SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2010
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
EPL Intermediate, Inc.
(Exact name of registrant as specified in its charter)
(Registrant’s telephone number, including area code)
(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.
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.
TABLE OF CONTENTS
Item 1. Financial Statements
EPL INTERMEDIATE, INC.
(A Wholly Owned Subsidiary of El Pollo Loco Holdings, Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Amounts in thousands)
EPL INTERMEDIATE, INC.
(A Wholly Owned Subsidiary of El Pollo Loco Holdings, Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Amounts in thousands, except share data)
EPL INTERMEDIATE, INC.
(A Wholly Owned Subsidiary of El Pollo Loco Holdings, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
See notes to condensed consolidated financial statements (unaudited).
EPL INTERMEDIATE, INC.
(A Wholly Owned Subsidiary of El Pollo Loco Holdings, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
EPL INTERMEDIATE, INC.
(A Wholly Owned Subsidiary of El Pollo Loco Holdings, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
EPL INTERMEDIATE, INC.
(A Wholly-Owned Subsidiary of El Pollo Loco Holdings, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited. EPL Intermediate, Inc. (“Intermediate”) and its wholly owned subsidiary El Pollo Loco, Inc. (“EPL” and jointly with Intermediate, the “Company,”) prepared these condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America for interim financial information and Article 10 of Regulation S-X. In compliance with those instructions, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.
The accompanying unaudited condensed consolidated financial statements include all adjustments (consisting of normal recurring adjustments and accruals) that management considers necessary for a fair presentation of its financial position and results of operations for the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the entire year or any other future periods.
The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 30, 2009 (File No. 333-115644) as filed with the Securities and Exchange Commission (the “Commission”) on March 30, 2010.
Intermediate is a wholly-owned subsidiary of El Pollo Loco Holdings, Inc. (“Holdings”), which is a wholly owned indirect subsidiary of Chicken Acquisition Corp. (“CAC”) which is 99% owned by Trimaran Pollo Partners, LLC (the “LLC”). The Company’s activities are performed principally through Intermediate’s wholly-owned subsidiary, EPL, which develops, franchises, licenses, and operates quick-service restaurants under the name El Pollo Loco®.
The Company uses a 52-53 week fiscal year ending on the last Wednesday of the calendar year. In a 52-week fiscal year, each quarter includes 13 weeks of operations; in a 53-week fiscal year, the first, second and third quarters each include 13 weeks of operations and the fourth quarter includes 14 weeks of operations. Fiscal year 2009, which ended December 30, 2009, was a 52-week fiscal year. Fiscal year 2010, which will end December 29, 2010, is also a 52-week year.
Concentration of credit risk
The Company maintains all of its cash at one commercial bank. Balances on deposit are insured by the Federal Deposit Insurance Corporation (FDIC) up to specified limits. The Company’s cash balances in excess of the FDIC limits are uninsured.
The Company’s principal liquidity requirements are to service its debt and meet capital expenditure needs. At September 29, 2010, the Company’s total debt was $268.7 million. Assuming the Company does not repurchase any of the outstanding 2014 Notes (as defined below), in May 2011 Intermediate is required to make a mandatory redemption of a portion of its 2014 Notes at an estimated cost of approximately $10.6 million along with the interest payment that will then be due. The Company’s ability to make payments on its indebtedness and to fund planned capital expenditures will depend on available cash and its ability to generate adequate cash flows in the future, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond the Company’s control. Based on current operations, the Company believes that its cash flow from operations, available cash of $12.1 million at September 29, 2010, available borrowings under the credit facility (which availability was approximately $6.1 million at September 29, 2010), and funds from CAC will be adequate to meet the Company’s liquidity needs for the next 12 months. Under the covenants governing the Company’s outstanding Notes, EPL is limited on the amount that it can distribute to Intermediate, including amounts that Intermediate could use to fund its debt service. The Company’s results of operations as well as current economic and constrained liquidity conditions could make it more difficult or costly to obtain additional debt financing or to refinance its existing debt when it becomes necessary (assuming such financing is then available to the Company), or could otherwise make alternative sources of liquidity or financing costly or unavailable.
As of December 30, 2009 and September 29, 2010, the Company had recorded $0.1 million as restricted cash on the accompanying condensed consolidated balance sheet. This amount serves as collateral to Bank of America for the Company’s Bank of America company credit cards as of September 29, 2010 as the Company transferred its banking relationship from Bank of America to another commercial bank.
4. Other Intangible Assets and Liabilities
Other intangible assets and liabilities consist of the following (in thousands):
Favorable leasehold interest represents the asset in excess of the approximate fair market value of the leases. The amount is being amortized over the approximate average life of the leases and is shown as other intangible assets-net on the accompanying condensed consolidated balance sheets.
Unfavorable leasehold interest liability represents the liability in excess of the approximate fair market value of the leases. The amount is being amortized over the approximate average life of the leases. This amount is shown as other intangible liabilities-net on the accompanying condensed consolidated balance sheets. Net amortization for other intangible assets and liabilities was $201,000 for the 39-week period ended September 30, 2009 and $254,000 for the 39-week period ended September 29, 2010.
