Document:

exv10w2

 

EXHIBIT 10.2

SUPPLEMENTAL LIMITED FORBEARANCE AGREEMENT 

     THIS SUPPLEMENTAL LIMITED FORBEARANCE AGREEMENT (this “Agreement”) dated effective as
of November ___, 2006 (the “Effective Date”) is entered into by and among PIZZA INN, INC.,
a Missouri corporation (the “Borrower”), the Guarantors identified on the signature pages
hereto (the “Guarantors”), NEWCASTLE PARTNERS, LP, a Texas limited partnership
(“Newcastle”) and WELLS FARGO BANK, NATIONAL ASSOCIATION (successor to Wells Fargo Bank
(Texas), National Association) (the “Bank”). The Borrower and the Guarantors are
sometimes collectively referred to herein as the “Obligors”, and the Obligors and Newcastle
are sometimes collectively referred to herein as the “Borrower Parties”. Capitalized terms
used and not otherwise defined herein shall have the meanings as set forth in the Loan Agreement
(as defined below).

PRELIMINARY STATEMENTS 

     A. The Borrower and the Bank have entered into that certain Third Amended and Restated Loan
Agreement dated as of January 22, 2003 (as amended or otherwise modified from time to time, the
“Loan Agreement”).

     B. Borrower, the other Obligors and the Bank have entered into that certain Limited
Forbearance Agreement dated as of August 8, 2006 (the “Original Forbearance Agreement”).

     C. The forbearance period established in connection with the Original Forbearance Agreement
expired on October 1, 2006.

     D. On October 13, 2006, the Bank exercised its right to terminate the Revolving Credit
Commitment and to accelerate all unpaid principal and accrued interest under the Notes, along with
all other unpaid obligations under the Loan Documents (the “Acceleration”) and all such
obligations are now immediately due and payable.

          NOW THEREFORE, in consideration of the premises and the mutual agreements, representations and
warranties herein set forth and for other good and valuable consideration, the parties hereto
hereby agree as follows:

     SECTION 1. Acceleration of the Obligations and Default Interest. The Obligors each
acknowledge that as a result of the Acceleration, all unpaid principal and accrued interest under
the Notes, along with all other unpaid obligations under the Loan Documents became immediately due
and payable, and subject to the terms of this Agreement, all such obligations remain immediately
due and payable as of the date hereof. Each of the Obligors further acknowledges that except
during the Forbearance Period as set forth in Section 4 hereof, all such unpaid obligations which
remain outstanding after October 13, 2006 shall bear interest at lesser of (i) the default rate of
interest applicable thereto under the Loan Documents or (ii) the Maximum Rate.

     SECTION 2. Existing Events of Default. The Obligors each hereby acknowledge that the
following defaults and events of default currently exist under the Loan Documents and shall
continue to exist under the Loan Documents under the Forbearance Period (the “Existing Events
of Default”):

 

 

          (a) The failure of Borrower to immediately pay, upon the Acceleration, all unpaid principal
and accrued interest under the Notes, along with all other unpaid obligations under the Loan
Documents and the continued failure of Borrower to pay such amounts during the Forbearance Period;

          (b) The failure of Borrower to maintain the required Fixed Charge Coverage Ratio as required
by Section 12.1 of the Loan Agreement for all periods ended on or before the Forbearance
Termination Date;

          (c) The failure of Borrower to maintain profitable operations as required by Section 12.3 of
the Loan Agreement for all periods ended on or before the Forbearance Termination Date; and

          (d) The failure of Borrower to maintain the ratio of Consolidated Liabilities less
Subordinated Debt to Tangible Net Worth as required by Section 12.2 of the Loan Agreement for all
periods ended on or before the Forbearance Termination Date.

     SECTION 3. Forbearance. (a) The Obligors hereby agree that but for the forbearance
of the Bank set forth below, which is subject to the satisfaction of the terms and conditions set
forth herein, the Bank would be entitled to pursue it rights and remedies for the enforcement of
the Obligors’ obligations under the Loan Documents. The Obligors further agree that (i) the
Existing Events of Default are not cured or waived by reason of the Bank’s execution of this
Agreement and (ii) the Acceleration shall not be affected by the forbearance of Bank set forth
below. The Bank is only agreeing in this Agreement to forbear from the exercise of its rights and
remedies which may arise or have arisen by virtue of the Existing Events of Default, and upon
termination of the Forbearance Period (as hereinafter defined), the Bank shall remain entitled to
pursue any and all of its rights and remedies which may arise or have arisen by virtue of the
Existing Events of Default.

          (b) The Bank agrees that for a period (the “Forbearance Period”) commencing on the
Effective Date and ending on the Forbearance Termination Date (as hereinafter defined), the Bank
will not commence any Foreclosure Proceedings as a result of the Existing Events of Default. The
Bank’s forbearance under this Agreement will automatically terminate without any notice to the
Borrower Parties or any other Person on such date (the “Forbearance Termination Date”)
being the earliest of (i) 4:59 p.m., (Houston, Texas time) on December 28, 2006, (ii) the
occurrence of any default or event of default under the Loan Documents (other than the Existing
Events of Default), (iii) the date on which any of the Forbearance Conditions described in Section
5 below shall fail to be satisfied and (iv) the date on which any of the Borrower Parties shall
fail to satisfy any of their obligations or covenants under this Agreement or any representation or
warranty made by any Borrower Party in this Agreement fails to be true and correct in any material
respect. On the Forbearance Termination Date, the Bank’s agreement hereunder to forebear from
exercising its remedies under the Loan Documents with respect to the Existing Events of Default
shall automatically cease and terminate and be of no further force and effect.

