NONQUALIFIED STOCK OPTION AGREEMENT
PIZZA INN, INC.
1. Grant of Option. Pursuant to and in accordance with that certain
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Employment Agreement (the "Employment Agreement") dated March 31, 2005 between
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Pizza Inn, Inc., a Missouri corporation (the "Company"), and Timothy P. Taft
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(the "Participant") the Company grants to Participant an option (the "Option" or
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"Stock Option") to purchase Five Hundred Thousand (500,000) shares (the
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"Optioned Shares") of common stock of the Company ("Common Stock"), par value
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$0.01 per share; the exercise price (the "Option Price") for purchase of the
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Optioned Shares under the Option is $2.50 per share. Such Option is subject to
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the terms and conditions set forth in this Nonqualified Stock Agreement (the
"Agreement"). The "Date of Grant" of this Stock Option is March 31, 2005.
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The "Option Period" shall commence on the Date of Grant and shall expire on
the date immediately preceding the tenth (10th) anniversary of the Date of
Grant. The Stock Option is a nonqualified stock option.
2. Subject to Committee. This Stock Option shall be subject to such
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administrative rules as may be promulgated by the Compensation Committee (the
"Committee") appointed by the Company's Board of Directors (the "Board") and
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communicated to the Participant in writing. If necessary to satisfy the
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requirements of Rule 16b-3 promulgated under the Securities Exchange Act of 1934
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(the "1934 Act"), membership on the Committee shall be limited to those members
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of the Board who are "non-employee directors" as defined in Rule 16b-3
promulgated under the 1934 Act. The Committee shall select one of its members
to act as its Chairman. A majority of the Committee shall constitute a quorum,
and the act of a majority of the members of the Committee present at a meeting
at which a quorum is present shall be the act of the Committee. The Committee
shall have the discretion to interpret the terms of this Stock Option; any such
interpretation that is not clearly erroneous shall be binding on all parties
interested herein.
3. Vesting; Time of Exercise. Except as specifically provided in this
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Agreement, the Optioned Shares shall be vested and the Stock Option shall be
exercisable as follows:
i. Fifty Thousand (50,000) of the total Optioned Shares shall vest and
that portion of the Stock Option shall become exercisable on the Date of Grant.
ii. One Hundred Thousand (100,000) of the total Optioned Shares shall
vest and that portion of the Stock Option shall become exercisable on the first
anniversary of the Date of Grant, provided the Participant is employed by the
Company, an affiliate, or a subsidiary on that date.
iii. One Hundred Fifty Thousand (150,000) of the total Optioned Shares
shall vest and that portion of the Stock Option shall become exercisable on the
second anniversary of the Date of Grant, provided the Participant is employed by
the Company, an affiliate, or a subsidiary on that date.
iv. Two Hundred Thousand (200,000) of the total Optioned Shares shall
vest and that portion of the Stock Option shall become exercisable on the third
anniversary of the Date of Grant, provided the Participant is employed by the
Company, an affiliate, or a subsidiary on that date.
v. Notwithstanding the foregoing, in the event that (i) a Change in
Control (as defined below) occurs, and (ii) within six months following the
Change in Control, the Company terminates the employment of the Participant
without Cause (as defined below), or the Participant terminates his employment
with the Company for Good Reason (as defined below), then all Optioned Shares
shall become immediately vested and the entire Stock Option shall become
exercisable and shall remain exercisable for a period of 90 days thereafter, at
which time the Stock Option shall expire.
vi. For purposes of this Agreement, "Change in Control" shall have the
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meaning assigned to such term in the Employment Agreement.
vii. For purposes of this Agreement, "Good Reason" shall have the
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meaning assigned to such term in the Employment Agreement.
viii. For purposes of this Agreement, "Cause" shall have the meaning
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assigned to such term in the Employment Agreement
4. Term; Forfeiture. Except as otherwise provided in this
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Agreement, to the extent the unexercised portion of the Stock Option relates to
Optioned Shares that are not vested on the date of the Participant's Termination
of Employment (as defined below), the Stock Option will be terminated on that
date. The unexercised portion of the Stock Option that relates to Optioned
Shares that are vested will terminate at the first of the following to occur:
i. 5 p.m. on the date the Option Period terminates;
ii. 5 p.m. on the date of the Participant's Termination of Employment
by the Company for Cause, or the Participant's voluntary Termination of
Employment;
iii. 5 p.m. on the date that is thirty (30) days following the date of
the Participant's Termination of Employment by the Company without Cause;
iv. 5 p.m. on the date the Company causes any portion of the Option to
be forfeited pursuant to Section 7 hereof.
