##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D. C. 20549
 FORM 10-K
  þ
    
    Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the fiscal year ended June 25, 2006.
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to .
 Commission File Number 0-12919
 PIZZA INN, INC.
  Missouri
    
    47-0654575(State or jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)3551 Plano ParkwayThe Colony, Texas
    
    75056(Address of principal executive offices)
    
    (Zip Code)
 (469) 384-5000
  Title of class
    
    Name of each exchange on which registeredCommon stock, par value $.01 each
    
    NASDAQ Capital Market
 None
 o þ
 o þ
 þ o
 o
  o o þ
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




---



TABLE OF CONTENTS  PART IITEM 1. BUSINESSITEM 1A. RISK FACTORSITEM 1B. UNRESOLVED STAFF COMMENTSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY RELATED STOCKHOLDER MATTERS. AND ISSUER PURCHASE OF EQUITY SECURITIESITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9ITEM 9AITEM 9B. OTHER INFORMATIONPART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICESPART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULESSIGNATURESAmended and Restated By-LawsRestated Articles of IncorporationWarehouse Lease AgreementCompromise and Settlement AgreementConsent of Independent Registered Public Accounting FirmRule 13a-14(a) Certification of Principal Executive OfficerRule 13a-14(a) Certification of Principal Financial OfficerSection 1350 Certification of Principal Executive OfficerSection 1350 Certification of Principal Financial Officer    Table of Contents  
 PART I
 
 ITEM 1. BUSINESS.
 General
   Our History
  Our Concepts
    2




---



##### Table of Contents



Buffet Restaurants
    Delivery/Carryout Restaurants
  Express Restaurants
  Site Selection
  3




---



##### Table of Contents



Development and Operations
   Franchise Operations
  Franchise and development agreements.
  Training.
 Standards.
 4




---



##### Table of Contents



Company Operations
    International Operations
    Food and Supply Distribution
  5




---



##### Table of Contents



Advertising
    Inn
 Trademarks and Quality Control
  6




---



##### Table of Contents



Government Regulation
   Employees
  Industry and Competition
    Available Information
 http://www.sec.gov
 7




---



##### Table of Contents



http://www.pizzainn.com
  Forward-Looking Statements
  
 ITEM 1A. RISK FACTORS.
  Risks Associated with Ongoing Operations
 As a result of losses in recent quarters, our financial condition has been materially weakened
and our liquidity has decreased.
  We are in default under our loan agreement, which has reduced available borrowing capacity
under our revolving credit line and resulted in diminished liquidity.
   8




---



##### Table of Contents



Our substantial indebtedness could materially adversely affect our business and limit our
ability to plan for or respond to changes in our business.
  
    
    make it more difficult for us to satisfy our obligations with respect to our loan agreement;
    
    increase our vulnerability to general adverse economic and industry conditions;
    
    reduce the availability of our cash flow for other purposes;
    
    limit our flexibility in planning for, or reacting to, changes in our business and the
industry in which we operate, thereby placing us at a competitive disadvantage compared to
our competitors that may have less debt; and
    
    limit, by the financial and other restrictive covenants in our loan agreement, our
ability to borrow additional funds.
 Payments we are required to make under a settlement agreement with our former president and
chief executive officer could result in diminished liquidity and cash flow positions.
  If we do not prevail in litigation with a former beverage supplier, we could be liable for
significant monetary damages.
  We also face risks of litigation from customers, franchisees, employees and others in the
ordinary course of business, which diverts our financial and management resources. Any adverse
litigation or publicity may negatively impact our financial condition and results of operations.
   9




---



##### Table of Contents



If we are not able to implement our growth strategy successfully, which includes opening new
domestic Buffet Units and reimaging existing restaurants, our ability to increase our revenues and
operating profits could be materially adversely affected.
    An increase in the cost of cheese or other commodities, including fuel and labor, could
adversely affect our profitability and operating results.
  Shortages or interruptions in the delivery of food products could adversely affect our
operating results.
  If we are not able to continue purchasing our key pizza ingredients from our current suppliers
or find suitable replacement suppliers our financial results could be materially adversely
affected.
  10




---



##### Table of Contents



We are subject to extensive government regulation, and any failure to comply with existing or
increased regulations could adversely affect our business and operating results.
  
    
    the preparation and sale of food;
    
    building and zoning requirements;
    
    minimum wage, citizenship, overtime and other labor requirements;
    
    compliance with the Americans with Disabilities Act; and
    
    working and safety conditions.
   Our earnings and business growth strategy depends on the success of our franchisees, and we
may be harmed by actions taken by our franchisees that are outside of our control.
  Loss of key personnel or our inability to attract and retain new qualified personnel could
hurt our business and inhibit our ability to operate and grow successfully.
  Our current insurance coverage may not be adequate, our insurance premiums may increase and we
may not be able to obtain insurance at acceptable rates, or at all.
  11




---



##### Table of Contents



The Companys management has concluded that the Companys disclosure controls and procedures
are not effective, and that a material weakness in financial reporting existed at June 25, 2006 as
a result of recent turnover in its accounting staff and reassignment of responsibilities among
remaining staff, which may affect the Companys ability to accurately and timely complete and file
its financial statements. If the Company is not able to accurately and timely complete its
financial statements and file the reports required under Section 13 or 15(d) of the Exchange Act,
the Company could face SEC or NASDAQ inquiries, its stock price may decline, and/or its financial
condition could be materially adversely affected.
  Risks Associated With Our Common Stock
 Even though our common stock is currently traded on the Nasdaq Capital Market, it has less
liquidity than the stock of many other companies quoted on the NASDAQ Stock Markets Global Market
or on a national securities exchange.
  The market price of our common stock may fluctuate in the future, and these fluctuations may
be unrelated to our performance.
  Risks Associated With Our Industry
 If we are not able to compete effectively, our business, sales and earnings could be
materially adversely affected.
   12




---



##### Table of Contents



Changes in consumer preferences and perceptions could decrease the demand for our products,
which would reduce sales and harm our business.
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS.
 None
 
 ITEM 2. PROPERTIES.
    
 ITEM 3. LEGAL PROCEEDINGS.
   13




---



##### Table of Contents



th th th
  PepsiCo, Inc. v. Pizza Inn Inc.,
 14




---



##### Table of Contents



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  15




---



##### Table of Contents



PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES.
   Actual TradeExecuted PriceHigh
    
    Low2006First Quarter Ended 9/25/2005
    
    $
    2.97
    
    
    $
    2.50Second Quarter Ended 12/25/2005
    
    
    2.90
    
    
    
    2.50Third Quarter Ended 3/26/2006
    
    
    2.93
    
    
    
    2.59Fourth Quarter Ended 6/25/2006
    
    
    3.35
    
    
    
    2.632005First Quarter Ended 9/26/2004
    
    $
    3.25
    
    
    $
    2.39Second Quarter Ended 12/26/2004
    
    
    3.26
    
    
    
    2.63Third Quarter Ended 3/27/2005
    
    
    2.95
    
    
    
    2.25Fourth Quarter Ended 6/26/2005
    
    
    3.00
    
    
    
    2.30
   16




---



##### Table of Contents



Equity Compensation Plan Information
  Number of Securities to
    
    
    Weighted-average
    
    
    Number of Securitiesbe issued upon exercise
    
    
    exercise price of
    
    
    remaining available forPlan
    
    of outstanding options,
    
    
    outstanding options,
    
    
    future issuance underCategory
    
    warrants, and rights
    
    
    warrants, and rights
    
    
    equity compensation plansEquity Compensation
plans approved by
security holders
    
    
    200,858
    
    
    $
    3.13
    
    
    