          (c) Notwithstanding the provisions of this Agreement, the Bank is entitled to take any and all
action as may be necessary and appropriate to perfect, protect and defend the priority

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of any liens or security interests granted to it pursuant to the Loan Documents against the claims
and actions of any other creditors (including any bankruptcy trustee) and to make such filings as
may be necessary and appropriate to insure or maintain the priority and perfection of such liens.
No failure on the part of the Bank to exercise, and no delay in exercising, any right or remedy
hereunder shall operate as a waiver of any such right or remedy nor shall any single or partial
exercise of any right or remedy hereunder preclude any other or further exercise thereof or the
exercise of any other right or remedy. The rights and remedies herein provided are cumulative and
not exclusive of any rights or remedies provided by applicable law.

     SECTION 4. Interest Rate During Forbearance Period. During the Forbearance Period,
the Bank and the Borrower Parties agree that all unpaid principal and accrued interest under the
Notes, along with all other unpaid obligations under the Loan Documents, shall bear interest at the
lesser of (i) the sum of the Prime Rate in effect from day to day plus two and three quarters
percent (2.75%) per annum or (ii) the Maximum Rate. After the Forbearance Termination Date, all
such obligations shall bear interest at the lesser of (i) the Maximum Rate or (ii) the default rate
of interest applicable thereto.

     SECTION 5. Conditions to Forbearance. Each of the following conditions shall
constitute a “Forbearance Condition” and the Obligors agree that all of the following shall
be satisfied as a condition to the Bank’s agreements hereunder:

          (a) Newcastle shall have delivered to the Bank either (i) a letter of credit in favor of the
Bank in the amount of $1,500,000 issued by a credit-worthy financial institution containing terms
and conditions acceptable to the Bank in its sole discretion (the “Newcastle Letter of
Credit”) or (ii) a guaranty agreement in form an substance acceptable to the Bank in its sole
discretion guaranteeing all the Obligations (the “Newcastle Guaranty”);

          (b) Newcastle shall have executed and delivered to the Bank a subordination agreement in form
and substance acceptable to the Bank in its sole discretion;

          (c) Borrower shall have paid any Swap Termination Payment owing to the Bank as a result of the
termination of the Swap Agreement pursuant to Section 7 hereof;

          (d) This Agreement must be fully executed by all parties hereto and the Bank must be in
possession of original signatures of each party hereto; and

          (e) The Borrower shall have paid all reasonable attorneys fees of the Bank and all other costs
of the Bank incurred in connection with the negotiation and preparation of this Agreement and in
connection with prior negotiations, matters, events and transactions related to the Loan Documents
for which Borrower has been provided with a written invoice prior to the Effective Date.

     SECTION 6. Newcastle Letter of Credit and the Newcastle Guaranty. The Obligors and
Newcastle agree that if any Obligations shall remain outstanding on the Forbearance Termination
Date, the Bank shall be entitled to draw on the Newcastle Letter of Credit or enforce its rights
under the Newcastle Guaranty, as applicable, at any time following such Forbearance Termination
Date. If the amount drawn by the Bank under the Newcastle Letter of Credit exceeds the amount of
Obligations then outstanding (as determined by the Bank in its sole

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discretion), the Bank shall promptly refund such excess amount to Newcastle. The Bank shall
promptly return the Newcastle Letter of Credit to Newcastle upon the payment in full of the
Obligations.

     SECTION 7. Termination of the Swap Agreement. The Obligors and the Bank agree that
the Interest Rate Swap Agreement dated as of February 27, 2001 between the Borrower and the Bank
(as amended or otherwise modified from time to time, the “Swap Agreement”) is hereby
terminated without necessity of any further action or notice by any party. If any amounts are
owing from Borrower to the Bank as a result of such termination (a
“Borrower Swap Termination
Payment”), such amounts shall automatically become part of the Obligations and shall be
immediately due and payable. For avoidance of doubt, it is understood that the Forbearance Period
shall not begin until all Borrower Swap Termination Payments have paid. If any amounts are owing
from the Bank to Borrower as a result of the termination of the Swap Agreement, such amounts shall
be applied to the repayment of the Obligations in accordance with the Loan Documents.

     SECTION 8. Additional Advances under the Loan Documents. As a result of the Existing
Events of Default and the termination of the Revolving Credit Commitment, the Bank has no
obligation of any kind or type to make advances under the Loan Documents. Notwithstanding the
foregoing, during the Forbearance Period the Bank agrees to fund requests for additional Revolving
Credit Advances so long as the aggregate principal amount of all Revolving Credit Advances at any
time outstanding (without giving effect to any Letter of Credit Liabilities) does not exceed
$2,020,000. Any advances so made by the Bank shall be evidenced by the Revolving Credit Note and
shall become a part of the Obligations without necessity of any further action, and shall bear
interest as set forth in this Agreement.

