SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. 2)
FILED BY REGISTRANT [X]
FILED BY A PARTY OTHER THAN THE REGISTRANT [ ]
CHECK THE APPROPRIATE BOX:
[ ] PRELIMINARY PROXY STATEMENT
[ ] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY RULE
14A-B(E)(2))
[X] DEFINITIVE PROXY STATEMENT
[ ] DEFINITIVE ADDITIONAL MATERIALS
[ ] SOLICITING MATERIAL PURSUANT TO 240.14A-11(C) OR 240.14A-12
PIZZA INN, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
[X] NO FEE REQUIRED.
[ ] FEE COMPUTED ON TABLE BELOW PER EXCHANGE ACT RULES 14A-6(I)(1) AND 0-11.
1) TITLE OF EACH CLASS OF SECURITIES TO WHICH TRANSACTION APPLIES:
2) AGGREGATE NUMBER OF SECURITIES TO WHICH TRANSACTION APPLIES:
3) PER UNIT PRICE OR OTHER UNDERLYING VALUE OF TRANSACTION COMPUTED
PURSUANT TO EXCHANGE ACT RULE 0-11 (SET FOR THE AMOUNT ON WHICH THE
FILING FEE IS CALCULATED AND STATE HOW IT WAS DETERMINED):
4) PROPOSED MAXIMUM AGGREGATE VALUE OF TRANSACTION:
5) TOTAL FEE PAID:
[ ] FEE PAID PREVIOUSLY WITH PRELIMINARY MATERIALS.
[ ] CHECK BOX IF ANY PART OF THE FEE IS OFFSET AS PROVIDED BY EXCHANGE ACT
RULE 0-11(A)(2) AND IDENTIFY THE FILING FOR WHICH THE OFFSETTING
FEE WAS PAID PREVIOUSLY. IDENTIFY THE PREVIOUS FILING BY REGISTRATION
STATEMENT NUMBER, OR THE FORM OR SCHEDULE AND THE DATE OF ITS
FILING.
1) AMOUNT PREVIOUSLY PAID:
2) FORM, SCHEDULE OR REGISTRATION STATEMENT NO:
3) FILING PARTY:
4) DATE FILED:
EXPLANATORY NOTE: This Amendment No. 2 to the Proxy Statement on Schedule 14A
filed November 10, 2004 by Pizza Inn, Inc. with the Commission (the "Original
Proxy Statement") supersedes and replaces the Original Proxy Statement and that
certain Amendment No. 1 to the Original Proxy Statement filed November 12, 2004
by Pizza Inn, Inc. with the Commission.
PIZZA INN, INC.
3551 PLANO PARKWAY
THE COLONY, TEXAS 75056
(469) 384-5000
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 23, 2005
To our Shareholders:
The 2004 Annual Meeting of Shareholders of Pizza Inn, Inc. (the "Company")
will be held at the Company's corporate offices, 3551 Plano Parkway, The Colony,
Texas 75056, on Thursday, June 23, 2005, at 10:00 a.m., Dallas time, for the
following purposes:
1. To elect four Class I directors;
2. To consider and vote upon a proposal to approve the adoption of a stock award
plan for non-employee directors as a successor plan to the 1993 Outside
Directors Stock Award Plan that expired in 2003;
3. To consider and vote upon a proposal to approve the adoption of a stock
award plan for employees as a successor plan to the 1993 Employee Stock Award
Plan that expired in 2003;
4. To consider and vote upon a proposal to amend the Company's Restated
Articles of Incorporation to declassify the board of directors; and
5. To transact such other business as may properly come before the meeting
or any postponements or adjournments thereof.
These items are more fully described in the proxy statement, which is part of
this notice. We have not received notice of other matters that may be properly
presented at the annual meeting. A copy of the Company's Annual Report for the
fiscal year ended June 27, 2004 is also enclosed. Except as expressly
incorporated by reference herein, such Annual Report does not constitute a part
of the materials used for the solicitation of proxies.
Please read the enclosed proxy statement carefully. Complete, date and sign the
proxy, and mail it in the stamped envelope enclosed for your convenience.
Only shareholders of record at the close of business on May 1, 2005 are entitled
to notice of, and to vote at, this meeting and any postponements or adjournments
thereof.
By Order of the Board of Directors,
Rod J. McDonald
The Colony, Texas Corporate Secretary
June 6, 2005
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, PLEASE COMPLETE,
DATE, AND SIGN THE ENCLOSED PROXY, AND MAIL IT IN THE STAMPED ENVELOPE ENCLOSED
FOR YOUR CONVENIENCE. THE ENCLOSED PROXY IS REVOCABLE AT ANY TIME PRIOR TO ITS
USE.
YOUR VOTE IS IMPORTANT.
PIZZA INN, INC.
3551 PLANO PARKWAY
THE COLONY, TEXAS 75056
(469) 384-5000
PROXY STATEMENT FOR THE
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 23, 2005
Pizza Inn, Inc., a Missouri corporation (the "Company"), is soliciting
proxies to be voted at the Annual Meeting of Shareholders (the "Annual Meeting")
to be held at the Company's corporate offices, 3551 Plano Parkway, The Colony,
Texas 75056, on Thursday, June 23, 2005, at 10:00 a.m., Dallas time, and at any
postponements or adjournments thereof. This Proxy Statement and the enclosed
form of proxy are first being sent or made available to the Company's
shareholders on or about June 6, 2005.
If the proxy is signed and returned before the Annual Meeting, it will be
voted in accordance with the directions on the proxy or, if no directions are
made, by the proxies named therein in their discretion. A shareholder may revoke
a proxy at any time before it is voted by execution of a subsequent proxy,
voting the shares in person at the Annual Meeting or by giving written notice to
Pizza Inn, Inc., c/o Securities Transfer Corporation, Transfer Agent, 2591
Dallas Parkway, Suite 102, Frisco, Texas 75034 at any time prior to the close of
the polls at the Annual Meeting stating that the proxy has been revoked. If you
hold shares through a bank or brokerage firm, you must contact that firm to
revoke any prior voting instructions. The Company must receive the notice or a
new proxy card before the vote is taken at the Annual Meeting.
OUTSTANDING CAPITAL STOCK
The record date for shareholders entitled to notice of, and to vote at, the
Annual Meeting is May 1, 2005. At the close of business on that date, there
were 10,091,294 outstanding shares of common stock, $.01 par value ("Common
Stock"). No other class of securities of the Company is entitled to notice of,
or to vote at, the Annual Meeting.
ACTION TO BE TAKEN AT THE MEETING
The accompanying proxy, unless the shareholder otherwise specifies in the
proxy, will be voted:
1. FOR the election of the four Class I director nominees named herein, to
serve for a term of two years each (or one year if the proposal to amend the
Company's Restated Articles of Incorporation is adopted) or until their
respective successors are elected and qualified;
2. FOR the approval of the adoption of a stock award plan for non-employee
directors as a successor plan to the 1993 Outside Directors Stock Award Plan
that expired in 2003;
3. FOR the approval of the adoption of an incentive stock award plan for
employees as a successor plan to the 1993 Employee Stock Award Plan that expired
in 2003;
4. FOR the amendment of the Company's Restated Articles of Incorporation to
declassify the board of directors; and
5. In the discretion of the proxy holders, as to the transaction of such other
business as may properly come before the meeting or any postponements or
adjournments thereof.
The Board of Directors is not presently aware of any other business to be
brought before the Annual Meeting.
QUORUM AND VOTING
A majority of the outstanding shares entitled to vote at the Annual
Meeting, represented in person or by proxy, shall constitute a quorum at the
Annual Meeting. If a quorum is not present, in person or by proxy, the meeting
may be postponed or adjourned from time to time until a quorum is obtained.
Each outstanding share entitled to vote under the provisions of the Company's
Restated Articles of Incorporation shall be entitled to one vote on each matter
submitted to a vote at the Annual Meeting. Cumulative voting for the election
of directors is not permitted. Thus, a shareholder is not entitled to cumulate
his votes and cast them all for any single nominee or to spread his votes, so
cumulated, among more than one nominee. The election of each nominee as a
director requires the affirmative vote of the holders of record of a majority of
the outstanding shares entitled to vote on the election of directors and
represented in person or by proxy at the Annual Meeting at which a quorum is
present.
Shares represented by a shareholder who, or a proxy that, directs that the
shares abstain from voting or that a vote be withheld on the election of
directors or any other matter, shall be deemed to be represented at the meeting
for quorum purposes as to such manner, but shall be treated, and have the same
effect, as a vote against the nominees for election as directors or against such
other matter, as applicable. Broker non-votes shall be deemed to be represented
at the meeting for quorum purposes, but shall be treated, and have the same
effect, as a vote against the nominees for election as directors and shall be
treated as shares that are not entitled to vote on, and have the effect of
neither a vote for nor a vote against, each other matter. Shares as to which
voting instructions are given as to at least one of the matters to be voted on
shall also be deemed to be so represented. If the proxy states how shares will
be voted in the absence of instructions by the shareholder, such shares shall be
deemed to be represented at the meeting.
The enclosed proxy, if properly executed and returned, will be voted as
directed or stated on the proxy or, in the absence of such direction, for the
election of the nominees as directors and each other matter on the proxy. If
any other matters properly come before the meeting, the enclosed proxy will be
voted by the proxy holders in accordance with their best judgment in their
discretion. The Board believes that all the nominees will be available to serve
as directors. If any nominee is unable to serve or for good cause will not
serve, the Board may recommend a substitute nominee, or the Board may fill the
vacancy later. The shares represented by all valid proxies may be voted for the
election of a substitute if one is nominated.
PROPOSAL ONE:
ELECTION OF DIRECTORS
The Company's Restated Articles of Incorporation and Bylaws provide that
the Board of Directors shall be divided into two Classes. The terms of the four
incumbent Class I directors expire at the Annual Meeting. The Board has
nominated four candidates for election at the Annual Meeting, two of whom are
incumbent Class I directors. If elected, each director nominee shall hold
office for a two-year term, subject to the proposed amendment to the Company's
Restated Articles of Incorporation, which would change the term as described
herein, or until his successor shall have been elected and qualified. Each
nominee of the Board has expressed his intention to serve the entire term for
which election is sought and has agreed to serve for a term of one year only if
the shareholders approve Proposal Four, to declassify the Board. If any nominee
is unable or unwilling to serve at the time the election occurs, the proxies may
be voted for the election of another nominee to be designated by the Board. THE
BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE FOUR NOMINEE DIRECTORS.
On October 20, 2004, the Board of Directors approved a proposal to amend the
Company's Restated Articles of Incorporation to delete Section 8.2, the
provision that divides the Board into two classes of directors. The amended and
substituted Section 8.2 would provide for one class of directors. Under the
amendment, if approved by the shareholders, the four director nominees proposed
in this proxy, if elected, will hold office until the 2005 annual meeting of
shareholders (expected to be held in December 2005), at which time they, or
their successors, would be subject to election as members of a single class of
seven directors. Those directors currently referred to as Class II directors,
who were elected at the 2003 annual meeting of shareholders to hold office until
the 2005 annual meeting of shareholders, will complete their terms at the 2005
annual meeting of shareholders, at which time they, or their successors, would
be subject to election as members of a single class of seven directors. Members
of the single class, or their successors, would be subject to re-election every
year. The proposal to amend the Restated Articles of Incorporation requires the
approval of holders of a majority of the shares present in person or represented
by proxy and entitled to vote.
If the proposed amendment is not approved by the shareholders, the two
classes of directors will continue, and the four Class I nominees, if elected,
will serve two-year terms.
Following is the biographical information, as of April 1, 2005, of the four
nominee directors, and the three directors whose terms of office will continue
after the Annual Meeting, the class to which each director has been or will be
elected, and the year in which each director was first elected.
NOMINEES
Bobby L. Clairday, 61, is an Area Developer of Pizza Inn restaurants and he
is President, a Director and sole shareholder of Clairday Food Services, Inc., a
Pizza Inn franchisee operating Pizza Inn restaurants in Arkansas. Mr. Clairday
is also sole shareholder of Advance Food Services, Inc., a franchisee operating
Pizza Inn restaurants in Arkansas. From 1990 until his election as a Director
of the Company in January 1993, Mr. Clairday was an ex-officio member of the
Board of Directors, serving as a representative of the Company's franchisees.
He has served as the President of the Pizza Inn Franchisee Association and as a
member of various committees and associations affiliated with the Pizza Inn
restaurant system. Mr. Clairday has been a franchisee of the Company for over
twenty years and a Class I Director for over nine years.
John D. Harkey, Jr., 44, has served as Chief Executive Officer and Chairman
of Consolidated Restaurant Companies, Inc., as Chief Executive Officer and Vice
Chairman of Consolidated Restaurant Operations, Inc., and has been manager of
the investment firm Cracken, Harkey, Street & Hartnett since 1997. From 1992 to
1998, Mr. Harkey was a partner with the law firm Cracken & Harkey, LLP. Mr.
Harkey was founder and managing director of Capstone Capital Corporation and
Capstone Partners, Inc. from 1989 until 1992. He has been a director of Total
Entertainment Restaurant Corporation since 1999.
Timothy P. Taft, 47, was appointed President and Chief Executive Officer in
March 2005. Prior to joining the Company, Mr. Taft served as President and
Chief Operating Officer of Whataburger, Inc. from October 2000 through October
2005. Prior to that, he served in various senior management positions with
Whataburger, Inc. beginning in 1994. Before joining Whataburger, Inc., Mr. Taft
was Vice President of The Marketing Continuum, a marketing services agency.
Mark E. Schwarz, 44, is the Chairman, Chief Executive Officer and Portfolio
Manager of Newcastle Capital Management, L.P., a private investment management
firm he founded in 1993 that is the general partner of Newcastle Partners, L.P.
Mr. Schwarz was appointed Chairman of the Board of the Company in February 2004.
Mr. Schwarz is also Chairman of the Board and Chief Executive Officer of
Hallmark Financial Services, Inc., Chairman of the Board of Bell Industries,
Inc., Chairman of the Board of New Century Equity Holdings Corp., and a director
of Nashua Corporation, S L Industries, Inc. and Web Financial Corporation. Mr.
Schwarz was appointed a Director in December 2002 to fill a vacant Class I Board
seat.
CONTINUING DIRECTORS
Robert B. Page, 45, is a franchisee of Shoney's, Inc., a family dining
restaurant chain. From November 2000 until September 2002, Mr. Page was Chief
Operations Officer of Gordon Biersch Brewery Restaurant Inc., a group of casual
dining restaurants. From 1993 through 2000 he worked for Romacorp, Inc., which
owns Tony Roma's, a chain of casual dining restaurants, where he was Chief
Executive Officer and a board member from 1998 through 2000, and President and
Chief Operations Officer from 1993 through 1998. Mr. Page was elected a Class II
Director of the Company in February 2004, and was appointed as the Company's
Acting Chief Executive Officer in January 2005, a position he held until March
2005.
Ramon D. Phillips, 71, is the former Chairman of the Board, President, and
Chief Executive Officer of Hallmark Financial Services, Inc., a financial
services company. He served as Chairman, President, and Chief Executive Officer
of Hallmark from 1989 through 2000, and as Chairman through August 2001. Prior
to Hallmark, Mr. Phillips had over fifteen years experience in the franchise
restaurant industry, serving as Controller for Kentucky Fried Chicken, Inc.
(1969-1974) and as Executive Vice President and Chief Financial Officer for
Pizza Inn, Inc. (1974-1989). He was elected a Director of the Company in 1990
and served through 2002. He served as an Advisory Director in 2002 and was
re-elected as a Class II Director in February 2004.
Steven J. Pully, 45, is the President of Newcastle Capital Management,
L.P., the general partner of Newcastle Partners, L.P. Mr. Pully has also been
Chief Executive Officer and a director of New Century Equity Holdings Corp.
since June 2004, and was Chief Executive Officer of Pinnacle Frames and Accents,
Inc. from January 2003 through June 2004. Prior to joining Newcastle Capital
Management, L.P. in late 2001, from May 2000 to December 2001, he was a managing
director in the mergers and acquisitions department of Banc of America
Securities, Inc. and from January 1997 to May 2000 he was a member of the
investment banking department of Bear Stearns where he became a senior managing
director in 1999. Prior to becoming an investment banker, Mr. Pully practiced
securities and corporate law at the law firm of Baker & Botts. Mr. Pully is a
CPA, a CFA, and a member of the Texas Bar. Mr. Pully was appointed a Director
in December 2002 to fill a vacant Class II Board seat.
INFORMATION REGARDING THE BOARD AND ITS COMMITTEES
The business of the Company is managed under the direction of the Board of
Directors. Each director is expected to make reasonable efforts to attend board
meetings, meetings of committees of which such director is a member and the
Annual Meeting of Shareholders. The Board of Directors intends to comply with
the corporate governance guidelines set forth by The Nasdaq Stock Market
("Nasdaq") listing standards and Securities and Exchange Commission ("SEC")
rules adopted to implement provisions of the Sarbanes-Oxley Act of 2002 (the
"Sarbanes-Oxley Act"). The Board has six committees: an Executive Committee, an
Audit Committee, a Compensation Committee, a Finance Committee, a Nominating and
Governance Committee and a Strategic Planning Committee. The charters for
certain Board committees, including the Nominating and Governance Committee, may
be viewed at http://www.pizzainn.com.