The estimated net amortization credits for the Company’s favorable and unfavorable leasehold interests for each of the five succeeding fiscal years is as follows (in thousands):
5. Asset Impairment
The Company reviews its long-lived assets for impairment on a restaurant-by-restaurant basis whenever events or changes in circumstances indicate that the carrying value of certain assets may not be recoverable. If the Company concludes that the carrying value of certain assets will not be recovered based on expected undiscounted future cash flows, an impairment write-down is recorded to reduce the assets to their estimated fair value. As a result of this review, the Company recorded an impairment charge of approximately $2.0 million in March 2009 for two under-performing company-operated stores that continue to be operated and $1.2 million in September 2009 for four under-performing company-operated stores of which three continue to be operated. The Company recorded an impairment charge of approximately $1.3 million in June 2010 for one under-performing company-operated store that continues to be operated and $0.2 million in September 2010 for one under-performing company store that continues to be operated. These impairment charges are included in other operating expenses in the accompanying condensed consolidated statements of operations.
6. Fair Value Measurement
The Company’s financial assets and liabilities, which include financial instruments as defined by Accounting Standards Codification (ASC) 820 Fair Value Measurements and Disclosures, to Certain Financial Instruments, include cash and cash equivalents, restricted cash, accounts receivable, accounts payable and certain accrued expenses, long-term debt and derivatives. The Company believes the carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and certain accrued expenses approximate fair value due to their short term maturities. Long term debt is considered by the Company to be representative of current market rates. Accordingly, the Company estimates that the recorded amounts approximate fair market value.
As of September 29, 2010, options to purchase 277,633 shares of common stock of CAC were outstanding, including 58,606 options that were fully vested. The remaining options partially vest upon the Company’s attaining annual financial or other goals, with the remaining unvested portion vesting on the sixth or seventh anniversary of the grant date or vesting 100% upon the occurrence of an initial public offering of at least $50 million or a change in control of CAC. All options were granted with an exercise price equal to the fair value of the common stock on the date of grant.
Changes in stock options for the thirty-nine weeks ended September 29, 2010 are as follows:
The intrinsic value is calculated as the difference between the estimated market value as of September 29, 2010 and the exercise price of options that are outstanding and exercisable.
As of September 29, 2010, there was total unrecognized compensation expense of $2.2 million related to unvested stock options, which the Company expects to recognize over a weighted-average period of 2.7 years or earlier in the event of an initial public offering of our common stock or change in control.
In accordance with the Restricted Stock Plan adopted in 2008, the Company granted 404 shares in 2009 of which 50% vested in January 2010 and granted 598 shares in the first quarter of 2010, none of which have vested. The restricted stock expense recorded in the thirty-nine weeks ended September 29, 2010 related to these vested shares was immaterial.
1,000 shares of common stock of CAC were issued to a director during the second quarter of 2010. In accordance with this issuance, compensation expense of $46,000 was recognized during the second quarter of 2010.
As previously disclosed in earlier reports filed with the Securities and Exchange Commission, the Company entered into an agreement in the fourth quarter of 2009 to settle for $8.0 million a purported class action lawsuit brought by former managers Haroldo Elias, Marco Ramirez and Javier Rivera. The Company funded the settlement on January 14, 2010 and the Superior Court of the State of California, County of Los Angeles, granted final approval of the class wide settlement and entered Final Judgment at a hearing on April 20, 2010. This settlement also included and settled the previously disclosed purported class action complaint filed by Salvador Amezcua. Total payments related to this case were $8.7 million.
In April 2007, Dora Santana filed a purported class action in state court in Los Angeles County on behalf of all “Assistant Shift Managers.” Plaintiff alleges wage and hour violations including working off the clock, failure to pay overtime, and meal break violations on behalf of the purported class, currently defined as all Assistant Managers from April 2003 to present. The parties have agreed to settle this matter for approximately $0.8 million and have executed a Settlement Agreement. This amount was fully accrued for in the prior year and is included in the accompanying condensed consolidated balance sheets in accounts payable as of September 29, 2010. The Court granted final approval of this settlement in August 2010 and the settlement was funded on October 25, 2010.
On May 30, 2008, Jeannette Delgado, a former Assistant Manager filed a purported class action on behalf of all hourly (i.e. non-exempt) employees of EPL in state court in Los Angeles County alleging violations of certain California labor laws and the California Business and Professions Code including failure to pay overtime, failure to provide meal periods and rest periods and unfair business practices. By statute, the purported class extends back four years, to May 30, 2004. Plaintiff’s requested remedies include compensatory and punitive damages, injunctive relief, disgorgement of profits and reasonable attorneys’ fees and costs. The parties have agreed to settle this matter for approximately $1.9 million and have executed a Settlement Agreement. This amount was accrued for in the prior year and is included in the accompanying condensed consolidated balance sheets in accounts payable as of September 29, 2010. On October 28, 2010, the Judge ruled that the settlement was fair and granted final approval upon successful notice to additional class members and a determination of the fees due to the settlement administrator. A final approval hearing is set for January 7, 2011.