     SECTION 9. Outstanding Letter of Credit in Favor of Northwestern National Insurance
Company. Pursuant to the Loan Agreement, the Bank has issued a Letter of Credit in favor of
Northwestern National Insurance Company (or its affiliate) in the amount of $230,000 which will
expire on November 30, 2006. The Bank has notified Northwestern National Insurance Company that
the Bank does not intend to renew such Letter of Credit. In the event such Letter of Credit is
drawn upon, all disbursements made by the Bank in connection with such Letter of Credit shall
become a part of the Obligations and shall bear interest as set forth in this Agreement. For
avoidance of doubt, if the Letter of Credit issued in favor of Northwestern National Insurance
Company is drawn upon, the occurrence of such drawing shall not cause the Forbearance Period to
terminate.

     SECTION 10. Remedies Upon Termination of the Forbearance Period. Upon the occurrence
of the Forbearance Termination Date, the Forbearance Period shall terminate without further act or
action by the Bank, and the Bank shall be entitled immediately to institute Foreclosure Proceedings
(as defined below) against any collateral securing the Obligations and to exercise any and all of
the rights and remedies available to the Bank under the Loan Documents and this Agreement, at law,
in equity or otherwise, without further notice, demand, presentment, notice of dishonor, notice of
acceleration or notice of intent to accelerate (it being acknowledged that the Obligations have
been accelerated), notice of intent to foreclose, notice of sale, notice of protest or other
formalities or any kind, all of which are hereby expressly waived by the Borrower Parties.
“Foreclosure Proceedings” shall mean (a) the commencement of

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judicial proceedings for the collection of the Obligations or the foreclosure of liens against any
of the collateral securing the Obligations, (b) the nonjudicial foreclosure of any of the
collateral securing the Obligations in accordance with the terms of the applicable Loan Document
and the Uniform Commercial Code, as applicable, (c) a combination of (a) and (b), or (d) the
exercise of any other remedies under the Loan Documents, including any right of setoff.

     SECTION 11. Ratification, No Defenses. The parties hereto acknowledge and agree that
the agreements and obligations of the Obligors under the Loan Documents are hereby brought forward,
renewed and extended until the indebtedness evidenced thereby shall have been fully paid and
discharged. The Obligors acknowledge and agree that the Loan Documents and all terms thereof are
valid and enforceable obligations of the Obligors and shall remain in full force and effect. The
Bank hereby preserves all of its rights against each of the Obligors, and each of the Obligors
hereby agree that all such rights are ratified and brought forward for the benefit of the Bank.

     SECTION 12. Representations and Warranties. (a) Each of the Obligors represents and
warrants to the Bank that:

     (1) Except for the Existing Events of Default, no default or event of default
has occurred and is continuing under the Loan Documents;

     (2) After giving effect to this Agreement, the representations and warranties
contained in the Loan Documents are true and correct in all material respects on
and as of the date hereof as though made on and as of the date hereof, except to
the extent such representations and warranties relate solely to an earlier date or
to the extent such representations and warranties are incorrect due to the Existing
Events of Default;

     (3) Except as set forth in Schedule A attached hereto, there is no
proceeding involving any Obligor pending or to the knowledge of any Obligor,
threatened, before any court or governmental authority, agency or arbitration
authority, except as disclosed to the Bank in writing and acknowledged by the Bank
prior to the date of this Agreement; and

     (4) There has been no change in the business or assets of any Obligor (when
compared to the financial statements of Borrower and the Obligor dated September
24, 2006 and delivered to the Bank) which would be materially adverse to Borrower
or any Obligor, any of their respective assets or properties, or operations.

          (b) Each of the Borrower Parties represents and warrants to the Bank that:

     (1) This Agreement has been duly authorized, executed and delivered on behalf
of such Borrower Party and no consent or approval of any third party is required as
a condition to the execution, delivery or performance by of this Agreement by such
Borrower Party;

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     (2) This Agreement is the legal, valid and binding obligation of such Borrower
Party, enforceable against each such Borrower Party in accordance with its terms,
except to the extent that the enforcement thereof may be limited by applicable
bankruptcy, insolvency or other similar laws relating to the enforcement of
creditors’ rights;

     (3) There is no charter, bylaw, stock provision, partnership agreement or
other document pertaining to the power or authority of such Borrower Party and no
provision of any existing agreement, mortgage, indenture or contract binding upon
such Borrower Party or affecting the property of such Borrower Party which would
conflict with or in any way prevent the execution, delivery or performance of the
terms of this Agreement; and

     (4) To the best knowledge of such Borrower Party, all written information
furnished to the Bank by such Borrower Party in connection with this Agreement is
and will be accurate and complete on the date as of which such information is
delivered to the Bank and is not and will not be incomplete by the omission of any
material fact necessary to make such information not misleading.

     SECTION 13. No Course of Dealing. This Agreement shall not create a course of dealing
among or between the parties hereto, constitute an accord or satisfaction of, or extend any
maturity dates for the Obligations, and no further obligation of any kind in excess of those
expressly set forth herein shall be inferred from this Agreement.

