El Pollo Loco 2016 Annual Report Download - page 20

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restaurants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affect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inJuly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franchiseesdonotoperatetoourexpectations,ourimageandreputation,andtheimagesand
reputationsofotherfranchisees,maysuffermaterially,andsystem-widesalescoulddeclinesignificantly.
Franchisees,asindependentbusinessoperators,mayfromtimetotimedisagreewithusandourstrategiesregardingthebusinessorourinterpretationofour
respectiverightsandobligationsunderthefranchiseagreement.Disagreementmayleadtodisputeswithourfranchisees,andweexpectsuchdisputestooccurfrom
timetotimeinthefutureaswecontinuetoofferfranchises.Totheextentthatwehavesuchdisputes,theattention,time,andfinancialresourcesofour
managementandourfranchiseeswillbedivertedfromourrestaurants,whichcouldhaveamaterialadverseeffectonourbusiness,financialcondition,resultsof
operations,andcashflows.
Our self-insurance programs may expose us to significant and unexpected costs and losses.
Wecurrentlymaintainemployeehealthinsurancecoverageonaself-insuredbasis.Wedomaintainstoplosscoveragewhichsetsalimitonourliabilityforboth
individualandaggregateclaimcosts.
Wecurrentlyrecordaliabilityforourestimatedcostofclaimsincurredandunpaidasofeachbalancesheetdate.Ourestimatedliabilityisrecordedonan
undiscountedbasisandincludesanumberofsignificantassumptionsandfactors,includinghistoricaltrends,expectedcostsperclaim,actuarialassumptions,and
currenteconomicconditions.Ourhistoryofclaimsactivityforalllinesofcoverageiscloselymonitored,andliabilitiesareadjustedaswarrantedbasedon
changingcircumstances.Itispossible,however,thatouractualliabilitiesmayexceedourestimatesofloss.Wemayalsoexperienceanunexpectedlylargenumber
ofclaimsthatresultincostsorliabilitiesinexcessofourprojections,andthereforewemayberequiredtorecordadditionalexpenses.Fortheseandotherreasons,
ourself-insurancereservescouldprovetobeinadequate,resultinginliabilitiesinexcessofouravailableinsuranceandself-insurance.Ifasuccessfulclaimismade
againstusandisnotcoveredbyourinsuranceorexceedsourpolicylimits,ourbusinessmaybenegativelyandmateriallyimpacted.
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