Martin Penaloza, a former Assistant Manager, filed a purported class action on May 26, 2009 in Superior Court in Orange County, California. The claims, requested remedies, and potential class in this case overlap those in the Delgado lawsuit described above and will be included in that settlement.
In September 2008, American International Specialty Lines Insurance Company (AISLIC) from whom the Company acquired excess insurance coverage, filed an action for declaratory judgment seeking to have the court determine that it is not required to indemnify EPL for any amounts awarded against it (or paid in settlement) in connection’s with the previously settled EPL-Mexico v. EPL-USA trademark litigation. In July 2010, the parties agreed to settle this matter for payment to the Company of $75,000 and a waiver of fees and costs by AISLIC. The Company received payment from AISLIC on July 28, 2010.
The Company is also involved in various other claims and legal actions that arise in the ordinary course of business. We do not believe that the ultimate resolution of these other actions will have a material adverse effect on our financial position, results of operations, liquidity and capital resources. A significant increase in the number of claims or an increase in amounts owing under successful claims could materially adversely affect our business, financial condition, results of operation and cash flows.
The Company has long-term beverage supply agreements with certain major beverage vendors. Pursuant to the terms of these arrangements, marketing rebates are provided to the Company and its franchisees from the beverage vendors based upon the dollar volume of purchases for system-wide restaurants which will vary according to their demand for beverage syrup and fluctuations in the market rates for beverage syrup. These contracts have terms extending into 2011 and 2012 with an estimated Company obligation totaling $3.8 million.
In March 2010, EPL executed a chicken supply contract with a vendor that has pricing relatively flat compared to the prior year’s expired contract. This agreement has a balance of approximately 17 months remaining for chicken purchases totaling approximately $15.2 million. Additionally, EPL has a balance of approximately 5 months remaining on contracts with certain other vendors for chicken totaling approximately $12.0 million.
EPL has a fixed price steak supply contract with a vendor that was entered into in January 2010. The contract requires that the Company purchase a quantity totaling approximately $3.7 million and expires on December 31, 2010. At September 29, 2010, our remaining obligation under the contract was approximately $0.9 million.
Contingent Lease Obligations
As a result of assigning our interest in obligations under real estate leases in connection with the sale of Company-owned restaurants to some of our franchisees, we are contingently liable on six lease agreements. These leases have various terms, the latest of which expires in 2015. As of September 29, 2010, the potential amount of undiscounted payments we could be required to make in the event of non-payment by the primary lessee was approximately $1.1 million. The present value of these potential payments discounted at our estimated pre-tax cost of debt at September 29, 2010 was approximately $0.8 million. Our franchisees are primarily liable on the leases. We have cross-default provisions with these franchisees that would put them in default of their franchise agreement in the event of non-payment under the leases. We believe these cross-default provisions reduce the risk that we will be required to make payments under these leases. Accordingly, no liability has been recorded on the Company’s books related to this guarantee.
9. Senior Secured Notes (2012 Notes)
On May 22, 2009, EPL issued $132.5 million aggregate principal amount of 11¾% senior secured notes due December 1, 2012 (the “2012 Notes”) in a private placement. EPL sold the 2012 Notes at an issue price equal to 98.0% of the principal amount, resulting in gross proceeds to EPL of $129.9 million before expenses and fees. At September 29, 2010, the Company had $130.9 million outstanding in aggregate principal amount of the 2012 Notes. The principal value of the 2012 Notes will increase (representing accretion of original issue discount) from the date of original issuance so that the accreted value of the 2012 Notes will be equal to the full principal amount of $132.5 million at maturity. Interest is payable each year in June and December beginning December 1, 2009. The 2012 Notes are guaranteed by Intermediate and are secured by a second priority lien on substantially all of the Company’s assets, which includes all of the outstanding common stock of EPL. The 2012 Notes may be redeemed at a premium, at the discretion of EPL, after March 1, 2011, or sooner in connection with certain equity offerings. If EPL undergoes certain changes of control, each holder of the notes may require EPL to repurchase all or a part of its notes at a price of 101% of the principal amount. The Indenture governing the 2012 Notes contains a number of covenants that, among other things, restrict, subject to certain exceptions, EPL’s ability to incur additional indebtedness, pay dividends or certain restricted payments, make certain investments, sell assets, create liens, merge and enter into certain transactions with its affiliates. As of September 29, 2010, EPL’s fixed charge coverage ratio was 1:19 to 1:00 which does not meet the coverage ratio of 2:00 to 1:00 which EPL must meet in order to incur additional indebtedness (other than indebtedness under our revolving credit facility) and make dividend and other restricted payments in an aggregate amount in excess of $2.9 million. A failure to comply with this ratio affects only EPL's ability to incur additional indebtedness and make certain dividend and other restricted payments, but does not constitute a default under the 2012 notes.