     SECTION 14. Release and Covenant Not to Sue. EACH OF THE BORROWER PARTIES (EACH IN
ITS OWN RIGHT AND ON BEHALF OF ITS RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, INDEPENDENT
CONTRACTORS, ATTORNEYS AND AGENTS) (EACH IN THEIR OWN RIGHT AND ON BEHALF OF THEIR RESPECTIVE
ATTORNEYS AND AGENTS) (THE “RELEASING PARTIES”) JOINTLY AND SEVERALLY RELEASE, ACQUIT, AND
FOREVER DISCHARGE THE BANK AND ITS DIRECTORS, OFFICERS, EMPLOYEES, INDEPENDENT CONTRACTORS,
ATTORNEYS AND AGENTS, AND ATTORNEYS (THE “RELEASED PARTIES”), TO THE FULLEST EXTENT
PERMITTED BY APPLICABLE STATE AND FEDERAL LAW, FROM ANY AND ALL ACTS AND OMISSIONS OF THE RELEASED
PARTIES, AND FROM ANY AND ALL CLAIMS, CAUSES OF ACTION, COUNTERCLAIMS, DEMANDS, CONTROVERSIES,
COSTS, DEBTS, SUMS OF MONEY, ACCOUNTS, RECKONINGS, BONDS, BILLS, DAMAGES, OBLIGATIONS, LIABILITIES,
OBJECTIONS, AND EXECUTIONS OF ANY NATURE, TYPE, OR DESCRIPTION WHICH THE RELEASING PARTIES HAVE
AGAINST THE RELEASED PARTIES, INCLUDING, BUT NOT LIMITED TO, NEGLIGENCE, GROSS NEGLIGENCE, USURY,
FRAUD, DECEIT, MISREPRESENTATION, CONSPIRACY, UNCONSCIONABILITY, DURESS, ECONOMIC DURESS,
DEFAMATION, CONTROL, INTERFERENCE WITH CONTRACTUAL AND BUSINESS RELATIONSHIPS, CONFLICTS OF
INTEREST, MISUSE OF INSIDER INFORMATION, CONCEALMENT, DISCLOSURE, SECRECY, MISUSE OF COLLATERAL,
WRONGFUL RELEASE OF COLLATERAL, FAILURE TO INSPECT, ENVIRONMENTAL DUE DILIGENCE, NEGLIGENT LOAN
PROCESSING AND ADMINISTRATION, WRONGFUL SETOFF, VIOLATIONS OF STATUTES AND

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REGULATIONS OF GOVERNMENTAL ENTITIES, INSTRUMENTALITIES AND AGENCIES (BOTH CIVIL AND CRIMINAL),
RACKETEERING ACTIVITIES, SECURITIES AND ANTITRUST LAWS VIOLATIONS, TYING ARRANGEMENTS, DECEPTIVE
TRADE PRACTICES, BREACH OR ABUSE OF ANY ALLEGED FIDUCIARY DUTY, BREACH OF ANY ALLEGED SPECIAL
RELATIONSHIP, COURSE OF CONDUCT OR DEALING, ALLEGED OBLIGATION OF FAIR DEALING, ALLEGED OBLIGATION
OF GOOD FAITH, AND ALLEGED OBLIGATION OF GOOD FAITH AND FAIR DEALING, WHETHER OR NOT IN CONNECTION
WITH OR RELATED TO THE LOAN DOCUMENTS AND THIS AGREEMENT, AT LAW OR IN EQUITY, IN CONTRACT IN TORT,
OR OTHERWISE, KNOWN OR UNKNOWN, SUSPECTED OR UNSUSPECTED UP TO AND INCLUDING THE DATE OF THIS
AGREEMENT (THE “RELEASED CLAIMS”) (IT BEING UNDERSTOOD THAT WITH RESPECT TO NEWCASTLE, THE
RELEASED CLAIMS SHALL BE LIMITED TO THOSE ARISING OUT OF OR IN CONNECTION WITH THE OBLIGORS, THE
LOAN DOCUMENTS, THIS AGREEMENT, THE NEWCASTLE LETTER OF CREDIT, THE NEWCASTLE GUARANTY AND ANY
TRANSACTIONS CONNECTED WITH OR RELATED TO THE FOREGOING). THE RELEASING PARTIES FURTHER AGREE TO
LIMIT ANY DAMAGES THEY MAY SEEK IN CONNECTION WITH ANY CLAIM OR CAUSE OF ACTION, IF ANY, TO EXCLUDE
ALL PUNITIVE AND EXEMPLARY DAMAGES, DAMAGES ATTRIBUTABLE TO LOST PROFITS OR OPPORTUNITY, DAMAGES
ATTRIBUTABLE TO MENTAL ANGUISH, AND DAMAGES ATTRIBUTABLE TO PAIN AND SUFFERING, AND THE RELEASING
PARTIES DO HEREBY WAIVE AND RELEASE ALL SUCH DAMAGES WITH RESPECT TO ANY AND ALL CLAIMS OR CAUSES
OF ACTION WHICH MAY ARISE AT ANY TIME AGAINST ANY OF THE RELEASED PARTIES. THE RELEASING PARTIES
REPRESENT AND WARRANT THAT NO FACTS EXIST WHICH COULD PRESENTLY OR IN THE FUTURE COULD SUPPORT THE
ASSERTION OF ANY OF THE RELEASED CLAIMS AGAINST THE RELEASED PARTIES. THE RELEASING PARTIES
FURTHER COVENANT NOT TO SUE THE RELEASED PARTIES ON ACCOUNT OF ANY OF THE RELEASED CLAIMS, AND
EXPRESSLY WAIVE ANY AND ALL DEFENSES THEY MAY HAVE IN CONNECTION WITH THEIR DEBTS AND OBLIGATIONS
UNDER THE LOAN DOCUMENTS AND THIS AGREEMENT. THE PARAGRAPH IS IN ADDITION TO AND SHALL NOT IN ANY
WAY LIMIT ANY OTHER RELEASE, COVENANT NOT TO SUE, OR WAIVER BY THE RELEASING PARTIES IN FAVOR OF
THE RELEASED PARTIES

     SECTION 15. WAIVER OF JURY TRIAL. THE BORROWER PARTIES HEREBY WAIVE, TO THE FULLEST
EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED
HEREBY OR THEREBY.