-----------------------
The Board met nine times during the last fiscal year. All directors
attended 75% or more of the Board meetings and meetings of the committees on
which they served and all seven directors attended the prior year's annual
meeting. Below is a table that provides membership and meeting information for
each of the Board committees during fiscal year 2004:
Nominating Strategic
Name Executive Audit Compensation Finance & Governance Planning
- --------------------------------------------------------------------------------
Mr. Schwarz X*
Mr. Clairday
Mr. Page X2 X2 X* X2 X**
Mr. Parker X1
Mr. Phillips X X* X X X X**
Mr. Powell X
Mr. Pully X* X X*
Number of Meetings
in Fiscal 2004 10 9 5 3 1 143
- -------------------------------------------------------------------------------
1 - Mr. Parker was replaced by Mr. Page as a member of the Executive Committee
in December 2004.
2 - Mr. Page resigned his membership on these committees effective as of his
appointment as Acting Chief Executive Officer on January 4, 2005.
3 - Includes five meetings with the Company's management team.
* Committee Chairman
** Committee Co-Chairman
Independent directors meet at least twice annually apart from other Board
members and management representatives. Each of the Company's current
directors, other than Mr. Clairday, Mr. Page and Mr. Parker, qualify as
"independent" in accordance with published Nasdaq listing requirements. On
January 4, 2005 the Board appointed Mr. Page as Acting Chief Executive Officer
of the Company. Mr. Page served in that capacity until the appointment of Mr.
Taft as President and CEO on March 31, 2005. According to published Nasdaq
listing requirements during his term as Acting CEO and for a period of three
years thereafter, Mr. Page will not qualify as an independent director.
Below is a description of each committee of the Board. Each of the
committees has authority to engage legal counsel or other experts or consultants
as it deems appropriate to carry out its responsibilities. The Board has
determined that each member of each committee meets the applicable laws and
regulations regarding "independence" when applicable and that each member is
free of any relationship that would interfere with his individual exercise of
independent judgment.
Executive Committee. This committee will consider issues as directed by
--------------------
the Chairman of the Board. It also may exercise the authority of the Board
between Board meetings, except to the extent that the Board has delegated
authority to another committee or to other persons, and except as otherwise
limited by Missouri law.
Audit Committee. The Company has a separately designated standing audit
----------------
committee established in accordance with Section 3(a)(58)(A) of the Securities
Exchange Act of 1934. The responsibilities of this committee include reviewing
the financial reports and other financial information provided by the Company to
any governmental body or the public; the Company's systems of internal controls
regarding finance, accounting, legal compliance and ethics that management and
the Board have established; the Company's auditing, accounting and financial
reporting processes generally; and such other functions as the Board may from
time to time assign to the committee. In performing its duties, the committee
seeks to maintain an effective working relationship with the Board, the
independent accountant and management of the Company. The specific duties and
functions of the Audit Committee are set forth in the Audit Committee Charter.
The Charter is reviewed annually and updated as necessary to reflect changes in
regulatory requirements, authoritative guidelines, and evolving practices.
Management is responsible for the preparation, presentation, and integrity
of the Company's financial statements, accounting and financial reporting
principles, internal controls and procedures designed to ensure compliance with
accounting standards, applicable laws, and regulations. The Company's
independent auditor, BDO Seidman LLP, is responsible for performing an
independent audit of the consolidated financial statements and expressing an
opinion on the conformity of those financial statements with generally accepted
accounting principles.
Compensation Committee. The primary responsibilities of this committee are
----------------------
to (a) review and recommend to the Board the compensation of the Chief Executive
Officer and other officers of the Company, (b) review executive bonus plan
allocations, (c) oversee and advise the Board on the adoption of policies that
govern the Company's compensation programs, (d) oversee the Company's
administration of its equity-based compensation and other benefit plans, and (e)
approve grants of stock options to officers and employees of the Company under
its stock plans. The Compensation Committee's role includes producing the
report on executive compensation required by SEC rules and regulations. The
specific duties and functions of the Compensation Committee are set forth in its
charter. This charter is reviewed annually and updated as necessary to reflect
changes in regulatory requirements, authoritative guidelines and evolving
practices.
Finance Committee. The primary responsibilities of this committee are to
------------------
(a) monitor present and future capital requirements and opportunities pertaining
to the Company's business and (b) review and provide guidance to the Board and
management about all proposals concerning major financial policies of the
Company. The Finance Committee's role includes designating officers and
employees who can execute documents and act on behalf of the Company in the
ordinary course of business under previously approved banking, borrowing, and
other financing arrangements.
Nominating and Governance Committee. The primary responsibilities of this
------------------------------------
committee are to (a) recommend the slate of director nominees for election to
the Board, (b) identify and recommend candidates to fill vacancies occurring
between annual shareholder meetings and (c) review, evaluate, and recommend
changes to the Company's corporate governance practices. The Nominating and
Governance Committee's role includes periodic review of the compensation paid to
non-employee directors for annual retainers and meeting fees and making
recommendations to the Board for any adjustments. The specific responsibilities
and functions of the Nominating and Governance Committee are set forth in its
Charter.
From time to time the Nominating and Governance Committee reviews the Board
to assess the skills and characteristics required of Board members in the
context of the current composition of the Board. This assessment includes
issues of diversity in numerous factors, understanding of and achievements in
the restaurant industry, board service, business, finance, marketing and
community involvement. These factors, and any other qualifications considered
useful by the Nominating and Governance Committee, are reviewed in the context
of an assessment of the perceived needs of the Board at a particular point. As
a result, the priorities and emphasis of the Nominating and Governance Committee
and of the Board may change from time to time to take into account changes in
business and other trends, and the portfolio of skills and experience of current
and prospective Board members. Therefore, while focused on the achievement and
the ability of potential candidates to make a positive contribution with respect
to such factors, the Nominating and Governance Committee has not established
specific minimum criteria or qualifications that a nominee must possess.
Consideration of new Board nominee candidates typically involves a series
of internal discussions, review of information concerning candidates and
interviews with selected candidates. In general, candidates for nomination to
the Board are suggested by Board members or by employees. In determining the
slate of nominees for the 2004 annual meeting, the Nominating and Governance
Committee considered a number of candidates recommended by shareholders,
directors and others. Mr. Harkey and Mr. Taft were both recommended to the
Nominating and Governance Committee for nomination to the Board by
non-management directors who are also shareholders, and were nominated as
candidates for election to the Board by the Nominating and Governance Committee.
In 2004 the Company did not employ a search firm or pay fees to other third
parties in connection with seeking or evaluating Board nominee candidates. The
Nominating and Governance Committee will consider director candidates
recommended by shareholders. The Nominating and Governance Committee evaluates
candidates proposed by shareholders using the same criteria as for other
candidates. The name of any recommended candidate for director, together with a
brief biographical sketch, a document indicating the candidate's willingness to
serve if elected and evidence of the nominating person's ownership of Company
stock should be sent to the Corporate Secretary of the Company using one of the
methods set forth in "Communications from Shareholders to the Board," below.
Strategic Planning Committee. This committee was constituted on April 21,
-----------------------------
2004 specifically to work with the Company's senior management to create and
implement a strategic plan for the Company. The Strategic Planning Committee
and Company management assembled and analyzed data pertaining to the Company's
business plan, competitive environment and objectives and other factors relevant
to the Company's concepts, products and services, ultimately preparing and
recommending plans, timetables, strategies, options and procedures for the
Company's long-term growth and success. The Strategic Planning Committee is
currently inactive; however, it is subject to reformation from time to time as
the Board may deem necessary.
Communications from Shareholders to the Board
The Board recommends that shareholders initiate any communications with the
Board in writing and send them in care of the Corporate Secretary. Shareholders
can send communications by e-mail to corporate_secretary@pizzainn.com, by fax to
--------------------------------
(469) 384-5061 or by mail to Corporate Secretary, Pizza Inn, Inc., 3551 Plano
Parkway, The Colony, TX 75056. This centralized process assists the Board in
reviewing and responding appropriately to shareholder communications. The names
of specific intended Board members should be noted in the communication. The
Board has instructed the Corporate Secretary to forward such correspondence only
to the intended recipients; however, the Board has also instructed the Corporate
Secretary, prior to forwarding any correspondence, to review such correspondence
and, in his discretion, not to forward certain items if they are deemed of a
commercial or frivolous nature or otherwise inappropriate for the Board's
consideration. In such cases, that correspondence may be forwarded elsewhere in
the Company for review and possible response.
Director Compensation
During fiscal year 2004, each non-employee director received as
compensation for serving on the Board and committees of the Board:
An annual retainer of $17,000;
An annual retainer of $6,000 for the Chairman of the Board; and
A per meeting fee of $1,000 for Board meetings and $250 fee for committee
meetings.
While Acting CEO of the Company, Mr. Page received no compensation for
serving as a director, except that he, like all directors of the Company, was
eligible to receive reimbursement of any expenses incurred in attending Board
and committee meetings. Mr. Parker has received the standard director's
compensation effective as of December 14, 2004, the day after his last day of
employment by the Company. Previously Mr. Parker was not paid for serving as a
member of the Board.
Members of the Strategic Planning Committee received a per diem fee of $500
for each day they were directly engaged in the discharge of committee
responsibilities. As of the date of this proxy statement, the Company is
withholding Board fees otherwise due to Mr. Clairday and offsetting those
amounts against the Advance Foods Debt (defined below), and the Company is
actively pursuing with Mr. Clairday alternative methods to pay the Company in
full.
In addition to annual and meeting fees, each non-employee director was
eligible to receive stock option awards under the 1993 Outside Directors Stock
Award Plan (the "1993 Plan") until the 1993 Plan's expiration on October 13,
2003. Under the 1993 Plan, eligible directors would receive, as of the first
day of the Company's fiscal year, options for Common Stock equal to twice the
number of shares of Common Stock purchased during the preceding fiscal year or
purchased by exercise of previously granted options during the first ten days of
the current fiscal year. On the first day of the first fiscal year immediately
following the day on which a non-employee director first became eligible to
participate in the 1993 Plan, that director would receive options to acquire two
shares of Common Stock for each share of Common Stock owned by such director on
the first day of the fiscal year. Stock options granted under the 1993 Plan
have an exercise price equal to the market price of the Common Stock on the date
of grant and are first exercisable one year after grant. For shares of Common
Stock purchased during fiscal 2004 or thereafter, each eligible director will be
entitled to options for no more than 40,000 shares per fiscal year if the
Directors Plan (defined below) is approved.
Since the beginning of fiscal year 2004, stock options for 5,000 shares
were granted to Mr. Schwarz pursuant to the 1993 Plan at an exercise price of
$2.15 per share.
Expiration of the 1993 Plan does not affect vesting, exercise or expiration
of options previously granted pursuant to such Plan; however, no further options
may be granted.
The Board expects to grant stock option awards to non-employee directors
beginning in calendar year 2005 if the shareholders approve Proposal Two,
"Adoption of a Non-Employee Directors Stock Option Award Plan."
EXECUTIVE OFFICERS
The following table sets forth certain information, as of April 1, 2005,
regarding the Company's executive officers:
Executive
Officer
Name Age Position Since
- ---- --- -------- -----
Timothy P. Taft 47 President and Chief Executive Officer 2005
Ward T. Olgreen 46 Senior Vice President of Franchise Operations
and Concept Development 1995
Shawn M. Preator 35 Chief Financial Officer and Vice
President of Distribution 1999
Rod J. McDonald 44 Secretary and General Counsel 2004
Danny K. Meisenheimer 45 Vice President of Marketing 2003
BIOGRAPHIES OF NON-DIRECTOR EXECUTIVE OFFICERS
Ward T. Olgreen was appointed Senior Vice President of Franchise Operations
and Concept Development in December 2002. He was appointed Vice President of
Concept Development in February 1999 and Senior Vice President of Concept
Development in July 2000. He joined the Company in September 1991 and served in
a variety of operational positions until his appointment in January 1995 as Vice
President of International Operations and Brand R&D. Mr. Olgreen was a Branch
Manager for GCS Service, Inc., a restaurant equipment service provider, from
June 1986 through July 1991.
Shawn M. Preator was appointed Chief Financial Officer and Vice President
of Distribution in October 2002. He was elected Vice President in June 2000.
He was elected Controller, Treasurer, and Assistant Secretary in April 1999.
Previously, Mr. Preator had been Assistant Controller for the Company since July
1998. Prior to joining the Company, Mr. Preator was a Senior Financial Analyst
at LSG/Sky Chefs, Inc., an international airline caterer, from September 1996 to
July 1998. Prior to September 1996, Mr. Preator worked for the accounting firm
Ernst & Young LLP in its audit department. Mr. Preator is a CPA.
Rod J. McDonald was appointed Corporate Secretary and General Counsel in
August 2004. Mr. McDonald joined the Company in September 1997 and served as
Assistant General Counsel of the Company until his appointment as General
Counsel. Prior to joining the Company, he was Vice President and Assistant
General Counsel for TCBY Enterprises, Inc. He served as Acting Chief Executive
Officer of the Company in December 2004 and January 2005.
Danny K. Meisenheimer was appointed Vice President of Marketing in January
2003 after joining the Company in December 2002. Prior to joining the Company,
Mr. Meisenheimer served as Vice President of Marketing for Furr's Restaurant
Group, Inc. since 1995. Mr. Meisenheimer joined the Marketing Department of
Furr's in 1991.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS,
AND EXECUTIVE OFFICERS
The following table sets forth certain information, as of April 1, 2005,
with respect to the beneficial ownership of Common Stock by: (a) each person
known to the Company to be a beneficial owner of more than five percent of the
outstanding Common Stock; (b) each director, nominee director, and executive
officer named in the section entitled "Summary Compensation Table;" and (c) all
such directors and executive officers as a group (13 persons). Except as
otherwise indicated, each of the persons named in the table below is believed by
the Company to possess sole voting and investment power with respect to the
shares of Common Stock beneficially owned by such person. Information as to the
beneficial ownership of Common Stock by directors and executive officers of the
Company has been furnished by the respective directors and executive officers.
Name Shares Percent
and Address of Beneficially of Class
-------
Beneficial Owner Owned
- ---------------- -----
Newcastle Partners, L.P.(a)
Newcastle Capital Management, L.P.
Newcastle Capital Group, L.L.C.
300 Crescent Court, Ste. 1110
Dallas, TX 75201 3,627,130 35.94%
Ronald W. Parker (b)
7108 Round Hill Road
McKinney, TX 75070 851,821 8.44%
Farnam Street Partners, L.P. (c)
Farnam Street Capital, Inc.
3033 Excelsior Boulevard,
Suite 300
Minneapolis, MN 55416 630,262 5.25%
Mark E. Schwarz (a)(d) 3,647,130 36.14%
Robert B. Page -0- -0-
Bobby L. Clairday (e) 48,900 Less than 1%
Ramon D. Phillips (f) 11,590 Less than 1%
Butler E. Powell (d) 32,500 Less than 1%
Steven J. Pully (a) 8,929 Less than 1%
John D. Harkey, Jr. -0- -0-
Timothy P. Taft (d) 50,000 Less than 1%
Ward T. Olgreen (d) 137,675 1.68%
Shawn M. Preator (d) 54,349 Less than 1%
Danny K. Meisenheimer 922 Less than 1%
B. Keith Clark (g) 4,000 Less than 1%
All Directors and 4,855,588 48.12%
Executive Officers as a Group
(a) Newcastle Capital Management, L.P. is the general partner of Newcastle
Partners, L.P., Newcastle Capital Group, L.L.C. is the general partner of
Newcastle Capital Management, L.P., and Mr. Schwarz is the managing member of
Newcastle Capital Group, L.L.C. Accordingly, each of Newcastle Capital
Management, L.P., Newcastle Capital Group, L.L.C. and Mark E. Schwarz may be
deemed to beneficially own the shares of Common Stock beneficially owned by
Newcastle Partners, L.P. In addition, Newcastle Partners, L.P., Newcastle
Capital Management, L.P., Newcastle Capital Group, L.L.C., Mr. Schwarz and Mr.
Pully are members of a Section 13d reporting group and may be deemed to
beneficially own shares of Common Stock owned by the other members of the group.
Newcastle Partners, L.P., Mr. Schwarz and Mr. Pully also directly own shares of
Common Stock. Mr. Pully disclaims beneficial ownership of the shares of Common
Stock beneficially owned by Newcastle Partners, L.P. Mr. Schwarz directly owns
20,000 shares of Common Stock, including options to acquire 5,000 shares.
(b) Mr. Parker was President and Chief Executive Officer of the Company
until December 13, 2004. He is an incumbent director who was not nominated to
stand for re-election.
(c) Farnam Street Capital, Inc. is the general partner of Farnam Street
Partners, L.P. Together Farnam Street Capital, Inc. and Farnam Street Partners,
L.P. beneficially own all of the shares shown. Mr. Raymond E. Cabillot is Chief
Executive Officer and Chief Financial Officer of Farnam Street Capital, Inc.,
and Mr. Peter O. Haeg is President and Secretary of Farnam Street Capital, Inc.
Accordingly, each of Farnam Street Partners, L.P., Farnam Street Capital, Inc.,
Mr. Cabillot and Mr. Haeg may be deemed to beneficially own the shares of Common
Stock beneficially owned by Farnam Street Capital, Inc. and Farnam Street
Partners, L.P. In addition, Farnam Street Partners, L.P., Farnam Street
Capital, Inc., Mr. Cabillot and Mr. Haeg are members of a Section 13d reporting
group and may be deemed to beneficially own shares of Common Stock owned by
other members of the group.
(d) Includes vested options and options vesting within 60 days of February
1, 2005 under the Company's stock option plans, as follows: 5,000 shares for Mr.
Schwarz; 20,000 shares for Mr. Powell; 50,000 shares for Mr. Taft; 66,500 shares
for Mr. Olgreen; and 44,500 shares for Mr. Preator.
(e) Mr. Clairday shares voting and investment power for 18,200 shares with
his wife.
(f) Mr. Phillips shares voting and investment power for 5,333 shares with
the other shareholders of Wholesale Software International, Inc.
