Dallas Business Journal Rogers also began to repair relations with franchisees, whom he learned had not been in contact with the home office for an entire year. With Pizza Inn selling off units, franchising would now be the life blood of the company. In effect, the franchisees would finance the future growth of the company, since they would be the ones making the major capital investments. Rogers also came to rely on the franchises to conduct the chain’s research and development, believing that because they were on the front lines they would be better able to recognize what worked and what failed. One area that he felt strongly about was delivery, which was the fastest-growing segment of the pizza market. Little more than a third of all Pizza Inns offered delivery, a situation that Rogers began aggressively to address.

Pizza Inn lost money in 1991 and 1992. It was in 1992 that he hired one of his key executives at USACafes, Ronald Parker, to become Pizza Inn’s chief operating officer. Improved customer service, cleaner restaurants, and a better menu resulted in Pizza Inn turning a profit of $2.2 million in 1993, which increased to $2.6 million the following year, and $3.2 million in 1995, as system wide sales improved to $218 million. Pizza Inn turned to the convenience store market, opening Pizza Inn Express units inside Coastal Marts. Its full service restaurants moved into North Carolina, gaining a toe hold for Pizza Inn in the east. Moreover, Pizza Inn renewed its overseas efforts, franchising restaurants in Brazil, the Philippines, and the Middle East. At the same time, the company did not sacrifice control of the chain for sheer size. When its South Korean franchisee, who operated 40 stores, failed to use proper ingredients and offered poor service, the company did not hesitate to terminate the licensing agreement and seek new partners.

For his efforts in revitalizing Pizza Inn, Rogers was named Inc. magazine’s Entrepreneur of the Year in the “turnaround category” in September 1994. To maintain momentum in the mid-1990s, Rogers greatly increased Pizza Inn’s marketing budget, more than doubling the money spent on television advertising. The size of the Pizza Inn chain continued to grow each year, with new units more than offsetting under-performing ones that were shut down. In 1998, for instance, Pizza Inn opened 66 domestic units and 16 international units, while at the same time closing 54 units domestically and five overseas.

The fortunes of Pizza Inn peaked in 1997 when the company generated revenues of $69 million and posted a net profit of $4.5 million. Over the next few years, sales would stagnant, although the company would remain consistently profitable in the highly competitive pizza industry. In July 2000, Parker took over as president of the company to focus on operational issues and franchise service, allowing Rogers, who remained CEO, to concentrate on unit growth and profitability. The company continued its international growth, signing franchise deals in new territories such as Romania, Honduras, and Iceland. In 2001 Pizza Inn launched new initiatives to improve sagging sales trends, including store remodelings and the rolling out of the buffet format to new units. Although now fiscally healthy, Pizza Inn was not large enough to challenge its main rival, Pizza Hut, on a head-to-head basis. Rather, the chain had to continue to carefully target its markets in the southern portion of the United States while adding to its very successful overseas franchising program.

Key Dates:

I960:: Francis J. Spillman opens a pizza business near the Southern Methodist University campus.
1961:: Pizza Inn is incorporated.
1963:: Franchising of the company begins.
1971:: A bid to merge with Pizza Hut fails.
1987:: Pantera’s Corp. acquires Pizza Inn.
1989:: The company is forced to declare bankruptcy.
1990:: Jeff Rogers is named president.
1993:: Pizza Inn returns to profitability.

Principal Subsidiaries

PIBCO, ltd.; Barko Realty, Inc.; Pizza Inn of Delaware, Inc.; Pizza Inn, Servicos de Gestao de Franchising, Lda.; R-Check, Inc.

Principal Competitors

Domino’s Pizza Inc.; Godfather’s Pizza Inc.; Little Caesar International Inc.; Papa John’s International Inc.; Pizza Hut Inc.; Sbarro Inc.; Uno Restaurant Corporation.