     SECTION 16. Arbitration. The provisions of Section 14.16 (Arbitration) of the Loan
Agreement will apply to this Agreement and any controversies or claims between or among the parties
hereto relating to this Agreement, and the provisions of Section 14.16 (Arbitration) of the Loan
Agreement are incorporated herein by reference for all purposes.

     SECTION 17. Agreement Controlling. This Agreement constitutes a Loan Document. In
the event of a conflict between the terms and provision of this Agreement and the terms and

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provisions of the other Loan Documents, the terms and provisions of this Agreement shall control.

     SECTION 18. Address for Notices. All notices and other communications provided for
herein and in the Loan Documents shall be given or made in writing by personal delivery, reputable
overnight courier service, telecopy or registered or certified, first class mail, return receipt
requested. Any communication sent by personal delivery or telecopy shall be deemed received upon
such personal delivery or dispatch of such telecopy, any communication sent by U.S. mail in the
manner specified above shall be deemed received three (3) days following deposit in the mail, and
any communication sent by courier shall be deemed received on the next business day following
delivery to the courier service. All communications shall be addressed to the intended recipient
at the address specified below or at such other address as shall be designated by such party in a
notice to each other party in the manner specified herein.

	 	 	 
	To the Bank:

	 	Wells Fargo Bank, National Association.
	 

	 	1000 Louisiana Street, 4th Floor
	 

	 	Houston, Texas 77002
	 

	 	Attn: Danny Oliver
	 

	 	Telefax No. (713) 739-1076
	 
	 	 
	To the Obligors:

	 	Pizza Inn, Inc.
	 

	 	3551 Plano Parkway
	 

	 	The Colony Texas 75056
	 

	 	Attn: Rod McDonald, Esq. – General Counsel
	 

	 	Attn: Clinton J. Coleman – Interim CFO
	 

	 	Telefax No. (469) 574-4452
	 
	 	 
	To Newcastle:

	 	Steven J. Pully
	 

	 	Newcastle Partners, L.P.
	 

	 	300 Crescent Court, Suite 1110
	 

	 	Dallas, Texas 75201
	 

	 	Attn: Steven J. Pully
	 

	 	Telefax No. (214) 661-7475

     SECTION 19. Further Assurances, Expenses. The Borrower Parties agree to execute and
deliver to the Bank, promptly upon request from the Bank, such other and further documents as may
be reasonably necessary or appropriate to consummate the terms of this Agreement. Each Obligor
agrees to execute and deliver to the Bank, promptly upon request from the Bank such other and
further documents as may be reasonably necessary or appropriate to prefect and/or renew and extend
any liens or security interests granted by Obligors as security for the Obligations. Borrower
agrees to promptly reimburse the Bank for all reasonable expenses incurred by the Bank in
connection with the preparation and execution of this Agreement.

     SECTION 20. Miscellaneous Provisions. This Agreement may be signed in any number of
counterparts, each of which shall be deemed an original, but all of which together shall constitute
one and the same instrument. The headings herein shall be accorded no significance in interpreting
this Agreement. In case any one or more of the provisions contained in this

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Agreement should be invalid or unenforceable in any respect, the validity, legality or
enforceability of the remaining provisions contained herein shall not in any way be affected or
impaired thereby. This Agreement may be amended only by a written agreement executed by each of
the parties hereto. This Agreement shall be binding upon and inure to the benefit of the Borrower
Parties and the Bank and their respective successors and assigns; provided, however, that the
Borrower Parties may not transfer their respective rights under this Agreement to any person or
entity without the prior written consent of the Bank, and any such assignment not in accordance
with this provision shall be null and void and of no effect. The Borrower Parties acknowledge that
the Bank may assign this Agreement in accordance with the Loan Documents.

     SECTION 21. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas and applicable federal law.

     SECTION 22. FINAL AGREEMENT OF THE PARTIES. THIS AGREEMENT, THE NOTES AND THE OTHER
LOAN DOCUMENTS CONSTITUTE A “LOAN AGREEMENT” AS DEFINED IN SECTION 26.02(a) OF THE TEXAS BUSINESS
AND COMMERCE CODE AND REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED
BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT AGREEMENTS OF THE PARTIES. THERE ARE NO ORAL
AGREEMENTS BETWEEN THE PARTIES.

     SECTION 23. Consent and Agreement with Respect to Certain Matters.

          (a) Sale of Certain Assets. Notwithstanding the Existing Events of Default, the
Borrower may sell (i) the assets described on Schedule B attached hereto to Sygma Network,
Inc. so long as such assets are not sold for less than the fair market value thereof and (ii)
terminate any leases with respect to trailer equipment leased by Borrower and sell at not less than
fair market value any trailer equipment owned by Borrower which is no longer useful in its
operations. Any proceeds from such sale shall be paid to the Bank to be applied against the
outstanding Revolving Credit Advances. For avoidance of doubt, no event of default shall have
occurred under the Loan Documents if the termination of such leases results in a violation of the
Capital Expenditure limit set forth in Section 12.4 of the Loan Agreement or the limitation on
operating lease payments set forth in Section 12.5 of the Loan Agreement.