EPL incurred direct finance costs of approximately $9.2 million in connection with this offering and registration of these notes. These costs have been capitalized and are included in other assets in the accompanying condensed consolidated balance sheets, and the related amortization is reflected as a component of interest expense in the accompanying condensed consolidated statement of operations. The Company used the net proceeds from the 2012 Notes to repay certain indebtedness and for general corporate purposes. In December 2009, we completed the exchange of these notes for registered, publicly tradable notes that have substantially identical terms of these notes.
10. Senior Unsecured Notes Payable (2013 Notes)
EPL has outstanding $106.5 million aggregate principal amount of 11¾% senior notes due November 15, 2013 (the “2013 Notes”). Interest is payable in May and November beginning May 15, 2006. The 2013 Notes are unsecured, are guaranteed by Intermediate, and may be redeemed at a premium, at the discretion of the issuer. The indenture contains certain provisions which may prohibit EPL’s ability to incur additional indebtedness, sell assets, engage in transactions with affiliates, and issue or sell preferred stock and make certain dividends and other restricted payments, among other items. As of September 29, 2010, EPL’s fixed charge coverage ratio was 1:11 to 1:00 which does not meet the coverage ratio of 2:00 to 1:00 which EPL must meet in order to incur additional indebtedness (other than indebtedness under our revolving credit facility) and make dividend and other restricted payments in an aggregate amount in excess of $2.9 million. A failure to comply with this ratio affects only EPL’s ability to incur additional indebtedness and make certain dividend and other restricted payments, but does not constitute a default under the 2013 notes.
In October 2006, EPL completed the exchange of the 2013 Notes for registered, publicly tradable notes that have substantially identical terms as the 2013 Notes. The costs incurred in connection with the offering of the 2013 Notes have been capitalized and are included in other assets in the accompanying condensed consolidated balance sheets, and the related amortization is reflected as a component of interest expense in the accompanying condensed consolidated financial statements. The Company used the proceeds from the 2013 Notes to refinance certain indebtedness of the Company.
The Company purchased $2.0 million in principal amount of the 2013 Notes at a price of $1.5 million in March 2009. The net purchase price was 74% of the principal amount of such notes and resulted in a net gain of $0.5 million which is included in other income in the condensed consolidated statement of operations. The gain of $0.5 million is net of the write-off of prorated deferred finance costs of $0.1 million.
On May 22, 2009, EPL entered into a credit agreement (the “Credit Facility”) with Intermediate as guarantor, Jefferies Finance LLC, as administrative and syndication agent and the various lenders (see subsequent event Note 17). The Credit Facility provides for a $12.5 million revolving line of credit with borrowings (including obligations in respect of revolving loans and letters of credit) limited at any time to the lesser of (i) $12.5 million and (ii) the Company’s consolidated cash flow for the most recently completed trailing twelve consecutive months and, in no event, shall obligations in respect to letters of credit exceed an amount equal to $10 million. Utilizing the Credit Facility, $6.4 million of letters of credit were issued and outstanding as of September 29, 2010.
The Credit Facility bears interest, payable quarterly, at an Alternate Base Rate (as defined in the Credit Facility) or LIBOR, at EPL's option, plus an applicable margin. The applicable margin rate is 5.50% with respect to LIBOR and 4.50% with respect to Alternate Base Rate advances. The Credit Facility is secured by a first priority lien on substantially all of the Company’s assets and is guaranteed by Intermediate. The Credit Facility matures on July 22, 2012.
The Credit Facility contains a number of covenants that, among other things, restrict, subject to certain exceptions, the Company’s ability to (i) incur additional indebtedness or issue preferred stock; (ii) create liens on assets; (iii) engage in mergers or consolidations; (iv) sell assets; (v) make certain restricted payments; (vi) make investments, loans or advances; (vii) make certain acquisitions; (viii) engage in certain transactions with affiliates; (ix) change the Company’s lines of business or fiscal year; and (x) engage in speculative hedging transactions. In addition, the Credit Facility requires the Company to maintain, on a consolidated basis, a minimum level of consolidated cash flow at all times. As of September 29, 2010, the Company was in compliance with all of the financial covenants contained in the Credit Facility and had $6.1 million available for borrowings under the revolving line of credit.
12. PIK Notes (2014 Notes)
At September 29, 2010, Intermediate had $29.3 million outstanding in aggregate principal amount, along with $0.3 million of the premium discussed below, of the 14½% PIK notes due 2014. No cash interest accrued on these notes prior to November 15, 2009. Instead, the principal value of these notes increased (representing accretion of original issue discount) from the date of original issuance until but not including November 15, 2009 at a rate of 14½% per annum compounded annually, so that the accreted value of these notes on November 15, 2009 was equal to the full principal amount of $29.3 million due at maturity.
