NPC INTERNATIONAL INC - FORM 10-Q

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EX-31.2 - SECTION 302 CERTIFICATION OF CFO - NPC INTERNATIONAL INC	dex312.htm
EX-32.1 - SECTION 906 CERTIFICATION OF CEO - NPC INTERNATIONAL INC	dex321.htm
EX-32.2 - SECTION 906 CERTIFICATION OF CFO - NPC INTERNATIONAL INC	dex322.htm
EX-31.1 - SECTION 302 CERTIFICATION OF CEO - NPC INTERNATIONAL INC	dex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark one)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 29, 2009

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 333-138338

NPC INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)


KANSAS		48-0817298
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification number)

7300 W. 129^th Street Overland Park, KS		66213
(Address of principal executive offices)		(Zip Code)

Telephone: (913) 327-5555

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x

(Note: As a voluntary filer, not subject to the filing requirements, the registrant filed all reports required under Section 13 or 15(d) of the Exchange Act during the preceding 12 months.)

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

There is no market for the Registrant’s equity. As of November 13, 2009, there were 1,000 shares of common stock outstanding.

INDEX


			Page
Part I		FINANCIAL INFORMATION

	Item 1.	Condensed Consolidated Financial Statements (unaudited)	2
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
	Item 4.	Controls and Procedures	26
	Item 4T.	Controls and Procedures	26

Part II		OTHER INFORMATION

	Item 1.	Legal Proceedings	27
	Item 1A.	Risk Factors	27
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
	Item 3.	Defaults Upon Senior Securities	27
	Item 4.	Submission of Matters to a Vote of Security Holders	27
	Item 5.	Other Information	27
	Item 6.	Exhibits	28
Exhibit Index			28
Signatures			31

PART I

PART 1. FINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements

NPC INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share and per share data)


	September 29, 2009			December 30, 2008
Assets
Current assets:
Cash and cash equivalents	$	10,436		$	5,327
Accounts receivable		3,633			4,110
Inventories		6,230			7,291
Prepaid expenses and other current assets		4,900			4,633
Income taxes receivable		3,183			2,086
Deferred income taxes		4,763			4,531
Assets held for sale		1,410			20,934

Total current assets		34,555			48,912

Facilities and equipment		265,621			236,999
Less accumulated depreciation		(96,752	)		(67,885	)

Net facilities and equipment		168,869			169,114
Franchise rights, less accumulated amortization of $29,132 and $22,008, respectively		411,090			407,915
Goodwill		191,662			188,530
Other assets, net		26,502			25,044

Total assets	$	832,678		$	839,515

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	22,349		$	22,998
Accrued payroll		11,927			14,294
Sales tax payable		3,560			5,212
Payroll taxes		3,390			3,012
Accrued interest		9,099			6,317
Other accrued liabilities		16,497			14,277
Current portion of insurance reserves		8,870			8,240
Current portion of debt		1,340			17,094

Total current liabilities		77,032			91,444

Long-term debt		432,370			436,710
Other deferred items		36,017			35,556
Insurance reserves		11,326			11,133
Deferred income taxes		117,616			117,240

Total long-term liabilities		597,329			600,639

Commitments and contingencies
Stockholders’ equity:
Common stock ($0.01 par value, 2,000 shares authorized and 1,000 shares issued and outstanding as of September 29, 2009 and December 30, 2008)		—			—
Paid-in-capital		163,325			163,325
Accumulated other comprehensive loss		(3,890	)		(4,125	)
Retained deficit		(1,118	)		(11,768	)

Total stockholders’ equity		158,317			147,432

Total liabilities and stockholders’ equity	$	832,678		$	839,515

See accompanying notes to the condensed consolidated financial statements.

NPC INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(in thousands)


	13 Weeks Ended September 29, 2009			13 Weeks Ended September 23, 2008
Sales:
Net product sales	$	205,107		$	156,980
Fees and other income		8,847			5,564

Total sales		213,954			162,544
Costs and expenses:
Cost of sales		53,855			44,682
Direct labor		65,273			44,168
Other restaurant operating expenses		73,442			52,450
General and administrative expenses		11,901			10,002
Corporate depreciation and amortization of intangibles		2,955			2,387
Other		718			120

Total costs and expenses		208,144			153,809

Operating income		5,810			8,735

Other (expense) income:
Interest expense		(7,695	)		(8,141	)
Miscellaneous		—			3

(Loss) income before income taxes		(1,885	)		597
Income tax (benefit) expense		(3,215	)		241

Income from continuing operations		1,330			356
Income from discontinued operations, net of taxes		—			781

Net income	$	1,330		$	1,137

See accompanying notes to the condensed consolidated financial statements.

NPC INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(in thousands)


	39 Weeks Ended September 29, 2009			39 Weeks Ended September 23, 2008
Sales:
Net product sales	$	641,803		$	476,953
Fees and other income		28,305			15,526

Total sales		670,108			492,479
Costs and expenses:
Cost of sales		170,806			135,512
Direct labor		197,002			134,597
Other restaurant operating expenses		221,405			153,829
General and administrative expenses		36,671			29,497
Corporate depreciation and amortization of intangibles		8,810			7,381
Other		1,483			426

Total costs and expenses		636,177			461,242

Operating income		33,931			31,237

Other expense:
Interest expense		(23,438	)		(24,935	)
Miscellaneous		—			(19	)

Income before income taxes		10,493			6,283
Income tax (benefit) expense		(216	)		1,957

Income from continuing operations		10,709			4,326
(Loss) income from discontinued operations, net of taxes		(59	)		2,987

Net income	$	10,650		$	7,313

See accompanying notes to the condensed consolidated financial statements.

NPC INTERNATIONAL, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

(in thousands, except share data)


	Shares of common stock	Common stock		Paid-in capital		Retained deficit			Accumulated other comprehensive loss			Total stockholders’ equity
Balance at December 30, 2008	1,000	$	—	$	163,325	$	(11,768	)	$	(4,125	)	$	147,432
Comprehensive income:
Net income	—		—		—		10,650			—			10,650
Net unrealized change in cash flow hedging derivatives	—		—		—		—			(3,131	)		(3,131	)
Reclassification adjustment into income for derivatives used in cash flow hedges	—		—		—		—			3,366			3,366

Total comprehensive income													10,885

Balance at September 29, 2009	1,000	$	—	$	163,325	$	(1,118	)	$	(3,890	)	$	158,317

See accompanying notes to the condensed consolidated financial statements.

NPC INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)


	39 Weeks Ended September 29, 2009			39 Weeks Ended September 23, 2008
Operating activities
Net income	$	10,650		$	7,313
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		39,077			30,576
Amortization of debt issuance costs		1,515			1,252
Net facility impairment charges		947			309
Deferred income taxes		(30	)		2,249
Net loss on disposition of assets		64			117
Changes in assets and liabilities, excluding acquisitions:
Accounts receivable		506			2,590
Inventories		1,349			(557	)
Prepaid expenses and other current assets		(266	)		(697	)
Accounts payable		(649	)		(4,809	)
Payroll and sales taxes		(1,274	)		(7	)
Income taxes		(1,097	)		350
Accrued interest		2,782			3,285
Accrued payroll		(2,367	)		2,532
Other accrued liabilities		1,766			2,415
Insurance reserves		823			2,381
Other deferred items		1,904			(1,539	)
Other assets		(3,902	)		1,644

Net cash provided by operating activities		51,798			49,404

Investing activities
Capital expenditures		(19,526	)		(26,514	)
Net proceeds from sale of units		19,463			—
Purchase of leased properties for sale-leaseback		—			(6,907	)
Purchase of business assets, net of cash acquired		(32,798	)		(34	)
Proceeds from sale or disposition of assets		660			975

Net cash used in investing activities		(32,201	)		(32,480	)

Financing activities
Borrowings under revolving credit facility		216,224			140,200
Payments under revolving credit facility		(219,224	)		(155,700	)
Payments on term bank facilities		(17,094	)		(4,196	)
Debt issue costs		(796	)		(62	)
Proceeds from sale-leaseback transactions		5,500			6,896
Proceeds from sale-leaseback transactions on formerly leased properties		902			3,085

Net cash used in financing activities		(14,488	)		(9,777	)

Net change in cash and cash equivalents		5,109			7,147
Beginning cash and cash equivalents		5,327			7,609

Ending cash and cash equivalents	$	10,436		$	14,756

Supplemental disclosures of cash flow information:
Net cash paid for interest	$	19,141		$	20,399
Net cash paid for income taxes	$	2,813		$	298
Non-cash investing activities:
Accrued capital expenditures	$	609		$	1,356

See accompanying notes to the condensed consolidated financial statements.

NPC INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – Basis of Presentation

NPC International, Inc., together with its subsidiaries, is referred to herein as “NPC” and “the Company.” NPC Acquisition Holdings, LLC, its ultimate parent company, is referred to herein as “Holdings.”

On May 3, 2006, all of NPC’s outstanding stock was acquired by Holdings, a company controlled by Merrill Lynch Global Private Equity (“MLGPE”) and certain of its affiliates. In connection with the acquisition, the Company issued $175.0 million principal amount of notes and entered into a $375.0 million Senior Secured Credit Facility. The $375.0 million Senior Secured Credit Facility consists of a $300.0 million term loan due 2013 and a $75.0 million revolving credit facility due 2012.

The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for reporting on Form 10-Q. Accordingly, certain information and disclosures required by accounting principles generally accepted in the United States for complete consolidated financial statements are not included herein.

The interim statements should be read in conjunction with the financial statements and notes thereto included in the Company’s latest Annual Report on Form 10-K.

The results of operations of any interim period are not necessarily indicative of the results of operations for the full year. The Company believes this information includes all adjustments, consisting of normal recurring accruals, necessary to fairly present the financial condition, results of operations and cash flows for the periods then ended.

Reclassifications. Reclassifications have been made to the prior years’ Consolidated Statements of Income and all related notes to reflect the effect of discontinued operations. (See Note 3.)