          (b) Sale and Leaseback of Real Property. Notwithstanding Section 11.9 of the Loan
Agreement, the Bank hereby consents to the execution by Borrower of an agreement for the sale and
leaseback of the Real Property, it being understood, however, that notwithstanding the execution by
Borrower of such sale and leaseback agreement, until all Obligations have been paid in full no sale
or other transfer of the Real Property shall be permitted and the Bank’s security interest in the
real property shall not be released. Upon the termination of the Forbearance Period, nothing in
this Agreement shall be deemed to prevent the Bank from posting the Real Property for foreclosure,
foreclosing upon the Real Property or otherwise exercising any of its rights or remedies under the
Loan Documents.

          (c) Security Interest in Favor of Newcastle. Provided that the Forbearance Conditions
have been satisfied, the Bank hereby agrees that (i) Borrower may incur reimbursement obligations
to Newcastle with respect to amounts required to be paid by

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Newcastle in respect of the Newcastle Letter of Credit or the Newcastle Guaranty, as applicable,
(ii) Borrower may grant to Newcastle a security interest in Borrower’s property as security for
such obligations, and (iii) Newcastle may file financing statements to perfect such security
interests. It is understood that in accordance with the subordination agreement referenced in
Section 5(b), all such obligations and security interests granted to Newcastle shall be subordinate
to any and all obligations and security interests of the Bank.

          (d) Parker Settlement. The Bank agrees that no event of default shall have occurred
under the Loan Documents solely by reason of the incurrence by Borrower of payment obligations to
Ronald W. Parker in the principal amount of $2,800,000 (together with interest thereon at five
percent (5.00%) per annum) in connection with the Compromise and Settlement Agreement regarding the
Matter of Arbitration between Borrower and Ronald W. Parker before the American Arbitration
Association, case number 71 166 00025 05, provided that such payment obligations shall be unsecured
and shall be subordinate to the Obligations. During the Forbearance Period, the Bank consents to
the payment of $450,000 (plus accrued interest thereon) by Borrower as scheduled principal
repayments of such obligations.

          (e) Pepsico Settlement. The Bank agrees that no event of default shall occur under
the Loan Documents solely by reason of the incurrence by the Borrower of aggregate payment
obligations to Pepsico of $410,000, of which $250,000 may be evidenced by a promissory note, in
connection with the settlement of certain disputes between the Borrower and Pepsico, provided that
such payment obligations shall be unsecured and shall be subordinate to the Obligations. The
Borrower shall make no payments on such obligations until the Obligations shall have been paid in
full.

          (f) Other Matters. The Bank agrees that (i) based on the information provided to the
Bank as of the Effective Date, the Bank is not aware that any representation or warranty made by
Borrower pursuant to Section 9.13 of the Loan Agreement has been false, misleading or erroneous in
any material respect, (ii) no event of default shall occur with respect to Section 9.15 of the Loan
Agreement solely by reason of the transactions described in this Section 23, (iii) no event of
default under the Loan Documents currently exists with respect to the failure by the Bank to
approve any leases of the Real Property previously submitted in writing to the Bank and (iv) no
event of default has occurred under clause (ii) of Section 11.1(f) of the Construction Loan
Agreement.

     SECTION 24. Expiration. This Agreement shall be null and void, and of no effect,
unless all conditions precedent to its effectiveness are satisfied on or before 12:00 p.m. CST on
November 13, 2006.

[SIGNATURE PAGES FOLLOW]

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     IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective
duly authorized officers to be effective as of the date first written above.

	 	 	 	 	 
	 	 	BORROWER:
	 
	 	 	 	 
	 	 	PIZZA INN, INC., a Missouri corporation
	 
	 	 	 	 
	 

	 	By:
	 	/s/ Rod J. McDonald
	 

	 	 	 	 
	 

	 	Name:
	 	Rod J. McDonald
	 

	 	Title:
	 	Secretary
	 
	 	 	 	 
	 	 	GUARANTORS:
	 
	 	 	 	 
	 	 	BARKO REALTY, INC., a Texas corporation
	 
	 	 	 	 
	 

	 	By:
	 	/s/ Rod J. McDonald
	 

	 	 	 	 
	 

	 	Name:
	 	Rod J. McDonald
	 

	 	Title:
	 	Secretary
	 
	 	 	 	 
	 	 	R-CHECK, INC., a Texas corporation
	 
	 	 	 	 
	 

	 	By:
	 	/s/ Rod J. McDonald
	 

	 	 	 	 
	 

	 	Name:
	 	Rod J. McDonald
	 

	 	Title:
	 	Secretary
	 
	 	 	 	 
	 	 	PIZZA INN OF DELAWARE, INC., a Delaware corporation
	 
	 	 	 	 
	 

	 	By:
	 	/s/ Rod J. McDonald
	 

	 	 	 	 
	 

	 	Name:
	 	Rod J. McDonald
	 

	 	Title:
	 	Secretary

Signature Page to Supplemental Forbearance Agreement

 

 

	 	 	 	 	 
	 	 	NEWCASTLE:
	 
	 	 	 	 
	 	 	NEWCASTLE PARTNERS, LP, a Texas limited
	 	 	partnership
	 
	 	 	 	 
	 	 	     By: Newcastle Capital Management, L.P., a
	 	 	     Texas limited partnership, its general partner
	 