    1,433,759Equity Compensation
plans not approved by
security holders
    
    
    500,000
    
    
    $
    2.50
    
    
    
    Total
    
    
    700,858
    
    
    $
    2.68
    
    
    
    1,433,759
  
 ITEM 6. SELECTED FINANCIAL DATA.
  Year EndedJune 25,
    
    June 26,
    
    June 27,
    
    June 29,
    
    June 30,2006
    
    2005
    
    2004
    
    2003
    
    2002(In thousands, except per share amounts)SELECTED INCOME STATEMENT DATA:Total revenues
    
    $
    50,608
    
    
    $
    55,269
    
    
    $
    59,988
    
    
    $
    58,471
    
    
    $
    65,388(Loss) income before taxes
    
    
    (7,018
    )(2)
    
    
    359
    
    
    
    3,648
    
    
    
    4,643
    
    
    
    1,723Net (loss) income
    
    
    (5,989
    )(2)
    
    
    204
    
    
    
    2,243
    
    
    
    3,093
    
    
    
    1,137Basic (loss) earnings per common share
    
    
    (0.59
    )(2)
    
    
    0.02
    
    
    
    0.22
    
    
    
    0.31
    
    
    
    0.11Diluted (loss) earnings per common share
    
    
    (0.59
    )(2)
    
    
    0.02
    
    
    
    0.22
    
    
    
    0.31
    
    
    
    0.11SELECTED BALANCE SHEET DATA:Total assets
    
    
    19,001
    
    
    
    20,255
    
    
    
    20,906
    
    
    
    20,796
    
    
    
    24,318
    (1)Total debt and
capital lease obligations
    
    
    8,044
    
    
    
    7,727
    
    
    
    8,376
    
    
    
    11,233
    
    
    
    17,112
 
 (1)
    
    Total assets in 2002 include a prior period adjustment of $296,000 to properly reflect
deferred income tax asset and liability balances.(2)
    
    In fiscal year 2006 the Company adopted SFAS No. 123(R) that requires compensation expense
for most equity-based awards be recognized over the requisite service period. Year ended June 25,
2006 compensation expense was $341,000. 17




---



##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
 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 Annual
Report on Form 10-K 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 the strategies underlying the Companys business objectives, its customers
and its franchisees, its liquidity and capital resources, the impact of its historical and
potential business strategies on the Companys business, financial condition, and operating results
and the expected effects of potentially adverse litigation outcomes. The Companys actual results
could differ materially from its expectations. Further information concerning the Companys
business, including additional risk factors and uncertainties that could cause actual results to
differ materially from the forward-looking statements contained in this Annual Report on Form 10-K ,
are set forth above under Item 1 and below under the heading Risk Factors. 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 Annual Report on Form 10-K and, except as may be required by applicable
law and regulation, the Company does not undertake, and specifically disclaims 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.
 Fiscal 2006 Compared to Fiscal 2005
 Overview
    18




---



##### Table of Contents



Fiscal Year EndedJune 25,
    
    June 26,2006
    
    2005Chainwide retail sales Buffet Units (in thousands)
    
    $
    119,369
    
    
    $
    126,723Chainwide retail sales Delco Units (in thousands)
    
    $
    13,765
    
    
    $
    13,842Chainwide retail sales Express Units (in thousands)
    
    $
    8,579
    
    
    $
    9,333Average number of Buffet Units
    
    
    186
    
    
    
    203Average number of Delco Units
    
    
    51
    
    
    
    53Average number of Express Units
    
    
    69
    
    
    
    71
 Revenues
  Food and Supply Sales
  Franchise Revenue
  Fiscal Year EndedJune 25,
    
    
    June 26,2006
    
    
    2005Domestic royalties
    
    $
    4,229
    
    
    $
    4,624International royalties
    
    
    370
    
    
    
    365Domestic franchise fees
    
    
    147
    
    
    
    173International development fees
    
    
    53
    
    
    
    Franchise revenue
    
    $
    4,799
    
    
    $
    5,162
 19




---



##### Table of Contents



Restaurant Sales
  Fiscal Year EndedJune 25,
    
    
    June 26,2006
    
    
    2005New Buffet Units
    
    $
    855
    
    
    $
    Buffet Unit  sold February 2006
    
    
    354
    
    
    
    574Delco Unit  closed April 2006
    
    
    249
    
    
    
    372Total Restaurant sales
    
    $
    1,458
    
    
    $
    946
 Cost of Sales
  Franchise Expenses
  General and Administrative Expenses
  Fiscal Year EndedJune 25,
    
    
    June 26,2006
    
    
    2005Litigation settlement accrual
    
    $
    2,800
    
    
    $
    Legal fees
    
    
    1,417
    
    
    
    1,257Impairment of long-lived assets and goodwill
    
    
    1,319
    
    
    
    Payroll
    
    
    878
    
    
    
    758Other administrative expenses
    
    
    367
    
    
    
    309Stock Compensation
    
    
    341
    
    
    
    Utilities
    
    
    216
    
    
    
    138Board of director fees
    
    
    148
    
    
    
    297Write-off of on-line ordering system
    
    
    125
    
    
    
    Company stores marketing
    
    
    118
    
    
    
    73State franchise tax
    
    
    (61
    )
    
    
    68Primary variances in general
and administrative expenses
    
    $
    7,668
    
    
    $
    2,900
 20




---



##### Table of Contents



Interest Expense
  Provision for Bad Debt
  Provision for Income Tax
  21




---



##### Table of Contents



Restaurant Openings and Closings
   Beginning
    
    
    
    
    
    
    
    
    
    Concept
    
    End ofof Period
    
    Opened
    
    Closed
    
    Change
    
    PeriodBuffet Units
    
    
    199
    
    
    
    4
    
    
    
    21
    
    
    
    
    
    
    
    182Delco Units
    
    
    52
    
    
    
    4
    
    
    
    7
    
    
    
    
    
    
    
    49Express Units
    
    
    73
    
    
    
    5
    
    
    
    8
    
    
    
    
    
    
    
    70International Units
    
    
    74
    
    
    
    11
    
    
    
    11
    
    
    
    
    
    
    
    74Total
    
    
    398
    
    
    
    24
    
    
    
    47
    
    
    
    
    
    
    
    375
  Beginning
    
    
    
    
    
    
    
    
    
    Concept
    
    End ofof Period
    
    Opened
    
    Closed
    
    Change
    
    PeriodBuffet Units
    
    
    212
    
    
    
    8
    
    
    
    18
    
    
    
    (3
    )
    
    
    199Delco Units
    
    
    53
    
    
    
    6
    
    
    
    8
    
    
    
    1
    
    
    
    52Express Units
    
    
    73
    
    
    
    8
    
    
    
    10
    
    
    
    2
    
    
    
    73International Units
    
    
    67
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    74Total
    
    
    405
    
    
    
    29
    
    
    
    36
    
    
    
    
    
    
    
    398
 Fiscal 2005 Compared to Fiscal 2004
 Overview
   22




---



##### Table of Contents



Fiscal Year EndedJune 26,
    
    June 27,2005
    
    2004Chainwide retail sales Buffet Units (in thousands)
    
    $
    126,723
    
    
    $
    129,335Chainwide retail sales Delco Units (in thousands)
    
    $
    13,842
    
    
    $
    15,156Chainwide retail sales Express Units (in thousands)
    
    $
    9,333
    
    
    $
    9,415Average number of Buffet Units
    
    
    203
    
    
    
    213Average number of Delco Units
    
    
    53
    
    
    