Beginning November 15, 2009, cash interest accrued on these notes at an annual rate of 14½% per annum payable semi-annually in arrears on May 15 and November 15 of each year, beginning May 15, 2010. Principal is due on November 15, 2014. The indenture governing these notes restricts Intermediate’s and EPL’s ability to, among other items, incur additional indebtedness, sell assets, engage in transactions with affiliates and issue or sell preferred stock. The indenture governing these notes also limits the ability of Intermediate or EPL to make payments to El Pollo Loco Holdings, Inc., the immediate parent corporation of Intermediate. As of September 29, 2010, the Company’s fixed charge coverage ratio was 1:11 to 1:00 which does not meet the coverage ratio of 2:00 to 1:00 which the Company must meet in order to incur additional indebtedness (other than indebtedness under our revolving credit facility) and make dividend and other restricted to payments in an aggregate amount in excess of $2.9 million. A failure to comply with this ratio affects only the Company’s ability to incur additional indebtedness and make certain dividend and other restricted payments and does not constitute a default under the 2014 notes.
These notes are effectively subordinated to all existing and future indebtedness and other liabilities of EPL. These notes are unsecured and are not guaranteed. If any of these notes are outstanding at May 15, 2011, Intermediate is required to redeem for cash a portion of each note then outstanding at 104.5% of the accreted value of such portion of such note, plus accrued and unpaid interest, if any. This payment is currently estimated to be approximately $10.6 million. Additionally, Intermediate may, at its discretion, redeem for a premium any or all of these notes, subject to certain provisions contained in the indenture governing these notes. As a holding company, the stock of EPL constitutes Intermediate’s only material asset. Consequently, EPL conducts all of the Company’s consolidated operations and owns substantially all of the consolidated operating assets. Intermediate has no material assets or operations; the Company’s principal source of the cash required to pay its obligations is the cash that EPL generates from its operations. EPL is a separate and distinct legal entity, has no obligation to make funds available to Intermediate, and the 2013 notes (see Note 10) and the 2012 Notes (see Note 9), have restrictions that limit distributions or dividends that may be paid by EPL to Intermediate. See Note 14 for condensed consolidating financial statements of Intermediate and EPL.
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.
14. Financial Information for Parent Guarantor and Subsidiary
The following presents condensed consolidating financial information for the Company, segregating: (1) Intermediate, the parent which has unconditionally guaranteed, jointly and severally the 2012 Notes and 2013 Notes and has pledged its investment in the common stock of EPL as collateral for the 2012 Notes; and (2) EPL, the issuer of the 2012 Notes that also unconditionally guaranteed, jointly and severally the 2012 Notes. EPL is a wholly owned subsidiary of Intermediate.
For the Thirteen Weeks Ended September 29, 2010
For the Thirteen Weeks Ended September 30, 2009
For the Thirty-nine Weeks Ended September 29, 2010
For the Thirty-nine Weeks Ended September 30, 2009
As of September 29, 2010
As of December 30, 2009
15. New Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2009-13, Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force, which amends the guidance in ASC 605, Revenue Recognition. ASU No. 2009-13 eliminates the residual method of accounting for revenue on undelivered products and instead, requires companies to allocate revenue to each of the deliverable products based on their relative selling price. In addition, this ASU expands the disclosure requirements regarding multiple-deliverable arrangements. ASU No. 2009-13 will be effective for revenue arrangements entered into during fiscal years beginning on or after June 15, 2010. The Company’s adoption of ASU No. 2009-13 is not expected to have a material impact on the Company’s financial position or results of operations.
16. Restatement of Condensed Consolidated Financial Statements
We have restated our accompanying 13 weeks ended and 39 weeks ended September 30, 2009 Condensed Consolidated Statements of Operations and 39 weeks ended September 29, 2009 Condensed Consolidated Statements of Cash Flows from amounts previously reported to correct an income tax error associated with the accounting for a full valuation allowance recorded during the second and third quarters of 2009. The error was due to incorrectly classifying certain intangible assets as indefinite-lived assets when the full valuation allowance was recorded.
The correction of the error, as reflected in our 13 weeks ended and 39 weeks ended September 30, 2009 Condensed Consolidated Statements of Operations, decreased our provision for income taxes and net loss for the period by $3,116,000. This correction also decreased our net loss and deferred income taxes on the Condensed Consolidated Statements of Cash Flows for the 39 weeks ended September 30, 2009 by $3,116,000 as well.
The following is a summary of effects of these changes on the 2009 Condensed Consolidated Financial Statements:
On October 21, 2010, the Company’s Credit Facility was assigned from Jefferies Finance LLC to GE Capital Financial, Inc. In connection with this assignment the parties entered into an Agency and Assignment Agreement and Amendment No. 1 to the Credit Agreement and the Other Loan Documents. The terms and conditions of the Credit Facility remain essentially the same as described in Note 11.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion together with our condensed consolidated financial statements and related notes thereto included elsewhere in this filing. The following management’s discussion and analysis gives effect to the restatement discussed in Note 16 to the Condensed Consolidated Financial Statements.
Certain statements contained within this report may be deemed to constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company intends that all such statements be subject to the safe harbor provisions contained in those sections. Forward-looking statements are those that do not relate solely to historical fact. They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events. Forward-looking statements generally contain words such as “believe,” “anticipate,” “expect,” “estimate,” “intend,” “project,” “plan,” “will,” “should,” “may,” “could” or words or phrases of similar meaning.