(g) Mr. Clark was Senior Vice President, Secretary and General Counsel of
the Company until July 7, 2004.
AUDIT COMMITTEE REPORT
The Audit Committee of the Board is responsible for providing independent,
objective oversight of the Company's accounting functions and internal controls.
The Audit Committee is currently composed of two independent directors and acts
under a written charter adopted and approved by the Board on April 15, 2003.
The Audit Committee reviews its Charter on an annual basis. Each of the members
is independent as defined by Nasdaq's listing standards and as required by the
Sarbanes-Oxley Act. After a full review and analysis, the Board positively
reaffirmed that each member is independent within the meaning of Rule
4200(a)(14) of the listing standards of the Nasdaq and the rules and regulations
of the SEC, as such requirements are defined as of the mailing date of this
proxy statement. The Board annually reviews the Nasdaq listing standards'
definition of independence for audit committee members and makes an annual
determination of the independence of Audit Committee members.
On January 18, 2005, the Company notified Nasdaq that, due to one vacancy
on the Audit Committee that resulted from the resignation of Robert B. Page as a
member, the Company failed to comply with the audit committee composition
requirements under Marketplace Rule 4350(d)(2)(A), and would be relying on the
cure period provided under Marketplace Rule 4350(d)(4). As previously
disclosed, Mr. Page resigned in connection with and effective as of his
appointment on January 4, 2004 as the Acting Chief Executive Officer of the
Company.
On January 18, 2005, the Company received notice from Nasdaq that,
consistent with Marketplace Rule 4350(d)(4), the Company will be provided a cure
period until the earlier of the Company's next annual shareholders meeting or
January 4, 2006 in order to regain compliance with the audit committee
requirements and that the Company would be included in a list of non-compliant
Nasdaq companies at www.nasdaq.com on or after January 25, 2005. The Company
proposes to appoint Mr. Harkey to the Audit Committee, assuming his election as
a director at the Annual Meeting, to regain compliance with Nasdaq audit
committee requirements. The Company believes that Mr. Harkey will be
independent within the meaning of Rule 4200(a)(14) of the Nasdaq listing
standards and the rules and regulations of the SEC.
The Board of Directors has determined that at least one member of the Audit
Committee, Mr. Phillips, is an "audit committee financial expert," as defined by
SEC rules and regulations. This designation results from a disclosure
requirement of the SEC related to Mr. Phillips' experience and understanding
with respect to certain accounting and auditing matters. The SEC believes this
designation does not impose upon Mr. Phillips any duty, obligation or liability
that is greater than is generally imposed on him as a member of the Audit
Committee and the Board, and that his designation as an audit committee
financial expert pursuant to this SEC requirement does not affect the duty,
obligation or liability of any other member of the Audit Committee or the Board.
For an overview of Mr. Phillips' relevant experience, see the section entitled
"Continuing Directors" above.
The Audit Committee reviewed and discussed the Company's audited financial
statements with management. It also discussed with BDO Seidman LLP the matters
required to be discussed by Statement on Auditing Standards No. 61,
"Communications with Audit Committees", as amended by Statement on Auditing
Standards No. 90. In addition, BDO Seidman LLP also provided to the Audit
Committee the written disclosures and the letter required by Independence
Standards Board Standard No. 1, "Independence Discussions with Audit
Committees," and the Committee discussed with BDO Seidman LLP that firm's
independence.
The Audit Committee is responsible for recommending to the Board that the
Company's financial statements be included in the Company's annual report.
Based on the discussions with BDO Seidman LLP concerning the audit, the
financial statement review, and other such matters deemed relevant and
appropriate by the AuditCommittee, the Audit Committee recommended to the Board
that the June 27, 2004 audited financial statements be included in the Company's
2004 Annual Report on Form 10-K.
In accordance with the rules of the SEC, the foregoing information, which
is required by paragraphs (a) and (b) of Regulation S-K Item 306, shall not be
deemed to be "soliciting material", or to be "filed" with the SEC or subject to
the SEC's Regulation 14A, other than as provided in that Item, or to the
liabilities of Section 18 of the Securities Exchange Act of 1934, as amended,
except to the extent that the Company specifically requests that the information
be treated as soliciting material or specifically incorporates it by reference
into a document filed under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended.
Submitted by the Audit Committee: Ramon D. Phillips, Chairman
Butler E. Powell
FEES PAID TO INDEPENDENT AUDITORS
The Audit Committee has selected BDO Seidman LLP certified public
accountants as the independent auditors of the Company for fiscal year 2005. A
representative of BDO Seidman LLP will be present at the Annual Meeting, will be
available to respond to appropriate questions and will have an opportunity to
make a statement.
For fiscal 2004, the Audit Committee selected BDO Seidman LLP to replace
PricewaterhouseCoopers LLP, which was the Company's independent auditor for the
fiscal year ending June 29, 2003. The decision to change accountants was made by
vote of the Audit Committee, and the dismissal of PricewaterhouseCoopers LLP
became effective on October 8, 2003. During fiscal years 2002 and 2003, there
were no disagreements between the Company's senior management and
PricewaterhouseCoopers LLP's senior audit personnel on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure such that would have caused PricewaterhouseCoopers LLP to have made
reference to the subject matter of such disagreements in connection with its
audit report. The Company does not anticipate that a representative of
PricewaterhouseCoopers LLP will be present at the Annual Meeting, nor does it
anticipate that any such representative will be available to make a statement or
to answer questions.
The following table shows the fees the Company paid or accrued for audit
and other services provided by PricewaterhouseCoopers LLP in fiscal 2003 and
2004 and BDO Seidman LLP in fiscal 2004.
PRICEWATERHOUSECOOPERS BDO SEIDMAN
2003 2004 2004
- --------------------------------------------------------------------------------
Audit Fees $ 129,540 -- $ 74,718
Audit-Related Fees $ 13,656 -- $ --
Tax Fees $ 13,345 $ 9,300 $ 950
All Other Fees $ 35,579 $ 12,500 $ 3,050
-----------------------------------------------------------
Total $ 192,120 $ 21,800 $ 78,718
Audit Fees. This category represents aggregate fees billed by
PricewaterhouseCoopers LLP and BDO Seidman LLP for professional services
rendered for the audit of the Company's annual financial statements for the
years ended June 29, 2003 and June 27, 2004, respectively, and the reviews of
the financial statements included in the Company's Forms 10-Q for those years.
Audit-Related Fees. These fees consist of assurance and related services
that are reasonably related to the performance of the audit or review of the
Company's financial statements. This category includes fees related to the
performance of audits and attest services not required by statute or
regulations, audits of the Company's benefits plans and accounting consultations
regarding the application of generally accepted accounting principles to
proposed transactions.
Tax Fees. These fees consist of fees billed by PricewaterhouseCoopers LLP
for fiscal years 2003 and 2004 for tax return preparation and foreign tax
analysis, and for a change in tax accounting method, and fees billed by BDO
Seidman LLP for tax services during fiscal 2004.
All Other Fees. Fees paid to PricewaterhouseCoopers LLP and BDO Seidman LLP
in 2003 and 2004 generally include services pertaining to the question of change
of control of the Board and the Company following the election of directors at
the Company's 2003 Annual Meeting of Shareholders, consultation on a potential
business opportunity and for review by PricewaterhouseCoopers, LLP of the
Company's franchise offering circular. Fees paid to PricewaterhouseCoopers LLP
in fiscal 2004 also include services related to the transfer of audit-related
materials from PricewaterhouseCoopers LLP to BDO Seidman LLP.
In considering and authorizing these payments to the independent auditors
for services unrelated to performance of the audit of the Company's financial
statements, the Committee has determined that the cost segregation analysis
services, tax return preparation, foreign tax analysis and calculation, review
of the Company's franchise offering circular and transfer of materials related
to the audit engagement undertaken by the independent auditors are not
inconsistent with the independent auditor's performance of the audit and
financial statement review functions and are compatible with maintaining the
independent auditor's independence.
Policy of the Audit Committee for Pre-Approval of Audit and Permissible
Non-Audit Services of the Independent Auditor
The Audit Committee is responsible for appointing, setting compensation
for, and overseeing the work of, the independent auditor. In accordance with
Audit Committee policy and the requirements of law, all services to be provided
by BDO Seidman LLP are pre-approved by the Audit Committee. Pre-approval
applies to audit services, audit-related services, tax services and other
services. In some cases, pre-approval is provided by the full Audit Committee
for up to a year, and relates to a particular defined task or scope of work and
is subject to a specific budget. In other cases, the Chairman of the Audit
Committee has the delegated authority from the Audit Committee to pre-approve
additional services, and such pre-approvals are then communicated to the full
Audit Committee.
SUMMARY COMPENSATION TABLE
The following table sets forth the annual compensation of the Chief
Executive Officer and the other four most highly compensated executive officers
of the Company for the fiscal years ended June 27, 2004, June 29, 2003, and June
30, 2002 (designated as years 2004, 2003, and 2002, respectively).
Annual Compensation
------------------------
Long-Term
Compensation
Awards
------------------
Securities Under-
Name Other Annual lying Options
(and Principal Position) Year Salary ($) Bonus ($) Compensation ($) (b) (# of shares)
- ------------------------------- ------------------ --------------- ---------- --------------------- -------------
Ronald W. Parker. (a) . . . . . 2004 $ 550,000 $ 275,000 $ 176,084 0
(President and Chief . . . . . 2003 $ 537,755 $ 275,000 $ 179,910 0
Executive Officer). . . . . . . 2002 $ 507,885 $ 277,300 $ 287,863 0
B. Keith Clark (c) (Senior. . . . . 2004 $ 195,000 $ 26,500 $ 5,961 0
Vice President, Secretary,. . . 2003 $ 186,035 $ 53,325 $ 2,993 0
and General Counsel). . . . . . 2002 $ 161,884 $ 42,500 $ 0 0
Ward T. Olgreen . . . . . . . . 2004 $ 168,000 $ 33,600 $ 7,539 0
(Senior Vice President. . . . . 2003 $ 160,904 $ 34,700 $ 3,769 0
of Franchise Operations and . . 2002 $ 147,596 $ 32,250 $ 0 0
Concept Development)
Shawn M. Preator. . . . . . . . 2004 $ 150,000 $ 30,000 $ 5,961 0
(Chief Financial Officer and. . 2003 $ 139,650 $ 42,750 $ 3,042 0
Vice President of Distribution) 2002 $ 107,923 $ 21,000 $ 0 0
Danny K. Meisenheimer . . . . . 2004 $ 136,102 $ 27,000 $ 0 0
Vice President of . . . . . . . 2003 (d) $ 65,244 $ 13,000 $ 0 0
Marketing
(a) Mr. Parker was President and Chief Executive Officer of the Company
until December 13, 2004.
(b) Includes for Mr. Parker, a payment of $150,000 for life and disability
insurance benefits, secondary medical benefits and supplemental retirement
benefits (which includes the payment of related taxes) in 2004, and payments of
$165,266 for such benefits in 2003 and 2002.
(c) Mr. Clark was Senior Vice President, Secretary and General Counsel of
the Company until July 7, 2004.
(d) Includes compensation for Mr. Meisenheimer from his employment date of
December 31, 2002.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information regarding stock options
exercised during fiscal year 2004 and unexercised stock options held at the end
of fiscal year 2004 by the Chief Executive Officer and the other four most
highly compensated executive officers of the Company. The closing bid price for
the Company's Common Stock, as reported by the National Association of
Securities Dealers Automated Quotation System, was $---2.82 on June 25, 2004,
the last trading day of the Company's fiscal year.
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
Shares Fiscal Year End Fiscal Year
Acquired on Value Realized (Exercisable/ End (Exercisable/
Name Exercise (#) ($) Unexercisable) (#) Unexercisable)
- --------------------- ------------ ---------------- ------------------ -------------------
Ronald W. Parker.(a). -- -- 62,500 (e) $ 0
0 (u) $ 0
B. Keith Clark.(b). . 30,000 22,800 61,500 (e) $ 0
0 (u) $ 0
Ward. T. Olgreen. . . -- -- 76,500 (e) $24,600
0 (u) $ 0
Shawn M. Preator. . . -- -- 44,500 (e) $24,600
0 (u) $ 0
Danny K. Meisenheimer -- -- 0 (e) $ 0
0 (u) $ 0
0 (u)
0
(e) Denotes exercisable options.
(u) Denotes unexercisable options.
(a) Mr. Parker was President and Chief Executive Officer of the Company until
December 13, 2004.
(b) Mr. Clark was Senior Vice President, Secretary and General Counsel of the
Company until July 7, 2004.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding stock options granted
during fiscal year 2004, pursuant to the Company's 1993 Stock Award Plan, to the
Chief Executive Officer and the other four most highly compensated executive
officers of the Company.
Individual Grants
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for Option
Term
% of Total Options
Granted to Exercise
Options Employees in Price Expiration
Name Granted Fiscal Year ($/Share) Date 5% 10%
- ----------------------- ------------------------------ ------------ --------- ---------- -- ----
Ronald W. Parker 0 - $ - - $- $ -
B. Keith Clark 0 - $ - - $- $ -
Ward T. Olgreen 0 - $ - - $- $ -
Shawn M. Preator 0 - $ - - $- $ -
Danny K. Meisenheimer 0 - $ - - $- $ -
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors has been historically
comprised of three independent, non-employee directors. On January 4, 2004,
Robert B. Page submitted his resignation as a member effective as of and in
connection with his appointment as the Company's Acting Chief Executive Officer,
leaving the Compensation Committee currently comprised of two members. The
Compensation Committee is responsible for establishing the level of compensation
of the executive officers of the Company and will be responsible for
administering the 2005 Non-Employee Director Stock Option Award Plan and the
2005 Employee Stock Award Plan if approved by the shareholders.
The Compensation Committee and the Board have adopted a charter to conform
to the Compensation Committee's responsibilities under the revised Nasdaq
standards, new rules adopted by the SEC and the provisions of the Sarbanes-Oxley
Act.
Compensation Philosophy and Practice
In its administration and periodic review of executive compensation, the
Compensation Committee believes in aligning the interests of the executive
officers with those of the Company's shareholders. To accomplish this, the
Compensation Committee seeks to structure and maintain a compensation program
that is directly and materially linked to operating performance and enhancement
of shareholder value.
Tax Deductibility under Section 162(m)
As noted, the Company's compensation policy is primarily based upon the
practice of pay-for-performance. Section 162(m) of the Internal Revenue Code
imposes a limitation on the deductibility of nonperformance-based compensation
in excess of $1 million paid to the Chief Executive Officer and the other most
highly compensated executive officers of the Company. The Compensation
Committee currently believes that the Company should be able to continue to
manage its executive compensation program for these officers so as to preserve
the related federal income tax deductions.
CHIEF EXECUTIVE OFFICER
The compensation of Ronald W. Parker as Chief Executive Officer of the
Company was based on his employment agreement, which was entered into on
December 16, 2002. Mr. Parker's employment with the Company was terminated for
cause on December 13, 2004.
Mr. Parker's employment agreement had been approved by the then members of
the Board of Directors of the Company and the Compensation Committee as
constituted on December 16, 2002. The employment agreement provided for a term
through December 31, 2007. Under his employment agreement, Mr. Parker's
compensation was to be determined by the Compensation Committee, the Board or
the Stock Award Plan Committee (whose function has been assumed by the
Compensation Committee), based on the recommendations of the Compensation
Committee. The Compensation Committee's recommendations with respect to Mr.
Parker's compensation, however, were subject to other provisions in his
employment agreement, including the provisions that provided that Mr. Parker's
total annual compensation could not be reduced to less than an annual salary of
$550,000 and a mandatory minimum annual bonus equal to $275,000. Additionally,
Mr. Parker was entitled to receive under his employment agreement certain
defined benefits, which, in fiscal 2004, totaled approximately $176,084. The
bonus program established in Mr. Parker's employment agreement was based on the
Company's performance in the areas of revenue growth, net income, new store
openings, store sales, Company stock price, store closings and Company expenses,
subject to payment of the minimum bonus described above.
The Compensation Committee that was comprised of Messrs. Pully (Chairman),
Page and Phillips reviewed the compensation of Mr. Parker and evaluated Mr.
Parker's compensation by comparing it to the compensation of chief executive
officers in the restaurant industry and by considering the Company's current
structure and performance, among other things. As a result of this review, the
Compensation Committee believes that the total amount of Mr. Parker's
compensation was well in excess of the compensation of chief executive officers
at comparable companies and also excessive based upon the Company's performance
for the last completed fiscal year. The Compensation Committee also believes
that the compensation of the Chief Executive Officer, as well as other officers
and employees of the Company, should be more directly tied to individual
performance and the performance of the Company.
The Executive Committee and the Compensation Committee authorized payment
to Mr. Page of an annualized salary of $250,000 for his services as Acting Chief
Executive Officer. Mr. Page was the Acting Chief Executive Officer from January
4, 2005 through March 31, 2005. Mr. Page did not have an employment contract.
In establishing Mr. Page's compensation, the Compensation Committee and
Executive Committee considered Mr. Page's qualifications and experience,
compensation of chief executives at similar companies in the quick serve and
casual dining restaurant segments and the nature and complexity of the issues to
be encountered by Mr. Page during his term as Acting Chief Executive Officer.
Mr. Page was not paid a bonus.
On March 31, 2005, the Company and Timothy P. Taft entered into an
Executive Compensation Agreement approved by the Executive Committee and the
Compensation Committee. The agreement provides for a term through March 31,
2007, with a salary in the first 12 months of $1.00. Mr. Taft's bonuses,
benefits and salary in the second 12 months of the agreement are established by
the Compensation Committee or the Board, subject to certain minimum amounts.
