UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Form
10-Q





x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the
quarterly period ended June 30, 2010





or





 ̈  TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the
transition period from __________ to __________





Commission
File No. 333-115644





EPL
Intermediate, Inc.


(Exact
Name of Registrant as Specified in Its Charter)




Delaware
              13-4092105(State
      or Other Jurisdiction of
              (I.R.S.
      EmployerIncorporation
      or Organization)
              Identification
      No.)3535
      Harbor Blvd., Suite 100Costa
      Mesa, California
              92626(Address
      of Principal Executive Offices)
              (Zip
      Code)





(714)
599-5000


(Registrant’s
Telephone Number, Including Area Code)





Not
Applicable


(Former
Name, Address or Fiscal Year if Changed from Last Report)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.   Yes  xNo  ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).     Yes  ̈     No  ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company, as
defined in Rule 12b-2 of the Exchange Act.


Large
accelerated filer  ̈Accelerated filer  ̈Non-accelerated filer xSmaller reporting
company  ̈





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).   Yes  ̈   No
x





As of
August 12, 2010, the registrant had 100 shares of its common stock, $.01 par
value, outstanding.







TABLE
OF CONTENTS




Item
                              
                              
                              PagePART
      I – FINANCIAL INFORMATION1.
                              
                              Condensed
      Consolidated Financial Statements (Unaudited)
                              32.
                              
                              Management’s
      Discussion and Analysis of Financial Condition and Results of Operations
                              193.
                              
                              Quantitative
      and Qualitative Disclosures About Market Risk
                              314.
                              
                              Controls
      and Procedures
                              31PART
      II – OTHER INFORMATION1.
                              
                              Legal
      Proceedings
                              325.
                              
                              Other
      Information
                              326.
                              
                              Exhibits
                              33


2




Item
1.  Financial Statements





EPL
INTERMEDIATE, INC.


(A
Wholly Owned Subsidiary of El Pollo Loco Holdings, Inc.)





CONDENSED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)


(Amounts
in thousands)





DECEMBER 30,
                
                
                JUNE 30,2009
                
                
                2010ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                
                $
                11,277
                
                
                $
                3,435Restricted
      cash
                
                
                131
                
                
                
                131Accounts
      and other receivables-net
                
                
                9,607
                
                
                
                5,341Inventories
                
                
                1,606
                
                
                
                1,657Prepaid
      expenses and other current assets
                
                
                5,262
                
                
                
                4,789Deferred
      income taxes
                
                
                327
                
                
                
                327Total
      current assets
                
                
                28,210
                
                
                
                15,680PROPERTY
      OWNED—Net
                
                
                77,344
                
                
                
                75,295PROPERTY
      HELD UNDER CAPITAL LEASES—Net
                
                
                524
                
                
                
                451GOODWILL
                
                
                249,924
                
                
                
                249,924DOMESTIC
      TRADEMARKS
                
                
                91,788
                
                
                
                91,788OTHER
      INTANGIBLE ASSETS—Net
                
                
                1,900
                
                
                
                1,672OTHER
      ASSETS
                
                
                12,200
                
                
                
                11,000TOTAL
      ASSETS
                
                $
                461,890
                
                
                $
                445,810





See
      notes to condensed consolidated financial statements (unaudited).
              (continued)


3




EPL
INTERMEDIATE, INC.


(A
Wholly Owned Subsidiary of El Pollo Loco Holdings, Inc.)





CONDENSED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)


(Amounts
in thousands, except share data)





DECEMBER 30,
                
                
                JUNE 30,2009
                
                
                2010LIABILITIES
      AND STOCKHOLDER'S EQUITYCURRENT
      LIABILITIES:Current
      portion of obligations under capital leases
                
                $
                341
                
                
                $
                226Current
      portion of PIK Notes (2014 Notes)
                
                
                -
                
                
                
                10,600Accounts
      payable
                
                
                20,607
                
                
                
                12,261Accrued
      salaries
                
                
                4,289
                
                
                
                3,937Accrued
      vacation
                
                
                2,010
                
                
                
                2,124Accrued
      insurance
                
                
                1,545
                
                
                
                1,836Accrued
      income taxes payable
                
                
                15
                
                
                
                34Accrued
      interest
                
                
                3,432
                
                
                
                3,237Accrued
      advertising
                
                
                96
                
                
                
                -Other
      accrued expenses and current liabilities
                
                
                5,239
                
                
                
