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EPL Intermediate, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware	13-4092105
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
3535 Harbor Blvd., Suite 100
Costa Mesa, California	92626
(Address of principal executive offices)	(Zip Code)

(714) 599-5000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 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 x No ¨  

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.

Large accelerated filer o

Accelerated filer o

Non-accelerated filer x

Smaller reporting company o

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

As of November 12, 2010, 100 shares of the registrant’s common stock were outstanding. 

 

 

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In October 2006, Intermediate completed the exchange of these notes for registered, publicly tradable notes that have substantially identical terms as these notes. The costs incurred in connection with the registration of these notes were capitalized and included in other assets in the consolidated balance sheets and the related amortization was reflected as a component of interest expense in the condensed consolidated statements of operations.

13. Income Taxes

The Company’s taxable income or loss is included in the consolidated federal and state income tax returns of CAC. The Company records its provision for income taxes based on its separate stand-alone operating results using the asset and liability method.

As of December 30, 2009 and September 29, 2010, the Company has no material unrecognized tax benefits.

The Company will continue to classify income tax penalties and interest as part of the provision for income taxes in its Condensed Consolidated Statements of Operations. The Company has not recorded accrued interest and penalties on uncertain tax positions as of September 29, 2010. The Company’s liability for uncertain tax positions is reviewed periodically and is adjusted as events occur that affect the estimated liability for additional taxes, such as the lapsing of applicable statutes of limitations, the conclusion of tax audits, the measurement of additional estimated liabilities based on current calculations, the identification of new uncertain tax positions, the release of administrative tax guidance affecting the Company’s estimates of tax liabilities, or the rendering of court decisions affecting its estimates of tax liabilities.

The Company recorded a full valuation allowance on its deferred tax assets in 2009 due to uncertainties surrounding the Company’s ability to generate future taxable income to realize such deferred income tax assets.  In evaluating the need for a valuation allowance, the Company made judgments and estimates related to future taxable income, the timing of the reversal of temporary differences and facts and circumstances.  The Company continues to maintain a full valuation allowance against its deferred tax assets as of September 29, 2010.  However, subsequent changes in facts and circumstances that affect the Company’s judgments or estimates in determining the proper deferred tax assets or liabilities could materially affect the valuation allowance.

 

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Changes in company-operated restaurant revenue reflect changes in the number of company-operated restaurants and changes in same-store sales, which are impacted by price and transaction volume changes. The challenging economic conditions and increased unemployment, especially in California where a majority of our company-operated restaurants are located, negatively impacted our transaction volume in the first three quarters of 2010. Consumers are eating out less, and when they do eat out, are more sensitive to price increases and are looking for specials and promotions. This has an impact on both same-store sales and on restaurant margins. We believe 2010 has been as challenging as 2009 from an economic standpoint for QSR’s making it difficult to achieve same-store sales growth. Many factors can influence sales at all or specific restaurants, including increased competition, strength of marketing promotions, the restaurant manager’s operational execution and changes in local market conditions and demographics.  

Franchise revenue consists of royalties, initial franchise fees revenue, IT support services fees and franchise rental income. Royalties average 4% of the franchisees’ net sales. During 2009 and the first three quarters of 2010, due to adverse economic conditions, some of our franchises were late in the payment of franchise fees due us and one franchisee filed for bankruptcy in 2009 (we purchased four of its stores and five other stores were closed).   As of September 29, 2010, we had commitments from franchisees to open 70 new restaurants at various dates through 2024. However, the current adverse economic and liquidity conditions have caused some franchisees to delay the opening of new restaurants under existing development agreements or to terminate such agreements. As a result of these conditions, we currently estimate that 8 of those potential new restaurants could open. As of September 29, 2010 we were legally authorized to market franchises in 36 states. We have entered into development agreements that usually result in area development fees being recognized as the related restaurants open. Due to the recession and associated liquidity crisis, most of our developing franchisees are having a difficult time obtaining financing for new restaurants. Additionally, some of our franchisees that operate other restaurant concepts have incurred significant loss of cash flow due to declining sales in these other concepts, as well as their El Pollo Loco restaurants. This has had the effect of slowing development of new El Pollo Loco restaurants, especially in new markets. In addition, the economic conditions have had a negative effect on our ability to recruit and financially qualify new single-unit and developing franchisees. We expect these trends to continue through 2010 and even into 2011. We expect that many of the franchisees who have development agreements will not be able to meet the new unit opening dates required under their agreements. There were two franchise development agreements that were terminated in the first quarter of 2010 and as a result, the Company recognized approximately $240,000 of income related to those terminations in the first quarter of 2010. No franchise development agreements were terminated in the second quarter of 2010. In the third quarter of 2010, the Company recognized approximately $50,000 of income related to the termination of one franchise development agreement.

