MARK SCHWARZ, THE LEAN AND YOUTHFUL-LOOKING CHAIRMAN OF PIZZA INN, walks a visitor through the company’s gleaming, state-of-the-art corporate headquarters in The Colony. It’s a bank holiday, but many of the 150 employees are still working. Schwarz shows off the vast, chilly warehouse where pickers load pallet upon pallet with boiled eggs, tomato tidbits in heavy purée, and other supplies to be shipped out to the more than 400 Pizza Inn units in 20 states. Franchisees run nearly all of them.
The $12 million, 11-acre campus also houses an R&D kitchen, where such creations as the Taco Pizza and cinnamon stromboli came to life. In the office building, Schwarz points out the employees’ exercise room and the sections of leather-backed booths, prototypes destined for new Pizza Inn restaurants.
But walking among mostly empty cubicles and offices, Schwarz shakes his head with either disgust or disbelief. It’s hard to tell. “This building, this facility, it represents the best of everything,” he says. “This is the best that money can buy. There’s a lot of potential here, but nobody was even thinking about how you capture that potential.”
“Potential” is an optimist’s word for “languor.” Pizza Inn, in its 43-year history, has never been a huge company. Its stock has not ventured much higher than $3 per share in the past few years. Trading volume is consistently low. The company’s 2003 net earnings were only $3.1 million on revenue of $60 million; Pizza Hut, by comparison, generated $2.2 billion in sales. With only a handful of investors holding the majority of Pizza Inn’s stock, Wall Street analysts don’t even bother.
Schwarz, though, is an optimist. Back in 2002, he and his investment group Newcastle Partners had 3.3 million shares of the company, making him the largest shareholder. The way he saw it, all he had to do was win control of the board of directors and fire Ronnie Parker, the CEO he deemed overpaid and underperforming. He’d be rolling in the dough in no time. Except it hasn’t been that easy. After a yearlong proxy battle, Schwarz did finally get control of Pizza Inn’s board. And last December, that board fired Parker. But that move could cost the company as much as $7.4 million in compensation packages. Parker himself claims he’s owed more than $5 million. It led to arbitration. Bad publicity. And a mess worse than a Taco Pizza in a blender.
IT ALL STARTED IN THE SUMMER OF 2002 when the CEO at the time, Jeff Rogers, was forced to resign [see “The Rise and Fall of Jeff Rogers,” March 2003]. Basically Rogers took out a loan from the company to exercise his stock options. When the market tanked post-9/11, Pizza Inn’s stock tanked as well. Rogers wasn’t liquid enough to pay his debt, and the company wrote off the $1.9 million as a loss.
Still, Rogers vowed to pay back the loan, and he did. He sold his multimillion-dollar vacation home in Lake Tahoe for about half of what it was worth. He also sold his 29 percent interest in Pizza Inn to a Dallas investment firm called Newcastle Partners.
Schwarz, 44, founded Newcastle 12 years ago with an investment philosophy based on the intrinsic value of assets. Basically, Schwarz and his Newcastle partners find a small, publicly traded company that isn’t performing well. That’s step one. Step two: buy a controlling interest. Step three: insinuate yourself onto the board of directors, clean house, and get the company to perform to its potential. Step four: profit. Philosophy is good; results matter. Newcastle boasts a 12-year annualized return of about 27 percent.
Schwarz has elbowed his way into the boardrooms of companies like Tandycrafts and Hallmark Financial Services. Other company’s boards, like those of Gehl, a maker of construction equipment, and Haggar, maker of pants, have fended off his advances.
Ronnie Parker tried to fend them off, too. When Rogers stepped down in August 2002, the board of directors approached Parker, who was COO at the time, to take over as president and CEO. Parker was nearing the end of his second five-year contract with the company. In his new contract, Parker wanted what anybody with a new boss knocking on the door would want—job security, not only for himself but also for his team of executives. Parker’s new employment agreement would include a golden parachute so mighty that one would think twice before firing him.
On December 18, 2002, less than two weeks after Schwarz bought controlling interest in the company but before he had representation on the board of directors, the board unanimously approved Parker’s new employee agreement. Parker’s new severance package would equal four times the sum of his highest salary plus his largest bonus—about $5.4 million. When added to similar compensation packages for the three executives on Parker’s team, Pizza Inn would be faced with a payment of about $7.4 million. The poison pill would go into effect if ever there were a change of control of the board of directors.
On February 11, 2004, there was a change of control of the board of directors. Sort of. After a proxy battle that started early in 2003, Newcastle Partners finally assumed two seats on Pizza Inn’s board, and Mark Schwarz was named chairman. An independent law firm, however, ruled that the “incumbent board” was still intact, and so the poison pill provision didn’t kick in.
Schwarz was finally on the board of directors. He needed to get rid of the old guard, but firing them without just cause would trigger the very expensive compensation packages. Maybe, even though the board at the time approved them, Schwarz could poke holes in the legality of the poison pills.
On October 5, 2004, Pizza Inn filed a breach of fiduciary duty suit against Akin Gump Strauss Hauer & Feld, Pizza Inn’s law firm from June 1997 through May 2004. Pizza Inn, now represented by Bickel & Brewer, says Akin Gump and co-defendant Ken Menges, a partner there, schemed with Ronnie Parker and others “to enrich themselves at the expense of Pizza Inn and its shareholders.” As the petition points out, the $7.4 million in compensation payouts is more than 200 percent of Pizza Inn’s total net earnings in 2003.
Shortly after the breach of fiduciary duty was filed, in a special Saturday meeting on December 11, the board fired Ronnie Parker, citing “violations of his employment agreement.” Parker would not comment for this article, but his lawyer, Rogge Dunn, says Parker has done nothing wrong. His client deserves the compensation package that the board unanimously approved for him, and he’ll fight to get it. As of press time, the matter is in arbitration.
In a statement, Akin Gump says the law firm did not scheme with anyone. “The company … decided to revise existing employment agreements for several key executives, including the new CEO, to ensure stability in the management team following the departure of the outgoing CEO,” the statement reads. “After deliberation, Pizza Inn’s duly elected board of directors determined the revised agreements were in the best interest of the company and unanimously voted to approve them. Pizza Inn now seeks the benefits of the changes for purposes of its termination of Mr. Parker but wants Akin Gump to bear the potential burdens of these agreements, signed by the company and unanimously approved by the board of directors.”
Even after the legal mess is untangled—be it in the courts or in arbitration—Schwarz still has the problem of what to do with Pizza Inn. How is he going to turn all of that potential into profit?
“The first thing you do is come up with a plan, and I’ve been a huge proponent of it,” Schwarz says. The company has hired a recruiting firm to find a permanent CEO, presumably one who can come up with a plan and implement it.
And then what? If and when the stock price goes up, will Schwarz take his profits and move on to the next project?
“I care about this company,” he says. “I care a lot about this company. I’m not a short-term flip artist here. I’m not here to spruce it up and pawn it off on somebody at some higher price.”
It’s late in the day as the tour of the headquarters comes to an end. Schwarz walks by the front desk, where he sees an envelope sitting on a pile of outgoing mail. It’s addressed to him.
“We can save the postage on this, can’t we?” he says as he tucks it under his arm.
He just added 37 cents to the bottom line. Now if he can just come up with that plan.