Mr. Taft was also granted 500,000 options to acquire shares of Common Stock.
See "Executive Employment Contracts" below for more detail.
In structuring Mr. Taft's employment agreement, the Compensation Committee
and Executive Committee sought to offer a competitive and fair compensation
package tied to Mr. Taft's experience and qualifications while also aligning his
interests with those of the Company's shareholders. A significant portion of
Mr. Taft's compensation is materially and directly linked to Company performance
as a result of the granting of options to him. The options vest in increments
from 2005 through 2008. The Compensation Committee believes that Mr. Taft's
salary in the second 12 months, bonus amounts and benefits are comparable to
those offered to chief executive officers at similar companies in the quick
serve and casual dining restaurant segments.
OTHER EXECUTIVE OFFICERS
Subject to existing employment agreements, salaries of the other executive
officers are reviewed annually and adjusted based on competitive practices,
changes in level of responsibilities and individual performance measured against
goals.
STOCK OPTIONS
The Company established the 1993 Employee Stock Award Plan ("Employee
Option Plan") for the purpose of aligning employee and shareholder interests.
Under the Employee Option Plan, stock options were granted from time to time to
certain executive officers, as well as other employees, based upon their
relative positions and responsibilities, as well as historical and expected
contributions to Company growth. During fiscal years 2003 and 2004, the Company
did not grant stock options to employees.
The term of the Employee Option Plan expired on October 13, 2003.
Expiration does not affect vesting, exercise or expiration of options previously
granted pursuant to the Plan. Upon expiration of the Employee Option Plan no
further option grants can be made.
On March 31, 2005, the Company and Mr. Taft entered into a Non-Qualified
Stock Option Award Agreement as a part of Mr. Taft's employment agreement,
pursuant to which Mr. Taft was awarded options for 500,000 shares of Common
Stock at an exercise price of $2.50 per share.
The Board expects to grant additional stock option awards to eligible
employees beginning in calendar year 2005 if the shareholders approve Proposal
Three "Adoption of an Employee Stock Option Award Plan."
Submitted by the Compensation Committee: Steven J. Pully, Chairman
Ramon D. Phillips
EXECUTIVE EMPLOYMENT CONTRACTS
Ronald W. Parker, Ward T. Olgreen and Shawn M. Preator each entered into an
employment agreement with the Company on December 16, 2002. The agreements
provided for terms extending through December 31, 2007 for Mr. Parker and
December 31, 2005 for Mr. Olgreen and Mr. Preator, and provided that the
respective executive's compensation be determined each year by the Compensation
Committee subject to certain minimum amounts. The agreements also provided that
each executive may be terminated with or without cause.
Mr. Parker's agreement provided that his compensation would be determined
each year by the Compensation Committee, the Board or the Stock Award Plan
Committee, provided that he would receive an annual salary of not less than his
then current salary of $550,000 and a bonus of not less than $275,000, based
upon certain criteria defined in the agreement. The agreement also provided that
Mr. Parker could terminate the agreement within 12 months of a "change of
control" of the Company, as defined in the agreement, and that he could be
terminated with or without cause. Mr. Parker's employment was terminated for
cause by the Board on December 13, 2004.
On April 22, 2005, Mr. Preator and Mr. Olgreen each entered into an
Executive Compensation Agreement with the Company, replacing the employment
agreements executed on December 16, 2002. The agreements executed on April 22,
2005 each provided for a term through December 31, 2005. Mr. Preator's
agreement provides for salary of not less than his current salary of $150,000
and a bonus of not less than $30,000. Mr. Olgreen's agreement provides for
salary of not less than his current salary of $168,000 and a bonus of not less
than $33,600. Under the agreements each executive may be terminated with or
without cause and each executive may terminate his employment for any reason or
no reason at all.
Under the agreements executed on April 22, 2005, if the Company terminates
Mr. Olgreen's or Mr. Preator's employment without cause, he will be entitled to
a lump sum payment equal to six months of the executive's then current annual
salary plus a lump sum payment equal to any unpaid bonus the respective
executive would have been entitled to receive had he worked through December 31,
2005. Upon such a termination each would receive for a period of six months
following the date of termination of employment, all of the medical, life
insurance and other benefits then currently provided to the respective
executive, and a lump sum payment of the value of any accrued vacation days and
any unpaid "extra days" as defined in the Company's employee policy manual, that
the executive would have been entitled to receive if the executive had worked
through December 31, 2005. If the Company terminates Mr. Olgreen or Mr. Preator
for cause the Company shall pay the respective executive salary plus accrued
bonus, accrued vacation days and any unpaid "extra days" due to the executive
through the date of termination. If Mr. Preator or Mr. Olgreen terminates his
employment with or without any reason through December 31, 2005, the Company
will pay to the executive a lump sum payment equal to six months of the
executive's then current annual salary plus a lump sum payment equal to any
unpaid bonus the executive would have been entitled to receive had he worked
through December 31, 2005. Upon such a termination each would also receive a
lump sum payment of the value of any accrued vacation days and any unpaid "extra
days" as defined in the Company's employee policy manual, that the executive
would have been entitled to receive if the executive had worked through December
31, 2005.
Timothy P. Taft entered into an employment agreement with the Company on
March 31, 2005. The agreement is for a term that currently extends through
March 31, 2007, and provides for a salary in the first 12 months of $1.00.
Salary in the second 12 months is determined by the Board, subject to a minimum
amount of $300,000, and bonuses are determined by the Board, subject in the
second 12 months to a minimum amount of $200,000. The agreement also provides
for a grant of 500,000 non-qualified stock options, with 50,000 of such options
vesting immediately and the remainder vesting over three years. Mr. Taft may be
terminated with or without cause, with the definition of cause including, but
not limited to, breach of a monetary obligation to the Company, violation of the
compensation agreement, fraud against the Company and failure to substantially
perform required duties, each as described in the agreement.
If the Company terminates Mr. Taft's employment for cause, or if Mr. Taft
terminates his employment voluntarily, he will be entitled to a payment in the
amount of any unpaid salary accrued through the date of termination, any
unreimbursed expenses properly incurred prior to the date of termination and
rights granted to him under any executive benefit plan. If the Company
terminates Mr. Taft's employment without cause, he will be entitled to payment
of the amounts described above, and, either (a) during the first 12 months of
the agreement an amount equal to $25,000 for each full month he has been
employed or (b) commencing on the first anniversary of his employment, an amount
equal to 12 months of his then base salary. If the Company terminates Mr.
Taft's employment within six months of a change of control he will be entitled
to receive payment of all amounts payable under the agreement for termination or
resignation with or without cause, plus all then unvested stock options will
become immediately exercisable and remain exercisable for 90 days following the
date of termination of employment. Mr. Taft may terminate his agreement at any
time within six months after a "change of control" of the Company occurs or
following a change of control for "good reason", as those terms are defined in
the agreement.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On October 6, 1999, the Company loaned Ronald W. Parker, the Company's then
President and Chief Operating Officer, approximately $560,000 to acquire 200,000
shares of Common Stock through the exercise of vested stock options previously
granted to him by the Company. On July 7, 2000, the Company loaned Mr. Parker
approximately $302,000 to acquire an additional 200,000 shares of Common Stock
through the exercise of vested stock options previously granted to him by the
Company. The interest rate on the loans was the same floating interest rate the
Company was paying on its credit facility with Wells Fargo. As collateral for
the loans, Mr. Parker granted the Company (i) a first lien on 100,000 previously
purchased shares of Common Stock and certain real property, and (ii) a second
lien on certain additional real property. After the July 7, 2000 loan, the
principal amount outstanding was approximately $862,000. The Board of Directors
approved each loan, with the specific terms and collateral being approved by the
Compensation Committee.
On October 30, 2000, Mr. Parker paid the Company approximately $165,000 of
the principal amount of the loans, and on June 10, 2004 Mr. Parker paid the
remaining principal balance and accrued interest in full. The Company has
released all liens on the shares of common stock and the real property pledged
by Mr. Parker as collateral for the loans. The Company currently has no
outstanding loans to its officers or directors.
Bobby L. Clairday is President and sole shareholder of Clairday Food
Services, Inc. and is sole shareholder of Advance Food Services, Inc., both of
which are franchisees of the Company. Mr. Clairday also holds area development
rights in his own name. Mr. Clairday currently operates 11 restaurants in
Arkansas, either individually or through the corporations noted above. As
franchisees, the two corporations purchase a majority of their food and other
supplies from the Company's distribution division. In fiscal year 2004,
purchases by these franchisees made up 4.4% of the Company's food and supply
sales. Royalty payments by Mr. Clairday and such franchisees were 3.2% of the
Company's royalty revenues, and license fees and area development fees from Mr.
Clairday and such franchisees made up 6.3% of the Company's franchise revenues.
As of October 1, 2004 Advance Food Services, Inc. and Clairday Food
Services, Inc. collectively owed the Company approximately $946,329, primarily
for royalties and purchases of products from the Company's distribution division
("Clairday Debt"). Of the total amount of the Clairday Debt outstanding on that
date, approximately $556,434 represents normal and customary 30-day purchase and
payment cycles for these franchisees. The balance of the Clairday Debt,
approximately $335,318, represents amounts incurred by Advance Foods, Inc.
during a period in 1996 and 1997 following Mr. Clairday's sale of that company
to unrelated third parties and prior to his reacquisition of the company in 1997
("Advance Foods Debt"). The Company carries the Advance Foods Debt on its books
as past due trade receivables, with no interest accrual. Mr. Clairday has made
limited payments toward reduction of the Advance Foods Debt, and the Company
has on occasion set off certain payments due Mr. Clairday or Advance Foods, Inc.
against the Advance Foods Debt, reducing the balance owed. The last payment
made by Mr. Clairday toward the Advance Foods Debt was $5,232 in June 2000, and
the last set-off applied by the Company against the Advance Foods Debt was
$1,167 in April 2001. No payment or set off was applied during fiscal 2004. At
June 27, 2004, the amount of the Advance Foods Debt was $335,318. As of the
date of this proxy statement, the Company is withholding Board fees otherwise
due to Mr. Clairday and offsetting those amounts against the Advance Foods Debt,
and the Company is actively pursuing with Mr. Clairday alternative methods to
pay the Company in full.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 ("Act") requires the
Company's executive officers and directors and the persons who own more than ten
percent of the Common Stock to file initial reports of ownership of Common Stock
and reports of changes of ownership with the Securities and Exchange Commission
and the National Association of Securities Dealers, Inc. and to furnish the
Company with copies of such reports. The Company believes that, during the
preceding fiscal year and prior fiscal years, all of the Company's executive
officers, directors and holders of more than 10% of Common Stock timely filed
all reports required by Section 16(a) of the Act, except as previously disclosed
and except for the following filings made on behalf of the following directors:
For Mr. Schwarz, a Form 4 Statement of Changes in Beneficial Ownership of
Securities reflecting the purchase of 7,500 shares of Common Stock on June 30,
2003 was not timely filed. A filing was made on July 14, 2003. For Mr.
Phillips, a Form 4 Statement of Changes in Beneficial Ownership of Securities
reflecting the sale of 5,290 shares of Common Stock on April 2, 2004 was not
timely filed. A filing was made on April 13, 2004.
PROPOSAL TWO:
ADOPTION OF NON-EMPLOYEE DIRECTORS STOCK OPTION AWARD PLAN
There will be presented to the meeting a proposal to adopt the 2005
Non-Employee Directors Stock Option Award Plan (the "Directors Plan"). The
Directors Plan will replace the 1993 Outside Directors Stock Award Plan, which
expired by its terms on October 13, 2003. The Board believes that an
equity-based incentive plan is an integral component of an attractive
compensation program that will attract, retain and reward qualified non-employee
directors, to the benefit of the Company and its shareholders. The Board has
approved the Directors Plan and directed that it be submitted to the
shareholders for approval. The proposal to approve the Directors Plan requires
the approval of holders of a majority of the shares present in person or
represented by proxy and entitled to vote.
Description of the Proposed Directors Plan
Administration. The Directors Plan is administered by the Compensation
Committee, which is comprised of two directors who are not employed by the
Company and who satisfy the "independence" requirements under rules issued by
Nasdaq.
Eligibility. All non-employee directors of the Company ("Non-Employee
Directors") are eligible to participate in the Directors Plan. A Non-Employee
Director is a member of the Company's Board of Directors who is not an employee
of the Company.
Shares Subject to the Directors Plan. The total number of shares of Common
Stock that may be issued to Non-Employee Directors under the Directors Plan
shall not exceed 500,000, subject to adjustment as provided in the Directors
Plan. Awards granted under the Directors Plan that expire or terminate without
being exercised may be regranted.
Awards and Limitations. Under the Directors Plan, unless and until the
Compensation Committee determines otherwise and in addition to any other award
that may be granted to the Non-Employee Directors, an option to acquire two
shares of Common Stock shall be granted to each Non-Employee Director on the
first day of each fiscal year for each share of Common Stock purchased by such
Non-Employee Director during each preceding fiscal year, with up to a maximum
award of 40,000 options.
Exercise Price. The exercise price for any option granted under the
Directors Plan may not be less than the fair market value of the Common Stock on
the date of grant. Fair market value is defined in the Directors Plan as the
closing price for the Common Stock on Nasdaq on the date of the option award.
The fair market value of the Common Stock was $2.75 on April 1, 2005.
Terms of Option Awards. For all awards under the Directors Plan, the
minimum vesting period is six months after grant and the maximum exercise period
is ten years after grant. Payment for shares purchased pursuant to exercise of
an option award must be made at the time of exercise in cash or other payment
method approved by the Compensation Committee.
Term of the Directors Plan. The Directors Plan terminates ten years from
the date of approval by the Company's shareholders, or such earlier date as the
Board may determine and no awards may be granted thereafter.
Option Exercise and Transfer. Awards granted pursuant to the Directors
Plan may not be transferred other than as provided in the Directors Plan and may
only be exercised by the participant, or, in the event of his death, by his
heirs or estate. Upon the death (or permanent disability) of a participant
while serving as a Non-Employee Director, any outstanding unvested award (other
than any unvested award that the participant would have been able to exercise
within the following 12 months if no termination of service had occurred) is
immediately forfeited and any outstanding unvested award that the participant
would have been able to exercise within the following 12 months if no
termination of service had occurred and any outstanding unexercised vested award
may be exercised by the participant's heirs, estate or guardian within 12 months
following the participant's death (or commencement of such disability), after
which any unexercised option award terminates. If a Non-Employee Director's
service as a member of the Board terminates for any reason other than death or
disability, all unvested and all unexercised vested option awards terminate;
however, the Compensation Committee may allow 30 days within which to exercise
vested options. In the event of a "change of control" of the Company, as
defined in the Directors Plan, all outstanding option awards will become
immediately vested and exercisable.
Plan Amendment and Modification. The Board may amend or terminate the
Directors Plan, subject to certain restrictions in the Directors Plan. For
example, shareholder approval is required for any amendment that would increase
the total number of shares as to which awards may be granted under the Directors
Plan or modify the class of persons eligible to receive awards or otherwise
require shareholder approval under applicable law or regulation. In addition,
neither the Board nor the Compensation Committee may amend the Directors Plan
regarding the amount, pricing and timing of awards other than to comply with
changes in the Internal Revenue Code, the Employment Retirement Income Security
Act of 1974, or the rules thereunder. Modification, or amendment of the
Directors Plan may not, without the consent of a participant, affect his or her
rights under a previously granted award. The Directors Plan provides for
automatic adjustments to prevent dilution or enlargement of the participant's
rights in the event of a stock split, stock dividend or similar transaction. No
adjustments or reduction of the exercise price of any outstanding award may be
made in the event of a decline in the price of the Common Stock, either by
reducing the exercise price of outstanding awards or by canceling outstanding
awards in connection with regranting incentives at a lower price to the same
participant.
Federal Income Tax Consequences Under the Directors Plan. The only awards
that may be granted under the Directors Plan are nonqualified options. The
following is a brief summary of certain federal income tax consequences relating
to the transactions described under the Directors Plan as set forth below. This
summary does not purport to address all aspects of federal income taxation and
does not describe state, local or foreign tax consequences. This discussion is
based upon provisions of the Internal Revenue Code of 1986, as amended (the
"Code") and the treasury regulations issued thereunder (the "Treasury
Regulations"), and judicial and administrative interpretations under the Code
and Treasury Regulations, all as in effect as of the date hereof, and all of
which are subject to change (possibly on a retroactive basis) or different
interpretation.
Nonqualified Stock Options. Nonqualified stock option awards granted under
the Directors Plan do not qualify as "incentive stock options" and will not
qualify for any special tax benefits to the participant. A participant
generally will not recognize any taxable income at the time the nonqualified
option award is granted. However, upon its exercise, the participant will
recognize ordinary income for federal tax purposes measured by the excess of the
then fair market value of the Common Stock over the exercise price.
A participant's basis for determination of gain or loss upon the subsequent
disposition of Common Stock acquired upon the exercise of a nonqualified option
award will be the amount paid for such Common Stock plus any ordinary income
recognized as a result of the exercise of such option award. Upon disposition of
any Common Stock acquired pursuant to the exercise of a nonqualified option
award, the difference between the sale price and the participant's basis in the
Common Stock will be treated as short-term or long-term capital gain or loss,
depending on how long the participant has held the Common Stock.
In general, there will be no federal income tax deduction allowed to the
Company upon the grant or termination of a nonqualified option award or a sale
of disposition of the Common Stock acquired upon the exercise of a nonqualified
option award. However, upon the exercise of a nonqualified option award, the
Company will be entitled to a deduction for federal income tax purposes equal to
the amount of ordinary income that a participant is required to recognize as a
result of the exercise, provided that, among other things, the income meets the
test of reasonableness, is an ordinary and necessary business expense, is not an
"excess parachute payment" within the meaning of Section 280G of the Code and is
not disallowed by the $1 million limitation on certain executive compensation
under Section 162(m) of the Code.