These forward-looking statements reflect our current views with respect to future results, performance, achievements or events. Readers are cautioned that such forward-looking statements are subject to risks and uncertainties and many important factors, including factors outside of the control of the Company, could cause actual results, performance, achievements or events to differ materially from those discussed in the forward-looking statements. Except for our ongoing obligation to disclose material information as required by federal securities laws, we do not intend to update you concerning any future revisions to any forward-looking statements to reflect events or circumstances occurring after the date of this report.
Factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include but are not limited to the adverse impact of economic conditions on our operating results and financial condition, on our ability to comply with the terms and covenants of our debt agreements and on our ability to pay or to refinance our existing debt or to obtain additional financing; our substantial level of indebtedness; food-borne-illness incidents; negative publicity, whether or not valid; increases in the cost of chicken or other product costs; our dependence upon frequent deliveries of food and other supplies; our vulnerability to changes in consumer preferences and economic conditions; our sensitivity to events and conditions in the greater Los Angeles area, our largest market; our ability to compete successfully with other quick service and fast casual restaurants; our ability to expand into new markets; our reliance on our franchisees, who have also been adversely impacted by the recession; matters relating to labor laws and the adverse impact of related litigation, including wage and hour class actions; our ability to support our franchise system; our ability to renew leases at the end of their term; the impact of applicable federal, state or local government regulations; our ability to protect our name and logo and other proprietary information; risks arising from the delay or inability to hire new executives for our currently vacant President/Chief Executive Officer and Chief Marketing Officer positions since the Company depends on the unique abilities and knowledge of its officers; litigation we face in connection with our operations and other factors, uncertainties and risks, including those outside of our control. Actual results may differ materially due to various factors, uncertainties and risks, including those described in our Annual Report on Form 10-K (File No. 333-115644) as filed with the Securities and Exchange Commission on March 30, 2010, as updated from time to time in our quarterly reports and current reports filed with the Commission and as updated in this Form 10-Q. Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, the Company cannot assure the reader that the results, performance, achievements or events contemplated by the forward-looking statements will be realized in the timeframe anticipated or at all. In light of the significant uncertainties inherent in forward-looking statement included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the Company’s objectives or plans will be achieved. Accordingly, readers are cautioned not to place undue reliance on such forward-looking statements.
We use a 52-53 week fiscal year ending on the last Wednesday of the calendar year. In a 52-week fiscal year, each quarter includes 13 weeks of operations; in a 53-week fiscal year, the first, second and third quarters each include 13 weeks of operations and the fourth quarter includes 14 weeks of operations. Fiscal year 2009, which ended December 30, 2009, was a 52-week fiscal year. Fiscal year 2010 which will end December 29, 2010, is also a 52-week fiscal year.
References to “our restaurant system” or “system-wide” mean both company-operated and franchised restaurants. Unless otherwise indicated, references to “our restaurants” or results or statistics attributable to one or more restaurants without expressly identifying them as company-operated, franchise or the entire restaurant system mean our company-operated restaurants only.
EPL Intermediate, Inc. (“Intermediate”) through its wholly-owned subsidiary El Pollo Loco, Inc. (“EPL” and together with Intermediate, the “Company,” “we,” “us” and “our”) owns, operates and franchises restaurants specializing in marinated flame-grilled chicken. Our distinct menu, inspired by the kitchens of Mexico, features our authentic recipe flame-grilled chicken, which along with our service format and value price points, serves to differentiate our unique brand. In the first half of 2010, we introduced steak products as an additional choice for our customers. We offer high-quality, freshly-prepared food commonly found in fast casual restaurants, while at the same time providing the value and convenience typically available at traditional quick serve restaurant or QSR chains. Our restaurants are located principally in California, with additional restaurants in Arizona, Colorado, Connecticut, Georgia, Illinois, Missouri, Nevada, New Jersey, Oregon, Texas, Utah, and Virginia. Our typical restaurant is a freestanding building ranging from approximately 2,200 to 2,600 square feet with seating for approximately 60 customers and offering drive-thru convenience.
Our store counts at September 30, 2009, September 29, 2010 and December 30, 2009 are set forth below:
El Pollo Loco Restaurants
During the 39 weeks ended September 29, 2010, the Company did not open any new restaurants and closed two restaurants. During this same 39 week period, our franchisees opened two new restaurants and closed three restaurants.
We plan to open one company-operated restaurant in the fourth quarter of fiscal 2010. Our franchisees opened a total of three new restaurants in fiscal 2010 (the third restaurant opened on October 19, 2010). The growth in new restaurant openings and the rate of restaurant closings have been, and are expected to continue to be, negatively impacted by the economic climate, as discussed below. In response to this challenging economic environment, we are adjusting our growth strategy for the future to focus on new proto-type designs which are expected to have lower construction costs than our past restaurant designs.
At the end of the third quarter of 2010, we had 19 system-wide restaurants open in markets east of the Rockies. The 19 open stores are currently experiencing a wide range of sales volumes, and a majority of them have sales volumes that are significantly less than the chain average due to the lack of brand awareness in the new markets.
