El Pollo Loco 2015 Annual Report Download - page 24

Table of Contents
Our secured revolving credit facility contains a number of covenants that, among other things, restrict, subject to certain exceptions, our ability
to (i) incur additional indebtedness, (ii) issue preferred stock, (iii) create liens on assets, (iv) engage in mergers or consolidations, (v) sell assets,
(vi) make investments, loans, or advances, (vii) make certain acquisitions, (viii) engage in certain transactions with affiliates, (ix) authorize or
pay dividends, and (x) change our lines of business or fiscal year. In addition, our secured revolving credit facility requires us (i) to maintain, on
a consolidated basis, a minimum consolidated fixed charge coverage ratio and (ii) not to exceed a maximum lease adjusted consolidated leverage
ratio. Our ability to borrow under our secured revolving credit facility depends on our compliance with these tests. Events beyond our control,
including changes in general economic and business conditions, may affect our ability to meet these tests. We cannot guarantee that we will meet
these tests in the future, or that our lenders will waive any failure to meet these tests.
We may not be able to compete successfully with other quick-service and fast casual restaurants. Intense competition in the restaurant
industry could make it more difficult to expand our business, and could also have a negative impact on our operating results, if customers
favor our competitors or if we are forced to change our pricing and other marketing strategies.
The food service industry, and particularly its quick-service and fast casual segments, is intensely competitive. In addition, the greater Los
Angeles area, the primary market in which we compete, consists of what we believe to be the most competitive Mexican-inspired quick-service
and fast casual market in the United States. We expect competition in this market and in each of our other markets to continue to be intense,
because consumer trends are favoring limited service restaurants that offer healthier menu items made with better-quality products, and many
limited service restaurants are responding to these trends. Competition in our industry is primarily based on price, convenience, quality of
service, brand recognition, restaurant location, and type and quality of food. If our company-operated and franchised restaurants cannot compete
successfully with other quick-service and fast casual restaurants in new and existing markets, we could lose customers and our revenue could
decline. Our company-operated and franchised restaurants compete with national and regional quick-service and fast casual restaurant chains for
customers, restaurant locations, and qualified management and other staff. Compared with us, some of our competitors have substantially greater
financial and other resources, have been in business longer, have greater brand recognition, or are better-established in the markets where our
restaurants are located or are planned to be located. Any of these competitive factors may materially and adversely affect our business, financial
condition, and results of operations.
Our marketing programs may not be successful, and our new menu items, advertising campaigns, and restaurant designs and remodels may
not generate increased sales or profits.
We incur costs and expend other resources in our marketing efforts on new menu items, advertising campaigns, and restaurant designs and
remodels, to raise brand awareness and to attract and retain customers. Our initiatives may not be successful, resulting in expenses incurred
without the benefit of higher revenues. Additionally, some of our competitors have greater financial resources than we do, enabling them to
spend significantly more on marketing, advertising, and other initiatives. Should our competitors increase spending on marketing, advertising,
and other initiatives, or our marketing funds decrease for any reason, or should our advertising, promotions, new menu items, and restaurant
designs and remodels be less effective than those of our competitors, there could be a material adverse effect on our results of operations and
financial condition.
The challenging economic environment may affect our franchisees, with adverse consequences to us.
We rely in part on our franchisees and the manner in which they operate their locations to develop and promote our business. As of
December 31, 2014, our top 10 franchisees operated over 64% of our franchised restaurants and two franchisees (the “Significant Franchisees”)
operated approximately 35% of our franchised restaurants. Due to the continuing challenging economic environment, it is possible that some
franchisees could file for bankruptcy or become delinquent in their payments to us, which could have significant adverse impacts on our
business, due to loss or delay in payments of (i) royalties, (ii) information technology (“IT”) support service fees,
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