Withholding. Any ordinary income realized by the participant upon the
exercise of a nonqualified option award is subject to withholding of federal,
state and local income tax and to withholding of the Participant's share of tax
under the Federal Insurance Contribution Act ("FICA") and the Federal
Unemployment Tax Act ("FUTA").
To satisfy federal, state and local income tax withholding requirements,
the Company will require that the participant remit to the Company an amount
sufficient to satisfy the withholding requirements.
Withholding does not represent an increase in the participant's total
income tax obligation, since it is fully credited toward his or her tax
liability for the year. Additionally, withholding does not affect the
participant's basis in any Common Stock. Compensation income realized and tax
withheld will be reflected on Forms W-2 supplied by the Company to employees by
January 31 of the succeeding year.
New Plan Benefits. The following table sets forth information, as of
April 1, 2005, concerning the benefits or amounts that will be received by or
allocated to the non-employee directors and all non-employee directors as a
group under the Directors Plan, to the extent such benefits or amounts are
determinable as of April 1, 2005:
NAME AND POSITION NUMBER OF UNITS(1) DOLLAR VALUE(4)
- ------------------- ----------------- -------------
Mark E. Schwarz, Director 25,000(2) 0
Steven J. Pully, Director 17,858(3) 0
(1) The awards under the Directors Plan and the shares underlying any such
award may be subject to certain vesting, exercise, acceleration and/or other
rights, restrictions and conditions, at various exercise prices, in each case,
as determined by the Compensation Committee.
(2) On November 3, 2004, the Compensation Committee awarded Mark E. Schwarz
an option to purchase 25,000 shares of Common Stock at an exercise price of
$2.85 per share under the terms of the 2005 Directors Plan as a result of Mr.
Schwarz's purchase of 12,500 shares of Common Stock in the open market in the
fiscal year ended June 27, 2004. The option will vest on November 3, 2005 and
will expire on November 3, 2010. The fair market value of the Common Stock was
$2.75 on April 1, 2005.
(3) On November 3, 2004, the Compensation Committee awarded Steven J. Pully
an option to purchase 17,858 shares of Common Stock at an exercise price of
$2.85 under the terms of the 2005 Directors Plan as a result of Mr. Pully's
purchase of 8,929 shares of Common Stock in the open market in the fiscal year
ended June 27, 2004. The option will vest on November 3, 2005 and will expire
on November 3, 2010. The fair market value of the Common Stock was $2.75 on
April 1, 2005.
(4) For purposes of determining values for this proxy statement for the
proposed option grants, the dollar value is calculated as of April 1, 2005, a
date selected only as being a recent reasonably practicable date. The dollar
values shown reflect the differences between the value of the options at the
exercise price of $2.85 and the $2.75 market value of the options at the closing
price for the Common Stock on April 1, 2005.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS APPROVE THE DIRECTORS
PLAN.
PROPOSAL THREE:
APPROVAL OF AN EMPLOYEE STOCK OPTION AWARD PLAN
There will be presented to the meeting a proposal to adopt the 2005
Employee Stock Option Award Plan (the "Employee Plan"). The Employee Plan will
replace the 1993 Employee Stock Award Plan, which expired by its terms on
October 13, 2003. The Board believes that an equity-based incentive plan can be
an integral component of an attractive compensation program that will attract,
retain and reward qualified employees to the benefit of the Company and its
shareholders. The Board has approved the Employee Plan and directed that it be
submitted to the shareholders for approval. The proposal to approve the
Employee Plan requires the approval of holders of a majority of the shares
present in person or represented by proxy and entitled to vote.
Description of the Proposed Employee Plan
Administration. The Employee Plan is administered by the Compensation
Committee, which is comprised of two directors who are not employed by the
Company, who are not eligible to receive awards under the Employee Plan and who
satisfy the "independence" requirements under rules issued by Nasdaq.
Eligibility. All full-time employees of the Company or any subsidiary or
affiliate of the Company who are not on probationary status ("Employees" or
"Participants") are eligible to participate in the Employee Plan. As of May 1,
2005, there were approximately 150 individuals eligible to participate in the
Employee Plan.
Shares Subject to the Employee Plan. The total number of shares of Common
Stock that may be issued or transferred to Employees under the Employee Plan
shall not exceed 1,000,000, subject to adjustment as provided in the Employee
Plan. Awards granted under the Employee Plan that expire or terminate without
being exercised may be regranted.
Exercise Price. The exercise price for any option granted under the
Employee Plan may not be less than the fair market value of the Common Stock on
the date of grant. Fair market value is defined in the Employee Plan as the
closing price for the Common Stock on Nasdaq on the date of the option award.
The fair market value of the Common Stock was $2.75 on April 1, 2005.
Terms of Option Awards. For all awards under the Employee Plan, the
minimum vesting period and the maximum exercise period will be determined for
each option grant by the Compensation Committee. Payment for shares purchased
pursuant to exercise of an option award must be made at the time of exercise in
cash or other payment method approved by the Compensation Committee.
Term of the Employee Plan. The Employee Plan terminates ten years from the
date of approval by the Company's shareholders or such other date as the Board
may determine, and no awards may be granted thereafter.
Option Exercise and Transfer. Awards granted pursuant to the Employee Plan
may not be transferred other than as provided in the Employee Plan and may only
be exercised by the participant, or, in the event of his death, by his heirs or
estate. Upon the death (or permanent disability) of an Employee, any unvested
award (other than any unvested award that the participant would have been able
to exercise within the following 12 months if no termination of service had
occurred) is immediately forfeited and any unvested award that the participant
would have been able to exercise within the following 12 months if no
termination of service had occurred and any outstanding unexercised vested award
may be exercised by the participant's heirs, estate or guardian within 12 months
following the participant's death (or commencement of such disability), after
which any unexercised option award terminates. If an Employee's employment
terminates for any reason other than death or disability, all unvested and all
exercised vested option awards terminate, but under certain circumstances the
Employee may have thirty (30) days within which to exercise vested options. In
the event of a "change of control" of the Company, as defined in the Employee
Plan, all outstanding option awards will become immediately vested and
exercisable.
Plan Amendment and Modification. The Board may amend or terminate the
Employee Plan, subject to certain restrictions in the Employee Plan. For
example, shareholder approval is required for any amendment that would: (i)
increase the total number of shares as to which awards may be granted under the
Employee Plan, (ii) modify the class of persons eligible to receive awards, or
(iii) otherwise require shareholder approval under applicable law or regulation.
In addition, neither the Board nor the Committee may amend the Employee Plan
regarding the amount, pricing and timing of awards other than to comply with
changes in the Internal Revenue Code, the Employment Retirement Income Security
Act of 1974, or the rules thereunder. Modification, or amendment of the Employee
Plan may not, without the consent of a participant, affect his or her rights
under a previously granted award. The Employee Plan provides for automatic
adjustments to prevent dilution or enlargement of the Participant's rights in
the event of a stock split, stock dividend, or similar transaction. No
adjustments or reduction of the exercise price of any outstanding award may be
made in the event of a decline in the price of the Common Stock, either by
reducing the exercise price of outstanding awards or by canceling outstanding
awards in connection with regranting incentives at a lower price to the same
Participant.
Federal Income Tax Consequences Under the Employee Plan. Option awards
under the Employee Plan are treated as incentive options ("ISO") or nonqualified
options. The following is a brief summary of certain federal income tax
consequences relating to the transactions described under the Employee Plan as
set forth below. This summary does not purport to address all aspects of
federal income taxation and does not describe state, local or foreign tax
consequences. This discussion is based upon provisions of the Code and the
Treasury Regulations, and judicial and administrative interpretations under the
Code and Treasury Regulations, all as in effect as of the date hereof, and all
of which are subject to change (possibly on a retroactive basis) or different
interpretation.
Incentive Stock Options. The grant of an ISO does not result in
recognizable income for the grantee. The exercise of an ISO would not result in
recognizable income for the grantee if the grantee (i) does not dispose of the
Common Stock within two (2) years after the date of grant or one (1) year after
the transfer of Common Stock upon exercise (the "holding periods"), and (ii) is
an employee of the Company from the date of grant and through and until three
(3) months before the exercise date. If these requirements are met, the basis
of the Common Stock upon later disposition would be the option price. Any gain
will be taxed to the Participant as long-term capital gain. However, to the
extent that the fair market value (determined as of the date of grant) of the
Common Stock with respect to which the Participant's ISOs are exercisable for
the first time during any year exceeds $100,000, the ISOs for the Common Stock
over $100,000 will be treated as nonqualified options, and not ISOs, for federal
tax purposes, and the Participant will recognize income as if the ISOs were
nonqualified options.
The excess of the market value on the exercise date over the option price
may be deemed as a tax preference for purposes of the alternative minimum tax,
which may produce significant tax repercussions depending upon the Participant's
particular tax status.
If the Participant disposes of the Common Stock prior to the expiration of
either of the holding periods, and the amount received for the Common Stock is
greater than the fair market value of the Common Stock on the exercise date,
then the difference between the ISO's exercise price and the fair market value
of the Common Stock at the time of exercise will be treated as ordinary income
for the tax year in which the disposition occurs. The Participant's basis in
the Common Stock will be increased by an amount equal to the amount treated as
ordinary income as a result of the disposition. Any gain in excess of the
increased basis in the Common Stock would be taxable as long-term or short-term
capital gain. However, if the price received for Common Stock acquired by
exercise of an ISO is less than the fair market value of the Common Stock on the
exercise date and the disposition is a transaction in which the Participant
sustains a loss which otherwise would be recognizable under the Code, then the
amount of ordinary income that the Participant will recognize is the excess, if
any, of the amount realized on the disposition of the Common Stock over the
basis of the Common Stock.
In general, there will be no federal income tax deduction allowed to the
Company upon the grant of an ISO, and the Company will be entitled to a
deduction to the extent a Participant recognizes ordinary income in the
circumstances described above, provided that, among other things, the income
meets the test of reasonableness, is an ordinary and necessary business expense,
is not an "excess parachute payment" within the meaning of Section 280G of the
Code and is not disallowed by the $1 million limitation on certain executive
compensation under Section 162(m) of the Code.
Nonqualified Stock Options. Nonqualified stock option awards granted under
the Employee Plan do not qualify as "incentive stock options" and will not
qualify for any special tax benefits to the Participant. A Participant
generally will not recognize any taxable income at the time the nonqualified
option award is granted. However, upon its exercise, the Participant will
recognize ordinary income for federal tax purposes measured by the excess of the
then fair market value of the Common Stock over the exercise price.
A Participant's basis for determination of gain or loss upon the subsequent
disposition of Common Stock acquired upon the exercise of a nonqualified option
award will be the amount paid for such Common Stock plus any ordinary income
recognized as a result of the exercise of such option award. Upon disposition
of any Common Stock acquired pursuant to the exercise of a nonqualified option
award, the difference between the sale price and the Participant's basis in the
Common Stock will be treated as short-term or long-term capital gain or loss,
depending on how long the Participant has held the Common Stock.
In general, there will be no federal income tax deduction allowed to the
Company upon the grant or termination of a nonqualified option award or a sale
of disposition of the Common Stock acquired upon the exercise of a nonqualified
option award. However, upon the exercise of a nonqualified option award, the
Company will be entitled to a deduction for federal income tax purposes equal to
the amount of ordinary income that a Participant is required to recognize as a
result of the exercise, provided that, among other things, the income meets the
test of reasonableness, is an ordinary and necessary business expense, is not an
"excess parachute payment" within the meaning of Section 280G of the Code and is
not disallowed by the $1 million limitation on certain executive compensation
under Section 162(m) of the Code.
Withholding. Any ordinary income realized by the Participant upon the
exercise of an ISO or nonqualified option award is subject to withholding of
federal, state and local income tax and to withholding of the Participant's
share of tax under FICA and FUTA.
To satisfy federal, state and local income tax withholding requirements,
the Company will require that the Participant remit to the Company an amount
sufficient to satisfy the withholding requirements.
Withholding does not represent an increase in the Participant's total
income tax obligation, since it is fully credited toward his or her tax
liability for the year. Additionally, withholding does not affect the
Participant's basis in any Common Stock. Compensation income realized and tax
withheld will be reflected on Forms W-2 supplied by the Company to employees by
January 31 of the succeeding year.
Special Withholding Rules for Incentive Options Exercised During the
Holding Period. According to Internal Revenue Service ("IRS") Notice 2002-47,
2002-28 I.R.B. 97, the IRS' current position is that it will not (1) assess FICA
or FUTA taxes upon the exercise of an ISO or the disposition of stock acquired
by an employee pursuant to the exercise of an ISO, and (2) will not treat the
exercise of an ISO, or the disposition of stock acquired by an employee pursuant
to the exercise of an ISO, as subject to federal income tax withholding.
However, to the extent that a Participant recognizes ordinary income due to the
sale of Common Stock acquired by the exercise of an ISO, the Participant still
must include compensation in income relating to the disposition of Common Stock
acquired by the exercise of an ISO. In addition, we must report on Form W-2 any
payment to an employee (or former employee) that is at least $600 in a calendar
year, even if the payment is not subject to federal income tax withholding.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS APPROVE THE EMPLOYEE
PLAN.
PROPOSAL FOUR:
APPROVAL OF AN AMENDMENT TO
THE COMPANY'S RESTATED ARTICLES OF INCORPORATION
TO DECLASSIFY THE BOARD OF DIRECTORS
On October 20, 2004, the Board of Directors approved a proposal to amend
the Company's Restated Articles of Incorporation to delete Section 8.2, which
currently provides that the Board be divided into two classes of Directors,
Class I and Class II, with each class elected for a term expiring at the annual
meeting of the Company's shareholders held in the second year following their
election. The amended and substituted Section 8.2 would provide for one class
of Directors beginning with the slate of Directors proposed to the shareholders
at the annual meeting of the Company's shareholders in 2005. Members of the
single class would be subject to re-election every year. The proposal to amend
the Restated Articles of Incorporation requires the approval of holders of a
majority of the shares present in person or represented by proxy and entitled to
vote. The text of the existing and proposed versions of Section 8.2 is set forth
below.
Current Section 8.2 of the Company's Restated Articles of Incorporation.
- -------------------------------------------------------------------------------
8.2 The directors shall be divided into two (2) classes with respect to the
time for which they severally hold office, designated Class I and Class II.
Class I shall be composed of four (4) directors who shall hold office until the
1994 Annual meeting and until their respective successors shall be elected and
shall qualify. Class II shall be composed of three (3) directors (the initial
members of this class being designated in the Plan), who shall hold office until
the annual meeting of the shareholders in 1993 and until their respective
successors shall be elected and shall qualify. Upon expiration of the initial
terms of the office of directors as classified above, their successors shall be
elected for a term expiring at the annual meeting of the Corporation's
shareholders held in the second year following the year of their election. Any
director elected to fill any vacancy on the Board of Directors shall hold office
for the remainder of the full term of the class of directors in which such
vacancy occurs.
Section 8.2 as amended to reflect the changes discussed above in Proposal
---------------------------------------------------------------------------
Four.
---
8.2 Beginning with the Company's 2004 annual meeting of shareholders,
if the shareholders vote to amend the Restated Articles to so provide, there
shall be one (1) class of directors, who shall be elected annually. Those
directors currently referred to as Class I Directors, who are nominated for
election at the 2004 annual meeting of shareholders, if elected, will hold
office until the 2005 annual meeting of shareholders, at which time they, or
their successors, must be nominated for election as members of a single class of
directors. Those directors currently referred to as Class II Directors, who were
elected at the 2003 annual meeting of shareholders to hold office until the 2005
annual meeting of shareholders, will complete their terms at the 2005 annual
meeting of shareholders, at which time they, or their successors, must be
nominated for election as members of a single class of directors. Any director
elected to fill any vacancy on the Board of Directors shall hold office for the
remainder of the full term of the director whose position such newly elected
director fills.
If Proposal Four is not approved by the shareholders, directors will
continue to be elected by class, with the members of each class holding office
for a term to expire at the annual meeting of the Company's shareholders held in
the second year following the year of their election.
Background. Classified boards of directors have been widely adopted by
companies and have a long history in corporate law. Proponents of classified
boards assert that they promote the independence of directors in that directors
elected for multi-year terms are less subject to outside influence. Proponents
of classified boards also believe that they provide continuity and stability in
the management of the business and affairs of a company since a majority of the
directors will have prior experience as directors of the company. Proponents
further assert that classified boards may enhance stockholder value by
motivating an entity seeking control of a target company with a classified board
to initiate arms-length discussions with the board of the target company because
the entity would be unable to replace the entire board in a single election.
Some investors have, however, come to view classified boards as having the
effect of insulating directors from accountability to a company's shareholders.
A classified board, for example, limits the ability of stockholders to elect all
directors on an annual basis and thereby exercise influence over a company, and
may discourage proxy contests in which shareholders have an opportunity to vote
for a competing slate of director nominees. The election of directors is the
primary means for shareholders to influence the business and affairs of a
company and to hold directors accountable for implementation of policies.
Management and the Board of Directors agree that one class of directors to
be annually elected is consistent with good governance practices and provides
greater accountability of the Board to the Company's shareholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS APPROVE THIS AMENDMENT
TO THE RESTATED ARTICLES OF INCORPORATION.