	 	 	 	 
	 	 	     By: Newcastle Capital Group L.L.C., a Texas
	 	 	     limited liability company, its general partner
	 
	 	 	 	 
	 

	 	     By:
	 	/s/ Mark Schwarz
	 

	 	 	 	 
	 

	 	     Name:
	 	Mark Schwarz
	 

	 	     Title:
	 	Managing Member

	 	 	 	 	 
	 	 	BANK:
	 
	 	 	 	 
	 	 	WELLS FARGO BANK, NATIONAL ASSOCIATION
	 
	 	 	 	 
	 

	 	By:
	 	/s/ Danny Oliver
	 

	 	 	 	 
	 

	 	Name:
	 	Danny Oliver
	 

	 	Title:
	 	Vice President

Attachments:

Schedule A — Pending or Threatened Litigation

Schedule B — Sale of Certain Assets

Signature Page to Supplemental Forbearance Agreementexv10w14

 

Exhibit 10.14

EXECUTION VERSION

Cardica, Inc.

Note Conversion Agreement

     This Note Conversion Agreement (this “Agreement”) is made and entered into as of
the 7th day of November, 2006, by and among Cardica, Inc., a Delaware corporation (the
“Company”), and Guidant Investment Corporation, a California corporation (the “Holder”).

Recitals

     Whereas, the Holder holds 8.75% Notes, dated August 19, 2003 and February 25, 2004
from the Company in the principal amounts of $5,000,000 and $5,250,000, respectively (collectively,
the “Notes”);

     Whereas, the Notes were issued pursuant to the terms of an Agreement dated August 19,
2003, and are secured by an Intellectual Property Security Agreement dated August 19, 2003, between
the Company and the Holder (the “Security Agreement”);

     Whereas, as of the date hereof, the outstanding balance of the Notes, including
principal and accrued interest thereon, is $12,901,729.19;

     Whereas, the Holder has agreed to convert a portion of the principal amount of the
Notes into shares of common stock of the Company (the “Common Stock”) on the terms and conditions
set forth in this Agreement, and after such conversion the Notes shall be cancelled; and

     Whereas, the parties desire to consummate the transactions contemplated by this
Agreement on the date hereof (the “Closing”).

Agreement

     Now, Therefore, in consideration of the mutual promises, covenants and agreements set
forth herein, the sufficiency of which the parties acknowledge, the parties hereby agree as
follows:

     1. Conversion of Notes. Effective as of the Closing, and in full settlement
of the Company’s obligations under the Notes, the Company hereby agrees to issue to the Holder (a)
an aggregate of 1,432,550 shares of Common Stock (the “Shares”), (b) payment of $5,738,979.50 by
wire transfer of immediately available funds to an account specified in writing by Holder, and (c)
the Registration Rights Agreement in the form attached hereto as Exhibit A duly executed by
the Company. Immediately following the Closing, the Holder shall promptly deliver the original
Notes to the Company for cancellation; provided, however, that in the event that the Holder is
unable to produce the original Notes, the Holder will execute and deliver a lost note affidavit in
substantially a form approved by the Company. Notwithstanding the obligations of the Holder to
deliver the Notes for cancellation by the Company, the conversion and cancellation of the
Notes shall be effective as of the Closing regardless of whether the Notes are delivered for
cancellation by the Company.

 

 

     2. Termination of Security Interests. Upon conversion of the Notes as set
forth above, the Holder agrees to terminate any and all security interests that the Holder has in
any of the assets or properties of the Company pursuant to the Notes and the Security Agreement.
The Holder hereby authorizes the Company to file upon the Closing any termination statements
necessary to effect such termination and the Holder further agrees to execute and deliver to the
Company any additional documents or instruments as the Company shall reasonably request to evidence
such termination.

     3. Representations, Warranties and Covenants of the Company. The Company
hereby represents and warrants to the Holder as follows:

          3.1 Corporate Power. The Company has all requisite corporate power and authority to execute
and deliver this Agreement, and to carry out and perform the provisions of this Agreement.

          3.2 Authorization. All corporate action on the part of the Company, its officers, directors
and stockholders necessary for the authorization, execution and delivery of this Agreement and the
Registration Rights Agreement and the performance of all obligations of the Company hereunder has
been taken. This Agreement and the Registration Rights Agreement, when executed and delivered by
the Company, will constitute valid and binding obligations of the Company, enforceable against the
Company in accordance with their terms. Without limiting the generality of the foregoing, the
board of directors of the Company has taken all action so (i) that the Holder will not be
prohibited from, or require any subsequent approval or consent in connection with, entering into or
consummating a “business combination” with the Company as an “interested stockholder” or
“interested shareholder” (in each case as such terms are used in Section 203 of the Delaware
General Corporation Law) as a result of the execution of this Agreement or consummation of the
transactions contemplated hereby and (ii) that the rights granted to the Holder under the
Registration Rights Agreement may be granted to and will not conflict with the provisions of the
Amended and Restated Investor Rights Agreement dated August 19, 2003 between the Company and the
Investors named therein. Furthermore, the issuance of the shares of Common Stock upon conversion
of the Notes will not require approval by the Company’s stockholders under any rule or regulation
of The NASDAQ Stock Market.