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v. For purposes of this Agreement, "Termination of Employment" shall
occur when the Participant ceases to serve as an employee of the Company and its
Subsidiaries, for any reason. All times are Central Standard Time.
5. Who May Exercise. Subject to the terms and conditions set forth in
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Sections 3 and 4 above, the Stock Option may be exercised only by the
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Participant, or by the Participant's guardian or personal or legal
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representative.
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6. No Fractional Shares. The Stock Option may be exercised only with
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respect to full shares, and no fractional share of stock shall be issued.
7. Manner of Exercise. Subject to such administrative regulations as
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the Committee may from time to time adopt and to standard Company policy
regarding stock trading, the Stock Option may be exercised by the delivery of
written notice to the Committee setting forth the number of shares of Common
Stock with respect to which the Stock Option is to be exercised, the date of
exercise thereof (the "Exercise Date"), which shall be at least three (3) days
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after giving such notice unless an earlier time shall have been mutually agreed
upon. On the Exercise Date, the Participant shall deliver to the Company
consideration with a value equal to the total Option Price of the shares to be
purchased, payable as follows: (a) a cashier's check payable in United States
currency, or (b) if acceptable to the Committee, a personal check, or (c) in any
other form of valid consideration that is acceptable to the Committee.
Upon payment of all amounts due from the Participant, the Company shall
cause certificates for the Optioned Shares then being purchased to be delivered
to the Participant in a form (DWAC, physical delivery, or other) and at an
address designated by Participant within ten (10) business days after the
Exercise Date. The obligation of the Company to deliver shares of Common Stock
shall, however, be subject to the condition that if at any time the Company
shall determine in its discretion that the listing, registration, or
qualification of the Stock Option or the Optioned Shares upon any securities
exchange or under any state or federal law, or the consent or approval of any
governmental regulatory body, is necessary as a condition of, or in connection
with, the Stock Option or the issuance or purchase of shares of Common Stock
thereunder, then the Stock Option may not be exercised in whole or in part
unless such listing, registration, qualification, consent, or approval shall
have been effected or obtained free of any conditions not reasonably acceptable
to the Committee.
If the Participant fails to pay for any of the Optioned Shares specified in
such notice or fails to accept delivery thereof, then the Stock Option, and
right to purchase such Optioned Shares may be forfeited by the Participant.
8. Nonassignability. The Stock Option is not assignable or
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transferable by the Participant.
9. Rights as Stockholder. The Participant will have no rights as a
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stockholder with respect to any shares covered by the Stock Option until the
issuance of a certificate or certificates to the Participant for the Optioned
Shares. The Optioned Shares shall be subject to the terms and conditions of
this Agreement regarding such Shares. Except as otherwise provided in Section
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10 hereof, no adjustment shall be made for dividends or other rights for which
the record date is prior to the issuance of such certificate or certificates.
10. Adjustment of Number of Optioned Shares and Related Matters. The
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number of shares of Common Stock covered by the Stock Option, and the Option
Prices thereof, shall be subject to adjustment as provided in this Section 10.
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i. No Effect on Company's Authority. The grant of this Stock Option
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shall not affect in any way the right or power of the Company or its
stockholders to make or authorize any or all adjustments, recapitalizations,
reorganizations, or other changes in the Company's capital structure and its
business, or any merger or consolidation of the Company, or any issuance of
bonds, debentures, preferred or preference stocks ranking prior to or otherwise
affecting the Common Stock or the rights thereof (or any rights, options, or
warrants to purchase same), or the dissolution or liquidation of the Company, or
any sale or transfer of all or any part of its assets or business, or any other
corporate act or proceeding, whether of a similar character or otherwise.
ii. Capital Adjustments. In the event that the Committee shall determine
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that any dividend or other distribution (whether in the form of cash, Common
Stock, other securities, or other property), recapitalization, stock split,
reverse stock split, rights offering, reorganization, merger, consolidation,
split-up, spin-off, split-off, combination, subdivision, repurchase, or exchange
of Common Stock or other securities of the Company, issuance of warrants or
other rights to purchase Common Stock or other securities of the Company, or
other similar corporate transaction or event affects the Common Stock such that
an adjustment is determined by the Committee to be appropriate to prevent the
dilution or enlargement of the benefits or potential benefits intended to be
made available under this Stock Option, then the Committee shall, in such manner
as it may deem equitable, adjust any or all of (i) the number of shares and type
of Common Stock (or other securities or property) subject to this Option and
(ii) the Option Price; provided however, that the number of shares of Common
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Stock (or other securities or property) subject to this Stock Option shall
always be a whole number. In lieu of the foregoing, if deemed appropriate and
not otherwise in violation of Section 409A of the Internal Revenue Code of 1986,
as amended, (the "Code"), the Committee may make provision for a cash payment to
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the Participant. Such adjustments shall be made in accordance with the rules of
any securities exchange, stock market, or stock quotation system to which the
Company is subject. Upon the occurrence of any such adjustment or cash payment,
the Company shall provide notice to the Participant of its computation of such
adjustment or cash payment, which shall be conclusive and shall be binding upon
the Participant.