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
Our non-employee directors may benefit from the Directors Plan as
non-employee directors may be eligible to participate in the Directors Plan and
may receive benefits and awards under the Directors Plan. Certain non-employee
directors have already received awards under the Directors Plan that are subject
to shareholder approval of the Directors Plan. These awards are described in
this Proxy Statement under the caption "New Plan Benefits" in Proposal Two. Our
employees, including our employee directors, our executive officers and their
associates, may have a substantial interest in, and may benefit from, the
Employee Plan as such persons may be eligible to participate in the Employee
Plan and may receive benefits and awards under the Employee Plan.
The Board of Directors, in approving the Directors Plan and the Employee
Plan, may have different and/or conflicting interests than or with the
shareholders of the Company. In addition, the Board of Directors, management and
employees of the Company, and shareholders affiliated with the Company may have
different and/or conflicting interests than or with the shareholders of the
Company that are not affiliated with the Company in any capacity other than in
their capacity as a shareholder of the Company, including interests arising from
ownership of securities of the Company under the Directors Plan or the Employee
Plan that are not shared on a pro rata basis by all shareholders of the Company.
SHAREHOLDER PROPOSALS
FOR THE 2005 ANNUAL MEETING
If a shareholder wishes to present a proposal at the Annual Meeting of
Shareholders tentatively scheduled for December 14, 2005, the shareholder must
deliver his or her proposal to the Company at its principal executive offices a
reasonable time before the Company begins to print and mail its proxy materials
for such Annual Meeting in order to have that proposal included in the proxy
materials of the Company for such Annual Meeting of Shareholders. If a
shareholder wishes to present a proposal at the 2005 Annual Meeting of
Shareholders outside the processes of Rule 14a-8 of the Securities Exchange Act
of 1934, as amended, the shareholder must notify the Company in writing of his
or her intent to make such presentation no later than 50 calendar days nor more
than 75 calendar days prior to the 2005 Annual Meeting (provided, however, that
in the event that less than 65 calendar days notice or prior public disclosure
of the date of the meeting is given or made to shareholders, notice by the
shareholder to be timely must be so received no later than the close of business
on the 15th calendar day following the day on which such notice of the date of
the meeting was mailed or such public disclosure was made, whichever first
occurs) and otherwise in accordance with the advance notice provisions in the
Company's bylaws or the Company may have the right to determine and declare to
the meeting that such proposal was not properly brought before the meeting in
accordance with the bylaws of the Company and/or exercise its discretionary
voting authority when such proposal is presented at the Annual Meeting of
Shareholders, without including any discussion of that proposal in the proxy
materials for the Annual Meeting.
To be in proper form, a shareholder's notice must include the specified
information concerning the proposal or nominee as described in the Company's
Bylaws. A shareholder who wishes to submit a proposal or nomination is
encouraged to seek independent counsel with regard to the Company's Bylaws and
SEC requirements. The Company may not consider any proposal or nomination that
does not meet its Bylaw requirements and the SEC's requirements for submitting a
proposal or nomination. Notices of intention to present proposals at the
Company's 2005 Annual Meeting of Shareholders should be addressed to the
Corporate Secretary, Pizza Inn, Inc., 3551 Plano Parkway, The Colony, TX 75056,
or by fax to (469) 384-5061, or by e-mail to corporate_secretary@pizzainn.com.
--------------------------------
The Company reserves the right to reject, rule out of order, or take other
appropriate action with respect to any proposal that does not comply with these
and other applicable requirements.
STOCK PERFORMANCE GRAPH
The following graph compares the cumulative annual total shareholder return
(change in share price plus reinvestment of any dividends) on the Common Stock
versus two indexes for the past five fiscal years. The graph assumes $100 was
invested on the last trading day of the fiscal year ending June 28, 1998. Prior
to the first quarter of fiscal year 1998 and subsequent to the second quarter of
fiscal year 2001, the Company did not pay cash dividends on its Common Stock
during the applicable period. The Dow Jones Equity Market Index is a published
broad equity market index. The Dow Jones Entertainment and Leisure Restaurant
Index is compiled by Dow Jones and Company, Inc., and is comprised of seven
public companies, weighted for the market capitalization of each company,
engaged in restaurant or related businesses (CKE Restaurants, Inc., Brinker
International, Inc., Cracker Barrel Old Country Store, Inc., Darden Restaurants,
Inc., McDonald's Corporation, Tricon Global Restaurants, Inc., and Wendy's
International, Inc.).
PIZZA INN INC NEW
Cumulative Total Return
6/27/1999 6/25/2000 6/24/2001 6/30/2002 6/29/2003 6/27/2004
PIZZA INN, INC. . . . . . 100.00 107.90 69.33 40.89 68.69 90.09
DOW JONES US TOTAL MARKET 100.00 113.03 96.50 79.46 80.51 96.13
DOW JONES US RESTAURANTS. 100.00 79.06 81.09 96.18 86.50 106.18
MISCELLANEOUS
The accompanying proxy is being solicited on behalf of the Company. The cost of
solicitation has been or will be borne by the Company. Proxies may also be
solicited by directors, officers and employees of the Company in person or by
telephone, telefax, or email without compensation for those activities other
than reimbursement for out-of-pocket expenses. Arrangements may also be made
with brokerage houses and other custodians, nominees, and fiduciaries for the
forwarding of solicitation materials to the beneficial owners of stock held of
record by such persons and the Company may reimburse them for reasonable
out-of-pocket expenses of such solicitation.
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K EXCLUDING EXHIBITS,
DATED SEPTEMBER 24, 2004, IS BEING FURNISHED TO SHAREHOLDERS WITH THIS PROXY
STATEMENT. COPIES OF SUCH EXHIBITS WILL BE FURNISHED UPON WRITTEN REQUEST AND
UPON REIMBURSEMENT OF THE COMPANY'S REASONABLE EXPENSES FOR FURNISHING SUCH
EXHIBITS. REQUESTS SHOULD BE ADDRESSED TO PIZZA INN, INC., 3551 PLANO PARKWAY,
THE COLONY, TEXAS 75056, ATTENTION: CORPORATE SECRETARY.
This Proxy, when properly executed, will be voted by the Proxies in the manner
designated below. If this Proxy is returned signed but without a clear voting
designation, the Proxies will vote FOR Item 1, Item 2, Item 3, and Item 4.
Please mark Your
votes as indicated
IN THIS EXAMPLE.
[X]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEM 1, ITEM 2, ITEM 3, AND ITEM 4.
Item 1. ELECTION OF CLASS I DIRECTORS. Nominees: Bobby L. Clairday,
John D. Harkey, Jr.
Timothy P. Taft
Mark E. Schwarz
(or any substitute
nominee or substitute
nominees, if any of the
foregoing persons is
unable to serve or for good
cause will not serve)
WITHHELD
FOR FOR ALL WITHHELD FOR: (Write that nominee's name in the space
provided below).
[ ] [ ] ------------------------------------------------------
Item 2. ADOPTION OF A NON-EMPLOYEE DIRECTORS STOCK OPTION AWARD PLAN.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Item 3. ADOPTION OF AN EMPLOYEE INCENTIVE STOCK OPTION AWARD PLAN.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Item 4. AMENDMENT OF THE RESTATED ARTICLES OF INCORPORATION TO DECLASSIFY
THE BOARD OF DIRECTORS.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
If you plan to attend the Annual WILL
Meeting, please mark the WILL ATTEND
ATTEND block. [ ]
Date , 2005
_____________________________________________
Signature
_____________________________________________
Signature if held jointly
NOTE: Please sign as name appears hereon.
Joint owners should each sign. When
signing as attorney, executor, administrator,
trustee, or guardian, please give full title.
FOLD AND DETACH HERE
PROXY
(1) THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
PIZZA INN, INC.
3551 PLANO PARKWAY
THE COLONY, TEXAS 75056
ANNUAL MEETING OF SHAREHOLDERS ON JUNE 23, 2005
The undersigned, revoking all proxies heretofore given, hereby appoints
Kevin A. Kleiner and Shawn M. Preator, or either of them, as proxies of the
undersigned, with full power of substitution and resubstitution, to vote on
behalf of the undersigned the shares of Pizza Inn, Inc. (the "Company") that the
undersigned is entitled to vote at the Annual Meeting of Shareholders to be held
at 10:00 a.m., Dallas time, on Thursday, June 23, 2005, at the Company's
corporate offices, 3551 Plano Parkway, The Colony, Texas 75056, and at all
adjournments thereof, as fully as the undersigned would be entitled to vote if
personally present, as specified on the reverse side of this card and on such
other matters as may properly come before the meeting or any adjournments
thereof. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
PIZZA INN, INC
2005 NONEMPLOYEE DIRECTORS
STOCK OPTION AWARD PLAN
The name of the plan is the PIZZA INN, INC. 2005 NONEMPLOYEE DIRECTORS
STOCK OPTION AWARD PLAN ("Plan").
----
1. Purpose. The purpose of the Plan is to advance the interests of
Pizza Inn, Inc., a Missouri corporation ("Company") by attracting and retaining
-------
the services of experienced and knowledgeable non-employee directors
("Directors" or "Participants") for the benefit of the Company and its
------------
shareholders and to provide additional incentive for such directors to continue
to work for the best interests of the Company and its shareholders through
continuing ownership of the Company's stock.
2. Definitions
2.1 "Award" means a stock option granted to a Participant pursuant to
this Plan.
2.2 "Award Agreement" means a written agreement between a Participant and
the Company that sets out the terms of the grant of an Award.
2.3 "Board" means the Board of Directors of the Company.
2.4 "Change of Control" means any circumstances in which any person or group
that does not include Mark E. Schwarz, Newcastle Partners L.P. or any of their
respective affiliates becomes the beneficial owner of securities representing
more than 50% of the combined voting power of the Company's outstanding
securities entitled to vote on the election of directors (for which purpose the
terms "person," "group" and "beneficial owner" have the same meaning as used in
Section 13(d) of the Securities Exchange Act of 1934 and the rules promulgated
thereunder, and the term "affiliate" has the same meaning as defined in Rule 405
promulgated under the Securities Act of 1933).
2.5 "Code" means the Internal Revenue Code of 1986, as such is amended
from time to time, and any reference to a section of the Code shall include any
successor provision of the Code.
2.6 "Committee" means the Compensation Committee of the Board, or any
Board committee constituted and appointed by the Board from among its members to
administer this Plan pursuant to its terms.
2.7 "Date of Grant" means the effective date on which an Award is made to a
Participant as set forth in the applicable Award Agreement; provided, however,
that solely for purposes of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder, the Date of Grant of an Award shall be the
date of shareholder approval of the Plan if such date is later than the
effective date of such Award as set forth in the Award Agreement.
2.8 "Director" means a member of the Board.
2.9 "Disability" means a disability as construed under the appropriate
provisions of the long-term disability plan maintained for the benefit of
Employees of the Company who are regularly employed on a salaried basis, unless
the Committee adopts another meaning.
2.10 "Employee" means common law employee (as defined in accordance with the
Regulations and Revenue Rulings then applicable under Section 3401(c) of the
Code) of the Company or any subsidiary or affiliate of the Company.
2.11 "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, and any reference to a section of the Exchange Act shall
include any successor provisions of the Exchange Act.
2.12 "Fair Market Value" means, as it relates to the Shares, the closing
price of a Share on Nasdaq on the day on which an Award is granted, provided,
however, that in the event that the foregoing definition of "Fair Market Value"
does not comply with the definition of "fair market value" provided under
Section 409A of the Code (or the guidance and regulations issued thereunder),
the definition of "fair market value" under Section 409A of the Code shall be
used for purposes of the Plan and any Awards granted under the Plan.
2.13 "Nonqualified Stock Option" means a nonqualified stock option,
granted pursuant to this Plan, which is not an "incentive stock option" within
the meaning of Section 422 of the Code.
2.14 "Outside Director" or "Non-Employee Director" each means a member of
the Board who is not otherwise an Employee of the Company, and otherwise
satisfying the requirements of this Plan pertaining to Directors.
2.15 "Option" means the right to acquire a share of the Company's common
stock at prices and on dates established by the Committee pursuant to the terms
of this Plan and documents evidencing the Award.
2.16 "Participants" means those Directors to whom Awards have been granted
from time to time and any authorized transferee of such Awards.
2.17 "Plan" means the 2005 Non-Employee Director Stock Option Award Plan.
2.18 "Plan Year" means a 12-month period, commensurate with the Company's
fiscal year, used for calculating Director eligibility and participation, and
for determining Award dates. From time to time, the Board may determine
beginning and end dates for a Plan Year other than those of the Company's fiscal
year.
2.19 "1993 Plan" means the Pizza Inn 1993 Outside Directors Stock Award
Plan, which expired, without renewal or extension, on October 13, 2003.
2.20 "Share" means one share of the Company's common stock, $0.01 par value,
or the number and types of shares of stock or other securities that shall be
substituted or adjusted for such shares as provided herein.
2.21 "Termination of Service" occurs when a Participant who is an Outside
Director of the Company or a subsidiary shall cease to serve as a director of
the Company and its subsidiaries for any reason. Except as may be necessary or
desirable to comply with applicable federal or state law, a "Termination of
Service" shall not be deemed to have occurred when a Participant who is an
Outside Director becomes an Employee.
3. Effective Date. This Plan was approved by the Board of the Company on
October 20, 2004 and will become effective on June 23, 2005 ("Effective Date"),
--------------
subject to approval by the affirmative vote of the holders of a majority of the
votes cast at the 2004 Annual Meeting of Shareholders; however, the Committee
may grant Awards under the Plan prior to the time of shareholder approval. Any
such Award granted prior to such shareholder approval shall be made subject to
such shareholder approval.
4. Administration. Subject to the terms of this Section 4, this Plan
---------
shall be administered by the Committee. The Committee has the authority to grant
Awards to Directors and is responsible for the general administration and
interpretation of this Plan. At any time there is no Committee to administer
the Plan, any references in this Plan to the Committee shall be deemed to refer
to the Board.
4.1 Delegation. The Committee may delegate to one or more of its
----------
members such administrative duties as it may deem advisable and the Committee,
or any person to whom it has delegated duties, may employ one or more qualified
persons to render advice with respect to any responsibility the Committee or
such person may have under this Plan. The Committee may employ attorneys,
consultants, accountants, or other persons and the Committee, the Company, and
its officers and directors shall be entitled to rely upon the advice, opinions,
or valuations of any such persons. All actions taken and all interpretations
and determinations made by the Committee in good faith shall be final and
binding upon all persons who have received grants under the Plan, the Company,
and all other interested persons. No member or agent of the Committee shall be
personally liable for any action, determination, or interpretation made in good
faith with respect to the Plan and all members and agents of the Committee shall
be fully protected by the Company in respect of any such action, determination,
or interpretation.
The Committee may delegate the administration of the Plan to an officer or
officers of the Company, and such administrator(s) may have the authority to
execute and distribute agreements or other documents evidencing or relating to
Awards; to maintain records relating to the grant, vesting, exercise,
forfeiture, or expiration of Awards; to process or oversee the issuance of
Shares upon the exercise, vesting and/or settlement of an Award; to interpret
the terms of Awards; and to take such other actions as the Committee may
specify, provided that in no instance shall any such administrator be authorized
to grant Awards under the Plan.
4.2 Committee Powers. Subject to the express provisions and
-----------------
limitations set forth in this Plan, the Committee shall be authorized and
empowered to do all things necessary or desirable, in its sole discretion, in
connection with the administration of this Plan, including, without limitation,
the following:
(a) to prescribe, amend, and rescind rules and regulations relating to this
Plan and to define terms not otherwise defined herein;
(b) to determine which persons are Participants, to which Participants, if
any, Awards shall be granted hereunder and the timing of any such Awards, and to
grant Awards;
(c) to grant Awards to Participants and determine the terms and conditions
thereof, including the number of Shares subject to Awards and the exercise or
purchase price of such Shares (subject to limitations provided herein) and the
circumstances under which Awards become exercisable or vested or are forfeited
or expire;
(d) to prescribe and amend the terms of the agreements or other documents
evidencing Awards made under this Plan (which may not be identical);
(e) to interpret and construe this Plan, any rules and regulations under
this Plan, and the terms and conditions of any Award granted hereunder, and to
make exceptions to any such provisions in good faith and for the benefit of the
Company; and
(f) to make all other determinations deemed necessary or advisable for the
administration of this Plan.
4.3 Limitations on the Committee. The Committee may not (i) grant
-------------------------------
Awards at a price below Fair Market Value, (ii) reprice or reduce the exercise
price of an Option without shareholder approval, or (iii) offer reload grants or
grant Awards conditional upon delivery of shares to satisfy the exercise price
and/or tax withholding obligation under another Award.
5. Eligibility. Each Director who is not an Employee is an Outside Director
and is eligible to participate in the Plan. The Board has reserved discretion to
determine that one or more Directors will not be eligible for a specified Plan
Year or for an indefinite period.
6. Shares Subject to the Plan. Subject to adjustment as provided in
Section 13, the maximum number of Shares that may be awarded and delivered under
--------
the Plan pursuant to Awards is 500,000 subject to legal availability. Shares to
be issued may be made available from authorized but unissued Shares, Shares held
by the Company in its treasury, or Shares purchased by the Company on the open
market or otherwise. During the term of this Plan, the Company will at all
times reserve and keep available the number of Shares that shall be sufficient
to satisfy the requirements of this Plan. To the extent that any Award under
this Plan shall be forfeited, shall expire, or be canceled, in whole or in part,
then the number of Shares covered by the Award so forfeited, expired, or
canceled may again be awarded pursuant to the provisions of this Plan.