                4,456Total
      current liabilities
                
                
                37,574
                
                
                
                38,711NONCURRENT
      LIABILITIES:Senior
      secured notes (2012 Notes)
                
                
                130,407
                
                
                
                130,716Senior
      unsecured notes payable (2013 Notes)
                
                
                106,347
                
                
                
                106,431PIK
      Notes (2014 Notes)-less current portion
                
                
                29,342
                
                
                
                18,742Obligations
      under capital leases—less current portion
                
                
                1,763
                
                
                
                1,660Deferred
      income taxes
                
                
                37,776
                
                
                
                38,523Other
      intangible liabilities—net
                
                
                3,998
                
                
                
                3,599Other
      noncurrent liabilities
                
                
                10,673
                
                
                
                10,847Total
      noncurrent liabilities
                
                
                320,306
                
                
                
                310,518COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDER'S
      EQUITYCommon
      stock, $.01 par value—100 shares authorized;  100 shares issued
      and outstanding
                
                
                -
                
                
                
                -Additional
      paid-in-capital
                
                
                199,733
                
                
                
                199,958Accumulated
      Deficit
                
                
                (95,723
                )
                
                
                (103,377
                )Total
      stockholder's equity
                
                
                104,010
                
                
                
                96,581TOTAL
                
                $
                461,890
                
                
                $
                445,810





See
      notes to condensed consolidated financial statements (unaudited).
              (concluded)




4




EPL
INTERMEDIATE, INC.


(A
Wholly Owned Subsidiary of El Pollo Loco Holdings, Inc.)





CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)


(Amounts
in thousands)





13 Weeks Ended
                                                  
                                                  
                                                  26 Weeks EndedJuly 1,
                                                  
                                                  
                                                  June 30,
                                                  
                                                  
                                                  July 1,
                                                  
                                                  
                                                  June 30,2009
                                                  
                                                  
                                                  2010
                                                  
                                                  
                                                  2009
                                                  
                                                  
                                                  2010OPERATING
      REVENUE:Restaurant
      revenue
                                                  
                                                  $
                                                  67,779
                                                  
                                                  
                                                  $
                                                  66,512
                                                  
                                                  
                                                  $
                                                  133,704
                                                  
                                                  
                                                  $
                                                  129,930Franchise
      revenue
                                                  
                                                  
                                                  4,885
                                                  
                                                  
                                                  
                                                  4,723
                                                  
                                                  
                                                  
                                                  9,593
                                                  
                                                  
                                                  
                                                  9,297Total
      operating revenue
                                                  
                                                  
                                                  72,664
                                                  
                                                  
                                                  
                                                  71,235
                                                  
                                                  
                                                  
                                                  143,297
                                                  
                                                  
                                                  
                                                  139,227OPERATING
      EXPENSES:Product
      cost
                                                  
                                                  
                                                  22,199
                                                  
                                                  
                                                  
                                                  20,769
                                                  
                                                  
                                                  
                                                  43,160
                                                  
                                                  
                                                  
                                                  40,546Payroll
      and benefits
                                                  
                                                  
                                                  18,082
                                                  
                                                  
                                                  
                                                  17,378
                                                  
                                                  
                                                  
                                                  35,770
                                                  
                                                  
                                                  
                                                  34,907Depreciation
      and amortization
                                                  
                                                  
                                                  2,806
                                                  
                                                  
                                                  
                                                  2,612
                                                  
                                                  
                                                  
                                                  5,636
                                                  
                                                  
                                                  
                                                  5,194Other
      operating expenses
                                                  
                                                  
                                                  25,437
                                                  
                                                  
                                                  
                                                  23,235
                                                  
                                                  
                                                  
                                                  50,546
                                                  
                                                  
                                                  
                                                  46,986Total
      operating expenses
                                                  
                                                  
                                                  68,524
                                                  
                                                  
                                                  
                                                  63,994
                                                  
                                                  
                                                  
                                                  135,112
                                                  
                                                  
                                                  
                                                  127,633OPERATING
      INCOME
                                                  
                                                  
                                                  4,140
                                                  
                                                  
                                                  
                                                  7,241
                                                  
                                                  
                                                  
                                                  8,185
                                                  
                                                  
                                                  
                                                  11,594INTEREST
      EXPENSE—Net
                                                  
                                                  
                                                  8,382
                                                  
                                                  
                                                  