iii. Exchange or Cancellation of Incentives Where Company Does Not Survive.
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(A) Subject to Section 10.iii.(B) hereof, in the event of any merger,
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consolidation, or share exchange pursuant to which the Company is not the
surviving or resulting corporation, there shall be substituted for each share of
Common Stock subject to the unexercised portions of this Stock Option, that
number of shares of each class of stock or other securities or that amount of
cash, property, or assets of the surviving, resulting, or consolidated company
that were distributed or distributable to the stockholders of the Company in
respect to each share of Common Stock held by them, and this Stock Option shall
be thereafter exercisable for such stock, securities, cash, or property in
accordance with the terms of this Agreement.
(B) Notwithstanding the foregoing, however, this Stock Option may be
canceled by the Company, in its sole discretion, as of the effective date of any
such reorganization, merger, consolidation, or share exchange, or of any
proposed sale of all or substantially all of the assets of the Company, or of
any dissolution or liquidation of the Company, by either:
(1) giving notice to the Participant or his personal representative of
its intention to cancel this Stock Option and permitting the purchase during the
thirty (30) day period next preceding such effective date of any or all of the
shares subject to this Stock Option, including in the Board's discretion some or
all of the shares as to which this Stock Option would not otherwise be vested
and exercisable; or
(2) provided it will not violate Section 409A of the Code, paying the
Participant an amount equal to a reasonable estimate of the difference between
the net amount per share payable in such transaction or as a result of such
transaction, and the exercise price per share of this Stock Option (the
"Spread"), multiplied by the number of shares subject to the Stock Option. In
estimating the Spread, appropriate adjustments to give effect to the existence
of all outstanding stock options of the Company shall be made, such as deeming
such stock options to have been exercised, with the Company receiving the
exercise price payable thereunder, and treating the shares receivable upon
exercise of such stock options as being outstanding in determining the net
amount per share. In cases where the proposed transaction consists of the
acquisition of assets of the Company, the net amount per share shall be
calculated on the basis of the net amount receivable with respect to shares of
Common Stock upon a distribution and liquidation by the Company after giving
effect to expenses and charges, including but not limited to, taxes payable by
the Company before such liquidation could be completed.
iv. Conversion of Incentives Where Company Survives. Subject to any
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required action by the stockholders, if the Company shall be the surviving or
resulting corporation in any merger, consolidation, or share exchange, the Stock
Option granted hereunder shall pertain to and apply to the securities or rights
(including cash, property, or assets) to which a holder of the number of shares
of Common Stock subject to this Stock Option would have been entitled.
v. Liquidation or Dissolution. Subject to Section 10.iii. hereof, in
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case the Company shall, at any time while this Stock Option shall be in force
and remain unexpired, (i) sell all or substantially all of its property, or (ii)
dissolve, liquidate, or wind up its affairs, then the Participant shall be
entitled to receive, in lieu of each share of Common Stock of the Company that
such Participant could have been entitled to receive under this Stock Option,
the same kind and amount of any securities or assets as may be issuable,
distributable, or payable upon any such sale, dissolution, liquidation, or
winding up with respect to each share of Common Stock of the Company. If the
Company shall, at any time prior to the expiration of this Stock Option, make
any partial distribution of its assets, in the nature of a partial liquidation,
whether payable in cash or in kind (but excluding the distribution of a cash
dividend payable out of earned surplus and designated as such) then in such
event the Option Price shall be reduced, on the payment date of such
distribution, in proportion to the percentage reduction in the tangible book
value of the shares of the Company's Common Stock (determined in accordance with
generally accepted accounting principles) resulting by reason of such
distribution.
11. Nonqualified Stock Option. The Stock Option shall not be treated
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as an incentive stock option under Section 422 of the Code.