Our revenue is derived from two primary sources, company-operated restaurant revenue and franchise revenue, the latter of which is comprised principally of franchise royalties and to a lesser extent franchise fees and sublease rental income. A common measure of financial performance in the restaurant industry is “same-store sales.” A restaurant enters our comparable restaurant base for the calculation of same-store sales the first full week after the 15-month anniversary of its opening. For the 13 weeks ended September 29, 2010, same-store sales for system-wide restaurants decreased 2.2% compared to the corresponding period in 2009. For the 39 weeks ended September 29, 2010, same-store sales for system-wide restaurants decreased 4.7% compared to the corresponding period in 2009. System-wide same-store sales include same-store sales at all company-owned stores and franchise-owned stores, as reported by franchisees. We use system-wide sales information in connection with store development decisions, planning and budgeting analyses. This information is useful in assessing consumer acceptance of our brand and facilitates an understanding of financial performance as our franchisees pay royalties (included in franchise revenue) and contribute to advertising pools based on a percentage of their sales. Same-store sales at company-operated restaurants decreased 1.1% for the 13 weeks ended September 29, 2010 compared to the 13 weeks ended September 30, 2009. Same-store sales at company-operated restaurants decreased 3.3% for the 39 weeks ended September 29, 2010 compared to the 39 weeks ended September 30, 2009.
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.
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.
Other operating expenses include restaurant other operating expense, franchise expense, and general and administrative expense.
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.
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.
Results of Operations
Our operating results for the 13 weeks ended September 30, 2009 and September 29, 2010 are expressed as a percentage of restaurant revenue below:
(1) General and administrative expenses as a percent of total operating revenue for 2009 and 2010 were 10.0% and 9.8%, respectively.
13 Weeks Ended September 29, 2010 Compared to 13 Weeks Ended September 30, 2009
Restaurant revenue remained flat at $63.7 million for the 13 weeks ended September 29, 2010 compared to the 13 weeks ended September 30, 2009. Adversely impacting restaurant revenue was a decrease of $0.7 million in restaurant revenue resulting from a 1.1% decrease in company-operated same-store sales for the 2010 period from the 2009 period. Restaurants enter the comparable restaurant base for same-store sales the first full week after that restaurant’s fifteen-month anniversary. The components of the company-operated comparable sales decrease were attributed to a transaction decrease of 2.1%, and a check average increase of 1.0%. Check average increased and the number of transactions decreased in the third quarter of 2010 compared to the third quarter of 2009 mainly due to deeper discount promotions in the third quarter of 2009 that increased traffic and lowered check averages in that period. Company-operated same-store sales continued to be impacted during the 2010 period by strong competition (mainly in discounts and promotions) and a general sales softness in the QSR industry due to higher unemployment, the challenging economic environment and other adverse economic and consumer confidence factors which we expect to continue through the remainder of 2010 and possibly into 2011. Another component of decreased restaurant revenue were the lost sales of $0.6 million from the closure of one and three company-operated restaurants in 2009 and 2010, respectively, of which one was managed by EPL through a management agreement with a franchisee. These decreases were offset by $0.9 million of revenue from four restaurants purchased from a franchisee in September 2009 and $0.4 million of revenue from three restaurants opened in fiscal 2009 that are not part of the company-operated same-store sales base.
Franchise revenue decreased $0.3 million, or 6.4%, to $4.5 million for the 13 weeks ended September 29, 2010 from $4.8 million for the 13 weeks ended September 30, 2009. This decrease is due primarily to lower franchise development fee income of $0.2 million and lower royalties of $0.1 million. The lower franchise development fee income is mainly attributable to the $0.2 million of income recognized in the 13 weeks ended September 30, 2009 due to a termination of one franchise development agreement. Royalties, which are based on sales, were slightly lower due to a 3.0% decrease in franchise-operated same-store sales for the 2010 period from the 2009 period. Franchise-operated same-store sales were impacted by the same adverse factors that affected company-operated same-store sales described above. Additionally, franchise revenue for the third quarter of 2010 was adversely impacted by the closure of one franchise unit in each of the first two quarters of 2010 and eight franchise unit closures in the third quarter of 2009. The decrease in royalty revenue due to closed units was partially offset by two franchise-operated stores opening in the third quarter of 2009 and one new restaurant opening in each of the second and third quarters of 2010, respectively.
Product costs decreased $0.7 million, or 3.2%, to $19.9 million for the 13 weeks ended September 29, 2010 from $20.6 million for the 13 weeks ended September 30, 2009. This decrease is a result of a $0.4 million net reduction in food cost and a $0.3 million decrease in non-ingredient items during the 2010 period compared to the 2009 period. The food cost decrease was due to lower costs for: chicken of $0.9 million, rice of $0.1 million and beans of $0.1 million. These lower commodity costs were partially offset by a $0.7 million increase in steak cost due to adding this additional protein in 2010. The non-ingredient costs decrease was mainly due to certain contracts for packaging items that were renewed in the first quarter of 2010 with favorable pricing compared to the prior year.
