El Pollo Loco 2016 Annual Report Download - page 19

Inaddition,wemaynotbeabletogeneratesufficientcashflowfromouroperationstorepayourindebtednesswhenitbecomesdueandtomeetourothercash
needs.Ifwearenotabletopayourdebtsastheybecomedue,wewillberequiredtopursueoneormorealternativestrategies,suchassellingassets,refinancingor
restructuringourindebtedness,orsellingadditionaldebtorequitysecurities.Wemaynotbeabletorefinanceourdebtorselladditionaldebtorequitysecuritiesor
ourassetsonfavorableterms,ifatall,andifwehavetosellourassets,thatsalemaynegativelyaffectourabilitytogeneraterevenue.
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30,2015,ourtop10
franchiseesoperatedover67%ofourfranchisedrestaurantsandtwofranchisees(the“SignificantFranchisees”)operatedover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,(iii)contributionstoouradvertisingfunds,and(iv)otherfees.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30,2015,wehadexecuteddevelopmentagreementsthatrepresentcommitmentstoopen61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
16