Note 2 – Business Combinations and Acquisitions

Between September 2008 and February 2009, the Company acquired 393 Pizza Hut units, including 294 units from Pizza Hut, Inc. (“PHI”) and 99 units from another franchisee. These acquisitions were funded through the issuance of a $40.0 million term loan under the Company’s Senior Secured Credit Facility, proceeds from the sale of units to PHI, proceeds drawn on the Company’s revolving credit facility and cash on hand. The acquisitions were accounted for using the purchase method of accounting. Accordingly, net assets were recorded at their estimated fair values. The allocations of the purchase price for the assets acquired from PHI are preliminary and will be finalized as information becomes available. As the purchase price exceeded the fair value of the assets, including identified intangible assets, goodwill associated with this transaction was recorded in the Consolidated Balance Sheets. The goodwill recorded reflects the Company’s ability to synergize acquired units with its existing operations. All of the goodwill recognized for these acquisitions will be deductible for income tax purposes.

Identification and allocation of values assigned to the intangible assets are based on fair value, which was estimated by performing the generally accepted valuation income approach. The income approach is predicated upon the value of the future cash flows that an asset will generate over its remaining useful life, which is consistent with how purchase price is typically determined for purchases such as these. The purchase price allocations, net of cash acquired, as adjusted, were as follows:


(Dollars in thousands)
	2009				2008
Acquired from Date acquired		PHI 1/20/09		PHI 2/17/09		Franchisee 9/30/08			PHI 12/9/08		PHI 12/9/08
Number of units		55		50		99			88		101
Fee properties		—		—		9			1		—
Market locations		CO		MO, IL		VA, WV, MD			FL, IA		MO, KS, GA
Purchase price allocation:
Franchise rights	$	8,655	$	1,938	$	18,950		$	9,318	$	12,111
Goodwill		1,077		970		2,290			3,037		1,309
Fixed assets		8,621		10,753		15,490			14,996		12,850
(Unfavorable) favorable leases, net		142		215		(487	)		104		(221	)
Other		182		200		(50	)		717		924

Total purchase price	$	18,677	$	14,076	$	36,193		$	28,172	$	26,973

Estimated annual rent	$	2,100	$	1,938	$	3,662		$	3,536	$	4,008

The above purchase price allocations were adjusted during the second quarter of 2009 to reflect an increase of $0.9 million to goodwill and $0.3 million to other with offsetting decreases of $1.2 million to fixed assets. There were no significant changes made to the purchase price allocations during the third quarter.

The weighted average amortization period assigned to the franchise rights acquired during 2009 was 44 years.

The pro forma impact on the results of operations is included in the below table for periods prior to the acquisition date in which the acquisitions were not previously consolidated. The pro forma results of operations are not necessarily indicative of the results that would have occurred had these acquisitions been consummated at the beginning of the periods presented, nor are they necessarily indicative of future operating results.


	Pro forma (unaudited) (in thousands)
	13 Weeks Ended		39 Weeks Ended
	Sept. 23, 2008		Sept. 29, 2009		Sept. 23, 2008
Total sales	$	251,768	$	679,098	$	760,151
Income before income taxes		1,405		10,365		8,707
Income from continuing operations		841		10,632		5,781

The Consolidated Statements of Income for the 13 weeks and 39 weeks ended September 29, 2009 included $74.0 million and $228.0 million, respectively, of total sales related to the above acquired units. It is impracticable to disclose earnings for these acquired units as earnings of such units are not tracked on an individual basis.

Note 3 – Discontinued Operations

In December 2008 and January 2009, the Company completed the sale of 70 units and 42 units, respectively and the results of operations for these units have been reflected in discontinued operations.

Summarized financial information for discontinued operations on units sold December 8, 2008 and January 20, 2009 is shown below (in thousands):


	13 Weeks Ended		39 Weeks Ended
	Sept. 23, 2008		Sept. 29, 2009			Sept. 23, 2008
Total sales	$	23,892	$	2,009		$	71,681

(Loss) income before income taxes		1,311		(84	)		4,576
Income tax (benefit) expense		530		(25	)		1,589

(Loss) income from discontinued operations, net of taxes	$	781	$	(59	)	$	2,987

Note 4 – Goodwill and Other Intangible Assets

Changes in goodwill are summarized below (in thousands):


Balance at December 30, 2008	$	188,530
Acquisitions		3,132

Balance at September 29, 2009	$	191,662

Goodwill increased $3.1 million as a result of the 2009 acquisitions and adjustments related to the 2008 acquisitions as presented in Note 2.

The Company completed its annual goodwill impairment test during the second quarter of 2009 and determined that goodwill was not impaired.

Amortizable other intangible assets consist of franchise rights, leasehold interests, internally developed software and a non-compete agreement. These intangible assets are amortized on a straight-line basis over the lesser of their economic lives or the remaining life of the applicable agreement. Intangible assets subject to amortization are summarized below (in thousands):


	September 29, 2009
	Gross Carrying Amount			Accumulated Amortization			Net Book Value
Amortizable intangible assets:
Franchise rights	$	440,222		$	(29,132	)	$	411,090
Favorable leasehold interests		10,114			(2,034	)		8,080
Unfavorable leasehold interests		(4,425	)		1,059			(3,366	)
Internally developed software		1,069			(730	)		339
Non-compete		1,925			(1,315	)		610

Total	$	448,905		$	(32,152	)	$	416,753


	December 30, 2008
	Gross Carrying Amount			Accumulated Amortization			Net Book Value
Amortizable intangible assets:
Franchise rights	$	429,923		$	(22,008	)	$	407,915
Favorable leasehold interests		9,597			(1,945	)		7,652
Unfavorable leasehold interests		(3,778	)		584			(3,194	)
Internally developed software		1,069			(570	)		499
Non-compete		1,925			(1,027	)		898

Total	$	438,736		$	(24,966	)	$	413,770

Amortization expense on intangible assets was $2.7 million and $1.9 million for the 13 weeks ended September 29, 2009 and September 23, 2008, respectively, and $8.0 million and $5.8 million for the 39 weeks ended September 29, 2009 and September 23, 2008, respectively. The Company expects annual amortization expense for amortizable other intangible assets for the next five fiscal years to range from approximately $10.0 million to $10.3 million.

Note 5 – Debt

The Company’s debt consisted of the following (in thousands):


	September 29, 2009		December 30, 2008
Senior Secured Credit Facility	$	258,710	$	275,804
Senior Subordinated Notes		175,000		175,000
Senior Secured Revolving Credit Facility		—		3,000

		433,710		453,804
Less current portion		1,340		17,094

	$	432,370	$	436,710

The Company’s debt facilities contain restrictions on additional borrowing, certain asset sales, capital expenditures, dividend payments, certain investments and related-party transactions, as well as requirements to maintain various financial ratios. At September 29, 2009, the Company was in compliance with all of its debt covenants.

Based upon the provisions of the Senior Secured Credit Facility, the Company may be required to make an annual excess cash flow mandatory prepayment on the term loan notes not later than 120 days after the Company’s fiscal year end. Based upon the amount of excess cash flow generated during fiscal 2008 and the Company’s leverage at fiscal 2008 year end, each of which is defined in the credit agreement, the mandatory prepayment was determined to be $17.1 million. This amount was included in the current portion of long-term debt at December 30, 2008 and was paid utilizing cash reserves and borrowings on the Revolving Credit Facility on April 24, 2009. Based on currently expected 2009 results, the Company anticipates that it will be required to make such a mandatory prepayment of between $21 million and $26 million in April 2010 depending upon the amount of excess cash flow generated during its fiscal year and its leverage at fiscal year-end. As this is a preliminary estimate, the final excess cash flow mandatory prepayment could ultimately differ materially from the amounts reflected above.

Based upon independent trading data the estimated fair value of the Company’s debt facilities was as follows (in thousands):


	September 29, 2009		December 30, 2008
Senior Secured Credit Facility	$	243,187	$	208,232
Senior Subordinated Notes		173,250		131,250
Revolving Credit Facility		—		3,000

	$	416,437	$	342,482

The Company determined the estimated fair value using available market information. However, the fair value estimates presented herein are not necessarily indicative of the amount that the Company’s debt holders could realize in an actual market transaction.

Note 6 – Income Taxes

For the 39 weeks ended September 29, 2009 the Company recorded an income tax benefit of $0.2 million. During 2009, the Company recorded a net tax benefit of $1.9 million associated with the change in the liability for uncertain tax positions as shown below. Additionally, the Company recorded $0.4 million of income tax benefit related to state tax rate changes and federal tax credit carry back adjustments. Excluding the impact of these discrete items totaling $2.3 million, the Company’s income tax expense would have been $2.1 million or 20.2% for the 39 weeks ended September 29, 2009. The tax rate decreased 11.0% from the second quarter 2009 largely due to lower annual projected taxable income. This lower than statutory rate is attributable to the impact of tax credits. The Company’s effective tax rate of 31.2% for the 39 weeks ended September 23, 2008 was higher than 2009 due to the aforementioned discrete items and higher tax credits in 2009.

The liability for uncertain tax positions was $9.8 million as of September 29, 2009, was considered long term and was included in other deferred items in the Consolidated Balance Sheet. As of September 29, 2009, the Company is subject to examination in the U.S. federal tax jurisdiction for the 2006-2008 tax years and is currently under examination for the tax years 2007 and 2006.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:


Balance at December 30, 2008	$	11,752
Additions based on tax positions related to the current year		179
Additional interest / penalties accrued		749
Lapse of applicable statute of limitations		(2,873	)

Balance at September 29, 2009	$	9,807

The Company expects to release certain reserves over the next 12 months as statutes expire which would impact the effective tax rate.

Note 7 – Commitments and Contingencies

On May 12, 2009, a lawsuit against the Company, entitled Jeffrey Wass, et al. v. NPC International, Inc., Case No. 2:09-CV-2254-JWL-KGS, was filed in the United States District Court for the District of Kansas. An Amended Complaint, entitled Jeffrey Wass and Mark Smith, et al. v. NPC International, Inc., was filed on July 2, 2009. Plaintiffs have brought the action individually and on behalf of similarly situated employees who work or previously worked as delivery drivers for NPC. The Amended Complaint states that the lawsuit is brought as a collective action under the Fair Labor Standards Act (FLSA) to recover unpaid wages and excessive deductions owed to plaintiffs and similarly situated workers employed by NPC in 28 states, and as a class action under Colorado law on behalf of one of the plaintiffs and all other similarly situated workers employed by NPC in Colorado to recover unpaid minimum wages and excess payroll deductions and certain costs relating to uniforms and special apparel. The Amended Complaint alleges among other things that NPC deprived plaintiffs and other NPC delivery drivers of minimum wages by providing insufficient reimbursements for automobile and other job-related expenses incurred for the purposes of delivering NPC’s pizza and other food items. With respect to the claim under the FLSA, the Amended Complaint seeks compensatory damages, liquidated damages, attorneys’ fees and costs, and pre-judgment and post-judgment interest. With respect to the claim under Colorado law, the Amended Complaint seeks compensatory damages, costs of litigation, and pre-judgment and post-judgment interest.