                                                  9,243
                                                  
                                                  
                                                  
                                                  14,426
                                                  
                                                  
                                                  
                                                  18,475OTHER
      EXPENSE
                                                  
                                                  
                                                  646
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  443
                                                  
                                                  
                                                  
                                                  -OTHER
      INCOME
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (452
                                                  )
                                                  
                                                  
                                                  -LOSS
      BEFORE PROVISION FOR INCOME TAXES
                                                  
                                                  
                                                  (4,888
                                                  )
                                                  
                                                  
                                                  (2,002
                                                  )
                                                  
                                                  
                                                  (6,232
                                                  )
                                                  
                                                  
                                                  (6,881
                                                  )PROVISION
      FOR INCOME TAXES
                                                  
                                                  
                                                  19,609
                                                  
                                                  
                                                  
                                                  29
                                                  
                                                  
                                                  
                                                  19,542
                                                  
                                                  
                                                  
                                                  773NET
      LOSS
                                                  
                                                  $
                                                  (24,497
                                                  )
                                                  
                                                  $
                                                  (2,031
                                                  )
                                                  
                                                  $
                                                  (25,774
                                                  )
                                                  
                                                  $
                                                  (7,654
                                                  )





See notes
to condensed consolidated financial statements (unaudited).


5




EPL
INTERMEDIATE, INC.


(A
Wholly Owned Subsidiary of El Pollo Loco Holdings, Inc.)





CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


(Amounts
in thousands)





26 Weeks EndedJuly 1,
                      
                      
                      June 30,2009
                      
                      
                      2010CASH
      FLOWS - OPERATING ACTIVITIES:Net
      loss
                      
                      $
                      (25,774
                      )
                      
                      $
                      (7,654
                      )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                      
                      
                      5,636
                      
                      
                      
                      5,194Stock-based
      compensation expense
                      
                      
                      237
                      
                      
                      
                      348Interest
      accretion
                      
                      
                      2,040
                      
                      
                      
                      393Loss
      on disposal of assets
                      
                      
                      -
                      
                      
                      
                      145Gain
      on repurchase of bonds
                      
                      
                      (452
                      )
                      
                      
                      -Asset
      impairment
                      
                      
                      1,996
                      
                      
                      
                      1,306Closed
      store reserve
                      
                      
                      -
                      
                      
                      
                      969Amortization
      of deferred financing costs
                      
                      
                      2,144
                      
                      
                      
                      1,449Amortization
      of favorable / unfavorable leases
                      
                      
                      (89
                      )
                      
                      
                      (171
                      )Deferred
      income taxes
                      
                      
                      19,542
                      
                      
                      
                      747Change
      in fair value of interest rate swap
                      
                      
                      231
                      
                      
                      
                      -Changes
      in operating assets and liabilities:Accounts
      and other receivables-net
                      
                      
                      (1,084
                      )
                      
                      
                      4,266Inventories
                      
                      
                      77
                      
                      
                      
                      (51
                      )Prepaid
      expenses and other current assets
                      
                      
                      (575
                      )
                      
                      
                      473Income
      taxes receivable / payable
                      
                      
                      (38
                      )
                      
                      
                      19Other
      long term assets
                      
                      
                      (132
                      )
                      
                      
                      (256
                      )Accounts
      payable
                      
                      
                      4,421
                      
                      
                      
                      (9,208
                      )Accrued
      salaries and vacation
                      
                      
                      648
                      
                      
                      
                      (238
                      )Accrued
      insurance
                      
                      
                      (25
                      )
                      
                      
                      291Other
      accrued expenses and current and noncurrent liabilities
                      
                      
                      (1,956
                      )
                      
                      
                      (1,868
                      )Net
      cash provided by (used in) operating activities
                      
                      
                      6,847
                      
                      
                      
                      (3,846
                      )CASH
      FLOWS -INVESTING ACTIVITIESPurchase
      of property
                      
                      
                      (4,362
                      )
                      
                      
                      (3,657
                      )Proceeds
      from asset disposition
                      
                      
                      -
                      
                      
                      
                      2Restricted
      cash
                      
                      
                      (6,723
                      )
                      
                      
                      -Net
      cash used in investing activities
                      
                      
                      (11,085
                      )
                      
                      
                      (3,655
                      )CASH
      FLOWS - FINANCING ACTIVITIESRepurchase
      of common stock
                      