We sublease facilities to certain franchisees and the sublease rent is included in our franchise revenue. This revenue may exceed, equal or be less than rent payments made under the leases that are included in franchise expense depending on the specific location. Since we do not expect to lease or sublease new properties to our franchisees as we expand our franchise restaurants, we expect the portion of franchise revenue attributable to franchise rental income to decrease over time.

        Product cost, which includes food and paper costs, is our largest single expense. Chicken accounts for the largest part of product cost, which was approximately 12.1% of revenue for company-owned restaurants in the first 39 weeks ended September 29, 2010. These costs are subject to increase or decrease based on commodity cost changes and depend in part on the success of controls we have in place to manage product cost in the restaurants. We currently have three supply contracts for chicken. Two of the contracts have a floor and ceiling price for chicken which expire in February 2011 and our remaining commitments to purchase chicken under these two supply contracts totaled approximately $12.0 million at September 29, 2010.   In March 2010, we entered into a new two year supply contract for chicken that has a fixed price adjusted annually. This new chicken supply contract has pricing that is relatively consistent compared to the prior year’s expired contract and provides that we will make purchases of chicken totaling approximately $20.3 million from the vendor over the two year term of the contract. We also have long-term beverage supply agreements with terms extending into 2011 and 2012 with estimated remaining obligations at September 29, 2010 totaling $3.8 million and a fixed price steak supply contract which expires on December 31, 2010. At September 29, 2010, we estimate that our remaining obligation under this steak supply contract was approximately $0.9 million. For the balance of 2010, based upon current market conditions, we currently believe that our overall product costs will in the best case remain relatively constant, although increases are possible.

 

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Payroll and benefits make up the next largest single expense. Payroll and benefits have been and remain subject to inflation and other increases, including minimum wage increases and expenses for health insurance and workers’ compensation insurance. A significant number of our hourly staff are paid at rates consistent with the applicable federal or state minimum wage and, accordingly, increases in the minimum wage will increase our labor cost. Should there be any increases in minimum wages, there is no assurance that we will be able to increase menu prices in the future to offset any of these increased costs. Workers’ compensation insurance costs are subject to a number of factors, including the impact of legislation. Except for a slight increase which we experienced in this quarter, we have generally seen an overall reduction over the long term in the number of workers’ compensation claims over time due to employee safety initiatives that we implemented in 2002. We cannot determine whether positive trend will continue in the future or whether future costs related to these types of claims may or may not increase. We self-insure employee health benefits. We cannot estimate at this time the effect that the recently passed healthcare reform legislation will have on our self insurance programs or on our business, financial condition, results of operations or cash flow, although we expect that it will increase our future health insurance costs significantly and, accordingly, have a negative impact on us and on some of our franchisees as we currently do not believe that all such increased costs can be passed on to our customers through higher prices given current economic and competitive conditions.

Depreciation and amortization expense consists primarily of depreciation of property and equipment of our restaurants.

 

Restaurant other operating expense includes occupancy, advertising and other costs such as utilities, repair and maintenance, janitorial and cleaning and operating supplies.

Franchise expense consists primarily of rent expense that we pay to landlords associated with leases under restaurants we are subleasing to franchisees. Franchise expense usually fluctuates primarily as subleases expire and is to some degree based on rents that are tied to a percentage of sales calculation. Because we do not expect to lease or sublease new properties to our franchisees as we expand our franchise restaurants, we expect franchise expense as a percentage of franchise revenue to decrease over time. Expansion of our franchise operations does not require us to incur material additional capital expenditures.

General and administrative expense includes all corporate and administrative functions that support existing operations and provide the infrastructure to facilitate our growth. These expenses are impacted by litigation costs, directors and officers insurance, compliance with laws relating to corporate governance and public disclosure, and audit and tax fees.

2010 Initiatives

In January 2010, we introduced steak, to our menu in a limited time offer promotion.  The citrus-marinade and signature flame-grilling technique on our steak products provides an additional choice for our customers to enjoy, in addition to our flame-grilled chicken products. After evaluation of the steak products during the first quarter of 2010, the Company added steak as a permanent choice to our menu in the second quarter of 2010. As of the 39 weeks ended September 29, 2010, steak products were approximately 5.8% of our total sales mix as a percent of restaurant sales.

We have “refreshed” the majority of our company-owned stores to improve the appearance of our units. The “refresh” scope of work may have included a fresh coat of paint to the interior and/or exterior, wallpaper, restroom finishes, replacing lighting fixtures and ceilings and replacing tables, chairs, and artwork in the restaurants. As of September 29, 2010, the Company had “refreshed” approximately 115 restaurants. Our total cost to “refresh” Company stores was $3.1 million. Additionally, 150 franchisee-owned restaurants have been scoped for the “refresh” program. In order to conserve capital until our operating results improve, the Company believes this is the best alternative to a complete and more expensive “re-image” program at this time.

Our operating results for the 39 weeks ended September 30, 2009 and September 29, 2010 are expressed as a percentage of restaurant revenue below:

		39 Weeks Ended
		September 30, 2009				September 29,   2010
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