At this time, the Company is not able to predict the outcome of the lawsuit, any possible loss or possible range of loss associated with the lawsuit or any potential effect on the Company’s business, results of operations or financial condition. However, the Company believes the lawsuit is wholly without merit and will defend itself from these claims vigorously.

Note 8 – Derivative Financial Instruments

The Company participates in interest rate related derivative instruments to manage its exposure on its debt instruments, which the Company designated as cash flow hedges. Gains and losses on derivative instruments designated as cash flow hedges are reported in other comprehensive income and reclassified into earnings in the periods in which earnings are impacted by the hedged item. The following interest rate swap contracts were entered into as a hedge to fix a portion of the term loan notes under the Senior Secured Credit Facility and provide for fixed rates as compared to the three-month LIBOR rate on the following notional amounts of floating rate debt at September 29, 2009:


Effective Date		Notional Amount (in thousands)			Fixed Rate Paid		Maturity Date
June 6, 2006		$	50,000	⁽¹⁾	5.39	%	December 31, 2010
January 31, 2008			50,000		3.16	%	January 31, 2011
April 7, 2008			50,000		2.79	%	April 7, 2011
November 18, 2008			30,000		2.81	%	November 18, 2011

		$	180,000



⁽¹⁾	The notional amount will amortize to $20.0 million on December 31, 2009 based on the swap’s amortization schedule.

The following table presents the fair value of the Company’s hedging portfolio as of September 29, 2009 and December 30, 2008 (in thousands):

The effect of the derivative instruments on the Condensed Consolidated Financial Statements was as follows (in thousands):


	Loss Recognized in OCI on Derivative (Effective Portion)												Loss Reclassified from Accumulated OCI into Income (Effective Portion)
	For the 13 Weeks Ended						For the 39 Weeks Ended						Location	For the 13 Weeks Ended						For the 39 Weeks Ended
	Sept. 29, 2009			Sept. 23, 2008			Sept. 29, 2009			Sept. 23, 2008				Sept. 29, 2009			Sept. 23, 2008			Sept. 29, 2009			Sept. 23, 2008
Interest rate contracts	$	(1,740	)	$	(1,173	)	$	(3,131	)	$	(618	)	Interest expense	$	(1,360	)	$	(599	)	$	(3,366	)	$	(1,281	)

The Company currently expects that approximately $4.0 million of the change in the fair value of the interest rate swap contracts included in “Accumulated other comprehensive loss” as of September 29, 2009 will be realized in earnings as additional interest expense within the next twelve months, contemporaneously with the net settlement of the underlying quarterly interest payments, which may vary based on actual changes within the LIBOR market rates.

The Company measures the fair value of its interest rate swap contracts under a Level 2 observable input. The Company uses a mark-to-market valuation based on observable interest rate yield curves which are adjusted for credit risk. During the third quarter of fiscal 2009 and 2008, there was virtually no ineffectiveness related to cash flow hedges.

Note 9 – Related-Party Transactions

MLGPE Advisory Agreement. On May 3, 2006, the Company entered into an advisory agreement with an affiliate of MLGPE pursuant to which such entity or its affiliates will provide advisory services to the Company. Under the agreement MLGPE or its affiliates will continue to provide financial, investment banking, management advisory and other services on the Company’s behalf for an annual fee of $1.0 million. The Company has paid $1.0 million to MLGPE for this fee for 2009, which is being amortized ratably to expense.

Bank of America Merchant Services. In January 2009, Bank of America Corporation acquired the parent company of MLGPE, Merrill Lynch & Co., Inc. For the 39 weeks ended September 29, 2009 the Company has paid Bank of America Merchant Services $0.3 million for credit card processing services.

Note 10 – New Accounting Pronouncements

Newly Adopted Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued the Accounting Standards Codification (“ASC”) as the authoritative source of generally accepted accounting principles for nongovernmental entities in the United States. Rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative GAAP for SEC registrants. The adoption of the ASC is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company adopted the ASC during the third quarter 2009, which changes how the Company references accounting standards, but the adoption did not have an impact on the Company’s consolidated financial statements.

In May 2009, the FASB issued the accounting standard addressing subsequent events. The standard establishes guidance of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This standard is effective for interim or annual financial periods ending after June 15, 2009. The Company adopted this standard and began providing the additional required disclosure during the second quarter of 2009. See Note 11 for the Company’s disclosure for the third quarter of 2009.

In April 2009, the FASB issued the accounting standard that provides guidance in determining whether impairments in debt securities are other than temporary, and modifies the presentation and disclosures surrounding such instruments. This standard is effective for interim periods ending after June 15, 2009, but early adoption is permitted for interim periods ending after March 15, 2009. The Company adopted this standard during the second quarter of 2009 and such adoption did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued an amendment to the accounting standard for financial instruments. This amendment requires disclosures about the fair value of financial instruments in interim financial statements as well as in annual financial statements. The adoption of this amendment is effective for interim periods ending after June 15, 2009, but early adoption is permitted for interim periods ending after March 15, 2009. The Company adopted this amendment during the first quarter 2009 and began providing the additional disclosure requirements. See Note 5 for a discussion of the fair value of the Company’s long-term debt and Note 8 for a discussion of the Company’s derivative instruments and hedging activities.

In December 2007, the principles and requirements for how an acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired were revised. This amendment significantly changes the accounting for business combinations in a number of areas including the treatment of contingent consideration, preacquisition contingencies, transaction costs, in-process research and development and restructuring costs. In addition, this amendment provides that changes in an acquired entity’s deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. Disclosure requirements were also established, which will enable financial statement users to evaluate the nature and financial effects of business combinations. This amendment is effective for fiscal years beginning after December 15, 2008 with early adoption prohibited. The Company adopted the amendment to the accounting for business combinations as of December 31, 2008. See Note 2 for a discussion of the Company’s business combination activity.

Note 11 – Subsequent Events

The Company has evaluated subsequent events through November 13, 2009 and determined that there were no subsequent events that would impact the Company’s Condensed Consolidated Financial Statements for the quarterly period ending September 29, 2009.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward Looking Information

This report includes forward-looking statements regarding, among other things, our plans, strategies, and prospects, both business and financial. All statements contained in this document other than current and historical information are forward-looking statements. Forward-looking statements include, but are not limited to, statements that represent our beliefs concerning future operations, strategies, financial results or other developments, and may contain words and phrases such as “may,” “expect,” “should,” “anticipate,” “intend,” or similar expressions. Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual results could be materially different. Although we believe that our plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions. Important factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to, the following:

•

competitive conditions;

•

general economic and market conditions, including the recent worsening of conditions in the credit markets and in general economic conditions;

•

effectiveness of franchisor advertising programs and the overall success of the franchisor;

•

increases in food, labor, fuel and other costs;

•

effectiveness of the hedging program for cheese prices directed by the Unified Foodservice Purchasing Co-op (“UFPC”);

•

significant disruptions in service or supply by any of our suppliers or distributors;

•

changes in consumer tastes, geographic concentration and demographic patterns;

•

consumer concerns about health and nutrition;

•

our ability to manage our growth and successfully implement our business strategy;

•

the risks associated with the expansion of our business, including risks relating to the integration of the substantial number of Pizza Hut units recently acquired by us;

•

the effect of disruptions to our computer and information systems;

•

the effect of local conditions, events and natural disasters;

•

general risks associated with the restaurant industry;

•

the outcome of pending or yet-to-be instituted legal proceedings;

•

regulatory factors;

•

the loss of our executive officers and certain key personnel;

•

our ability to service our substantial indebtedness;

•

restrictions contained in our debt agreements;

•

availability, terms and deployment of capital;

•

our ability to obtain debt or equity financing on reasonable terms in light of recent changes in the capital and credit markets, to the extent we require such financing for acquisitions or to expand or support our business in the future;

•

and, various other factors beyond our control.

Consequently, such forward-looking statements should be regarded solely as our current plans, estimates and beliefs. We do not intend, and do not undertake, any obligation to update any forward looking statements to reflect future events or circumstances after the date of such statements. For a more detailed discussion of the principal factors that could cause actual results to be materially different, you should read our risk factors in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 30, 2008 (“2008 Form 10-K”) and in Part II, Item 1A of our Quarterly Reports on Form 10-Q filed with the SEC in 2009.

Overview

Who We Are. We are the largest Pizza Hut franchisee and the largest franchisee of any restaurant concept in the United States according to the 2008 “Top 200 Restaurant Franchisees” by Franchise Times. We were founded in 1962 and, as of September 29, 2009 we operated 1,152 Pizza Hut units in 28 states with significant presence in the Midwest, South and Southeast. As of the third quarter 2009, our operations represented approximately 19% of the domestic Pizza Hut restaurant system and 22% of the domestic Pizza Hut franchised restaurant system as measured by number of units, excluding licensed units which operate with a limited menu and no delivery in certain of our markets.

Our Fiscal Year. We operate on a 52- or 53-week fiscal year ending on the last Tuesday in December. Fiscal year 2009 contains 52 weeks and fiscal year 2008 contained 53 weeks.

Acquisitions and Dispositions. Between September 2008 and February 2009 we acquired 294 Pizza Hut units from Pizza Hut, Inc. (“PHI”) for approximately $87.9 million and 99 units from another Pizza Hut franchisee for approximately $36.2 million. During this same time period, we also sold 112 units to PHI for approximately $37.8 million. The acquisitions were funded through the issuance of a $40.0 million term loan under our Senior Secured Credit Facility, proceeds from the sale of units to PHI, borrowings under our revolving credit facility and cash on hand.

As a result of the sale of units in 2008 and the sale of units in 2009, which were classified as held for sale at December 30, 2008, our consolidated statements of income for all years presented have been adjusted to remove the operations of the 2008 and 2009 sold units and reclassify them as discontinued operations. Also included in discontinued operations for the fiscal year ended December 30, 2008 was the loss on the sale of those units. The amounts presented below, except where otherwise indicated, relate to continuing operations only.