7. Limitations on Awards. Unless and until the Committee determines
otherwise and in addition to any other Option granted to Outside Directors, an
Option to acquire two (2) Shares shall be granted to each Outside Director on
the first day of each Plan Year for every one (1) Share purchased by such
Outside Director during the preceding Plan Year, up to a maximum award of
40,000. Purchases shall include, without limitation, purchases on the open
market as well as purchases by exercise of Awards granted under this Plan or the
1993 Plan. In addition, purchases in the preceding Plan Year shall include
exercises of previously granted Awards during the first ten (10) days of the new
Plan Year if such Outside Director's Options first become exercisable during
that period. Awards shall be the sole benefit available to Outside Directors
under this Plan.
8. Vesting, Forfeiture and Restrictions. All Awards shall be subject
to a minimum six (6) month vesting period; provided, however, that the Committee
may impose a longer vesting period or other restrictions on any Award, subject
in any case to the terms of the Plan. An Award vesting period shall lapse in
accordance with a schedule established by the Committee and set forth in the
Award Agreement for the Award, except as otherwise provided below. Each such
schedule may provide for pro rata vesting over several periods or full vesting
at the end of a single period, and may include any other conditions upon the
vesting of the Awards as the Committee shall determine. Any unvested Options
shall become 100% vested upon a Change of Control. Except as otherwise
expressly provided in the Participant's Award Agreement or this Plan, all
unvested Options shall be forfeited on the date of a Participant's Termination
of Service and all vested Options will be subject to forfeiture in accordance
with the following terms:
(a) Death. If a Participant suffers a Termination of Service as a result of
-----
his or her death, then all Awards that were vested and unexercised on the date
of death, or that the Participant would have been able to exercise within the
following twelve (12) months if no Termination of Service had occurred
(regardless of whether such Awards were vested as of the date of death), may be
exercised within the twelve (12) month period following the Participant's death
by his or her estate or by the person who acquires the exercise right by bequest
or inheritance. If a Participant suffers a Termination of Service prior to the
date of death, and the Awards were both vested and exercisable at the time of
the Participant's death, the Award may be exercised at any time within twelve
(12) months following the date of death by the Participant's estate or by a
person who acquires the right to exercise the Award by bequest or inheritance,
but only to the extent of that the Award was vested and exercisable as of the
date of the Termination of Service.
(b) Disability. If a Participant suffers a Termination of Service as a
----------
result of the Participant's Disability, then the Participant may, within twelve
(12) months after the Termination of Service, exercise all vested Awards he or
she could have exercised at the date of such Termination of Service, or would
have been able to exercise within the twelve (12) month period following the
Termination of Service had the Termination of Service not occurred (regardless
of whether such Awards were vested as of the date of Termination of Service due
to Disability), provided, however, that no such Award may be exercised after
expiration of the term specified in the Award Agreement.
(c) Termination of the Relationship for Other Reasons. Termination of
-------------------------------------------------------
Service for any other reason other than as set forth in paragraph 8(a) and 8(b)
above, including not being nominated for re-election, not being re-elected,
retirement, resignation, or discharge, will result in forfeiture of all
unexercised vested Awards as of 5 p.m. on the date of the Termination of
Service, unless otherwise specified in the Award Agreement. The Committee may
waive the forfeiture in whole or in part. Where forfeiture is waived, the
Participant may, within thirty (30) days after the date of such Termination of
Service, exercise all Awards he or she could have exercised at the date of the
Termination of Service, or would have been able to exercise within the thirty
(30) day period following the Termination of Service had the Termination of
Service not occurred (regardless if such Awards were vested as of the date of
Termination of Service).
9. Terms and Conditions of Option Awards. Each grant of an Award shall be
authorized by the Committee and shall be evidenced by an Award Agreement between
the Company and the Participant setting forth the Award being granted, the total
number of Shares subject to the Award (determined in accordance with the terms
of Section 7 of the Plan), the Exercise Price, the Date of Grant, and such other
---------
terms, provisions, limitations, and performance objectives as are approved by
the Committee, provided that such terms and conditions are not inconsistent with
the Plan and do not cause the Award to be subject to the requirements of Section
409A of the Code and the regulations and other guidance issued thereunder. The
minimum vesting period is six (6) months, and the term of an Award may be no
more than ten (10) years from the date of grant. No Award may be exercised
after expiration of its term.
10. Exercise Price. The Committee will determine the exercise price
for the Shares underlying each Award at the time the Award is granted. The
exercise price for Shares under an Award may not be less than 100% of the Fair
Market Value of the common stock of the Company on the Date of Grant. No Award
may be repriced, replaced, regranted through cancellation, or modified without
shareholder approval (except in connection with a change in the Company's
capitalization), if the effect would be to reduce the exercise price for the
Shares subject to an Award.
11. Exercise of Award; Form of Consideration. Subject to the other
provisions of this Plan, the Committee may, in its sole discretion, provide that
an Award may not be exercised in whole or in part for any period or periods of
time or beyond any date specified in the Award Agreement. Payment may be made
by cash, check, or by broker assisted same day sale. The Option holder must
also pay the Company, at the time of purchase, the amount of federal, state, and
local withholding taxes the Company is required to withhold.
12. Nontransferability of Awards. Unless otherwise determined by the
Committee, Awards granted under this Plan are not transferable other than by
will or the laws of descent and distribution and may be exercised during a
Participant's lifetime only by the Participant.
13. Adjustments Upon Changes in Capitalization, Merger, or Sale of
Assets In the event that the Company's stock changes by reason of any stock
split, dividend, combination, reclassification, or other similar change in the
Company's capital structure effected without the receipt of consideration,
appropriate adjustments shall be made in the number and class of Shares subject
to this Plan, the number and class of Shares subject to any Award outstanding
under this Plan, and the exercise price for Shares subject to any such
outstanding Award.
In the event of a liquidation or dissolution, any unexercised Awards shall
terminate. In the event of a Change of Control, the Board or the Committee, in
its discretion, may provide for the assumption, substitution, or adjustment of
each outstanding Award.
14. No Condition of Service. The granting of Awards under this Plan
shall impose no obligation on the Company, or any of its officers, directors, or
employees, to continue the service of a Participant and shall not waive or
modify the right to terminate services of any such Participant.
15. Securities Laws. The Company has no obligation to register Options
granted under the Plan. If Awards granted have not been registered, upon
issuance of Awards to an Outside Director and upon issuance of Shares upon
exercise of an Award, the Participant shall represent and warrant to the Company
that the Shares are being acquired for investment purposes and shall acknowledge
transfer restrictions under applicable securities laws.
16. Federal Income Tax Consequences. The only Options that may be
granted under the Plan are Nonqualified Stock Options.
Non-Qualified Options. A Participant generally will not recognize any
taxable income at the time the Award is granted. However, upon its exercise, the
Participant will recognize ordinary income for federal tax purposes measured by
the excess of the then fair market value of the Shares over the exercise price.
The income realized by the Participant will be subject to income and other
employee withholding taxes.
The Participant's basis for determination of gain or loss upon the subsequent
disposition of Shares acquired upon the exercise of an Award will be the amount
paid for such Shares plus any ordinary income recognized as a result of the
exercise of such Award. Upon disposition of any Shares acquired pursuant to the
exercise of an Award, the difference between the sale price and the
Participant's basis in the Shares will be treated as a capital gain or loss and
generally will be characterized as long-term gain or loss if the Shares have
been held for more than one year at disposition.
In general, there will be no federal income tax deduction allowed to the
Company upon the grant or termination of an Award or a sale of disposition of
Shares acquired upon the exercise of an Award. However, upon the exercise of an
Award the Company will be entitled to a deduction for federal income tax
purposes equal to the amount of ordinary income that a Participant is required
to recognize as a result of the exercise, provided that the deduction is not
otherwise disallowed under the Code.
17. Expiration. Unless it is terminated sooner, the Plan will
terminate ten (10) years from the Effective Date, or such earlier date as the
Board may determine. The expiration of the Committee's authority to grant Awards
under the Plan will not affect the operation of the terms of the Plan or the
Company's and Participant's rights and obligations with respect to Awards
granted on or prior to the expiration date of the Plan.
18. Amendment. The Board may at any time terminate the Plan or make
any modification that it deems advisable; provided, however, that shareholder
approval will be required for any amendment that will (i) increase the total
number of Shares as to which Awards may be granted under the Plan, (ii) modify
the class of persons eligible to receive Awards, or (iii) otherwise require
shareholder approval under applicable law or regulation. In addition, neither
the Board nor the Committee will amend the Plan regarding the amount, pricing,
and timing of Awards other than to comply with changes in the Code, the
Employment Retirement Income Security Act of 1974, or the rules thereunder.
Modification, or amendment of the Plan will not, without the consent of the
Participant, affect his or her rights under a previously granted Award.
19. Miscellaneous.
19.1 Impact on Other Benefits. At no time shall the value of any Award
------------------------
be includable as compensation or earnings for purposes of any other benefit
plan, if any, offered to Directors by the Company.
19.2 Funding of Plan. Insofar as it provides for Awards the Plan shall be
-----------------
unfunded. Although bookkeeping accounts may be established with respect to
Participants who are granted Awards under this Plan, any such accounts will be
used merely as a bookkeeping convenience. The Company shall not be required to
segregate any assets that may at any time be represented by Awards, nor shall
this Plan be construed as providing for such segregation, nor shall the Company
or the Committee be deemed to be a trustee of Shares to be awarded under this
Plan.
19.3 Governing Law. This Plan and any agreements or other documents
--------------
hereunder shall be interpreted and construed in accordance with the laws of the
State of Missouri and applicable federal law. The Committee may provide that any
dispute as to any Award shall be presented and determined in such forum as the
Committee may specify, including through binding arbitration. Any reference in
this Plan or in the agreement or other document evidencing any Award to a
provision of law or to a rule or regulation shall be deemed to include any
successor law, rule, or regulation of similar effect or applicability.
19.4 Liability of Company. The Company shall not be liable to a Participant
--------------------
or other persons as to (a) the non-issuance of Shares as to which the Company
has been unable to obtain from any regulatory body having jurisdiction the
authority deemed by the Company's counsel to be necessary to the lawful issuance
of any Shares hereunder; and (b) any tax consequence expected, but not realized,
by any Participant or other person due to the receipt, exercise, or settlement
of any Award granted pursuant to this Plan.
19.5 Compliance with Laws and Regulations. This Plan, the grant and
----------------------------------------
exercise of Awards hereunder, and the obligation of the Company to issue or
deliver Shares under such Awards, shall be subject to all applicable federal,
state, and local laws, rules, and regulations, and to such approvals by any
governmental or regulatory agency as may be required. To the extent the Company
is unable, or the Committee deems it infeasible, to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the Company's
counsel to be necessary to the lawful issuance and sale of any Shares under this
Plan, the Company shall be relieved of any liability with respect to the failure
to issue or sell such Shares as to which such requisite authority shall not have
been obtained. No Option shall be exercisable and no Shares shall be issued
and/or transferable under any other Award unless a registration statement with
respect to the Shares underlying such Options is effective and current or the
Company or its counsel has determined that such registration is unnecessary.
Adopted by the Board of Directors of Pizza Inn, Inc. on October 20, 2004.
/s/ Mark. E. Schwarz /s/ Steven J. Pully
- ----------------------- -----------------
Chairman of the Board Chairman, Compensation Committee
PIZZA INN, INC
2005 EMPLOYEE
STOCK OPTION AWARD PLAN
The name of the plan is the PIZZA INN, INC. 2005 EMPLOYEE STOCK OPTION
AWARD PLAN ("Plan").
----
1. Purpose. The purpose of the Plan is to advance the interests of
Pizza Inn, Inc., a Missouri corporation ("Company") by attracting and retaining
-------
the services of experienced and knowledgeable Employees ("Employees" or
---------
"Participants") for the benefit of the Company and its shareholders and to
-----
provide additional incentive for such Employees to continue to work for the best
interests of the Company and its shareholders through continuing ownership of
the Company's stock.
2. Definitions.
2.1 "Award" means a stock option granted to a Participant pursuant to
this Plan.
2.2 "Award Agreement" means a written agreement between a Participant and
the Company that sets out the terms of the grant of an Award.
2.3 "Board" means the Board of Directors of the Company.
2.4 "Change of Control" means any circumstances in which any person or group
that does not include Mark E. Schwarz, Newcastle Partners L.P. or any of their
respective affiliates becomes the beneficial owner of securities representing
more than 50% of the combined voting power of the Company's outstanding
securities entitled to vote on the election of directors (for which purpose the
terms "person," "group" and "beneficial owner" have the same meaning as used in
Section 13(d) of the Securities Exchange Act of 1934 and the rules promulgated
thereunder, and the term "affiliate" has the same meaning as defined in Rule 405
promulgated under the Securities Act of 1933).
2.5 "Code" means the Internal Revenue Code of 1986, as such is amended from
time to time, and any reference to a section of the Code shall include any
successor provision of the Code.
2.6 "Committee" means the Compensation Committee of the Board, or any
Board committee constituted and appointed by the Board from among its members to
administer this Plan pursuant to its terms.
2.7 "Date of Grant" means the effective date on which an Award is made to a
Participant as set forth in the applicable Award Agreement; provided, however,
that solely for purposes of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder, the Date of Grant of an Award shall be the
date of shareholder approval of the Plan if such date is later than the
effective date of such Award as set forth in the Award Agreement.
2.8 "Director" means a member of the Board.
2.9 "Disability" means a disability as construed under the appropriate
provisions of the long-term disability plan maintained for the benefit of
Employees of the Company who are regularly employed on a salaried basis, unless
the Committee adopts another meaning.
2.10 "Employee" means common law employee (as defined in accordance with the
Regulations and Revenue Rulings then applicable under Section 3401(c) of the
Code) of the Company or any subsidiary or affiliate of the Company.
2.11 "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, and any reference to a section of the Exchange Act shall
include any successor provisions of the Exchange Act.
2.12 "Fair Market Value" means, as it relates to the Shares, the closing
price of a Share on Nasdaq on the day on which an Award is granted, provided,
however, that in the event that the foregoing definition of "Fair Market Value"
does not comply with the definition of "fair market value" provided under
Section 409A of the Code (or the guidance and regulations issued thereunder),
the definition of "fair market value" under Section 409A shall be used for
purposes of the Plan and any Awards granted under the Plan.
2.13 "Incentive Stock Option" means an incentive stock option granted
pursuant to this Plan, and within the meaning of Section 422 of the Code.
2.14 "Non-Qualified Stock Option" means a non-qualified stock option granted
pursuant to this Plan, which is not an "incentive stock option" within the
meaning of Section 422 of the Code.
2.15 "Option" means the right to acquire a share of the Company's common
stock at prices and on dates established by the Committee pursuant to the terms
of this Plan and documents evidencing the Award.
2.16 "Participants" means those Employees to whom Awards have been granted
from time to time and any authorized transferee of such Awards.
2.17 "Plan" means the Pizza Inn, Inc. 2005 Employee Stock Option Award Plan.
2.18 "Plan Year" means a 12-month period, commensurate with the Company's
fiscal year, used for calculating Employee eligibility and participation, and
for determining Award dates. From time to time, the Board may determine
beginning and end dates for a Plan Year other than those of the Company's fiscal
year.
2.19 "Share" means one share of the Company's common stock, $0.01 par value,
or the number and types of shares of stock or other securities that shall be
substituted or adjusted for such shares as provided herein.
2.20 "Termination of Service" occurs when a Participant who is an Employee
of the Company, its operating divisions, affiliates, or a subsidiary shall cease
to be employed by the Company or such operating division, affiliate, or
subsidiary for any reason. Notwithstanding the foregoing, an Employee shall be
treated as continuing to be employed by the Company, its operating divisions,
affiliates, or a subsidiary if the Employee is on military leave, sick leave, or
other bona fide leave of absence and if the period of such leave does not exceed
three (3) months, or, if the leave of absence exceeds three (3) months, so long
as the Employee's right to reemployment with the Company, its operating
divisions, affiliates, or a subsidiary is provided either by statute or by
contract.
3. Effective Date. This Plan was approved by the Board of the Company on
October 20, 2004 and will become effective on June 23, 2005 ("Effective Date"),
--------------
subject to approval by the affirmative vote of the holders of a majority of the
votes cast at the 2004 Annual Meeting of Shareholders; however, the Committee
may grant Awards under the Plan prior to the time of shareholder approval. Any
such Award granted prior to such shareholder approval shall be made subject to
such shareholder approval.
4. Administration. Subject to the terms of this Section 4, this Plan
---------
shall be administered by the Committee. The Committee has the authority to grant
Awards to Employees and is responsible for the general administration and
interpretation of this Plan. At any time there is no Committee to administer
the Plan, any references in this Plan to the Committee shall be deemed to refer
to the Board.
4.1 Delegation. The Committee may delegate to one or more of its
----------
members such administrative duties as it may deem advisable and the Committee,
or any person to whom it has delegated duties, may employ one or more qualified
persons to render advice with respect to any responsibility the Committee or
such person may have under this Plan. The Committee may employ attorneys,
consultants, accountants, or other persons and the Committee, the Company, and
its officers and Employees shall be entitled to rely upon the advice, opinions,
or valuations of any such persons. All actions taken and all interpretations
and determinations made by the Committee in good faith shall be final and
binding upon all persons who have received grants under the Plan, the Company,
and all other interested persons. No member or agent of the Committee shall be
personally liable for any action, determination, or interpretation made in good
faith with respect to the Plan and all members and agents of the Committee shall
be fully protected by the Company in respect of any such action, determination,
or interpretation.
The Committee may delegate the administration of the Plan to an officer or
officers of the Company, and such administrator(s) may have the authority to
execute and distribute agreements or other documents evidencing or relating to
Awards; to maintain records relating to the grant, vesting, exercise,
forfeiture, or expiration of Awards; to process or oversee the issuance of
Shares upon the exercise, vesting and/or settlement of an Award; to interpret
the terms of Awards; and to take such other actions as the Committee may
specify, provided that in no instance shall any such administrator be authorized
to grant Awards under the Plan.
