El Pollo Loco 2015 Annual Report Download - page 25

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Table of Contents
(iii) contributions to our advertising funds, and (iv) other fees. In fiscal 2014, of our total franchise revenue, our top 10 franchisees accounted for
approximately 58%, and the Significant Franchisees accounted for approximately 30%. Bankruptcies by our franchisees could (i) prevent us
from terminating their franchise agreements, so that we could offer their territories to other franchisees, (ii) negatively impact our market share
and operating results, as we might have fewer well-performing restaurants, and (iii) adversely impact our ability to attract new franchisees.
As of December 31, 2014, we had executed development agreements that represent commitments to open 41 franchised restaurants at various
dates through 2019. Although we have developed criteria to evaluate and screen prospective developers and franchisees, we cannot be certain
that the developers and franchisees that we select will have the business acumen or financial resources necessary to open and operate successful
franchises in their franchise areas, and state franchise laws may limit our ability to terminate or modify these franchise arrangements. Moreover,
franchisees may fail to operate their restaurants in fashions consistent with our standards and requirements, or to hire and train qualified
managers and other restaurant personnel. Failures of developers and franchisees to open and operate franchises successfully could materially and
adversely affect our reputation, brand, business, financial condition, results of operations, cash flows, and ability to attract prospective
franchisees.
Franchisees may not have access to the financial or management resources that they need to open the restaurants contemplated by their
agreements with us, or be able to find suitable sites on which to develop those restaurants. Franchisees may not be able to negotiate acceptable
lease or purchase terms for restaurant sites, obtain necessary permits and government approvals, or meet construction schedules. Any of these
problems could slow our growth and reduce our franchise revenue. Additionally, our franchisees typically depend on financing from banks and
other financial institutions, which may not always be available to them, in order to construct and open new restaurants. For these reasons,
franchisees operating under development agreements may not be able to meet the new restaurant opening dates required under those agreements.
Also, we sublease certain restaurants to some existing California franchisees. If any such franchisees cannot meet their financial obligations
under their subleases, or otherwise fail to honor or default under the terms of their subleases, we will be financially obligated under a master
lease and could be materially and adversely affected.
In February 2011, one franchisee filed a petition for relief under Chapter 11 of the Bankruptcy Code in the Central District of California. The
resulting reorganization was completed in March 2013 and involved the sale of seven of the franchisee’s 13 restaurants located in the Central
Valley of California to new owners. All 13 restaurants continued to conduct business throughout the reorganization. The franchisee retained
ownership of six of the 13 restaurants owned by it prior to the bankruptcy, but closed one of those restaurants in August 2013, due to its inability
to renew the lease. The franchisee has the option to relocate that restaurant to a new site within a two-mile radius of the closed location or to
continue to pay monthly royalties pursuant to the terms of a settlement agreement entered into as part of the reorganization.
Another franchisee with two restaurants was placed into receivership in March 2013. One restaurant owned by that franchisee prior to being
placed into receivership was purchased by one of our largest franchisees in January 2014, and the second restaurant was sold to a new owner on
July 31, 2014. Both of the restaurants remained open during this process.
We have limited control with respect to the operations of our franchisees, which could have a negative impact on our business.
Franchisees are independent business operators. They are not our employees, and we do not exercise control over the day-to-day operations of
their restaurants. We provide training and support to franchisees, and set and monitor operational standards, but the quality of franchised
restaurants may be diminished by any number of factors beyond our control. Consequently, franchisees may fail to operate their restaurants in
fashions consistent with our standards and requirements, or to hire and train qualified managers and other restaurant personnel. If
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