Our Sales

Net Product Sales. Net product sales are comprised of sales of food and beverages from our restaurants, net of discounts. Year-to-date for fiscal 2009, pizza sales accounted for approximately 77% of net product sales. Various factors influence sales at a given unit, including customer recognition of the Pizza Hut brand, our level of service and operational effectiveness, pricing, marketing and promotional efforts and local competition. Several factors affect our sales in any period, including the number of units in operation, comparable store sales and seasonality. “Comparable store sales” refer to period-over-period net product sales comparisons for units under our operation for at least 12 months.

Fees and Other Income. Fees and other income are comprised primarily of delivery fees charged to customers, vending receipts and other fee income and are not included in our comparable store sales metric.

Seasonality. Our business is seasonal in nature with net product sales typically being lower in the second and third fiscal quarters. Sales are largely driven by product innovation, advertising and promotional activities and can be adversely impacted by holidays and economic times that generally negatively impact consumer discretionary spending, such as the back to school season. As a result of these seasonal fluctuations, our operating results may vary substantially between fiscal quarters. Further, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.

Restaurant formats. We operate our Pizza Hut restaurants through three different formats to cater to the needs of our customers in each respective market. Delivery units, or “Delcos,” are typically located in strip centers and provide delivery and carry-out, with a greater proportion being located in more densely populated areas. Red Roof units, or “RRs,” are traditional free-standing, dine-in restaurants which offer on-location dining room service as well as carry-out service. Restaurant-Based Delivery units, or “RBDs,” conduct delivery, dine-in, and carry-out operations from the same free-standing location. Approximately 44% of our units include the WingStreet™ product line at September 29, 2009. The WingStreet™ menu includes bone-in and bone-out fried chicken wings which are tossed in one of eight sauces and appetizers which are available for dine-in, carry-out and delivery.

The following table sets forth certain information with respect to each year-to-date fiscal period:


	39 weeks ended September 29, 2009		39 weeks ended September 23, 2008
Sales by occasion:
Delivery	40	%	35	%
Carryout	39	%	41	%
Dine-in	21	%	24	%
Number of restaurants open at the end of the period:
Delco	437		207
RR	187		152
RBD	528		413

	1,152	⁽¹⁾	772	⁽¹⁾

⁽¹⁾

Includes 508 units and 192 units offering the WingStreet™ product line, at September 29, 2009 and September 23, 2008, respectively.

Our Costs

Our operating costs and expenses are comprised of cost of sales, direct labor, other restaurant expenses and general and administrative expenses. Our cost structure is highly variable with approximately 70% of operating costs variable to sales and volume of transactions.

Cost of sales. Cost of sales includes the cost of food and beverage products sold, less rebates from suppliers, as well as paper and packaging, and is primarily influenced by fluctuations in commodity prices. Historically, our cost of sales has primarily been comprised of the following: cheese: 30-35%; dough: 16-19%; meat: 13-17%; and packaging: 8-10%. These costs can fluctuate from year-to-year given the commodity nature of the cost category, but are constant across regions. We are a member of the UFPC, a cooperative set up to act as a central procurement service for the operators of Yum! Brands, Inc. restaurants, and participate in various cheese hedging and procurement programs that are directed by the UFPC for cheese, meat and certain other commodities to help reduce the price volatility of those commodities from period-to-period. Based on information provided by the UFPC, the UFPC expects to hedge approximately 30% to 50% of the Pizza Hut system’s anticipated cheese purchases through a combination of derivatives taken under the direction of the UFPC.

Direct Labor. Direct labor includes the salary, payroll taxes, fringe benefit costs and workers’ compensation expense associated with restaurant based personnel. Direct labor is highly dependent on federal and state minimum wage rate legislation given that the vast majority of our workers are hourly employees. To control labor costs, we are focused on proper scheduling and adequate training and testing of our store employees, as well as retention of existing employees.

Other restaurant operating expenses. Other restaurant operating expenses include all other costs directly associated with operating a restaurant facility, which primarily represents royalties, advertising, rent and depreciation (facilities and equipment), utilities, delivery expenses, supplies, repairs, insurance, and other restaurant related costs.

Included within other restaurant operating expenses are royalties paid to PHI, which will be impacted in the future as follows. For delivery units currently operating under the Company’s existing franchise agreements and currently paying a 4.0% royalty rate, the franchise agreements provide for future increases in the royalty rates to be paid. The first such increase will occur in certain delivery units effective January 1, 2010, when royalty rates are scheduled to increase by 0.5% of sales to 4.5% or approximately $0.9 million of additional annual royalty expense based on current estimated sales. Effective January 1, 2020, royalty rates for these delivery units are scheduled to increase to 4.75% and, effective January 1, 2030, these rates will increase to 5.0%.

Our blended average royalty rate for the year-to-date period of 2009 was 4.8% of total sales compared to 4.4% for 2008. The increase is primarily due to the units acquired since September 2008 (“acquisition units”) which have a higher average royalty rate than our comparable stores.

General and administrative expenses. General and administrative expenses include field supervision and personnel costs and the corporate and administrative functions that support our restaurants, including employee wages and benefits, travel, information systems, recruiting and training costs, professional fees, supplies, insurance and bank service and credit card transaction fees.

Trends and Uncertainties Affecting Our Business

We believe that as a franchisee of such a large number of Pizza Hut restaurants, our financial success is driven less by variable factors that affect regional restaurants and their markets, and more by trends affecting the food purchase industry – specifically the Quick Service Restaurants or “QSR” industry. The following discussion describes certain key factors that may affect our future performance.

General Economic Conditions and Consumer Spending

Higher unemployment rates, declining home values and sales, the negative impact of changes in the credit markets, declining stock prices, and low consumer confidence as a result of the changes within the economic environment have caused the consumer to experience a real and perceived reduction in disposable income which has negatively impacted consumer spending in most segments of the restaurant industry, including the segment in which we compete. We believe these economic trends and the resulting negative impact on consumer sentiment are the primary causes of our lower comparable store sales.

Competition

The QSR industry is a fragmented market, with competition from national and regional chains, as well as independent operators, which affects pricing strategies and margins. Additionally, the frozen pizza and take-and-bake alternatives are becoming an intrusive competitive threat in the pizza segment. Limited product variability within our segment can make differentiation among competitors difficult. Thus, competitors continuously promote and market new product introductions, price discounts and bundled deals, and rely heavily on effective marketing and advertising to drive sales. Recently, our primary competitors have introduced aggressive pricing strategies to respond to the current economic environment. If we are required to introduce similar pricing strategies to compete, we may realize decreased revenues, margins, income and cash flow from operations.

Commodity Prices

Commodity prices of packaging products (liner board) and ingredients such as cheese, dough (wheat), and meat, can vary. The prices of these commodities can fluctuate throughout the year due to changes in supply and demand. Our costs can also fluctuate as a result of changes in ingredients or packaging instituted by Pizza Hut. Overall, our commodity costs were lower during the third quarter of 2009 than the prior year; such decreases more than offset the higher costs associated with Pizza Hut’s ingredient reformulation and packaging redesign in 2009.

The block cheese price for the third quarter of fiscal 2009 averaged $1.26 per pound, a decrease of $0.62 or 33% versus the average price for the third quarter of fiscal year 2008, additionally, dough costs declined 20% and meat declined 1% from the prior year. Our average costs of packaging increased during the third quarter of fiscal 2009 by 20% as compared to the prior year primarily due to the new packaging design in 2009.

Labor Cost

The restaurant industry is labor intensive and known for having a high level of employee turnover given low hourly wages and the part-time composition of the workforce. To the extent that our delivery sales mix increases due to acquisition of units or customer preference, our labor costs would be expected to increase due to the more labor intensive nature of the delivery transaction. Direct labor is highly dependent on federal and state minimum wage rate legislation given the vast majority of workers are hourly employees whose compensation is either determined or influenced by the minimum wage rate. There has been legislation passed to increase certain states’ minimum wage rates. This has resulted in incremental direct labor expense which we have attempted to mitigate through pricing initiatives, productivity improvement in our restaurants, better overall wage management tactics and other auxiliary cost reduction strategies. Further, in May 2007, the United States Congress passed a bill, which was signed into law, to increase the federal minimum wage rate per hour as follows: from $5.15 to $5.85 effective July 24, 2007; $6.55 effective July 24, 2008 and $7.25 effective July 24, 2009. The federal tipped wage rate remained unchanged at $2.13 per hour. The expected impact on our direct labor costs for these changes is described below under “Inflation and Deflation.” We believe we have effective strategies in place to offset some of this anticipated impact; however, we cannot be certain that we will be able to offset any or all of this increase through auxiliary cost savings, productivity improvements in our restaurants and to a lesser extent pricing.

Additionally, potential changes in federal labor laws, including the possible enactment of the Employee Free Choice Act (“EFCA”), could result in portions of our workforce being subjected to greater organized labor influence. The EFCA, also referred

to as the “card check” bill, if passed in its current form could significantly change the nature of labor relations in the United States, specifically, how union elections and contract negotiations are conducted. Although we do not currently have union employees, the EFCA could impose more requirements and union activity on our business, thereby potentially increasing our costs, and could have a material adverse effect on our business, results of operations and financial condition.

In addition, the federal government and several state governments have proposed legislation regarding health care, including legislation that in some cases would require employers to either provide health care coverage to their employees or pay into a fund that would provide coverage for them. If this type of legislation is enacted in geographic areas where we do business, it would likely increase our costs and could have a material adverse effect on our business, results of operations and financial condition.

Inflation and Deflation

Inflationary factors, such as increases in food and labor costs, directly affect our operations. Because most of our employees are paid on an hourly basis, changes in rates related to federal and state minimum wage and tip credit laws will affect our labor costs. We are not always able to offset higher costs with price increases. We anticipate that the aforementioned state minimum wage rates will increase direct labor expense in our comparable units (excluding acquisition units) by approximately an additional $0.6 million in fiscal 2009. Some of the states with indexed minimum wage rates, which impacts 9% of our units, have reported that there will be no increase in minimum wage rates for 2010. We project the federal minimum wage increase, which impacted approximately 93% of our units, will result in an increase of our direct labor expense in our comparable units of approximately $3.5 million in fiscal 2009. We believe we have effective strategies in place to offset some of this anticipated impact; however, we cannot be certain that we will be able to offset any or all of this increase through auxiliary cost savings, productivity improvements in our restaurants and to a lesser extent pricing.