                      
                      (602
                      )
                      
                      
                      (123
                      )Payment
      of obligations under capital leases
                      
                      
                      (324
                      )
                      
                      
                      (218
                      )Proceeds
      from borrowings
                      
                      
                      133,850
                      
                      
                      
                      -Payments
      on debt
                      
                      
                      (108,603
                      )
                      
                      
                      -Repurchase
      of notes
                      
                      
                      (1,470
                      )
                      
                      
                      -Deferred
      financing costs
                      
                      
                      (9,094
                      )
                      
                      
                      -Net
      cash provided by (used in) financing activities
                      
                      
                      13,757
                      
                      
                      
                      (341
                      )





See
      notes to condensed consolidated financial statements (unaudited).
              (continued)


6




EPL
INTERMEDIATE, INC.


(A
Wholly Owned Subsidiary of El Pollo Loco Holdings, Inc.)





CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


(Amounts
in thousands)





26 Weeks EndedJuly 1,
                                
                                
                                June 30,2009
                                
                                
                                2010INCREASE
      (DECREASE) IN CASH AND CASH EQUIVALENTS
                                
                                $
                                9,519
                                
                                
                                $
                                (7,842
                                )CASH
      AND CASH EQUIVALENTS—Beginning
      of period
                                
                                
                                1,076
                                
                                
                                
                                11,277CASH
      AND CASH EQUIVALENTS—End
      of period
                                
                                $
                                10,595
                                
                                
                                $
                                3,435SUPPLEMENTAL
      DISCLOSURE OF CASH FLOWINFORMATION—Cash
      paid during the period for:Interest
                                
                                $
                                8,874
                                
                                
                                $
                                16,824Income
      taxes, net
                                
                                $
                                38
                                
                                
                                $
                                7SUPPLEMENTAL
      SCHEDULE OF NON-CASH ACTIVITIES:Unpaid
      purchases of property and equipment
                                
                                $
                                200
                                
                                
                                $
                                891





See
      notes to the condensed consolidated financial statements (unaudited).
              (concluded)


7




EPL
INTERMEDIATE, INC.


(A
Wholly-Owned Subsidiary of El Pollo Loco Holdings, Inc.)





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





1.
Basis of Presentation





The
accompanying condensed consolidated financial statements are unaudited. EPL
Intermediate, Inc. (“Intermediate”) and its wholly owned subsidiary El Pollo
Loco, Inc. (“EPL” and jointly with Intermediate, the “Company,”) prepared these
condensed consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America for interim
financial information and Article 10 of Regulation S-X. In compliance with those
instructions, certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted.





The
accompanying unaudited condensed consolidated financial statements include all
adjustments (consisting of normal recurring adjustments and accruals) that
management considers necessary for a fair presentation of its financial position
and results of operations for the interim periods presented. The results of
operations for the interim periods presented are not necessarily indicative of
the results that may be expected for the entire year or any other future
periods.





The
accompanying condensed consolidated financial statements should be read in
conjunction with the Company’s audited consolidated financial statements and the
related notes thereto included in the Company’s Annual Report on Form 10-K for
the year ended December 30, 2009 (File No. 333-115644) as filed with the
Securities and Exchange Commission (the “Commission”) on March 30, 2010.





Intermediate
is a wholly-owned subsidiary of El Pollo Loco Holdings, Inc. (“Holdings”), which
is a wholly owned indirect subsidiary of Chicken Acquisition Corp. (“CAC”) which
is 99% owned by Trimaran Pollo Partners, LLC (the “LLC”). The Company’s
activities are performed principally through Intermediate’s wholly-owned
subsidiary, EPL, which develops, franchises, licenses, and operates
quick-service restaurants under the name El Pollo Loco®.





The
Company uses a 52-53 week fiscal year ending on the last Wednesday of the
calendar year.  In a 52-week fiscal year, each quarter includes 13
weeks of operations; in a 53-week fiscal year, the first, second and third
quarters each include 13 weeks of operations and the fourth quarter includes 14
weeks of operations.  Fiscal year 2009, which ended December 30, 2009,
was a 52-week fiscal year.  Fiscal year 2010, which will end December
29, 2010, is also a 52-week year.





2.
Cash





Concentration
of credit risk





The
Company maintains all of its cash at one commercial bank.  Balances on
deposit are insured by the Federal Deposit Insurance Corporation (FDIC) up to
specified limits.  Our balances in excess of the FDIC limits are uninsured.





