El Pollo Loco 2016 Annual Report Download - page 81
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EL POLLO LOCO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
thetransactionsgivingrisetotheallegedsecuritieslawviolations.Inbothcases,Plaintiffsseekanunspecifiedamountofdamages,aswellascostsandexpenses
(includingattorneys’fees).Defendantsintendtovigorouslydefendagainsttheclaimsasserted.Inaddition,onSeptember16,2015,theCompanyandcertainofits
officersanddirectorsreceivedaninformal,non-publicinquiryfromtheSECrequestingvoluntaryproductionofdocumentsandinformation.Allpartiesare
cooperatingfullywiththeSEC'srequest.
OnoraboutNovember5,2015,apurportedEPLshareholderfiledaderivativecomplaintonbehalfoftheCompanyintheCourtofChanceryoftheStateof
DelawareagainstcertainEPLofficersand,directorsandTrimaranPolloPartners,L.L.C.Thederivativecomplaintallegesthatthesedefendantsbreachedtheir
fiduciarydutiestoEPLandwereunjustlyenrichedwhentheysoldsharesofEPLatartificiallyinflatedpricesduetoallegedmisrepresentationsandomissions
regardingEPL’scomparablestoresalesinthesecondquarterof2015.TheEPLshareholder’srequestedremediesincludeanawardofcompensatorydamagesto
EPL,aswellasacourtordertoimprovecorporategovernancebyputtingforwardforstockholdervotecertainresolutionsforamendmentstoEPL’sBylawsor
CertificateofIncorporation.
Wearealsoinvolvedinvariousotherclaimsandlegalactionsthatariseintheordinarycourseofbusiness.Wedonotbelievethattheultimateresolutionofthese
otheractionswillhaveamaterialadverseeffectonourfinancialposition,resultsofoperations,liquidity,orcapitalresources.Asignificantincreaseinthenumber
ofclaims,oranincreaseinamountsowingundersuccessfulclaims,couldmateriallyandadverselyaffectourbusiness,financialcondition,resultsofoperations,
andcashflows.
Purchasing Commitments
TheCompanyhaslong-termbeveragesupplyagreementswithcertainmajorbeveragevendors.Pursuanttothetermsofthesearrangements,marketingrebatesare
providedtotheCompanyanditsfranchiseesfromthebeveragevendorsbaseduponthedollarvolumeofpurchasesforsystem-widerestaurantswhichwillvary
accordingtotheirdemandforbeveragesyrupandfluctuationsinthemarketratesforbeveragesyrup.Thesecontractshavetermsextendinginto2017withan
estimatedCompanyobligationtotaling$13.9million.
AtDecember30,2015,theCompany’stotalestimatedcommitmenttopurchasechickenwas$4.2million.
Contingent Lease Obligations
AsaresultofassigningtheCompany’sinterestinobligationsunderrealestateleasesinconnectionwiththesaleofCompany-operatedrestaurantstosomeofthe
Company’sfranchisees,theCompanyiscontingentlyliableonfourleaseagreements.Theseleaseshavevariousterms,thelatestofwhichexpiresin2022.Asof
December30,2015,thepotentialamountofundiscountedpaymentstheCompanycouldberequiredtomakeintheeventofnon-paymentbytheprimarylessee
was$1,360,000.ThepresentvalueofthesepotentialpaymentsdiscountedattheCompany’sestimatedpre-taxcostofdebtatDecember30,2015was$1,240,000.
TheCompany’sfranchiseesareprimarilyliableontheleases.TheCompanyhascross-defaultprovisionswiththesefranchiseesthatwouldputthemindefaultof
theirfranchiseagreementsintheeventofnon-paymentundertheleases.TheCompanybelievesthatthesecross-defaultprovisionsreducetheriskthatpayments
willberequiredtobemadeundertheseleases.Accordingly,noliabilityhasbeenrecordedintheCompany’sconsolidatedfinancialstatementsrelatedtothese
contingentliabilities.
Employment Agreements
TheCompanyhasemploymentagreementswithfouroftheofficersoftheCompanyonanatwillbasis.Theseagreementsprovideforminimumsalarylevels,
possibleannualadjustmentsforcost-of-livingchanges,andincentivebonusesthatarepayableundercertainbusinessconditions.
Indemnification Agreements
TheCompanyhasenteredintoindemnificationagreementswitheachofitscurrentdirectorsandexecutiveofficers.TheseagreementsrequiretheCompanyto
indemnifytheseindividualstothefullestextentpermittedunderDelawarelawagainstliabilitiesthatmayarisebyreasonoftheirservicetotheCompanyandto
advanceexpensesincurredasaresultofanyproceedingagainstthemastowhichtheycouldbeindemnified.TheCompanyalsointendstoenterinto
indemnificationagreementswithfuturedirectorsandexecutiveofficers.
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