If the economy experiences deflation, which is a persistent decline in the general price level of goods and services, we may suffer a decline in revenues as a result of the falling prices. In that event, given our fixed costs and minimum wage requirements, it is unlikely that we would be able to reduce our costs at the same pace as any declines in revenues. Consequently, a period of prolonged or significant deflation would likely have a material adverse effect on our business, results of operations and financial condition. Similarly, if we are required to reduce the prices we charge for our products as a result of continuing declines in same store sales or competitive pressures, we may suffer decreased revenues, margins, income and cash flow from operations.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our unaudited Condensed Consolidated Financial Statements. The preparation of these financial statements requires estimation and judgment that affect the reported amounts of revenue, expenses, assets, and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. If these estimates differ materially from actual results, the impact on the unaudited Condensed Consolidated Financial Statements may be material. Our critical accounting policies are available in Item 7 of our 2008 Form 10-K. There have been no significant changes with respect to these policies during the first 39 weeks of fiscal 2009.

Accounting for Goodwill. The Company has one operating segment and reporting unit for purposes of evaluating goodwill for impairment. Goodwill was $191.7 million and $188.5 million as of September 29, 2009 and December 30, 2008, respectively.

Goodwill primarily originated with the acquisition of the Company by a new controlling shareholder in May 2006. Additional goodwill was recorded in connection with multiple acquisitions of Pizza Hut units since 2006.

We evaluate goodwill for impairment annually and at any other date when events or changes in circumstances indicate that potential impairment is more likely than not and that the carrying amount of goodwill may not be recoverable.

The goodwill impairment test involves a two-step process. The first step is a comparison of the reporting unit’s fair value to its carrying value. If the carrying value exceeds fair value, goodwill is considered potentially impaired and we must complete the second step of the goodwill impairment test. Under step two, the implied fair value of the reporting unit’s goodwill is compared with the carrying amount of the reporting unit’s goodwill. If the carrying amount of goodwill is greater than the implied fair value of goodwill, an impairment loss would be recognized in an amount equal to the excess. The implied fair value of goodwill is calculated in the same manner as the amount of goodwill that is recognized in a business combination by allocating fair value to all assets and liabilities (both recognized and unrecognized). The difference between the fair value and the sum of the amounts that are assigned to recognized and unrecognized assets and liabilities is the implied value of goodwill.

Three calculation methodologies are considered when determining fair value of the reporting unit: the asset approach, the market approach and the income approach. The asset approach was not used as we have significant intangible value that is dependent on our cash flow. The market approach was not used due to deficiencies in the quality and quantity of comparable company data. The income approach explicitly recognizes that the current value of an investment or asset is premised upon the expected receipt of future economic benefits. When applied to a business ownership interest, a value indication is developed by discounting expected cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of the funds, the expected rate of inflation, and the risk associated with the particular investment. The discount rate selected is generally based on the rates of return available from alternative investments of similar type and quality as of the valuation date. The discounted cash flow method provides an indication of value by discounting future net cash flows available for distribution to their present worth at a rate that reflects both the current requirement of the market and the risk inherent in the specific investment. The income approach was used to determine our fair value.

Management judgment is a significant factor in determining whether an indicator of impairment has occurred. Management relies on estimates in determining the fair value of each reporting unit, which include the following critical quantitative factors:

Anticipated future cash flows and terminal value for each reporting unit. The income approach to determining fair value relies on the timing and estimates of future cash flows, including an estimate of terminal value. The projections use management’s estimates of economic and market conditions over the projected period including growth rates in sales and estimates of expected changes in operating margins. Our projections of future cash flows are subject to change if actual results are achieved that differ from those anticipated. We do not expect actual results to vary such that there would be a material change to the estimated fair value of our reporting unit.

Selection of an appropriate discount rate. The income approach requires the selection of an appropriate discount rate, which is based on a weighted average cost of capital analysis. The discount rate is subject to changes in short-term interest rates and long-term yield as well as variances in the typical capital structure of marketplace participants in the quick service restaurant industry. The discount rate is determined based on assumptions that would be used by marketplace participants, and for that reason, the capital structure of selected marketplace participants was used in the weighted average cost of capital analysis. Given the current volatile economic conditions, it is possible that the discount rate could change.

We completed our annual impairment testing during the second quarter of 2009 and determined that goodwill was not impaired. A key assumption on our fair value estimate using the income approach is the discount rate. We selected a weighted average cost of capital of 10.6%. We noted that an increase in the weighted average cost of capital of approximately 40 basis points would result in a reduction in fair value of approximately $37.0 million. A change in fair value of this amount would have resulted in a fair value that would have still been in excess of carrying value.

Recently Issued Accounting Statements and Pronouncements

See Note 10 of the Condensed Consolidated Financial Statements for new accounting standards, including the expected dates of adoption and estimated effects on our Condensed Consolidated Financial Statements.

Results of Operations

The table below presents (i) comparable store sales indices, (ii) equivalent unit count, (iii) average weekly sales and (iv) selected restaurant operating results as a percentage of net product sales for the 13-week and 39-week periods ended September 29, 2009 and September 23, 2008, respectively:


	13 Weeks Ended						39 Weeks Ended
	Sept. 29, 2009			Sept. 23, 2008			Sept. 29, 2009			Sept. 23, 2008
Comparable store sales		(12.9	)%		4.5	%		(10.1	)%		4.0	%
Equivalent units⁽¹⁾		1,152			772			1,145			775
Average weekly sales⁽²⁾	$	13,696		$	15,640		$	14,374		$	15,787
Net product sales		100	%		100	%		100	%		100	%
Direct restaurant costs and expenses:
Cost of sales		26.3	%		28.5	%		26.6	%		28.4	%
Direct labor		31.8	%		28.1	%		30.7	%		28.2	%
Other restaurant operating expenses		35.8	%		33.4	%		34.5	%		32.3	%

⁽¹⁾

“Equivalent units” represents the number of units open at the beginning of a given period, adjusted for units opened, closed, acquired or sold during the period on a weighted average basis.

⁽²⁾

In computing these averages, total net product sales for the quarter and year-to-date periods were divided by equivalent units for the respective periods.

Activity with respect to unit count is set forth in the table below:


	39 Weeks Ended September 29, 2009
Beginning of period	1,098
Developed⁽¹⁾	4
Acquired⁽²⁾	105
Sold	(42	)
Closed^{(1) (2)}	(13	)

End of period	1,152

⁽¹⁾ For the 39 weeks ended September 29, 2009 four units were relocated or rebuilt, and are included in both the developed and closed totals above. ⁽²⁾ Includes one unit acquired that was closed immediately upon purchase.

During the 39 weeks ended September 29, 2009 we added the WingStreet™ product line to 36 units (31 units converted and 5 units newly constructed), acquired 91 WingStreet™ units, closed three units and sold one unit for a total of 508 units offering the WingStreet™ product line at September 29, 2009.

Thirteen Weeks Ended September 29, 2009 Compared to September 23, 2008-adjusted for discontinued operations

Net Product Sales. Net product sales for the third quarter of 2009 compared to 2008, were $205.1 million and $157.0 million, respectively, an increase of $48.1 million, or 30.7%, resulting largely from a 49% increase in equivalent units due to acquisitions and development, with comparable store sales decreasing 12.9% for the third quarter of 2009, rolling over last year’s third quarter comparable store sales increase of 4.5%. We believe that this decline is largely due to the impact of the recession and the resulting negative impact on consumer sentiment.

Fees and Other Income. Fees and other income were $8.8 million for the third quarter of 2009, compared to $5.6 million for the prior year, for an increase of $3.2 million or 59%. The increase was primarily due to increased delivery transactions from acquisition units.

Cost of Sales. Cost of sales was $53.9 million for the third quarter of 2009, compared to $44.7 million for the prior year for an increase of $9.2 million or 20.5%. Cost of sales decreased 2.2%, as a percentage of net product sales, to 26.3%, compared to 28.5% in the prior year. This decrease was primarily due to a 20% decrease in dough costs, a 10% decrease in cheese costs (net of UFPC hedging effect) and a 1% decrease in meat costs. These decreases were partially offset by a 20% increase in packaging costs (primarily due to Pizza Hut package design changes) compared to the prior year. A modest shift in product mix accounted for the remainder of the overall reduction in cost of sales versus the prior year.

Direct Labor. Direct labor costs for the third quarter of 2009 as compared to the prior year were $65.3 million and $44.2 million, respectively, an increase of $21.1 million, or 47.8%. Direct labor costs were 31.8% of net product sales for the third quarter of 2009, a 3.7% increase compared to the prior year. Labor costs as a percent of net product sales increased by approximately 320 basis points (bps) primarily due to the de-leveraging impact on fixed and semi-fixed labor costs as a result of the comparable store sales decline (280 bps) and increased health insurance costs due to adverse claims development ($0.8 million or 40 bps). The remaining 50 bps increase was primarily due to higher acquisition-unit labor costs which were a result of higher delivery sales mix in these units which is more labor intensive than other occasions, higher average wage rates and general labor inefficiencies due to acquisition integration and training.

Other Restaurant Operating Expenses. Other restaurant operating expenses for the 13 weeks ended September 29, 2009 and September 23, 2008 were $73.4 million and $52.4 million, respectively, an increase of $21.0 million, or 40.0%. Other restaurant operating expenses were 35.8% of net product sales for the third quarter of 2009 compared to 33.4% of net product sales for the prior year, an increase of 2.4%. Approximately 160 bps of the increase, as a percentage of net product sales compared to the prior year, was due to the economics of the acquisition units, which was caused primarily by an increase in our royalty expense (50 bps), higher depreciation expense associated with purchase accounting asset values (50 bps), higher delivery driver reimbursement expenses due to a higher delivery mix (30 bps) and outsourced call center expenses for a certain acquisition market (20 bps). The remaining net variance of 80 bps was largely due to the de-leveraging impact on fixed and semi-fixed costs due to the comparable store sales decline consisting primarily of occupancy costs (100 bps), depreciation (50 bps) and advertising (30 bps), partially offset by lower store level bonuses (60 bps) and the decline in delivery driver reimbursement expenses for comparable stores due to lower fuel prices (40 bps).

Depreciation expense for store operations was $9.9 million or 4.8% of net product sales for the third quarter of 2009 compared to $6.0 million or 3.8% of net product sales for the prior year.

General and Administrative Expenses. General and administrative expenses for the 13 weeks ended September 29, 2009 were $11.9 million compared to $10.0 million for the 13 weeks ended September 23, 2008, an increase of $1.9 million or 19.0%. As a direct result of the 2009 and 2008 acquisitions, general and administrative expenses increased approximately $2.8 million consisting of increased field supervisory personnel costs of $1.7 million and increased credit card transaction fees of $1.1 million. These increases were partially offset by lower bonus and profit sharing expenses and on-going operational training expense as compared to the prior year.

Corporate Depreciation and Amortization. Corporate depreciation and amortization costs were $3.0 million and $2.4 million for the third quarter of 2009 and 2008, respectively.

Other. We recorded expense of $0.7 million and $0.1 million for other expenses during the third quarter of 2009 and 2008, respectively.

Interest Expense. Interest expense was $7.7 million for the third quarter of 2009 compared to $8.1 million for the prior year, a decrease of $0.4 million due to lower interest rates as compared to the prior year. Our cash borrowing rate decreased 0.9% to 6.5% during the third quarter of 2009 compared to the prior year, however, our average outstanding debt balance increased $25.9 million to $437.3 million in the third quarter of 2009 largely due to the issuance of a $40.0 million incremental term loan during the fourth quarter of 2008 used to fund acquisition activity. Interest expense included $0.5 million for amortization of deferred debt issuance costs in both the third quarter of 2009 and 2008, respectively.

Income Taxes. For the 13 weeks ended September 29, 2009, we recorded an income tax benefit of $3.2 million compared to income tax expense of $0.2 million for the 13 weeks ended September 23, 2008. The income tax benefit for the third quarter of 2009 was largely due to a favorable discrete tax adjustment of $2.1 million related to the release of liabilities for uncertain tax positions which was partially offset by an unfavorable discrete tax adjustment of $0.5 million for federal tax credit carry back adjustments. The current year anticipated annual tax rate was decreased 11% to 20.2% excluding discrete items, during the third quarter due to lower projected taxable income which resulted in a third quarter benefit. The prior year anticipated annual effective rate was increased to 32.7% during the third quarter of 2008 which resulted in a third quarter effective tax rate of 40.4%. This increase was due to changes to anticipated permanent deductions.

Income from Continuing Operations, net of taxes. Income from continuing operations for the 13 weeks ended September 29, 2009 was $1.3 million, compared to $0.4 million for the prior year. The increase was primarily due to the benefit of a 30.7% increase in net product sales, increased customer delivery charge income, lower commodity costs and an income tax benefit which were partially offset by increases in restaurant operating expenses, direct labor and general and administrative expenses.

Income from Discontinued Operations, net of taxes. Income from discontinued operations was $0.8 million for the third quarter of 2008. In December 2008, we completed the sale of 70 units to PHI and in January 2009, we completed the sale of 42 units to PHI (which were classified as held for sale at December 30, 2008).

Thirty-nine Weeks Ended September 29, 2009 Compared to September 23, 2008-adjusted for discontinued operations

Net Product Sales. Net product sales for the 39 weeks ended September 29, 2009 were $641.8 million compared to $477.0 million for the same period of 2008, an increase of $164.8 million, or 34.6%, resulting largely from a 48% increase in equivalent units due to acquisitions and development, with comparable store sales decreasing 10.1% for the 2009 year-to-date period, rolling over last year’s comparable store sales increase of 4.0%. We believe that this decline is largely due to the impact of the recession and the resulting negative impact on consumer sentiment.

Fees and Other Income. Fees and other income were $28.3 million for year-to-date 2009, compared to $15.5 million for the prior year, for an increase of $12.8 million or 82.3%. The increase was primarily due to increased delivery transactions from acquisition units.

Cost of Sales. Cost of sales was $170.8 million for year-to-date 2009, compared to $135.5 million for the prior year for an increase of $35.3 million or 26.0%. Cost of sales decreased 1.8%, as a percentage of net product sales, to 26.6%, compared to 28.4% in the prior year. This decrease was primarily due to an 11% decrease in cheese costs (net of UFPC hedging effect) and a 14% decrease in dough costs. These decreases were partially offset by a 23% increase in packaging costs and a 14% increase in meat ingredient costs (primarily due to Pizza Hut package design changes and ingredient reformulation) compared to the prior year. A modest shift in product mix accounted for the remainder of the overall reduction in cost of sales versus the prior year. Pricing initiatives beginning in the second quarter of 2008 also positively impacted our year-over-year cost of sales margins.

Direct Labor. Direct labor costs for year-to-date 2009 as compared to the prior year were $197.0 million and $134.6 million, respectively, an increase of $62.4 million, or 46.4%. Direct labor costs were 30.7% of net product sales for year-to-date 2009, a 2.5% increase compared to the prior year. Labor costs as a percent of net product sales increased by approximately 180 basis points (bps) primarily due to the de-leveraging impact on fixed and semi-fixed labor costs as a result of the comparable store sales decline (160 bps) and increased health insurance costs due to adverse claims development (20 bps). The remaining 70 bps increase was primarily due to higher acquisition-unit labor costs which were a result of higher delivery sales mix in these units which is more labor intensive than other occasions, higher average wage rates and general labor inefficiencies due to acquisition integration and training.

Other Restaurant Operating Expenses. Other restaurant operating expenses for year-to-date 2009 and 2008 were $221.4 million and $153.8 million, respectively, an increase of $67.6 million, or 43.9%. Other restaurant operating expenses were 34.5% of net product sales for year-to-date 2009 compared to 32.3% of net product sales for the prior year, an increase of 2.2%. Approximately 120 bps of the increase, as a percentage of net product sales compared to the prior year, was due to the economics of the acquisition units, which caused an increase in our royalty expense (50 bps), higher depreciation expense associated with purchase accounting asset values (40 bps), higher delivery driver reimbursement expenses due to a higher delivery mix (30 bps) and outsourced call center expenses for a certain acquisition market (20 bps) which were partially offset by lower rent (20 bps). The remaining net variance of 100 bps was largely due to the de-leveraging impact on fixed and semi-fixed costs due to the comparable store sales decline consisting primarily of occupancy costs (90 bps), depreciation (50 bps) and advertising (30 bps). These increases were partially offset by a decline in delivery driver reimbursement expenses for comparable stores due to lower fuel prices (40 bps) and lower store level bonuses (30 bps).

Depreciation expense for store operations was $29.4 million or 4.6% of net product sales for the year-to-date period of 2009 compared to $17.5 million or 3.7% of net product sales for the prior year.

General and Administrative Expenses. General and administrative expenses for year-to-date 2009 were $36.7 million compared to $29.5 million for the prior year, an increase of $7.2 million or 24.3%. As a direct result of the 2009 and 2008 acquisitions, general and administrative expenses increased approximately $8.6 million consisting of increased field supervisory personnel costs of $4.8 million, increased credit card transaction fees of $3.2 million and acquisition integration training costs of $0.6 million. These increases were partially offset by lower on-going operational training and bonus and profit sharing expenses as compared to the prior year.

Corporate Depreciation and Amortization. Corporate depreciation and amortization costs were $8.8 million and $7.4 million for 2009 and 2008, respectively.

Other. We recorded expense of $1.5 million and $0.4 million for other expenses for the year-to-date periods of 2009 and 2008, respectively. Included in this category were direct acquisition costs which are required to be expensed under accounting guidance for business combinations effective for fiscal year 2009 of $0.5 million.

Interest Expense. Interest expense was $23.4 million for 2009 compared to $24.9 million for the prior year, a decrease of $1.5 million due to lower interest rates as compared to the prior year. Our cash borrowing rate decreased 1.0% to 6.5% during 2009 compared to the prior year, however, our average outstanding debt balance increased $30.4 million to $448.8 million for 2009 largely due to the issuance of a $40.0 million incremental term loan during the fourth quarter of 2008 used to fund acquisition activity. Interest expense included $1.5 million and $1.3 million for amortization of deferred debt issuance costs in year-to-date 2009 and 2008, respectively.

Income Taxes. For the 39 weeks ended September 29, 2009, we recorded an income tax benefit of $0.2 million compared to tax expense of $2.0 million for the prior year. During 2009, we recorded a net tax benefit of $1.9 million associated with the change in the liability for uncertain tax positions consisting of the release of liabilities due to the lapse of applicable statutes of limitations which was partially offset by additional interest and penalties accrued. Additionally, we recorded $0.4 million of income tax benefit related to state tax rate changes and federal tax credit carry back adjustments. Excluding the impact of these discrete items totaling $2.3 million, our income tax expense would have been $2.1 million or 20.2% of net income before taxes for the 39 weeks ended September 29, 2009. The lower than statutory rate is due to the impact of tax credits. Our effective rate of 31.2% for the 39 weeks ended September 23, 2008 was higher than 2009 due to the aforementioned discrete items and higher tax credits in 2009.

Income from Continuing Operations, net of taxes. Income from continuing operations for the 39 weeks ended September 29, 2009 was $10.7 million, compared to $4.3 million for the prior year. The increase was primarily due to the benefit of a 34.6% increase in net product sales, increased customer delivery charge income, lower commodity costs, an income tax benefit and lower interest expense which were partially offset by increases in restaurant operating expenses, direct labor and general and administrative expenses.

(Loss) Income from Discontinued Operations, net of taxes. Loss from discontinued operations was $0.1 million for the year-to-date period of 2009 compared to income for the prior year-to-date period of $3.0 million. In December 2008, we completed the sale of 70 units to PHI and in January 2009, we completed the sale of 42 units to PHI (which were classified as held for sale at December 30, 2008).

Liquidity and Sources of Capital

Our short-term and long-term liquidity needs will arise primarily from: (1) interest and principal payments related to our existing credit facility and the Senior Subordinated Notes; (2) capital expenditures, including those for our re-imaging plan, maintenance capital expenditures, and the introduction of the WingStreet™ product line at certain existing locations; (3) opportunistic acquisitions of Pizza Hut restaurants or other acquisition opportunities; and (4) working capital requirements as may be needed to support our business. We intend to fund our operations, interest expense, capital expenditures, acquisitions and working capital requirements principally from cash from operations, cash reserves and borrowings on our revolving credit facility. Future acquisitions, depending on the size, may require borrowings beyond those available on our existing revolving credit facility and therefore may require further utilization of the additional remaining term loan borrowing capacity under our credit facility described below as well as other sources of debt or additional equity capital.