Liquidity





The
Company’s principal liquidity requirements are to service its debt and meet
capital expenditure needs. At June 30, 2010, the Company’s total debt was $268.4
million. Assuming the Company does not repurchase any of the outstanding 2014
Notes (as defined below), in May 2011 Intermediate is required to make a
mandatory redemption of a portion of our 2014 Notes at an estimated cost of
approximately $10.6 million along with the interest payment that will then be
due.  The Company’s ability to make payments on its indebtedness and to
fund planned capital expenditures will depend on available cash and its ability
to generate adequate cash flows in the future, which, to a certain extent, is
subject to general economic, financial, competitive, legislative, regulatory and
other factors that are beyond the Company’s control. Based on current
operations,  the Company believes that its cash flow from operations,
available cash of $3.4 million at June 30, 2010, available borrowings under the
credit facility (which availability was approximately $6.2 million at June 30,
2010), and funds from CAC will be adequate to meet the Company’s liquidity needs
for the next 12 months.  Under the covenants governing the Company’s
outstanding Notes, EPL is limited on the amount that it can distribute to
Intermediate, including amounts that Intermediate could use to fund its debt
service.  The Company’s results of operations as well as current
economic and constrained liquidity conditions could make it more difficult or
costly to obtain additional debt financing or to refinance its existing debt
when it becomes necessary (assuming such financing is then available to the
Company), or could otherwise make alternative sources of liquidity or financing
costly or unavailable.





3.
Restricted cash





As of
December 30, 2009 and June 30, 2010, the Company had recorded $0.1 million as
restricted cash on the accompanying condensed consolidated balance
sheet.  This amount serves as collateral to Bank of America for the
Company’s Bank of America company credit cards as of  June 30, 2010 as
the Company transferred its banking relationship from Bank of America to another
commercial bank.


8




4.
Other Intangible Assets and Liabilities





Other
intangible assets and liabilities consist of the following (in thousands):





December 30, 2009
                                          
                                          
                                          June 30, 2010Gross
                                          
                                          
                                          
                                          
                                          
                                          Net
                                          
                                          
                                          Gross
                                          
                                          
                                          
                                          
                                          
                                          NetCarrying
                                          
                                          
                                          Accumulated
                                          
                                          
                                          Carrying
                                          
                                          
                                          Carrying
                                          
                                          
                                          Accumulated
                                          
                                          
                                          CarryingAmount
                                          
                                          
                                          Amortization
                                          
                                          
                                          Amount
                                          
                                          
                                          Amount
                                          
                                          
                                          Amortization
                                          
                                          
                                          AmountFavorable
      leasehold interest
                                          $
                                          5,862
                                          
                                          
                                          $
                                          (3,962
                                          )
                                          
                                          $
                                          1,900
                                          
                                          
                                          $
                                          5,862
                                          
                                          
                                          $
                                          (4,190
                                          )
                                          
                                          $
                                          1,672Unfavorable
      leasehold interest liability
                                          $
                                          (9,156
                                          )
                                          
                                          $
                                          5,158
                                          
                                          
                                          $
                                          (3,998
                                          )
                                          
                                          $
                                          (9,156
                                          )
                                          
                                          $
                                          5,557
                                          
                                          
                                          $
                                          (3,599
                                          )





Favorable
leasehold interest represents the asset in excess of the approximate fair market
value of the leases. The amount is being amortized over the approximate average
life of the leases and is shown as other intangible assets-net on the
accompanying condensed consolidated balance sheets.





Unfavorable
leasehold interest liability represents the liability in excess of the
approximate fair market value of the leases. The amount is being amortized over
the approximate average life of the leases.  This amount is shown as
other intangible liabilities-net on the accompanying condensed consolidated
balance sheets. Amortization for other intangible assets and liabilities was
$140,000 for the 26-week period ended July 1, 2009 and $171,000 for the 26-week
period ended June 30, 2010.






