Stock-based Compensation Plan

In connection with the Acquisition, the Parent established the NPC International Holdings, Inc. Stock Option Plan (the “Plan”), which governs, among other things, the grant of options with respect to the common stock of the Parent. The purposes of this Plan are to: (i) attract and retain highly qualified employees for the Company; (ii) motivate the participants to exercise their best efforts on behalf of the Company and the Parent; (iii) allow participants in the Plan to participate in equity value creation; and (iv) align the incentives between the participants and the Parent as well as the Company.

The following table summarized stock option activity under the Plan during the 26 weeks ended July 1, 2014:



	Number of Options		Weighted Average Exercise Price			Weighted Average Remaining Contractual Term (in years)
Outstanding at December 31, 2013	249,019			$	146
Granted	22,765			143
Exercised	—			—
Forfeited or expired	(9,936	)		145
Outstanding at July 1, 2014	261,848			103		7.7
Exercisable at July 1, 2014	95,012			$	119	7.5

Under the Plan, options may be granted with respect to a maximum of 271,784 shares of common stock of the Parent, which represents 10% of the outstanding shares of common stock of the Parent as of the date of the Acquisition on a fully diluted basis and was recently adjusted to incorporate options to be available for performance of the Company’s Wendy’s operations. Each grant of options under the Plan will specify the applicable option exercise period, option exercise price, vesting conditions and such other terms and conditions as deemed appropriate by the Board of Directors of the Parent. Currently 79% of the options granted under the Plan will vest ratably over four years subject to the achievement of certain performance targets (“Series 1”); 20% of the options issued under the Plan will vest only upon a change of control of the Company (“Series 2”); and 1% of the options issued under the Plan have no vesting period and are fully exercisable at the date of grant (“Series 3”). In each case for options subject to vesting, vesting will be subject to the option holders’ continued employment through the vesting date. All options granted under the Plan will expire ten years from the date of grant, subject to earlier expiration in the event the option holder ceases to be employed. At July 1, 2014, there were 9,936 shares of common stock available for future grant under the Plan.

Under their respective employment agreements, the following options have been granted to certain members of management:



	As of July 1, 2014
Series 1 Options	207,266
Series 2 Options	51,817
Series 3 Options	2,765
Total options granted	261,848
Total options exercisable	95,012

The exercise price of the Series 1 options was established based on the per share price of the common stock investment in the Parent at the time of closing of the Acquisition, or $100 per share. For the Series 1 options, the exercise price accretes at a rate equal to 9% per annum, compounded annually. The exercise price of the Series 2 options was established as $250.00 per share. The exercise price of all options granted following the Acquisition was determined at the discretion of the Compensation Committee. The exercise price for all options granted was equal to or greater than the fair market value of the shares subject to the option on the date of grant.

Option grants will be made at the discretion and through approval of the Board of Directors to ensure that compensation to the Company’s executive officers remains competitive and in-line with its peer companies.

The Company considers these options to be liability awards. The compensation cost for the portion of awards that are outstanding for which the requisite service has not been rendered, or the performance condition has not been achieved, will be recognized as the requisite service is rendered (subject to the occurrence of a triggering event becoming probable as described below) and/or performance condition achieved. Further, under the award agreements under the Plan, any portion of the Series 1 and Series 2 options that were vested on the date of the termination of the option holder’s employment or engagement with the Company for any reason is forfeited without payment of any kind 30 days after the date of such separation; provided that in the event the separation is a result of a termination by the Company for cause or the resignation of the option holder (other than for good reason in certain situations), any portion of the option that was vested shall also expire and be forfeited without payment of any kind on the separation date. Under the Stockholders Agreement among the stockholders of Parent, upon the termination of an employee stockholder’s employment or engagement with the Company for any reason, the Parent is required to purchase and the employee is required to sell all of the shares held at a price per share equal to the greater of (i) the original cost of such repurchased shares or (ii) the fair market value of such repurchased shares; provided that, if the separation is the result of a termination by the Company with cause or the resignation of the employee stockholder (other than for good reason in certain situations), then the purchase price for such repurchase shares equals the lesser of (i) the original cost or (ii) fair market value.

The Series 3 options are not subject to vesting and may be exercised at any time prior to expiration. Based on the term of the agreement under the Plan, any option not exercised by the tenth anniversary date of the option grant or in the event the separation is a result of a termination by the Company for cause or the resignation of the option holder (other than for good reason in certain situations), the option shall expire and is forfeited without payment. In the event of a Change of Control, the employee is entitled to receive the greater of (i) the fair market value of such repurchased shares or (ii) an amount by which the fair market value of such repurchased shares exceeds the exercise price of all repurchased shares.

The Company does not have a contractual obligation to fund the repurchase of these shares; however, the Company may be called upon to provide a distribution to the Parent upon such time a triggering event should occur that would require a repurchase of outstanding shares.

As of July 1, 2014, no options had been exercised by management. Based on the provisions of the Plan and the award agreements thereunder, all options granted have clearly defined and limited scenarios in which the option has value to the option holder. Specifically, the Stockholders Agreement prohibits the transfer or sale of shares to third parties without consent, which is at the sole discretion of the Parent and its majority owners. Further, there are no provisions in place under which an employee may require the Company to repurchase shares absent the occurrence of a triggering event (termination of employment or a Parent sale transaction). Therefore, the holder of either options or shares acquired upon exercise of those options can generally only monetize the options and/or sell the underlying shares upon occurrence of such an event, and upon the occurrence of such an event the options granted have the potential to yield value to each option holder only if the holder’s employment is terminated by the Company without cause or by the holder with good reason in certain situations (“Good Leaver Scenario”) or upon a Parent sale transaction. A Good Leaver Scenario is achieved when an event in the Company’s control, such as a base salary reduction or a forced relocation, occurs; all such events have been deemed improbable of occurrence for all option holders and are expected to continue to be deemed improbable until the time one such qualifying event occurs. Absent a Good Leaver Scenario, the Company can repurchase the underlying shares at the lower of original purchase price or the fair market value at the repurchase date if the option holders terminate employment at any time prior to a change in control. Due to the fact that an option holder would have no value for termination of employment for any other reason, and currently the Good Leaver Scenario and Parent sale transaction are not deemed probable, the Company has concluded a 100% forfeiture rate is appropriate, as the restriction on transferability and sale of underlying shares creates an in-substance service period and there is no assurance that the underlying stock related to the options will achieve any value above its original cost under these conditions prior to forfeiture or expiration. As no triggering events have been deemed probable as of July 1, 2014, the Company has recorded no compensation expense for all options granted.