Credit and capital markets have experienced unusual volatility and disruption, and equity and debt financing have become more expensive and difficult to obtain. These recent changes in the financial and credit markets may impair our ability to obtain additional debt financing at costs similar to that of our current credit facility, if at all. In addition utilization of the additional remaining term loan borrowing capacity under our existing credit facility, beyond parameters established in our current agreement, would result in a reset of the interest rate on our existing term loan borrowings, which would increase our borrowing costs based on current market conditions. We will continue to evaluate the impact from these market changes as we assess our acquisition and other growth opportunities.

Our working capital was a deficit of $42.5 million as of September 29, 2009, and includes the benefit of approximately $5.1 million of additional cash reserves when compared to the prior fiscal year end. Like most restaurant companies, we are a cash business with low levels of inventories and accounts receivable. Because our sales are primarily cash and we receive credit from our suppliers, we operate on a net working capital deficit. Further, receivables are not a significant asset in the restaurant business and inventory turnover is rapid. Therefore, historically we have used available liquid assets to reduce borrowings under our revolving line of credit.

Cash flows from operating activities, inclusive of discontinued operations

Cash from operations is our primary source of funds. Changes in earnings and working capital levels are the two key factors that generally have the greatest impact on cash from operations. Our operating activities provided net cash inflows of $51.8 million for the 39 weeks ended September 29, 2009 compared to $49.4 million for 2008. Cash flows from operations during 2009 were positively impacted by a $10.4 million increase in after tax cash flows from operations (after adding back non-cash items to net income) as compared to the prior year, which was partially offset by negative changes in working capital of $5.9 million. The overall increase in operating cash flows was largely due to the positive impact of acquisitions on net income and working capital leverage.

Cash flows from investing activities

Cash flows used in investing activities were $32.2 million during the 39 weeks ended September 29, 2009 compared to $32.5 million for the 39 weeks ended September 23, 2008. During 2009, we completed an asset purchase and sale transaction in which we purchased 55 units for $18.7 million and sold 42 units for $19.5 million. We also completed an acquisition of 50 units for $14.1 million. During the year-to-date period of 2009 we invested $19.5 million in capital expenditures, consisting of approximately $14.0 million in our existing operations (including approximately $1.6 million for WingStreet^™ development at 36 units) and $5.5 million for acquisition related information technology equipment. In the prior year, we invested $26.5 million in capital expenditures for existing operations (including approximately $8.4 million for WingStreet^™development at 170 units).

We have reduced our capital expenditure estimate for 2009 from the previous target of $36 million to approximately $28.4 million, not including acquisitions. We anticipate that we will receive related sale-leaseback proceeds of approximately $2.6 million for a net capital expenditure of approximately $25.8 million. The reduction is primarily due to a $7 million decrease in our WingStreet^TM development plan from 200 originally planned to 40 units in an attempt to conserve free cash flow in light of the impact of the recession upon our sales volumes. The revised capital expenditure estimate includes an investment of approximately $2.1 million to add the WingStreet^TM product line to 40 units and $5.6 million to convert the PHI acquisition units to our proprietary POS (point of sale) system.

We currently expect our capital expenditure investment to be approximately $16 million to $17 million in 2010.

Cash flows from financing activities

Net cash outflows for financing activities were $14.5 million for the 39 weeks ended September 29, 2009 compared to net outflows of $9.8 million for the 39 weeks ended September 23, 2008. Net repayments under the revolving credit facility were $3.0 million for the 39 weeks ended September 29, 2009 despite borrowing approximately $14.2 million to fund our acquisition of 50 units in February 2009 and $15.0 million to partially fund our mandatory excess cash flow prepayment during the second quarter, compared to net repayments of $15.5 million during the prior year. During 2009, we paid our mandatory excess cash flow prepayment of $17.1 million on our Senior Secured Credit Facility compared to $4.2 million in the prior year. During the first half of 2009 we completed sale-leaseback transactions for six properties acquired in Virginia during the fourth quarter of 2008 for $2.9 million and completed sale-leaseback transactions on two formerly leased properties (purchased in 2008) for $0.9 million. Additionally, during the third quarter of 2009, we completed sale-leaseback transactions for two properties constructed in 2009 for $2.6 million. During the first half of 2008, we completed five sale-leaseback transactions on assets principally constructed during 2007 for $6.9 million and during the third quarter of 2008, we completed sale-leaseback transactions on five formerly leased properties for approximately $3.1 million.

We are required, under certain circumstances as defined in our credit agreement, to make an annual excess cash flow mandatory prepayment on the term loan notes not later than 120 days after our 2009 fiscal year-end. Based on currently expected 2009 results, we anticipate that we will be required to make a mandatory prepayment of an amount between $21 million and $26 million depending upon the amount of excess cash flow generated during our fiscal year and our leverage at fiscal year-end. As this amount is an estimate, the final excess cash flow mandatory prepayment could ultimately differ materially from the amounts reflected above.

As of September 29, 2009, we were in compliance with all of the financial covenants under our senior secured credit facility. Further, as shown in the following table, our financial leverage has increased from 3.92x at fiscal 2008 year end to 4.04x, primarily due to a decline in our operating results. Our ratios under the foregoing financial covenants in our credit agreement as of September 29, 2009 are as follows:


	Actual	Covenant Requirement
Maximum leverage ratio	4.04x	Not more than 5.25x
Minimum interest coverage ratio	1.94x	Not less than 1.65x

The credit agreement defines “Leverage Ratio” as the ratio of Consolidated Debt for Borrowed Money to Consolidated EBITDA; “Consolidated Interest Coverage Ratio” is defined as the ratio of (x) Consolidated EBITDA plus Rent Expense to (y) Consolidated Interest Expense plus Rent Expense. All of the foregoing capitalized terms are defined in the credit agreement, which was filed with the Securities and Exchange Commission on October 31, 2006 as Exhibit 10.2 to the Company’s Registration Statement on Form S-4 (File No 333-138338). The credit agreement provides that each of the above defined terms include the pro forma effect of acquisitions and divestitures on a full year basis. This pro forma effect used in connection with the financial debt covenant ratio calculations is not the same calculation we use to determine Adjusted EBITDA, which we disclose to investors in our earnings releases.

Based upon current operations, we believe that our cash flows from operations, together with borrowings that are available under the revolving credit facility portion of our senior secured credit facility, will be adequate to meet our anticipated requirements for working capital, capital expenditures, and scheduled principal and interest payments through the next 12 months. At September 29, 2009, we had $58.9 million of borrowing capacity available under our revolving line of credit net of $16.1 million of outstanding letters of credit. We will consider additional sources of financing to fund our long-term growth if necessary, including the remaining $60.0 million of term loan capacity available under our existing credit facility.

In borrowing amounts under our revolving credit facility, we are dependent upon the ability of participating financial institutions to honor draws on the facility. The disruptions in the global credit markets may impede the ability of financial institutions syndicated under our revolving credit facility to fulfill their commitments. CIT Lending Services Corporation (“CIT”) currently is responsible for funding approximately $10.0 million of our revolving credit facility. On November 1, 2009, the parent company of CIT, CIT Group, Inc., filed for bankruptcy. Prior to this filing, CIT fulfilled all lending requests made under our revolving credit facility. The Company has no outstanding borrowings under our revolving credit facility as of September 29, 2009. Based upon the current market conditions, we do not anticipate any potential reduction in commitments from CIT to have a material impact upon our current or future liquidity.

Letters of Credit

As of September 29, 2009, we had letters of credit of $16.1 million issued under our existing credit facility in support of self-insured risks. Based on our leverage ratio determined by fiscal 2009 operating results, we may be required to reinstate a $5.0 million letter of credit due to our franchisor, PHI. If this letter of credit is issued, this will reduce our revolving credit facility borrowing capacity by a like amount.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to various market risks. Market risk is the potential loss arising from adverse changes in market prices and rates. We do not enter into derivative or other financial instruments for trading or speculative purposes.

Interest Rate Risk. Our primary market risk exposure is interest rate risk. All of our borrowings under our senior secured credit facility bear interest at a floating rate. As of September 29, 2009, we had $258.7 million in funded floating rate debt outstanding under our senior secured credit facility. We have interest rate swap agreements that provide for fixed rates as compared to the three-month LIBOR rate on the following notional amounts of floating rate debt at September 29, 2009:


Effective Date	Notional Amount *(in millions)*			Fixed Rate Paid		Maturity Date
June 6, 2006	$	50.0	⁽¹⁾	5.39	%	Dec. 31, 2010
Jan. 31, 2008		50.0		3.16	%	Jan. 31, 2011
April 7, 2008		50.0		2.79	%	April 7, 2011
Nov. 18, 2008		30.0		2.81	%	Nov. 18, 2011

	$	180.0

⁽¹⁾

The notional amount will amortize to $20.0 million on December 31, 2009 based on the swap’s amortization schedule.

After giving effect to these swaps, which leaves us with $78.7 million of floating rate debt, a 100 basis point increase in this floating rate would increase annual interest expense by approximately $0.8 million.

Commodity Prices. Commodity prices such as cheese can vary. The price of this commodity can change throughout the year due to changes in supply and demand. Cheese has historically represented approximately 30% of our cost of sales. We are a member of the UFPC, and participate in cheese hedging programs that are directed by the UFPC to help reduce the volatility of this commodity from period-to-period. Based on information provided by the UFPC, the UFPC expects to hedge approximately 30% to 50% of the Pizza Hut system’s anticipated cheese purchases through a combination of derivatives taken under the direction of the UFPC.

The estimated increase in our food costs from a hypothetical 10% adverse change in the average cheese block price per pound (approximately $0.12 for the 39 weeks ended September 29, 2009 and $0.19 per pound for 2008) would have been approximately $3.5 million and $4.5 million for the 39 weeks ended September 29, 2009 and September 23, 2008, respectively, without giving effect to the UFPC directed hedging programs.

Item 4.

Controls and Procedures.

Not applicable.

Item 4T.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as such term is defined in Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting. There has been no change in our internal control over financial reporting that occurred during our third fiscal quarter of 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings.

Item 1A.

Risk Factors.

The following risk factor disclosure is in addition to the disclosure of risks in Item 1A of our 2008 Form 10-K, and should be read in conjunction with those disclosures:

Our results of operations could be adversely affected by increased costs if health care legislation is adopted.