Product cost as a percentage of restaurant revenue was 31.2% for the 13 weeks ended September 29, 2010 compared to 32.3% for the 13 weeks ended September 30, 2009. This decrease resulted primarily from lower food and non-ingredient costs discussed above and less discounting in the current period. The decreases in product costs as a percentage of restaurant revenue were partially offset by the introduction in the first quarter of 2010 of our steak products which have lower gross margins than our overall chicken products.
Payroll and benefit expenses increased $0.7 million, or 4.4%, to $17.3 million for the 13 weeks ended September 29, 2010 from $16.6 million for the 13 weeks ended September 30, 2009. This increase was primarily a result of $0.6 million in higher workers’ compensation insurance expense in 2010 compared to the 2009 period as we experienced an increase in the current quarter in the number of workers’ compensation claims and there were reductions to the workers’ compensation reserves in the prior year period. Due to increased medical claims in the current quarter, our health insurance costs increased by $0.4 million in the 2010 period compared to the 2009 period. These increases were partially offset by lower labor costs of $0.2 million due to improved labor scheduling and lower bonuses of $0.1 million.
As a percentage of restaurant revenue, payroll and benefit costs increased 1.1% to 27.2% for the 2010 period from 26.1% for the 2009 period mainly due to the reason mentioned above.
Depreciation and amortization decreased $0.3 million or 8.6%, to $3.0 million for the 13 weeks ended September 29, 2010 from $2.7 million for the 13 weeks ended September 30, 2009. This decrease was mainly attributed to a portion of our point of sale equipment in our restaurants being fully depreciated and no longer having amortization of our franchise network intangible asset that was fully impaired in 2009. These decreases were partially offset by depreciation from additional restaurants opened during the latter part of 2009.
Depreciation and amortization as a percentage of restaurant revenue decreased to 4.3% for the 13 weeks ended September 29, 2010 compared with 4.7% for the 13 weeks ended September 30, 2009 mainly due to the reasons noted above.
Other operating expenses include restaurant other operating expense, franchise expense, and general and administrative expense.
Restaurant other operating expense, which includes utilities, repair and maintenance, advertising, property taxes, occupancy and other operating expenses, decreased $0.3 million, or 1.8%, to $15.4 million for the 13 weeks ended September 29, 2010 from $15.7 million for the 13 weeks ended September 30, 2009. This decrease is mainly attributed to the reasons noted below.
Restaurant other operating expense as a percentage of restaurant revenue decreased to 24.2% for the 2010 period from 24.7% for the 2009 period. The decrease was primarily due to lower general liability insurance expense of $0.3 million as a result of an overall reduction in the number of general liability claims. Additionally, expenses for restaurant operating supplies decreased $0.1 million due to timing of purchases and a $0.1 million decrease in pre-opening expenses which was due to no new stores opening in the third quarter of 2010 compared to two new store openings and four units that transferred from a franchisee to the company in the third quarter of 2009. These decreases were partially offset by higher natural gas and electricity expenses of $0.2 million due primarily to increased rates.
Franchise expense consists primarily of rent expense that we pay to landlords associated with leases under restaurants we are subleasing to franchisees. This expense usually fluctuates primarily as subleases expire and to some degree based on rents that are tied to a percentage of sales calculation. Franchise expense was relatively flat at $1.2 million for the 13 weeks ended September 29, 2010.
General and administrative expense decreased $0.2 million, or 2.2%, to $6.6 million for the 13 weeks ended September 29, 2010 from $6.8 million for the 13 weeks ended September 30, 2009. The decrease was attributed to a decrease in restaurant asset impairment charges in the 2010 period of $1.0 million from the 2009 period and a $0.2 million decrease in severance expense. These decreases were partially offset by a $0.5 million increase in outside consulting services, a $0.2 million increase in the closed store reserve for one store that was closed in the third quarter of 2010, a $0.2 million increase in the corporate bonus accrual and higher health insurance costs of $0.1 million mainly due to increased medical claims.
General and administrative expense as a percentage of total revenue decreased 0.2% to 9.8% for the 13 weeks ended September 29, 2010 from 10.0% for the 13 weeks ended September 30, 2009. The decrease was due to the reduced general and administrative expense noted above.
Interest expense, net of interest income, increased $0.4 million, or 4.8%, to $9.5 million for the 13 weeks ended September 29, 2010 from $9.1 million for the 13 weeks ended September 30, 2009.
Despite having a loss for the 13 weeks ended September 29, 2010 and September 30, 2009, we had an income tax provision of $0.2 million and $0.3 million, respectively primarily related to the effect of changes in our deferred taxes and the related effect of maintaining a full valuation allowance against certain of our deferred tax assets as of September 29, 2010.
As a result of the factors noted above, we had a net loss of $4.8 million for the 13 weeks ended September 29, 2010 compared to a net loss of $4.6 million for the 13 weeks ended September 30, 2009.
Our operating results for the 39 weeks ended September 30, 2009 and September 29, 2010 are expressed as a percentage of restaurant revenue below: