El Pollo Loco 2015 Annual Report Download - page 113

Table of Contents
incurred by the Sponsor Advisors in connection with such services, if the Sponsor Advisors determined to provide such services. The
management agreement was terminated as of our IPO.
Income Tax Receivable Agreement
We expect to be able to utilize net operating losses and other tax attributes that arose prior to our IPO, assuming generation of future income.
These net operating loss carryforwards and other tax attributes will reduce the amount of tax that we and our subsidiaries would otherwise be
required to pay in the future.
We have entered into the TRA with our pre-IPO stockholders, which provides for payment by us to our pre-IPO stockholders of 85% of the
amount of cash savings, if any, in federal, state, local, and foreign income tax that we and our subsidiaries actually realize (or are deemed to
realize in the case of an early termination by us or a change of control, as discussed below) as a result of the utilization of our net operating
losses and other tax attributes attributable to periods prior to our IPO together with interest accrued at a rate of LIBOR plus 200 basis points
from the date that the applicable tax return is due (without extension) until paid.
For purposes of the TRA, cash savings in income tax is computed by comparing our actual income tax liability to the amount of such taxes that
we would have been required to pay had we not been able to utilize the tax benefits subject to the TRA. The term of the TRA will continue until
all relevant tax benefits have been utilized or have expired.
Our counterparties under the TRA will not reimburse us for any benefits that are subsequently disallowed, although any future payments would
be adjusted to the extent possible to reflect the result of such disallowance. As a result, in such circumstances, we could make payments under
the TRA greater than our actual cash tax savings.
While the actual amount and timing of any payments under the TRA will vary depending upon a number of factors, including the amount,
character, and timing of our and our subsidiaries’ taxable income in the future, we expect that during the term of the TRA, the payments that we
may make could be material. Assuming no material changes in relevant tax law, and that we earn sufficient taxable income to realize the full tax
benefits subject to the TRA, we expect that future payments under the TRA will total approximately $41 million in present value as of the fiscal
year 2014, ended December 31, 2014.
If we undergo a change of control as defined in the TRA, the TRA will terminate, and we will be required to make a payment equal to the
present value of expected future payments under the TRA, which payment would be based on certain assumptions (the “valuation assumptions”
),
including assumptions related to our future taxable income. Additionally, if we or a direct or indirect subsidiary transfers any asset to a
corporation with which we do not file a consolidated tax return, we will be treated as having sold that asset for its fair market value in a taxable
transaction for purposes of determining the cash savings in income tax under the TRA. Any such payment resulting from a change of control or
asset transfer could be substantial and could exceed our actual cash tax savings.
The TRA provides that in the event that we breach any of our material obligations under it, whether as a result of our failure to make any
payment when due (subject to a specified cure period), failure to honor any other material obligation under the TRA, or by operation of law as a
result of the rejection of the TRA in a case commenced under the U.S. Bankruptcy Code or otherwise, then all our payment and other obligations
under the TRA will be accelerated and will become due and payable, applying the same valuation assumptions discussed above, including those
relating to our future taxable income. Such payments could be substantial and could exceed our actual cash tax savings. Additionally, we
generally have the right to terminate the TRA. If we terminate the TRA, our payment and other obligations under the TRA will be accelerated
and will become due and payable, also applying the valuation assumptions discussed above. Such payments could be substantial and could
exceed our actual cash tax savings.
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