The federal government and several state governments have proposed legislation regarding health care, including legislation that in some cases would require employers to either provide health care coverage to their employees or pay into a fund that would provide coverage for them. If this type of legislation is enacted in geographic areas where we do business, it would likely increase our costs and could have a material adverse effect on our business, results of operations and financial condition.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

Not applicable.

Item 3.

Defaults Upon Senior Securities.

Not applicable.

Item 4.

Submission of Matters to a Vote of Security Holders.

Not applicable.

Item 5.

Other Information.

Not applicable.

Item 6.

Exhibits, Financial Statement Schedules

Pursuant to the rules and regulations of the Securities and Exchange Commission, we have filed or incorporated by reference the documents referenced below as exhibits to this Form 10-Q. The documents include agreements to which the Company is a party or has a beneficial interest. The agreements have been filed to provide investors with information regarding their respective terms. The agreements are not intended to provide any other factual information about the Company or its business or operations. In particular, the assertions embodied in any representations, warranties and covenants contained in the agreements may be subject to qualifications with respect to knowledge and materiality different from those applicable to investors and may be qualified by information in confidential disclosure schedules not included with the exhibits. These disclosure schedules may contain information that modifies, qualifies and creates exceptions to the representations, warranties and covenants set forth in the agreements. Moreover, certain representations, warranties and covenants in the agreements may have been used for the purpose of allocating risk between the parties, rather than establishing matters as facts. In addition, information concerning the subject matter of the representations, warranties and covenants may have changed after the date of the respective agreement, which subsequent information may or may not be fully reflected in the Company’s public disclosures. Accordingly, investors should not rely on the representations, warranties and covenants in the agreements as characterizations of the actual state of facts about the Company or its business or operations on the date hereof.


Exhibit No.		Document Description
2.1*		Stock Purchase Agreement dated as of March 3, 2006 among NPC Acquisition Holdings, LLC, NPC International, Inc. and the stockholders of NPC International, Inc. named therein

2.2*		Merger Agreement dated as of May 3, 2006 between Hawk-Eye Pizza, LLC and NPC Management, Inc.

2.3		Asset Sale Agreement by and between NPC International, Inc., Pizza Hut of America, Inc. and Pizza Hut, Inc. dated as of November 3, 2008 (incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the Commission on December 9, 2008)

2.4		Asset Purchase and Sale Agreement by and between NPC International, Inc., Pizza Hut of America, Inc. and Pizza Hut, Inc. dated as of November 3, 2008 (incorporated herein by reference to Exhibit 2.2 to the Company’s Current Report on Form 8-K filed with the Commission on December 9, 2008)

2.5		Amendment to Asset Sale Agreement dated as of December 8, 2008 among NPC International, Inc., Pizza Hut of America, Inc. and Pizza Hut, Inc. (incorporated herein by reference to Exhibit 2.3 to the Company’s Current Report on Form 8-K filed with the Commission on December 9, 2008)

2.6		Amendment to Asset Purchase and Sale Agreement dated as of December 8, 2008 among NPC International, Inc., Pizza Hut of America, Inc. and Pizza Hut, Inc. (incorporated herein by reference to Exhibit 2.4 to the Company’s Current Report on Form 8-K filed with the Commission on December 8, 2008)

2.7		Asset Purchase and Sale Agreement by and between NPC International, Inc., Pizza Hut of America, Inc. and Pizza Hut, Inc. dated as of December 15, 2008 (incorporated herein by reference to Exhibit 2.5 to the Company’s Current Report on Form 8-K filed with the Commission on January 20, 2009)

2.8		Asset Sale Agreement by and between NPC International, Inc., Pizza Hut of America, Inc. and Pizza Hut, Inc. dated as of January 13, 2009 (incorporated herein by reference to Exhibit 2.6 to the Company’s Current Report on Form 8-K filed with the Commission on February 17, 2009)

2.9		Amendment to Asset Sale Agreement dated as of February 12, 2009 between NPC International, Inc., Pizza Hut of America, Inc. and Pizza Hut, Inc. (incorporated herein by reference to Exhibit 2.7 to the Company’s Current Report on Form 8-K filed with the Commission on February 17, 2009)

2.10		Second Amendment to Asset Sale Agreement dated as of February 16, 2009 between NPC International, Inc., Pizza Hut of America, Inc. and Pizza Hut, Inc. (incorporated herein by reference to Exhibit 2.8 to the Company’s Current Report on Form 8-K filed with the Commission on February 17, 2009)

3.1*		Amended and Restated Articles of Incorporation of NPC International, Inc.

3.2*		Bylaws of NPC International, Inc.

4.1*		Indenture dated as of May 3, 2006 among NPC International, Inc., NPC Management, Inc. and Wells Fargo Bank, National Association, related to the issue of the 9¹/2% Senior Subordinated Notes due 2014


Exhibit No.		Document Description
4.2*		Form of 9¹/2% Senior Subordinated Note due 2014 (included in Exhibit 4.1)

4.3*		Registration Rights Agreement dated as of May 3, 2006 among NPC International, Inc., NPC Management, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and J.P. Morgan Securities Inc.

10.1*		Hawk-Eye Interests Purchase Agreement, dated as of May 3, 2006, among NPC International, Inc., Oread Capital Holdings, LLC and Troy D. Cook

10.2*		Credit agreement dated as of May 3, 2006 among NPC International, Inc., NPC Acquisition Holdings, LLC as a Guarantor, the other Guarantors party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, Collateral Agent and Issuing Bank, Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Syndication Agent, Bank of America, N.A. and Sun Trust Bank, as Co-Documentation Agents, and the Lenders signatory thereto

10.3*		Distribution Agreement, dated as of January 5, 2004, between McLane Foodservice, Inc. and NPC International, Inc.

10.4*		Advisory Agreement, dated as of May 3, 2006, among NPC International, Inc., NPC Acquisition Holdings, LLC and Merrill Lynch Global Partners, Inc.

10.5*		Employment Agreement, dated as of May 3, 2006, among NPC International, Inc., NPC Acquisition Holdings, LLC and James K. Schwartz

10.6*		Employment Agreement, dated as of May 3, 2006, among NPC International, Inc., NPC Acquisition Holdings, LLC and Troy D. Cook

10.7*		NPC International, Inc. Deferred Compensation and Retirement Plan

10.8*		NPC International, Inc. POWR Plan for Key Employees

10.9*		Form of Location Franchise Agreement dated as of January 1, 2003 between Pizza Hut, Inc. and NPC Management, Inc.

10.10*		Form of Territory Franchise Agreement dated as of January 1, 2003 between Pizza Hut, Inc. and NPC Management, Inc.

10.11*		Purchase Agreement and Escrow Instructions dated as of August 26, 2006 between Realty Income Corporation and NPC International, Inc.

10.12*		Purchase Agreement dated as of April 25, 2006 among Merrill Lynch & Co. and J.P. Morgan Securities Inc., as representative for the initial purchasers, NPC International, Inc, and NPC Management, Inc.

10.13		Pizza Hut National Purchasing Coop, Inc. Membership Subscription and Commitment Agreement (incorporated herein by reference to Exhibit 10.32 to the Registrant’s Annual Report on Form 10-K filed with the Commission on May 28, 1999 (File No. 0-13007))

10.14*		ISDA Master Agreement dated as of June 6, 2006 between Merrill Lynch Capital Services, Inc. and NPC International, Inc.

10.15		NPC Acquisition Holdings, LLC Management Option Plan (including forms of executive and director option agreements) dated January 24, 2007 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on January 25, 2007)

10.16		Amendment to Franchise Agreement dated as of December 25, 2007 between Pizza Hut, Inc. and NPC International, Inc. (incorporated herein by reference as Exhibit 10.16 to the Company’s Annual Report on Form 10-K filed with the Commission on March 14, 2008)

10.17		Swap Transaction Confirmation dated March 31, 2008 between Merrill Lynch Capital Services, Inc. and NPC International, Inc. (incorporated herein by reference to Exhibit 10.17 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on May 9, 2008)

10.18		Amended and Restated Employment Agreement, dated as of December 29, 2008 among NPC International, Inc., NPC Acquisition Holdings, LLC and James K. Schwartz (incorporated herein by reference as Exhibit 10.17 to the Company’s Current Report on Form 8-K filed with the Commission on January 5, 2009)


Exhibit No.		Document Description
10.19		Amended and Restated Employment Agreement, dated as of December 29, 2008 among NPC International, Inc., NPC Acquisition Holdings, LLC and Troy D. Cook (incorporated herein by reference as Exhibit 10.18 to the Company’s Current Report on Form 8-K filed with the Commission on January 5, 2009)

10.20		Amendment, dated as of March 10, 2009, to Amended and Restated Employment Agreement, dated as of December 29, 2008, among NPC International, Inc., NPC Acquisition Holdings, LLC and James K. Schwartz (incorporated herein by reference as Exhibit 10.19 to the Company’s Current Report on Form 8-K filed with the Commission on March 16, 2009)

10.21		Amendment, dated as of March 10, 2009, to Amended and Restated Employment Agreement, dated as of December 29, 2008, among NPC International, Inc., NPC Acquisition Holdings, LLC and Troy D. Cook (incorporated herein by reference as Exhibit 10.20 to the Company’s Current Report on Form 8-K filed with the Commission on March 16, 2009)

14.1		Code of Business Conduct and Ethics (incorporated herein by reference to the Registrant’s Annual Report on Form 10-K filed with the Commission on March 23, 2007)

21.1**		List of subsidiaries

31.1***		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2***		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1***		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2***		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*	Filed as an exhibit with corresponding number to the registrant’s registration statement on Form S-4 (File No 333-138338) and incorporated herein by reference

**	Filed as an exhibit with the corresponding number to Amendment No. 1 to the registrant’s registration statement on Form S-4 (File No. 333-138338) and incorporated herein by reference

***	Filed herewith

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on November 13, 2009.


NPC INTERNATIONAL, INC.

By:		/s/ Troy D. Cook
Name:		Troy D. Cook
Title:		Executive Vice President—Finance, Chief Financial Officer, Secretary and Treasurer (Principal Financial Officer)

By:		/s/ Susan G. Dechant
Name:		Susan G. Dechant
Title:		Vice President—Administration and Chief Accounting Officer (Principal Accounting Officer)

Liability Derivatives

Balance Sheet Location

Fair Value

September 29, 2009

December 30, 2008

Other deferred items