12. Voting. The Participant, as record holder, if applicable, of some
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or all of the Optioned Shares following exercise of this Stock Option, has the
exclusive right to vote, or consent with respect to, such Optioned Shares until
such time as the Optioned Shares are transferred in accordance with this
Agreement; provided, however, that this Section shall not create any voting
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right where the holders of such Optioned Shares otherwise have no such right.
13. Community Property. Each spouse individually is bound by, and such
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spouse's interest, if any, in any Optioned Shares is subject to, the terms of
this Agreement. Nothing in this Agreement shall create a community property
interest where none otherwise exists.
14. Participant's Representations. Notwithstanding any of the
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provisions hereof, the Participant hereby agrees that he will not exercise the
Stock Option granted hereby, and that the Company will not be obligated to issue
any shares to the Participant hereunder, if the exercise thereof or the issuance
of such shares shall constitute a violation by the Participant or the Company of
any provision of any law or regulation of any governmental authority. Any
determination in this connection by the Company shall be final, binding, and
conclusive. The obligations of the Company and the rights of the Participant
are subject to all applicable laws, rules, and regulations.
15. Investment Representation. Unless the Common Stock is issued to
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him in a transaction registered under applicable federal and state securities
laws, by his execution hereof, the Participant represents and warrants to the
Company that all Common Stock that may be purchased hereunder will be acquired
by the Participant for investment purposes for his own account and not with any
intent for resale or distribution in violation of federal or state securities
laws. Unless the Common Stock is issued to him in a transaction registered
under the applicable federal and state securities laws, all certificates issued
with respect to the Common Stock shall bear an appropriate restrictive
investment legend and shall be held indefinitely, unless they are subsequently
registered under the applicable federal and state securities laws or the
Participant obtains an opinion of counsel, in form and substance satisfactory to
the Company and its counsel, that such registration is not required.
16. Legend. The following legend shall be placed on all certificates
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representing Optioned Shares:
"The shares evidenced by this certificate are subject to a Stock Option
Agreement containing certain rights and limitations on transfer. A copy of that
agreement is on file at the principal place of business or the registered office
of the Company, and a copy may be obtained without charge upon written request
to the Company at its principal place of business or its registered office."
All Optioned Shares and shares into which Optioned Shares may be converted
owned by the Participant shall be subject to the terms of this Agreement and
shall be represented by a certificate or certificates bearing the foregoing
legend.
17. Participant's Acknowledgments. The Participant represents that he
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or she is familiar with the terms and provisions of this Agreement and hereby
accepts this Option subject to all the terms and provisions hereof. The
Participant hereby agrees to accept as binding, conclusive, and final all
decisions or interpretations of the Committee or the Board, as appropriate, upon
any questions arising under this Agreement.
18. Law Governing. This Agreement shall be governed by, construed, and
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enforced in accordance with the laws of the State of Texas (excluding any
conflict of laws rule or principle of Texas law that might refer the governance,
construction, or interpretation of this agreement to the laws of another state).
19. No Right to Continue Service or Employment. Nothing herein shall
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be construed to confer upon the Participant the right to continue in the employ
or to provide services to the Company or any Subsidiary, whether as an employee
or as a consultant or as a director, or interfere with or restrict in any way
the right of the Company or any Subsidiary to discharge the Participant as an
employee, consultant, or director at any time, subject to the provisions of the
Employment Agreement.
20. Legal Construction. In the event that any one or more of the
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terms, provisions, or agreements that are contained in this Agreement shall be
held by a Court of competent jurisdiction to be invalid, illegal, or
unenforceable in any respect for any reason, the invalid, illegal, or
unenforceable term, provision, or agreement shall not affect any other term,
provision, or agreement that is contained in this Agreement and this Agreement
shall be construed in all respects as if the invalid, illegal, or unenforceable
term, provision, or agreement had never been contained herein.
21. Covenants and Agreements as Independent Agreements. Each of the
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covenants and agreements that is set forth in this Agreement shall be construed
as a covenant and agreement independent of any other provision of this
Agreement. The existence of any claim or cause of action of the Participant
against the Company, whether predicated on this Agreement or otherwise, shall
not constitute a defense to the enforcement by the Company of the covenants and
agreements that are set forth in this Agreement.
22. Entire Agreement. This Agreement supersedes any and all other
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prior understandings and agreements, either oral or in writing, between the
parties with respect to the subject matter hereof and constitutes the sole and
only agreement between the parties with respect to the said subject matter. All
prior negotiations and agreements between the parties with respect to the
subject matter hereof are merged into this Agreement. Each party to this
Agreement acknowledges that no representations, inducements, promises, or
agreements, orally or otherwise, have been made by any party or by anyone acting
on behalf of any party, which are not embodied in this Agreement and that any
agreement, statement, or promise that is not contained in this Agreement shall
not be valid or binding or of any force or effect.