    54Average number of Express Units
    
    
    71
    
    
    
    70
  Revenues
  Food and Supply Sales
  Franchise Revenue
  Fiscal Year EndedJune 26,
    
    
    June 27,2005
    
    
    2004Domestic royalties
    
    $
    4,624
    
    
    $
    4,557International royalties
    
    
    365
    
    
    
    380Collection of international royalties previously
deemed uncollectible
    
    
    
    
    
    
    173Domestic franchise fees
    
    
    173
    
    
    
    278International development fees
    
    
    
    
    
    
    12Franchise Revenue
    
    $
    5,162
    
    
    $
    5,400
 23




---



##### Table of Contents



Restaurant Sales
  Fiscal Year EndedJune 26,
    
    
    June 27,2005
    
    
    2004Buffet Units
    
    $
    574
    
    
    $
    647Buffet Unit  sold February 2004
    
    
    
    
    
    
    616Delivery/carry-out unit  opened January 2004
    
    
    372
    
    
    
    253Restaurant sales
    
    $
    946
    
    
    $
    1,516
 Costs and Expenses
 Cost of Sales
  Franchise Expenses
  General and Administrative Expenses
  Fiscal Year EndedJune 26,
    
    
    June 27,2005
    
    
    2004Legal fees
    
    $
    1,257
    
    
    $
    (197
    )Payroll
    
    
    758
    
    
    
    1,122Consulting fees
    
    
    126
    
    
    
    33Other
    
    
    113
    
    
    
    Proxy solicitation
    
    
    69
    
    
    
    238Primary variances in general
and administrative expenses
    
    $
    2,323
    
    
    $
    1,196
 24




---



##### Table of Contents



Interest Expense
  Provision for Income Tax
  Restaurant Openings and Closings
   Beginning
    
    
    
    
    
    
    
    
    
    Concept
    
    End ofof Period
    
    Opened
    
    Closed
    
    Change
    
    PeriodBuffet Units
    
    
    212
    
    
    
    8
    
    
    
    18
    
    
    
    (3
    )
    
    
    199Delco Units
    
    
    53
    
    
    
    6
    
    
    
    8
    
    
    
    1
    
    
    
    52Express Units
    
    
    73
    
    
    
    8
    
    
    
    10
    
    
    
    2
    
    
    
    73International Units
    
    
    67
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    74Total
    
    
    405
    
    
    
    29
    
    
    
    36
    
    
    
    
    
    
    
    398
  Beginning
    
    
    
    
    
    
    
    
    
    Concept
    
    End ofof Period
    
    Opened
    
    Closed
    
    Change
    
    PeriodBuffet Units
    
    
    220
    
    
    
    12
    
    
    
    20
    
    
    
    
    
    
    
    212Delco Units
    
    
    56
    
    
    
    4
    
    
    
    8
    
    
    
    1
    
    
    
    53Express Units
    
    
    75
    
    
    
    10
    
    
    
    11
    
    
    
    (1
    )
    
    
    73International Units
    
    
    59
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    67Total
    
    
    410
    
    
    
    34
    
    
    
    39
    
    
    
    
    
    
    
    405
 25




---



##### Table of Contents



Liquidity and Capital Resources
       26




---



##### Table of Contents



th th th
 27




---



##### Table of Contents



Contractual Obligations and Commitments
  Fiscal Year
    
    
    Fiscal Years
    
    
    Fiscal Years
    
    
    After FiscalTotal
    
    
    2007
    
    
    2008 - 2009
    
    
    2010 - 2011
    
    
    Year 2011Bank debt (1)
    
    $
    8,848
    
    
    $
    8,848
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating lease obligations
    
    
    2,730
    
    
    
    809
    
    
    
    851
    
    
    
    542
    
    
    
    528Litigation settlement (2)
    
    
    2,859
    
    
    
    2,859
    
    
    
    
    
    
    
    
    
    
    
    Employment Agreements
    
    
    294
    
    
    
    294
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    14,731
    
    
    $
    12,810
    
    
    $
    851
    
    
    $
    542
    
    
    $
    528
 
 1)
    
    Includes $804 of interest expense calculated at a 10% rate for the entire fiscal year 2007.2)
    
    Includes $59 of interest expense calculated at a 5% rate on unpaid settlement amounts. 28




---



##### Table of Contents



Transactions with Related Parties
       29




---



##### Table of Contents



Critical Accounting Policies and Estimates
         30




---



##### Table of Contents



New Pronouncements
       31




---



##### Table of Contents



ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
      32




---



##### Table of Contents



PIZZA INN, INC.
 
 ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
  PAGE NO.FINANCIAL STATEMENTSReport of Independent Registered Public Accounting Firm.
    
    34Consolidated Statements of Operations for the years ended
June 25, 2006, June 26, 2005, and June 27, 2004.
    
    35Consolidated Statements of Comprehensive Income (Loss) for the years ended
June 25, 2006, June 26, 2005, and June 27, 2004.
    
    35Consolidated Balance Sheets at June 25, 2006 and June 25, 2005.
    
    36Consolidated Statements of Shareholders Equity for the years
ended June 25, 2006, June 26, 2005, and June 27, 2004.
    
    37Consolidated Statements of Cash Flows for the years ended June 25, 2006,
June 26, 2005, and June 27, 2004.
    
    38Notes to Consolidated Financial Statements.
    
    40FINANCIAL STATEMENT SCHEDULESchedule II    Consolidated Valuation and Qualifying Accounts
    
    58
  33




---



##### Table of Contents



,
   
 34




---



##### Table of Contents



PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS  (In thousands, except per share amounts)
 Year EndedJune 25,
    
    
    June 26,
    
    
    June 27,2006
    
    
    2005
    
    
    2004REVENUES:Food and supply sales
    
    $
    44,202
    
    
    $
    49,161
    
    
    $
    53,072Franchise revenue
    
    
    4,799
    
    
    
    5,162
    
    
    
    5,400Restaurant sales
    
    
    1,458
    
    
    
    946
    
    
    
    1,516Gain on sale of assets
    
    
    149
    
    
    
    
    
    
    
    50,608
    
    
    
    55,269
    
    
    
    59,988COSTS AND EXPENSES:Cost of sales
    
    
    43,762
    
    
    
    46,617
    
    
    
    49,023Franchise expenses
    
    
    3,126
    
    
    
    2,791
    
    
    
    3,175General and administrative expenses
    
    
    5,531
    
    
    
    4,882
    
    
    
    3,758Impairment of long-lived assets and goodwill
    
    
    1,319
    
    
    
    
    
    
    
    Litigation settlement accrual
    
    
    2,800
    
    
    
    
    
    
    
    Provision for (recovery of) bad debt
    
    
    301
    
    
    
    30
    
    
    
    (229
    )Interest expense
    
    
    787
    
    
    
    590
    
    
    
    61357,626
    
    
    
    54,910
    
    
    
    56,340(LOSS) INCOME BEFORE INCOME TAXES
    
    
    (7,018
    )
    
    
    359
    
    
    
    3,648Provision (benefit) for income taxes
    
    
    (1,029
    )
    
    
    155
    
    
    
    1,405NET (LOSS) INCOME
    
    $
    (5,989
    )
    
    $
    204
    
    
    $
    2,243Basic (loss) earnings per common share
    
    $
    (0.59
    )
    
    $
    0.02
    
    
    $
    0.22Diluted (loss) earnings per common share
    
    $
    (0.59
    )
    
    $
    0.02
    
    
    $
    0.22Weighted average common shares outstanding
    
    
    10,123
    
    
    
    10,105
    
    
    
    10,076Weighted average common and
potentially dilutive common shares outstanding
    
    
    10,123
    
    
    
    10,142
    
    
    
    10,117
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)  (In thousands)
 Year EndedJune 25,
    
    
    June 26,
    
    
    June 27,2006
    
    
    2005
    
    
    2004Net (loss) income
    
    $
    (5,989
    )
    
    $
    204
    
    
    $
    2,243Interest rate swap gain (net of
income tax expense of ($89), ($59),
and ($179), respectively)
    
    
    173
    
    
    
    115
    
    
    
    348Comprehensive Income (Loss)
    
    $
    (5,816
    )
    
    $
    319
    
    
    $
    2,591
 See accompanying Report of Independent Registered Public
Accounting Firm and Notes to Consolidated Financial Statement.
 35




---



##### Table of Contents



PIZZA INN, INC.
CONSOLIDATED BALANCE SHEETS  (In thousands, except share amounts)
 June 25,
    
    
    June 26,2006
    
    
    2005ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    184
    
    
    $
    173Accounts receivable, less allowance for doubtful
accounts of $324 and $360, respectively
    
    
    2,627
    
    
    
    3,419Accounts receivable  related parties
    
    
    452
    
    
    
    622Notes receivable, current portion, less allowance
for doubtful accounts of $0 and $11, respectively
    
    
    52
    
    
    
    Inventories
    
    
    1,772
    
    
    
    1,918Property held for sale
    
    
    
    
    
    
    301Current deferred income tax assets
    
    
    1,145
    
    
    
    193Prepaid expenses and other
    
    
    299
    
    
    
    355Total current assets
    
    
    6,531
    
    
    
    6,981LONG-TERM ASSETSProperty, plant and equipment, net
    
    
    11,921
    
    
    
    12,148Property under capital leases, net
    
    
    
    
    
    
    12Non-current notes receivable
    
    
    20
    
    
    
    Long-term receivable  related party
    
    
    
    
    
    
    314Re-acquired development territory, net
    
    
    431
    
    
    
    623Deposits and other
    
    
    98
    
    
    
    177$
    19,001
    
    
    $
    20,255LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIESAccounts payable  trade
    
    $
    2,217
    
    
    $
    1,962Accrued expenses
    
    
    4,791
    
    
    
    1,374Current portion of long-term debt
    
    
    8,044
    
    
    
    406Current portion of capital lease obligations
    
    
    
    
    
    
    11Total current liabilities
    
    
    15,052
    
    
    
    3,753LONG-TERM LIABILITIESLong-term debt
    
    
    
    
    
    
    7,297Long-term capital lease obligations
    
    
    
    
    
    
    13Deferred income tax liability
    
    
    
    
    
    
    3Other long-term liabilities
    
    
    437
    
    
    
    28315,489
    
    
    
    11,349COMMITMENTS AND CONTINGENCIES (See Notes D and I)SHAREHOLDERS EQUITYCommon stock, $.01 par value; authorized 26,000,000
shares; issued 15,090,319 and 15,046,319 shares, respectively;
outstanding 10,138,494 and 10,094,494 shares, respectively
    
    
    151
    
    
    
    150Additional paid-in capital
    
    
    8,426
    
    
    
    8,005Retained earnings
    
    
    14,593
    
    
    
    20,582Accumulated other comprehensive loss
    
    
    (14
    )
    
    
    (187
    )Treasury stock at costShares in treasury: 4,951,825 and 4,951,825, respectively
    
    
    (19,644
    )
    
    
    (19,644
    )Total shareholders equity
    
    
    3,512
    
    
    
    8,906$
    19,001
    
    
    $
    20,255
 See accompanying Report of Independent Registered Public
Accounting Firm and Notes to Consolidated Financial Statement.
 36




---



##### Table of Contents



PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY  (In thousands)
 Accum.OtherAdditional
    
    
    
    
    
    
    
    
    
    
    Comp.
    
    
    TreasuryCommon Stock
    
    
    Paid-in
    
    
    Loans to
    
    
    Retained
    
    
    (Loss)
    
    
    StockShares
    
    
    Amount
    
    
    Capital
    
    
    Officers
    
    
    Earnings
    
    
    Gain
    
    
    at Cost
    
    
    TotalBALANCE, JUNE 29, 2003
    
    
    10,059
    
    
    $
    150
    
    
    $
    7,825
    
    
    $
    (569
    )
    
    $
    18,135
    
    
    $
    (650
    )
    
    $
    (19,484
    )
    
    $
    5,407Exercise of stock options
    
    
    75
    
    
    
    
    
    
    
    150
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150Principal repayment of loans
by officers
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    569
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    569Interest rate swap gain (net
of income tax expense
of $179)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    348
    
    
    
    
    
    
    
    348Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,243
    
    
    
    
    
    
    
    
    
    
    
    2,243BALANCE, JUNE 27, 2004
    
    
    10,134
    
    
    
    150
    
    
    
    7,975
    
    
    
    
    
    
    
    20,378
    
    
    
    (302
    )
    
    
    (19,484
    )
    
    
    8,717Exercise of stock options
    
    
    15
    
    
    
    
    
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30Stock repurchase
(54 shares)
    
    
    (54
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (160
    )
    
    
    (160
    )Interest rate swap gain (net
of income tax expense
of $59)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115
    
    
    
    
    
    
    
    115Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    204
    
    
    
    
    
    
    
    
    
    
    
    204BALANCE, JUNE 26, 2005
    
    
    10,095
    
    
    
    150
    
    
    
    8,005
    
    
    
    
    
    
    
    20,582
    
    
    
    (187
    )
    
    
    (19,644
    )
    
    
    8,906Exercise of stock options
    
    
    44
    
    
    
    1
    
    
    
    80
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81Interest rate swap gain (net
of income tax expense
of $89)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    173
    
    
    
    
    
    
    
    173Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    341
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    341Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,989
    )
    
    
    
    
    
    
    
    
    
    
    (5,989
    )BALANCE, JUNE 25, 2006
    
    
    10,139
    
    
    $
    151
    
    
    $
    8,426
    
    
    $
    
    
    
    $
    14,593
    
    
    $
    (14
    )
    
    $
    (19,644
    )
    
    $
    3,512
 See accompanying Report of Independent Registered Public
Accounting Firm and Notes to Consolidated Financial Statement.
 37




---



##### Table of Contents



PIZZA INN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS  (In thousands)
 Year EndedJune 25,
    
    
    June 26,
    
    
    June 27,2006
    
    
    2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net (loss) income
    
    $
    (5,989
    )
    
    $
    204
    
    
    $
    2,243Adjustments to reconcile net (loss) income to
cash provided by operating activities:Impairment of goodwill and other assets
    
    
    1,443
    
    
    
    
    
    
    
    Gain on property held for sale
    
    
    (149
    )
    
    
    
    
    
    
    Depreciation and amortization
    
    
    1,214
    
    
    
    1,143
    
    
    
    1,133Stock compensation expense
    
    
    341
    
    
    
    
    
    
    
    Non cash settlement of accounts receivable
    
    
    
    
    
    
    
    
    
    
    (281
    )Litigation settlement
    
    
    2,800
    
    
    
    
    
    
    
    Deferred revenue
    
    
    542
    
    
    
    
    
    
    
    Deferred rent
    
    
    56
    
    
    
    
    
    
    
    Provision for (recovery of) bad debt, net
    
    
    301
    
    
    
    30
    
    
    
    (229
    )Deferred income taxes
    
    
    (1,029
    )
    
    
    39
    
    
    
    500Changes in operating assets and liabilities:Notes and accounts receivable
    
    
    884
    
    
    
    (256
    )
    
    
    (270
    )Inventories
    
    
    145
    
    
    
    (205
    )
    
    
    (202
    )Accounts payable  trade
    
    
    255
    
    
    
    716
    
    
    
    29Accrued expenses
    
    
    7
    
    
    
    (711
    )
    
    
    163Deferred franchise revenue
    
    
    
    
    
    
    (24
    )
    
    
    (4
    )Prepaid expenses and other
    
    
    414
    
    
    
    152
    
    
    
    430Cash provided by operating activities
    
    
    1,235
    
    
    
    1,088
    
    
    
    3,512CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from sale of assets
    
    
    589
    
    
    
    
    
    
    
    38Capital expenditures
    
    
    (2,227
    )
    
    
    (753
    )
    
    
    (655
    )Re-acquisition of area development territory
    
    
    
    
    
    
    
    
    
    
    (682
    )Cash used in investing activities
    
    
    (1,638
    )
    
    
    (753
    )
    
    
    (1,299
    )CASH FLOWS FROM FINANCING ACTIVITIES:Repayments of long-term bank debt and
capital lease obligations
    
    
    (414
    )
    
    
    (415
    )
    
    
    (1,534
    )Borrowings of long-term debt
    
    
    
    
    
    
    
    
    
    
    Change in line of credit, net
    
    
    747
    
    
    
    (234
    )
    
    
    (1,300
    )Proceeds from exercise of stock options
    
    
    81
    
    
    
    30
    
    
    
    150Officer loan payment
    
    
    
    
    
    
    
    
    
    
    689Purchases of treasury stock
    
    
    
    
    
    
    (160
    )
    
    
    Cash provided (used) in financing activities
    
    
    414
    
    
    
    (779
    )
    
    
    (1,995
    )Net increase (decrease) in cash and cash equivalents
    
    
    11
    
    
    
    (444
    )
    
    
    218Cash and cash equivalents, beginning of year
    
    
    173
    
    
    
    617
    
    
    
    399Cash and cash equivalents, end of year
    
    $
    184
    
    
    $
    173
    
    
    $
    617
 See accompanying Report of Independent Registered Public
Accounting Firm and Notes to Consolidated Financial Statement.
 38




---



##### Table of Contents



PIZZA INN, INC.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION  (In thousands)
 Year EndedJune 25,
    
    
    June 26,
    
    
    June 27,2006
    
    
    2005
    
    
    2004CASH PAID / (RECEIVED) FOR:Interest payments
    
    $
    782
    
    
    $
    589
    
    
    $
    624Income tax payments / (refunds)
    
    
    (283
    )
    
    
    633
    
    
    
    635NONCASH FINANCING AND INVESTING
ACTIVITIES:Gain on interest rate swap
    
    $
    262
    
    
    $
    174
    
    
    $
    527
 See accompanying Report of Independent Registered Public
Accounting Firm and Notes to Consolidated Financial Statement.
 39




---



##### Table of Contents



PIZZA INN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE A  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
 Description of Business:
   Principles of Consolidation:
  Cash and Cash Equivalents:
  Inventories:
  Property Held for Resale:
  Property, Plant and Equipment:
   40




---



##### Table of Contents



Goodwill:
 Goodwill and
Other Intangible Assets
 Long-Lived Asset Impairment Assessments, Excluding Goodwill:
  Accounts Receivable:
  Notes Receivable:
  Re-acquired Development Territory:
  41




---



##### Table of Contents



June 25,
    
    
    June 26,2006
    
    
    2005Gross Carrying Amount
    
    $
    912
    
    
    $
    912Accumulated Amortization
    
    
    (481
    )
    
    
    (289
    )Net
    
    
    431
    
    
    
    623Aggregate Amortization Expense:For the year ended June 25, 2006
    
    $
    192Estimated Amortization Expense:For the year ending 2007
    
    $
    192For the year ending 2008
    
    
    192For the year ending 2009
    
    
    47Total estimated amortization expense for the years ending 2007  2009
    
    $
    431
 Income Taxes:
   Revenue Recognition:
    42




---



##### Table of Contents



Stock Options:
      Disclosure about Fair Value of Financial Instruments:
  Contingencies:
  43




---



##### Table of Contents



Use of Management Estimates:
  Fiscal Year:
  New Pronouncements:
    44




---



##### Table of Contents



NOTE B  PROPERTY, PLANT AND EQUIPMENT:
  Estimated Useful
    
    June 25,
    
    
    June 26,Lives
    
    2006
    
    
    2005Property, plant and equipment:Equipment, furniture and fixtures
    
    3  7 yrs
    
    $
    5,861
    
    
    $
    5,681Building
    
    5  39 yrs
    
    
    10,923
    
    
    
    11,023Land
    
    
    
    
    2,071
    
    
    
    2,071Construction in progress
    
    
    
    
    
    
    
    
    18Leasehold improvements
    
    7 yrs or lease term if shorter
    
    
    495
    
    
    
    57919,350
    
    
    
    19,372Less: accumulated depreciation
    
    
    
    
    (7,429
    )
    
    
    (7,224
    )$
    11,921
    
    
    $
    12,148Real estate under capital lease
    
    20 yrs
    
    $
    
    
    
    $
    118Less: accumulated amortization
    
    
    
    
    
    
    
    
    (106
    )$
    
    
    
    $
    12
    NOTE C  ACCRUED EXPENSES:
  June 25,
    
    
    June 26,2006
    
    
    2005Litigation reserve (Note I)
    
    $
    2,800
    
    
    $
    Other
    
    
    762
    
    
    
    351Compensation
    
    
    664
    
    
    
    586Taxes
    
    
    402
    
    
    
    221Other professional fees
    
    
    163
    
    
    
    216$
    4,791
    
    
    $
    1,374
 NOTE D  LONG-TERM DEBT:
  45




---



##### Table of Contents



46




---



##### Table of Contents



NOTE E  INCOME TAXES:
  Year EndedJune 25,
    
    
    June 26,
    
    
    June 27,2006
    
    
    2005
    
    
    2004Current  Federal
    
    $
    
    
    
    $
    134
    
    
    $
    637Current  State
    
    
    
    
    
    
    7
    
    
    
    246Deferred  Federal
    
    
    (889
    )
    
    
    13
    
    
    
    493Deferred  State
    
    
    (140
    )
    
    
    1
    
    
    
    29Provision (benefit) for income taxes
    
    $
    (1,029
    )
    
    $
    155
    
    
    $
    1,405
  June 25,
    
    
    June 26,
    
    
    June 27,2006
    
    
    2005
    
    
    2004Federal income taxes based on 34%
of pre-tax income (loss)
    
    $
    (2,386
    )
    
    $
    122
    
    
    $
    1,240State income tax, net of federal effect
    
    
    (92
    )
    
    
    5
    
    
    
    162Permanent adjustments
    
    
    15
    
    
    
    15
    
    
    
    19Change in valuation allowance
    
    
    1,448
    
    
    
    (21
    )
    
    
    (16
    )Other
    
    
    (14
    )
    
    
    34
    
    
    
    $
    (1,029
    )
    
    $
    155
    
    
    $
    1,405
  June 25,
    
    
    June 26,2006
    
    
    2005Reserve for bad debt
    
    $
    115
    
    
    $
    131Depreciable assets
    
    
    122
    
    
    
    (244
    )Deferred fees
    
    
    31
    
    
    
    24Other reserves and accruals
    
    
    1,409
    
    
    
    123Interest rate swap loss
    
    
    7
    
    
    
    96Credit carryforwards
    
    
    176
    
    
    
    176Net operating loss
    
    
    849
    
    
    
    Gross deferred tax asset
    
    
    2,709
    
    
    
    306Valuation allowance
    
    
    (1,564
    )
    
    
    (116
    )Net deferred tax asset
    
    $
    1,145
    
    
    $
    190
  47




---



##### Table of Contents



NOTE F  LEASES:
    OperatingLeases2007
    
    $
    8092008
    
    
    4812009
    
    
    3702010
    
    
    3372011
    
    
    205Thereafter
    
    
    528$
    2,730
  June 25,
    
    
    June 26,
    
    
    June 27,2006
    
    
    2005
    
    
    2004Minimum rentals
    
    $
    1,162
    
    
    $
    1,040
    
    
    $
    1,135Contingent rentals
    
    
    (3
    )
    
    
    
    
    
    
    1Sublease rentals
    
    
    (12
    )
    
    
    (75
    )
    
    
    (94
    )$
    1,147
    
    
    $
    965
    
    
    $
    1,042
 NOTE G  EMPLOYEE BENEFITS:
  48




---



##### Table of Contents



NOTE H  STOCK OPTIONS:
      49




---



##### Table of Contents



Summary of Stock Option Transactions
  Year EndedJune 25, 2006
    
    June 26, 2005
    
    June 27, 2004Weighted-
    
    
    
    
    
    
    
    
    
    Weighted-
    
    
    
    
    
    Weighted-Average
    
    Average
    
    
    
    
    
    Average
    
    
    
    
    
    AverageExercise
    
    Intrinsic
    
    
    
    
    
    Exercise
    
    
    
    
    
    ExerciseShares
    
    Price
    
    Value
    
    Shares
    
    Price
    
    Shares
    
    PriceOutstanding at beginning
of year
    
    
    810,958
    
    
    $
    2.73
    
    
    
    
    
    
    
    485,700
    
    
    $
    3.40
    
    
    
    806,150
    
    
    $
    3.68Granted
    
    
    20,000
    
    
    $
    2.74
    
    
    
    
    
    
    
    542,858
    
    
    $
    2.53
    
    
    
    5,000
    
    
    $
    2.15Exercised
    
    
    (44,000
    )
    
    $
    1.85
    
    
    
    
    
    
    
    (15,000
    )
    
    $
    2.00
    
    
    
    (75,000
    )
    
    $
    2.00Canceled/Expired
    
    
    (86,100
    )
    
    $
    3.59
    
    
    
    
    
    
    
    (202,600
    )
    
    $
    3.86
    
    
    
    (250,450
    )
    
    $
    4.69Outstanding at end of year
    
    
    700,858
    
    
    $
    2.68
    
    
    $
    239,907
    
    
    
    810,958
    
    
    $
    2.73
    
    
    
    485,700
    
    
    $
    3.40Exercisable at end of year
    
    
    330,858
    
    
    $
    2.87
    
    
    $
    107,807
    
    
    
    318,100
    
    
    $
    3.00
    
    
    
    480,700
    
    
    $
    3.42Weighted-average fair value of
options granted during the year
    
    
    
    
    
    $
    1.22
    
    
    
    
    
    
    
    
    
    
    $
    1.37
    
    
    
    
    
    
    $
    0.53Total intrinsic value of
options exercised
    
    
    
    
    
    $
    41,020
    
    
    
    
    
    
    
    
    
    
    $
    11,772
    
    
    
    
    
    
    $
    63,162
  Options Outstanding
    
    
    Options ExercisableWeighted-AverageShares
    
    
    Remaining
    
    
    Weighted-
    
    
    Shares
    
    
    Weighted-Range of
    
    Outstanding
    
    
    Contractual
    
    
    Average
    
    
    Exercisable
    
    
    AverageExercise Prices
    
    at June 25, 2006
    
    
    Life (Years)
    
    
    Exercise Price
    
    
    at June 26, 2005
    
    
    Exercise Price$2.00 - 3.25
    
    
    622,858
    
    
    
    7.60
    
    
    $
    2.49
    
    
    
    252,858
    
    
    $
    2.44$3.30 - 4.25
    
    
    42,000
    
    
    
    0.61
    
    
    $
    3.58
    
    
    
    42,000
    
    
    $
    3.58$4.38 - 5.50
    
    
    36,000
    
    
    
    0.05
    
    
    $
    5.00
    
    
    
    36,000
    
    
    $
    5.00$2.00 - 5.50
    
    
    700,858
    
    
    
    6.79
    
    
    $
    2.68
    
    
    
    330,858
    
    
    $
    2.87Exercisable at
year end
    
    
    330,858
    
    
    
    4.81
 Share-Based Payment
 Accounting for Stock Issued to
Employees,
 50




---



##### Table of Contents



June 26, 2005
    
    June 27, 2004As Reported
    
    Pro Forma
    
    As Reported
    
    Pro FormaNet income
    
    $
    204
    
    
    $
    80
    
    
    $
    2,243
    
    
    $
    2,241Basic earnings per share
    
    $
    0.02
    
    
    $
    0.01
    
    
    $
    0.22
    
    
    $
    0.22Diluted earnings per share
    
    $
    0.02
    
    
    $
    0.01
    
    
    $
    0.22
    
    
    $
    0.22
   NOTE I  COMMITMENTS AND CONTINGENCIES:
   51




---



##### Table of Contents



th th th
  PepsiCo, Inc. v. Pizza Inn Inc.,
    52




---



##### Table of Contents



NOTE J  RELATED PARTIES
      53




---



##### Table of Contents



NOTE K  EARNINGS PER SHARE:
   Income (loss)
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountYear Ended June 25, 2006BASIC EPSIncome (Loss) Available to Common Shareholders
    
    $
    (5,989
    )
    
    
    10,123
    
    
    $
    (0.59
    )DILUTED EPSIncome (Loss) Available to Common Shareholders
& Potentially Dilutive Securities
    
    $
    (5,989
    )
    
    
    10,123
    
    
    $
    (0.59
    )Year Ended June 26, 2005BASIC EPSIncome Available to Common Shareholders
    
    $
    204
    
    
    
    10,105
    
    
    $
    0.02Effect of Dilutive Securities  Stock Options
    
    
    
    
    
    
    37DILUTED EPSIncome Available to Common Shareholders
& Potentially Dilutive Securities
    
    $
    204
    
    
    
    10,142
    
    
    $
    0.02Year Ended June 27, 2004BASIC EPSIncome Available to Common Shareholders
    
    $
    2,243
    
    
    
    10,076
    
    
    $
    0.22Effect of Dilutive Securities  Stock Options
    
    
    
    
    
    
    41DILUTED EPSIncome Available to Common Shareholders
& Potentially Dilutive Securities
    
    $
    2,243
    
    
    
    10,117
    
    
    $
    0.22
  NOTE L
 SUBSEQUENT EVENTS:
   54




---



##### Table of Contents



NOTE M
 SEGMENT REPORTING:
     55




---



##### Table of Contents



Year EndedJune 25,
    
    
    June 26,
    
    
    June 27,2006
    
    
    2005
    
    
    2004Net sales and operating revenues:Food and equipment distribution
    
    $
    44,202
    
    
    $
    49,161
    
    
    $
    53,072Franchise and other
    
    
    6,257
    
    
    
    6,108
    
    
    
    6,916Gain on sale of assets
    
    
    149
    
    
    
    
    
    
    
    Inter-segment revenues
    
    
    10,013
    
    
    
    228
    
    
    
    640Combined
    
    
    60,621
    
    
    
    55,497
    
    
    
    60,628Less inter-segment revenues
    
    
    (10,013
    )
    
    
    (228
    )
    
    
    (640
    )Consolidated revenues
    
    $
    50,608
    
    
    $
    55,269
    
    
    $
    59,988Depreciation and amortization:Food and equipment distribution
    
    $
    520
    
    
    $
    516
    
    
    $
    575Franchise and other
    
    
    364
    
    
    
    281
    
    
    
    181Combined
    
    
    884
    
    
    
    797
    
    
    
    756Corporate administration and other
    
    
    330
    
    
    
    346
    
    
    
    377Depreciation and amortization
    
    $
    1,214
    
    
    $
    1,143
    
    
    $
    1,133Interest expense:Food and equipment distribution
    
    $
    439
    
    
    $
    329
    
    
    $
    365Franchise and other
    
    
    3
    
    
    
    3
    
    
    
    4Combined
    
    
    442
    
    
    
    332
    
    
    
    369Corporate administration and other
    
    
    345
    
    
    
    258
    
    
    
    244Interest expense
    
    $
    787
    
    
    $
    590
    
    
    $
    613Operating income (loss):Food and equipment distribution (1)
    
    $
    (994
    )
    
    $
    614
    
    
    $
    3,066Franchise and other (1)
    
    
    (257
    )
    
    
    2,240
    
    
    
    2,319Inter-segment profit
    
    
    182
    
    
    
    91
    
    
    
    170Combined
    
    
    (1,069
    )
    
    
    2,945
    
    
    
    5,555Less inter-segment profit
    
    
    (182
    )
    
    
    (91
    )
    
    
    (170
    )Corporate administration and other
    
    
    (5,767
    )
    
    
    (2,495
    )
    
    
    (1,737
    )Income (loss) before taxes
    
    $
    (7,018
    )
    
    $
    359
    
    
    $
    3,648Income tax provision (benefit):Food and equipment distribution
    
    $
    (146
    )
    
    $
    265
    
    
    $
    1,231Franchise and other
    
    
    (38
    )
    
    
    967
    
    
    
    781Combined
    
    
    (184
    )
    
    
    1,232
    
    
    
    2,012Corporate administration and other
    
    
    (845
    )
    
    
    (1,077
    )
    
    
    (607
    )Income tax expense
    
    $
    (1,029
    )
    
    $
    155
    
    
    $
    1,405
 
 (1)
    
    Does not include full allocation of corporate administration 56




---



##### Table of Contents



Year EndedJune 25,
    
    
    June 26,
    
    
    June 27,2006
    
    
    2005
    
    
    2004Capital Expenditures:Food and equipment distribution
    
    $
    53
    
    
    $
    353
    
    
    $
    161Franchise and other
    
    
    2,063
    
    
    
    327
    
    
    
    1,159Combined
    
    
    2,116
    
    
    
    680
    
    
    
    1,320Corporate administration and other
    
    
    111
    
    
    
    73
    
    
    
    17Consolidated capital expenditures
    
    $
    2,227
    
    
    $
    753
    
    
    $
    1,337Assets:Food and equipment distribution
    
    $
    10,691
    
    
    $
    8,653
    
    
    $
    12,186Franchise and other
    
    
    1,948
    
    
    
    1,941
    
    
    
    1,280Combined
    
    
    12,639
    
    
    
    10,594
    
    
    
    13,466Corporate administration and other
    
    
    6,362
    
    
    
    9,661
    
    
    
    7,440Consolidated assets
    
    $
    19,001
    
    
    $
    20,255
    
    
    $
    20,906Geographic Information (Revenues):United States
    
    $
    49,425
    
    
    $
    54,059
    
    
    $
    58,569Foreign countries
    
    
    1,183
    
    
    
    1,210
    
    
    
    1,419Consolidated total
    
    $
    50,608
    
    
    $
    55,269
    
    
    $
    59,988
 NOTE N  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
  Quarter EndedSeptember 25,
    
    December 25,
    
    March 26,
    
    June 25,2005
    
    2005
    
    2006
    
    2006Fiscal Year 2006Revenues
    
    $
    12,853
    
    
    $
    12,753
    
    
    $
    12,845
    
    
    $
    12,157Gross profit
    
    
    394
    
    
    
    460
    
    
    
    418
    
    
    
    626Net loss
    
    
    (490
    )
    
    
    (601
    )
    
    
    (477
    )
    
    
    (4,421
    )Basic loss per share
    
    
    (0.05
    )
    
    
    (0.06
    )
    
    
    (0.05
    )
    
    
    (0.43
    )Diluted loss per share
    
    
    (0.05
    )
    
    
    (0.06
    )
    
    
    (0.05
    )
    
    
    (0.43
    )
 Quarter EndedSeptember 26,
    
    December 26,
    
    March 27,
    
    June 26,2004
    
    2004
    
    2005
    
    2005Fiscal Year 2005Revenues
    
    $
    14,421
    
    
    $
    13,768
    
    
    $
    13,401
    
    
    $
    13,679Gross profit
    
    
    884
    
    
    
    823
    
    
    
    841
    
    
    
    942Net Income (loss)
    
    
    285
    
    
    
    51
    
    
    
    (20
    )
    
    
    (112
    )Basic earnings per share on net income (loss)
    
    
    0.03
    
    
    
    0.01
    
    
    
    
    
    
    
    (0.01
    )Diluted earnings per share on net income (loss)
    
    
    0.03
    
    
    
    0.01
    
    
    
    
    
    
    
    (0.01
    )
  57




---



##### Table of Contents



SCHEDULE II
 PIZZA INN, INC.

CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS  (In thousands)
 AdditionsBalance at
    
    Charged to
    
    Recovered
    
    
    
    
    
    Balancebeginning
    
    cost and
    
    cost and
    
    
    
    
    
    at endof period
    
    expense
    
    expense
    
    Deductions
    
    of periodAllowance for doubtful
accounts and notes receivableYear Ended June 25, 2006
    
    $
    371
    
    
    $
    301
    
    
    $
    (11
    )
    
    $
    (337
    )
    
    $
    324Year Ended June 26, 2005
    
    $
    372
    
    
    $
    30
    
    
    $
    
    
    
    $
    (31
    )
    
    $
    371Year Ended June 27, 2004
    
    $
    916
    
    
    $
    35
    
    
    $
    (264
    )
    
    $
    (315
    )
    
    $
    372Valuation allowance for
deferred tax assetYear Ended June 25, 2006
    
    $
    116
    
    
    $
    1,448
    
    
    $
    
    
    
    $
    
    
    
    $
    1,564Year Ended June 26, 2005
    
    $
    137
    
    
    $
    
    
    
    $
    
    
    
    $
    (21
    )
    
    $
    116Year Ended June 27, 2004
    
    $
    153
    
    
    $
    
    
    
    $
    
    
    
    $
    (16
    )
    
    $
    137
 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
  
 ITEM 9A. CONTROLS AND PROCEDURES.
  58




---



##### Table of Contents



Deficiencies in The Companys Disclosure Controls and Procedures
  
    
    We experienced significant turnover in our accounting staff, including in the positions
of chief financial officer and controller, during the fiscal year ended June 25, 2006.
    
    We did not have sufficient staff-level personnel with adequate technical expertise to
analyze effectively, and review in a timely manner, our accounting for certain non-routine
business matters.
    