          3.3 Sufficient Shares. The number of authorized but unissued shares of Common Stock is
sufficient to permit conversion of the Notes pursuant to the terms of this Agreement. Upon the
issuance of the shares of Common Stock upon conversion of the Notes, such shares shall be duly and
validly issued, fully paid and nonassessable, and issued in compliance with all applicable
securities laws and shall not be issued in violation of any preemptive or similar right.

          3.4 Compliance with Other Instruments. The Company is not in violation or default of any term
of its charter documents or of any provision of any mortgage, indenture, contract, agreement,
instrument or contract to which it is party or by which it is bound or of any judgment, decree,
order or writ other than any such violation or default that would not have a material adverse
effect on the Company. The execution, delivery, and performance of and
compliance with this Agreement and the Registration Rights Agreement, and the issuance of the
shares of Common Stock pursuant hereto, will not result in any such material violation, or be in
material conflict with or constitute a default under any such term, or result in the creation of
any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the

 

 

Company or the suspension, revocation, impairment, forfeiture or nonrenewal of any permit, license,
authorization or approval material to the Company, its business, operations, assets or properties.

     4. Representations, Warranties and Covenants of the Holder. The Holder
hereby represents and warrants to the Company as follows (provided that such representations and
warranties do not lessen or obviate the representations and warranties of the Company set forth in
this Agreement):

          4.1 Corporate Power. The Holder has all requisite corporate power and authority to execute
and deliver this Agreement, and to carry out and perform the provisions of this Agreement.

          4.2 Authorization. All corporate action on the part of the Holder, its officers, directors
and stockholders necessary for the authorization, execution and delivery of this Agreement and the
Registration Rights Agreement and the performance of all obligations of the Holder hereunder has
been taken. This Agreement and the Registration Rights Agreement, when executed and delivered by
the Holder, will constitute valid and binding obligations of the Holder, enforceable against the
Holder in accordance with their terms.

          4.3 Investment Representations. The Holder understands that the Shares have not been
registered under the Securities Act of 1933, as amended (the “Securities Act”) and the Holder also
understands that the Shares are being offered and sold pursuant to an exemption from registration
contained in the Securities Act based in part upon the Holder’s representations contained in the
Agreement. The Holder hereby represents and warrants as follows:

               (a) Holder Bears Economic Risk. The Holder has substantial experience in evaluating and
investing in private placement transactions of securities in companies similar to the Company so
that it is capable of evaluating the merits and risks of its investment in the Company and has the
capacity to protect its own interests. The Holder must bear the economic risk of this investment
indefinitely unless the Shares are registered pursuant to the Securities Act, or an exemption from
registration is available. The Holder also understands that there is no assurance that any
exemption from registration under the Securities Act will be available and that, even if available,
such exemption may not allow the Holder to transfer all or any portion of the Shares under the
circumstances, in the amounts or at the times the Holder might propose.

               (b) Acquisition for Own Account. The Holder is acquiring the Shares for the Holder’s own
account for investment only, and not with a view towards their distribution.

               (c) The Holder Can Protect Its Interest. The Holder represents that by reason of its, or of
its management’s, business or financial experience, the Holder has the capacity to protect its own
interests in connection with the transactions contemplated in this Agreement and the Registration
Rights Agreement.

               (d) Accredited Investor. The Holder represents that it is an accredited investor within the
meaning of Regulation D under the Securities Act.

 

 

               (e) Rule 144. The Holder acknowledges and agrees that the Shares, are “restricted securities”
as defined in Rule 144 promulgated under the Securities Act as in effect from time to time and must
be held indefinitely unless they are subsequently registered under the Securities Act or an
exemption from such registration is available. The Holder has been advised or is aware of the
provisions of Rule 144, which permits limited resale of shares purchased in a private placement
subject to the satisfaction of certain conditions, including, among other things: the availability
of certain current public information about the Company, the resale occurring following the
required holding period under Rule 144 and the number of shares being sold during any three-month
period not exceeding specified limitations.

               (f) Residence. The office of the Holder in which its investment decision was made is located
at the address or addresses of the Holder set forth on the signature page to the Registration
Rights Agreement.

          4.4 Transfer Restrictions. The Holder acknowledges and agrees that the Shares are subject to
restrictions on transfer as set forth in the Registration Rights Agreement.

     5. Miscellaneous. This Agreement shall be governed in all respects by the
laws of the State of California as such laws are applied to agreements between California residents
entered into and performed entirely in California. The representations, warranties, covenants and
agreements of the parties hereunder shall survive the enforcement, amendment or waiver of this
Agreement. Except as otherwise expressly provided herein, the provisions hereof shall inure to the
benefit of, and be binding upon, the successors and assigns of the parties hereto. In case any
provision of this Agreement shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or impaired thereby.
This Agreement may be executed in any number of counterparts, each of which shall be an original,
but all of which shall constitute one instrument.

[Remainder of Page Intentionally Left Blank]

 

 

     In Witness Whereof, each of the parties hereto has executed this Note
Conversion Agreement as of the date first above written.

	 	 	 	 	 	 	 	 	 	 	 
	Cardica, Inc.	 	 	 	Guidant Investment Corporation	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	By:

	 	/s/ Bernard Hausen
	 	 	 	By:
	 	/s/ Lawrence J. Knopf	 	 
	 

	 	 
	 	 	 	 	 	 	 	 
	Name: Bernard Hausen, M.D., Ph.D.	 	 	 	Name: Lawrence J. Knopf	 	 
	Title:   Chief Executive Officer	 	 	 	Title: Vice President — Legal and Secretary

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