23. Parties Bound. The terms, provisions, and agreements that are
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contained in this Agreement shall apply to, be binding upon, and inure to the
benefit of the parties and their respective heirs, executors, administrators,
legal representatives, and permitted successors and assigns, subject to the
limitation on assignment expressly set forth herein.
24. Modification. No change or modification of this Agreement shall be
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valid or binding upon the parties unless the change or modification is in
writing and signed by the parties; provided, however, that the Company may
change or modify this Agreement without the Participant's consent or signature
if the Company determines, that such change or modification is necessary for
purposes of compliance with or exemption from the requirements of Section 409A
of the Code or any regulations or other guidance issued thereunder.
25. Headings. The headings that are used in this Agreement are used
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for reference and convenience purposes only and do not constitute substantive
matters to be considered in construing the terms and provisions of this
Agreement.
26. Gender and Number. Words of any gender used in this Agreement
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shall be held and construed to include any other gender, and words in the
singular number shall be held to include the plural, and vice versa, unless the
context requires otherwise.
27. Notice. Any notice required or permitted to be delivered hereunder
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shall be deemed to be delivered only when actually received by the Company or by
the Participant, as the case may be, at the addresses set forth below, or at
such other addresses as they have specified by written notice delivered in
accordance herewith:
i. Notice to the Company shall be addressed and delivered as follows:
Pizza Inn, Inc.
3551 Plano Parkway
The Colony, Texas 75056
Attn: Chairman, Compensation Committee
Facsimile: 469.384.5061
ii. Notice to the Participant shall be addressed and delivered to the
address shown from time to time on the employment records of the Company.
28. Tax Requirements. The Participant shall be required to pay the
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Company or a Subsidiary, as applicable (for purposes of this Section 28, the
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term Company shall be deemed to include an applicable Subsidiary), the amount of
any and all taxes that the Company is required to withhold in connection with
this Stock Option, the issuance of stock hereunder, or otherwise arising out of
this Stock Option. The Participant's obligation to pay such taxes may be
satisfied by any of the following or any combination thereof: (i) the delivery
of cash to the Company in an amount that equals or exceeds (to avoid the
issuance of fractional shares under (iii) below) the required tax withholding
obligation of the Company; (ii) if the Company, so consents in writing, the
actual delivery by the exercising Participant to the Company of shares of Common
Stock other than Common Stock that the Participant owns but has acquired from
the Company within six months prior to the date of exercise, which shares so
delivered have an aggregate Fair Market Value that equals or exceeds (to avoid
the issuance of fractional shares under (iii) below) the required tax
withholding payment; or (iii) if the Company, in its sole discretion, so
consents in writing, the Company's withholding of a number of shares to be
delivered upon the exercise of the Stock Option, which shares so withheld have
an aggregate Fair Market Value that equals (but does not exceed) the required
tax withholding payment; provided that, shares cannot be withheld in connection
with the exercise of this Stock Option in excess of the minimum number required
for tax withholding, and to permit the Stock Option to be accounted for as a
fixed award. Any such withholding payments with respect to the exercise of any
portion of the Stock Option in cash or by actual delivery of shares of Common
Stock shall be made when required by the Company and prior to the delivery of
any certificate representing the shares of Common Stock acquired upon exercise
of the Stock Option. The Company may, in its sole discretion, withhold such
taxes from any other cash remuneration otherwise paid by the Company to the
Participant.
29. Confidentiality. Participant agrees that, as partial consideration
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for the granting of this Stock Option, he will keep confidential all information
and knowledge that he has relating to the manner and amount of his Option Share
grant hereunder; provided, however, that such information may be given in
confidence to the Participant's spouse or to a financial institution or advisor
to the extent that such information is necessary in order to secure a loan, or
for tax or retirement planning purposes.
30. Use of Proceeds. Proceeds from the sale of Common Stock pursuant
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to the exercise of this Stock Option shall constitute general funds of the
Company.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by
its duly authorized officer, and the Participant, to evidence his consent and
approval of all the terms hereof, has duly executed this Agreement, as of the
date specified in Section 1 hereof.
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PIZZA INN, INC.
By: /s/ Mark E. Schwarz
Name: Mark E. Schwarz
Title: Chairman of the Board
/s/ Timothy P. Taft
Timothy P. Taft