    As a result of accounting staff turnover and unfilled staff and management positions,
including the positions of chief financial officer and controller, certain remaining
personnel were temporarily assigned responsibilities for which they did not have adequate
training or experience.
 Remediation for Identified Deficiencies Disclosure Controls and Procedures
  
    
    The Company has initiated a search for a qualified individual to serve as its permanent
Chief Financial Officer;
 
    
    The Company is evaluating the need for additional qualified accounting and finance
personnel to appropriately staff the accounting and finance departments, including a
qualified individual to support the financial accounting and reporting functions. The
hiring process is not complete and the Company is continuing to assess staffing needs.
Currently, the existing staff is addressing application of accounting principles generally
accepted in the United States of America. The Company is considering application of
additional resources and improvements to the documentation of job descriptions within the
financial accounting and reporting functions, but more is needed in this area and will be
enhanced with the addition of additional personnel.
 
    
    The Company has revised its processes, procedures and documentation standards relating
to accounting for non-routine business matters;
 
    
    The Company has redesigned existing training and will require additional training for
accounting staff;
 
    
    The Company will require continuing education for accounting and finance staff to ensure
compliance with current and emerging financial reporting and compliance practices;
 
    
    The Company is considering, and will consider, additional measures, and will alter the
measures described above, in an effort to remediate the identified deficiencies.
 59




---



##### Table of Contents



ITEM 9B. OTHER INFORMATION.
  
 PART III
  
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
  
 ITEM 11. EXECUTIVE COMPENSATION.
  
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
  
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
  
 ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES.
  
 PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
 (a)
    1.
    The financial statements filed as part of this report are listed in the Index to Financial
Statements
and Supplemental Data under Part II, Item 8 of this Form 10-K.2.
    The financial statement schedule filed as part of this report are listed in the Index to
Financial
Statements and Supplemental Data under Part II, Item 8 of this Form 10-K.
 60




---



##### Table of Contents



3.
    
    Exhibits:
 3.1
    
    Amended and Restated By-Laws3.2
    
    Restated Articles of Incorporation10.1
    
    Construction Loan Agreement between the Company and Wells Fargo Bank
(Texas), N.A. dated December 28, 2000 (filed as Item 10.2 to Form 10-Q for the
fiscal quarter ended December 24, 2000 and incorporated herein by reference).10.2
    
    Promissory Note between the Company and Wells Fargo Bank (Texas), N.A.
dated December 28, 2000 (filed as Item 10.3 to Form 10-Q for the fiscal quarter
ended December 24, 2000 and incorporated herein by reference).10.3
    
    Third Amended and Restated Loan Agreement dated January 22, 2003 but
effective December 29, 2002, between the Company and Wells Fargo Bank (Texas), N.A.
(filed as Item 10.1 to Form 10-Q for the fiscal quarter ended December 29, 2002 and
incorporated herein by reference).10.4
    
    Sixth Amended and Restated Revolving Credit Note Agreement dated
January 22, 2003 but effective as of December 29, 2002, between the Company and
Wells Fargo Bank (Texas), N.A. (filed as Item 10.2 to Form 10-Q for the fiscal
quarter ended December 29, 2002 and incorporated herein by reference.)10.5
    
    First Amendment to Third Amended and Restated Loan Agreement dated
April 22, 2004 but effective as of March 28, 2004, between the Company and Wells
Fargo Bank (Texas), N.A. (filed as Item 10.1 to Form 10-Q for the fiscal quarter
ended March 28, 2004 and incorporated herein by reference).10.6
    
    Seventh Amended and Restated Revolving Credit Note Agreement dated
April 22, 2004 but effective as of March 28, 2004, between the Company and Wells
Fargo Bank (Texas), N.A. (filed as Item 10.2 to Form 10-Q for the fiscal quarter
ended March 28, 2004 and incorporated herein by reference).10.7
    
    Second Amendment to Third Amended and Restated Loan Agreement and
Amendment to Real Estate Note dated February 11, 2005 but effective as of December
26, 2004, between the Company and Wells Fargo Bank (Texas), N.A. (filed as Item
10.2 to Form 10-Q for the fiscal quarter ended March 27, 2005 and incorporated
herein by reference).10.8
    
    Eighth Amended and Restated Revolving Credit Note Agreement dated
February 11, 2005 but effective as of December 26, 2004, between the Company and
Wells Fargo Bank, N.A. (filed as Item 10.3 to Form 10-Q for the quarterly period
ended March 27, 2005 and incorporated herein by reference).10.9
    
    Third Amendment to Third Amended and Restated Loan Agreement and Second
Amendment to Real Estate Note dated August 29, 2005 but effective as of June 26,
2005, between the Company and Wells Fargo Bank (Texas), N.A. (filed as Item 1.01 to
Form 8-K on August 29, 2005 and incorporated herein by reference).10.10
    
    Ninth Amended and Restated Revolving Credit Note Agreement dated
August 29, 2005 but effective as of June 26, 2005, between the Company and Wells
Fargo Bank (Texas), N.A. (filed as Item 1.01 to Form 8-K on August 29, 2005 and
incorporate herein by reference).10.11
    
    Employment Agreement dated March 31, 2005 between the Company and
Timothy P. Taft (filed as Item 10.4 on Form 10-Q for the quarterly period ended
March 27, 2005 and incorporated herein by reference). *10.12
    
    Non-Qualified Stock Option Agreement dated March 31, 2005 between the
Company and Timothy P. Taft (filed as Item 10.5 on Form 10-Q for the quarterly
period ended March 27, 2005 and incorporated herein by reference).*
 61




---



##### Table of Contents



10.13
    
    2005 Non-Employee Directors Stock Award Plan of the Company and form
of Stock Option Award Agreement (filed as Item 10.25 to Form 10-K for the fiscal
year ended June 26, 2005 and incorporated herein by reference).*10.14
    
    2005 Employee Incentive Stock Option Award Plan of the Company and
form of Stock Option Award Agreement (filed as Item 10.26 to Form 10-K.for the
fiscal year ended June 26, 2005 and incorporated herein by reference)*10.15
    
    Warehouse Lease Agreement dated August 25, 2006 between the Company
and The SYGMA Network.10.16
    
    Compromise and Settlement Agreement dated September 24, 2006 between
the Company and Ronald W. Parker.21.0
    
    List of Subsidiaries of the Company (filed as Exhibit 21.0 to the
Companys Annual Report on Form 10-K for the fiscal year ended June 26, 1994 and
incorporated herein by reference).23.1
    
    Consent of Independent Registered Public Accounting Firm.31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer.31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer.32.1
    
    Section 1350 Certification of Principal Executive Officer.32.2
    
    Section 1350 Certification of Principal Financial Officer.
 
  62




---



##### Table of Contents



SIGNATURES
  Date:   October 9, 2006
    By:
    /s/ Clinton J. ColemanClinton J. ColemanInterim Chief Financial Officer
Treasurer
(Principal Accounting Officer)

(Principal Financial Officer)  Name and Position
    
    
    
    Date/s/ Mark E. Schwarz
    
    
    
    October 9, 2006Mark E. SchwarzDirector and Chairman of the Board/s/ Ramon D. Phillips
    
    
    
    October 9, 2006Ramon D. PhillipsDirector and Vice Chairman of the Board/s/ Bobby L. Clairday
    
    
    
    October 9, 2006Bobby L. ClairdayDirector/s/ John D. Harkey, Jr.
    
    
    
    October 9, 2006John D. Harkey, Jr.Director/s/ Robert B. Page
    
    
    
    October 9, 2006Robert B. PageDirector/s/ Steven J. Pully
    
    
    
    October 9, 2006Steven J. PullyDirector/s/ Tim P. Taft
    
    
    
    October 9, 2006Tim P. TaftPresident and Chief Executive Officer(Principal Executive Officer)Director
 63