4.2 Committee Powers. Subject to the express provisions and
-----------------
limitations set forth in this Plan, the Committee shall be authorized and
empowered to do all things necessary or desirable, in its sole discretion, in
connection with the administration of this Plan, including, without limitation,
the following:
(a) to prescribe, amend, and rescind rules and regulations relating to this
Plan and to define terms not otherwise defined herein;
(b) to determine which persons are Participants, to which Participants, if
any, Awards shall be granted hereunder and the timing of any such Awards, and to
grant Awards;
(c) to grant Awards to Participants and determine the terms and conditions
thereof, including the number of Shares subject to Awards and the exercise or
purchase price of such Shares (subject to limitations provided herein) and the
circumstances under which Awards become exercisable or vested or are forfeited
or expire;
(d) to prescribe and amend the terms of the agreements or other documents
evidencing Awards made under this Plan (which may not be identical);
(e) to interpret and construe this Plan, any rules and regulations under
this Plan, and the terms and conditions of any Award granted hereunder, and to
make exceptions to any such provisions in good faith and for the benefit of the
Company; and
(f) to make all other determinations deemed necessary or advisable for the
administration of this Plan.
4.3 Limitations on the Committee. The Committee may not (i) grant
-------------------------------
Awards at a price below Fair Market Value, (ii) reprice or reduce the exercise
price of an Option without shareholder approval, or (iii) offer reload grants or
grant Awards conditional upon delivery of shares to satisfy the exercise price
and/or tax withholding obligation under another Award.
5. Eligibility. Each Employee who is employed full time and is not on
probationary status, as defined from time to time in the Company's employee
handbook, at the time of the Award Grant is eligible to participate in the Plan.
The Board has reserved discretion to determine that one or more Employees will
not be eligible for a specified Plan Year or for an indefinite period.
6. Shares Subject to the Plan. Subject to adjustment as provided in
Section 13, the maximum number of Shares that may be awarded and delivered under
--------
the Plan pursuant to Awards is 1,000,000 subject to legal availability, of which
100% may be awarded and delivered under the Plan as Incentive Stock Options.
Shares to be issued may be made available from authorized but unissued Shares,
Shares held by the Company in its treasury, or Shares purchased by the Company
on the open market or otherwise. During the term of this Plan, the Company will
at all times reserve and keep available the number of Shares that shall be
sufficient to satisfy the requirements of this Plan. To the extent that any
Award under this Plan shall be forfeited, shall expire, or be canceled, in whole
or in part, then the number of Shares covered by the Award so forfeited,
expired, or canceled may again be awarded pursuant to the provisions of this
Plan; provided, however, that such forfeited, expired or cancelled shares shall
not increase the maximum number of Shares described in this Section 6 as the
maximum number of Shares that may be delivered pursuant to Incentive Stock
Options.
7. Limitations on Awards. Each Participant will be eligible to receive
Awards, singly or in the aggregate, in any amount determined by the Committee,
subject to the requirements of this Plan. Awards shall be the sole benefit
available to Employees under this Plan.
8. Vesting, Forfeiture, and Restrictions. All Awards shall be subject
to minimum vesting periods and maximum exercise periods as the Committee may
determine from time to time, subject in any case to the terms of the Plan. An
Award vesting period shall lapse in accordance with a schedule established by
the Committee and set forth in the Award Agreement for the Award, except as
otherwise provided below. Each such schedule may provide for pro rata vesting
over several periods or full vesting at the end of a single period, and may
include any other conditions upon the vesting of the Awards, as the Committee
shall determine. Any unvested Options shall become 100% vested upon a Change of
Control. Except as otherwise expressly provided in the Participant's Award
Agreement or this Plan, all unvested Options shall be forfeited on the date of a
Participant's Termination of Service and all vested Options will be subject to
forfeiture in accordance with the following terms:
(a) Death. If a Participant suffers a Termination of Service as a result of
-----
his or her death, then all Awards that were vested and unexercised on the date
of death, or that the Participant would have been able to exercise within the
following twelve (12) months if no Termination of Service had occurred
(regardless of whether such Awards were vested as of the date of death), may be
exercised within the twelve (12) month period following the Participant's death
by his or her estate or by the person who acquires the exercise right by bequest
or inheritance. If a Participant suffers a Termination of Service prior to the
date of death, and the Awards were both vested and exercisable at the time of
the Participant's death, the Award may be exercised at any time within twelve
(12) months following the date of death by the Participant's estate or by a
person who acquires the right to exercise the Award by bequest or inheritance,
but only to the extent of that the Award was vested and exercisable as of the
date of the Termination of Service.
(b) Disability. If a Participant suffers a Termination of Service as a
----------
result of the Participant's Disability, then the Participant may, within twelve
(12) months after the Termination of Service, exercise all vested Awards he or
she could have exercised at the date of such Termination of Service, or would
have been able to exercise within the twelve (12) month period following the
Termination of Service had the Termination of Service not occurred (regardless
of whether such Awards were vested as of the date of Termination of Service due
to Disability), provided, however, that no such Award may be exercised after
expiration of the term specified in the Award Agreement.
(c) Termination of the Relationship for Other Reasons. Termination of
-------------------------------------------------------
Service for any reason other than as set forth in paragraph 8(a) and 8(b) above,
including, but not limited to, retirement, resignation, or discharge, will
result in forfeiture of all unexercised vested Awards as of 5 p.m. on the date
of the Termination of Service, unless otherwise specified in the Award
Agreement. The Committee may waive the forfeiture in whole or in part. Where
forfeiture is waived, the Participant may, within thirty (30) days after the
date of such Termination of Service, exercise all Awards he or she could have
exercised at the date of the Termination of Service, or would have been able to
exercise within the thirty (30) day period following the Termination of Service
had the Termination of Service not occurred (regardless if such Awards were
vested as of the date of Termination of Service).
9. Terms and Conditions of Option Awards. Each grant of an Award shall be
authorized by the Committee and shall be evidenced by an Award Agreement between
the Company and the Participant setting forth the Award being granted, the total
number of Shares subject to the Award (determined in accordance with the terms
of Section 7 of the Plan), the Exercise Price, the Date of Grant, and such other
---------
terms, provisions, limitations, and performance objectives as are approved by
the Committee, provided that such terms and conditions are not inconsistent with
the Plan and do not cause the Award to be subject to the requirements of Section
409A of the Code and regulations and other guidance issued thereunder. Any
Award granted pursuant to this Plan must be granted within ten (10) years of the
date of the adoption of this Plan.
10. Exercise Price. The Committee will determine the exercise price
for the Shares underlying each Award at the time the Award is granted. The
exercise price for Shares under an Award may not be less than 100% of the Fair
Market Value of the common stock of the Company on the Date of Grant; provided,
however, if an Incentive Stock Option is granted to an Employee who owns or is
deemed to own (by reason of the attribution rules of Section 424(d) of the Code)
more than ten percent (10%) of the combined voting power of all classes of stock
of the Company (or any parent or subsidiary), the exercise price shall be at
least 110% of the Fair Market Value of the Shares of stock on the Date of Grant.
No Award may be repriced, replaced, regranted through cancellation, or modified
without shareholder approval (except in connection with a change in the
Company's capitalization), if the effect would be to reduce the exercise price
for the Shares subject to an Award.
11. Exercise of Award; Form of Consideration. Subject to the other
provisions of this Plan, the Committee may, in its sole discretion, provide that
an Award may not be exercised in whole or in part for any period or periods of
time or beyond any date specified in the Award Agreement. Payment may be made
by cash, check, or by broker assisted same day sale. The Option holder must
also pay the Company, at the time of purchase, the amount of federal, state, and
local withholding taxes the Company is required to withhold.
12 Maximum ISO Grants. The Committee may not grant Incentive Stock Options
("ISO") under the Plan to any Employee which would permit the aggregate Fair
Market Value (determined on the Date of Grant) of the Shares of stock with
respect to which Incentive Stock Options (under this and any other plan of the
Company and its subsidiaries) are exercisable for the first time by such
Employee during any calendar year to exceed $100,000. To the extent any Option
granted under this Plan that is designated as an Incentive Stock Option exceeds
this limit or otherwise fails to qualify as an Incentive Stock Option, such
Option (or any such portion thereof) shall no longer be treated as an Incentive
Stock Option and shall, instead, be treated as a nonqualified stock option. In
such case, the Committee shall designate which stock will be treated as
Incentive Stock Option stock by causing the issuance of a separate stock
certificate and identifying such stock as Incentive Stock Option stock on the
Company's stock transfer records.
13. Nontransferability of Awards. Unless otherwise determined by the
Committee, Awards granted under this Plan are not transferable other than by
will or the laws of descent and distribution and may be exercised during a
Participant's lifetime only by the Participant.
14. Disqualifying Disposition of Incentive Stock Option. If Shares of
stock acquired upon exercise of an Incentive Option are disposed of by a
Participant prior to the expiration of either two (2) years from the Date of
Grant of such Option or one (1) year from the transfer of Shares of stock to the
Participant pursuant to the exercise of such Option, or in any other
disqualifying disposition within the meaning of Section 422 of the Code, such
Participant shall notify the Company in writing of the date and terms of such
disposition. A disqualifying disposition by a Participant shall not affect the
status of any other Option granted under the Plan as an Incentive Stock Option
within the meaning of Section 422 of the Code.
15. Adjustments Upon Changes in Capitalization, Merger, or Sale of
Assets. In the event that the Company's stock changes by reason of any stock
split, dividend, combination, reclassification, or other similar change in the
Company's capital structure effected without the receipt of consideration,
appropriate adjustments shall be made in the number and class of Shares subject
to this Plan, the number and class of Shares subject to any Award outstanding
under this Plan, and the exercise price for Shares subject to any such
outstanding Award.
In the event of a liquidation or dissolution, any unexercised Awards shall
terminate. In the event of a Change of Control, the Board or the Committee, in
its discretion, may provide for the assumption, substitution, or adjustment of
each outstanding Award.
16. No Condition of Service. The granting of Awards under this Plan
shall impose no obligation on the Company, or any of its officers, Employees, or
employees, to continue the service of a Participant and shall not waive or
modify the right to terminate services of any such Participant.
17. Securities Laws. The Company has no obligation to register Options
granted under the Plan. If Awards granted have not been registered, upon
issuance of Awards to an Employee and upon issuance of Shares upon exercise of
an Award, the Employee shall represent and warrant to the Company that the
Shares are being acquired for investment purposes and shall acknowledge transfer
restrictions under applicable securities laws.
18. Federal Income Tax Consequences. Options that may be granted under
the Plan include Incentive Stock Options and Non-Qualified Options.
(a) Incentive Stock Options. The grant of an ISO does not result in income
for the grantee or a deduction for the Company. The exercise of an ISO would not
result in income for the grantee if the grantee (i) does not dispose of the
shares within two (2) years after the date of grant or one (1) year after the
transfer of shares upon exercise, and (ii) is an employee of the Company from
the date of grant and through and until three (3) months before the exercise
date. If these requirements are met, the basis of the shares upon later
disposition would be the option price. Any gain will be taxed to the Employee as
long-term capital gain and the Company would not be entitled to a deduction. The
excess of the market value on the exercise date over the option price is an item
of tax preference, potentially subject to the alternative minimum tax.
If the Employee disposes of the shares prior to the expiration of
either of the holding periods, and the amount received for the shares is greater
than the fair market value of the shares on the exercise date, then the
difference between the ISO's exercise price and the fair market value of the
shares at the time of exercise will be treated as ordinary income for the tax
year in which the disposition occurs. Any gain in excess of the ordinary income
portion would be taxable as long-term or short-term capital gain
(b) Non-Qualified Stock Options. A Participant generally will not
recognize any taxable income at the time the Award is granted. However, upon its
exercise, the Participant will recognize ordinary income for federal tax
purposes measured by the excess of the then fair market value of the Shares over
the exercise price. The income realized by the Participant will be subject to
income and other employee withholding taxes.
The Participant's basis for determination of gain or loss upon the
subsequent disposition of Shares acquired upon the exercise of an Award will be
the amount paid for such Shares plus any ordinary income recognized as a result
of the exercise of such Award. Upon disposition of any Shares acquired pursuant
to the exercise of an Award, the difference between the sale price and the
Participant's basis in the Shares will be treated as a capital gain or loss and
generally will be characterized as long-term gain or loss if the Shares have
been held for more than one year at disposition.
In general, there will be no federal income tax deduction allowed to the
Company upon the grant or termination of an Award or a sale of disposition of
Shares acquired upon the exercise of an Award. However, upon the exercise of an
Award the Company will be entitled to a deduction for federal income tax
purposes equal to the amount of ordinary income that a Participant is required
to recognize as a result of the exercise, provided that the deduction is not
otherwise disallowed under the Code.
19. Expiration. Unless it is terminated sooner, the Plan will
terminate ten (10) years from the Effective Date, or such earlier date as the
Board may determine. The expiration of the Committee's authority to grant Awards
under the Plan will not affect the operation of the terms of the Plan or the
Company's and Participant's rights and obligations with respect to Awards
granted on or prior to the expiration date of the Plan.
20. Amendment. The Board may at any time terminate the Plan or make
any modification that it deems advisable; provided, however, that shareholder
approval will be required for any amendment that will (i) increase the total
number of Shares as to which Awards may be granted under the Plan, (ii) modify
the class of persons eligible to receive Awards, or (iii) otherwise require
shareholder approval under applicable law or regulation. In addition, neither
the Board nor the Committee will amend the Plan regarding the amount, pricing,
and timing of Awards other than to comply with changes in the Code, the
Employment Retirement Income Security Act of 1974, or the rules thereunder.
Modification, or amendment of the Plan will not, without the consent of the
Participant, affect his or her rights under a previously granted Award.
21. Miscellaneous.
21.1 Impact on Other Benefits. At no time shall the value of any Award
------------------------
be includable as compensation or earnings for purposes of any other benefit
plan, if any, offered to Employees by the Company.
21.2 Funding of Plan. Insofar as it provides for Awards the Plan shall be
-----------------
unfunded. Although bookkeeping accounts may be established with respect to
Participants who are granted Awards under this Plan, any such accounts will be
used merely as a bookkeeping convenience. The Company shall not be required to
segregate any assets that may at any time be represented by Awards, nor shall
this Plan be construed as providing for such segregation, nor shall the Company
or the Committee be deemed to be a trustee of Shares to be awarded under this
Plan.
21.3 Governing Law. This Plan and any agreements or other documents
--------------
hereunder shall be interpreted and construed in accordance with the laws of the
State of Missouri and applicable federal law. The Committee may provide that any
dispute as to any Award shall be presented and determined in such forum as the
Committee may specify, including through binding arbitration. Any reference in
this Plan or in the agreement or other document evidencing any Award to a
provision of law or to a rule or regulation shall be deemed to include any
successor law, rule, or regulation of similar effect or applicability.
21.4 Liability of Company. The Company shall not be liable to a Participant
--------------------
or other persons as to (a) the non-issuance of Shares as to which the Company
has been unable to obtain from any regulatory body having jurisdiction the
authority deemed by the Company's counsel to be necessary to the lawful issuance
of any Shares hereunder; and (b) any tax consequence expected, but not realized,
by any Participant or other person due to the receipt, exercise, or settlement
of any Award granted pursuant to this Plan.
21.5 Compliance with Laws and Regulations. This Plan, the grant and
----------------------------------------
exercise of Awards hereunder, and the obligation of the Company to issue or
deliver Shares under such Awards, shall be subject to all applicable federal,
state, and local laws, rules, and regulations, and to such approvals by any
governmental or regulatory agency as may be required. To the extent the Company
is unable, or the Committee deems it infeasible, to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the Company's
counsel to be necessary to the lawful issuance and sale of any Shares under this
Plan, the Company shall be relieved of any liability with respect to the failure
to issue or sell such Shares as to which such requisite authority shall not have
been obtained. No Option shall be exercisable and no Shares shall be issued
and/or transferable under any other Award unless a registration statement with
respect to the Shares underlying such Options is effective and current or the
Company or its counsel has determined that such registration is unnecessary.
Adopted by the Board of Directors of Pizza Inn, Inc. on
October 20, 2004.
/s/ Mark E. Schwarz /s/ Steven J. Pully
- ---------------------- ----------------------
Chairman of the Board Chairman, Compensation Committee
STOCK AWARD AGREEMENT
UNDER THE 2004 PIZZA INN, INC.
EMPLOYEES INCENTIVE STOCK OPTION PLAN
TERMS AND CONDITIONS
Award Date:
Participant:
Plan Year to Which Award Relates:
Number of Options Granted:
Exercise Price:
Vesting Schedule:
The Options are not transferable. The Shares that may be issued upon
exercise of Options may not be transferred, sold, offered for sale or otherwise
distributed except (i) in conjunction with an effective registration statement,
or (ii) in compliance with Rule 144, (iii) in compliance with Company's stock
option exercise policy, as amended from time to time, or (iv) pursuant to an
opinion of counsel satisfactory to the Company that such transfer, sale, offer
or distribution is exempt from the registration provisions of applicable
securities laws. The Company has no obligation to register the Stock or to
include the Stock in any future registration statement.
By execution below, Pizza Inn, Inc. and the Participant accept and approve
the foregoing Terms and conditions, subject to all provisions of the Plan and
all rules and regulations thereunder.
Unless otherwise defined in this Stock Award Agreement, capitalized terms
and words shall have the meaning ascribed to them in the 2004 Employee Incentive
Stock Option Plan, the terms and conditions of which are incorporated herein.
IN WITNESS WHEREOF, the parties have signed this Stock Award Agreement as
of the Award Date set forth above.
For Pizza Inn, Inc.
Participant