The
estimated net amortization credits for the Company’s favorable and unfavorable
leasehold interests for each of the five succeeding fiscal years is as follows
(in thousands):






Year Ending December2010
      (July 1  –  December 29)
                        
                        $
                        (157
                        )2011
                        
                        
                        (290
                        )2012
                        
                        
                        (275
                        )2013
                        
                        
                        (213
                        )2014
                        
                        
                        (227
                        )2015
                        
                        
                        (156
                        )





5.
Asset Impairment





The
Company reviews its long-lived assets for impairment on a
restaurant-by-restaurant basis whenever events or changes in circumstances
indicate that the carrying value of certain assets may not be recoverable. If
the Company concludes that the carrying value of certain assets will not be
recovered based on expected undiscounted future cash flows, an impairment
write-down is recorded to reduce the assets to their estimated fair value. As a
result of this review, the Company recorded an impairment charge of
approximately $2.0 million in March 2009 for two under-performing
company-operated stores that will continue to be operated. The Company recorded
an impairment charge of approximately $1.3 million in June 2010 for one
under-performing company-operated store that will continue to be
operated.  These impairment charges are included in other operating
expenses in the accompanying condensed consolidated statements of
operations.





6.
Fair Value Measurement





The
Company’s financial assets and liabilities, which include financial instruments
as defined by Accounting Standards Codification (ASC) 820 Fair Value
Measurements and Disclosures, to Certain Financial Instruments, include cash and
cash equivalents, accounts receivable, accounts payable and certain accrued
expenses, long-term debt and derivatives. The Company believes the carrying
amounts of cash and cash equivalents, accounts receivable, accounts payable and
certain accrued expenses approximate fair value due to their short term
maturities. Long term debt is considered by the Company to be representative of
current market rates. Accordingly, the Company estimates that the recorded
amounts approximate fair market value. The fair value of the Company’s
derivative is determined based on observable inputs that are corroborated
by market data.


9




The
following table summarizes the valuation of the Company’s financial instrument
by the fair value hierarchy as of July 1, 2009.


(dollars
in thousands):





Level 1
                
                
                Level 2
                
                
                Level 3
                
                
                TotalLiabilities
      at fair value:Derivative
      financial instrument—2009
                
                $
                —
                
                
                $
                1,846
                
                
                $
                —
                
                
                $
                1,846





7.
Stock-Based Compensation





As of
June 30, 2010, options to purchase 279,858 shares of common stock of CAC were
outstanding, including 58,606 options that are fully vested. The remaining
options partially vest upon the Company’s attaining annual financial or other
goals, with the remaining unvested portion vesting on the sixth or seventh
anniversary of the grant date or vesting 100% upon the occurrence of an initial
public offering of at least $50 million or a change in control of CAC. All
options were granted with an exercise price equal to the fair value of the
common stock on the date of grant.





Changes
in stock options for the twenty-six weeks ended June 30, 2010 are as follows:





Weighted-AverageRemainingWeighted-
                  Average
                
                
                Contractual
                  Life
                
                Aggregate
                  IntrinsicShares
                
                
                Exercise Price
                
                
                (in Years)
                
                ValueOutstanding—December
      30, 2009
                
                
                289,217
                
                
                $
                71.22Grants
      (weighted-average fair value of $20.21 per share)
                
                
                2,225
                
                
                $
                46.00Exercised
                
                
                (7,134
                )
                
                $
                3.84Canceled
                
                
                (4,450
                )
                
                $Outstanding—June
      30, 2010
                
                
                279,858
                
                
                $
                72.49
                
                
                
                5.1
                
                
                $
                2,125,054Vested
      and expected to vest – June 30, 2010
                
                
                276,444
                
                
                $
                72.49
                
                
                
                5.1
                
                
                $
                2,125,054Exercisable –
      June 30, 2010
                
                
                58,606
                
                
                $
                9.74
                
                
                
                1.7
                
                
                $
                2,125,054





The
intrinsic value is calculated as the difference between the estimated market
value as of June 30, 2010 and the exercise price of options that are outstanding
and exercisable.





As of
June 30, 2010, there was total unrecognized compensation expense of $2.7 million
related to unvested stock options, which the Company expects to recognize over a
weighted-average period of 3.0 years or earlier in the event of an initial
public offering of our common stock or change in control.





In
accordance with the Restricted Stock Plan adopted in 2008, the Company granted
404 shares in 2009 of which 50% vested in January 2010 and granted 598 shares in
the first quarter of 2010, none of which have vested.  The restricted
stock expense recorded in the twenty-six weeks ended June 30, 2010 related to
these vested shares was immaterial.





1,000
shares of common stock of CAC were issued to a director during the second
quarter of 2010.  In accordance with this issuance, compensation
expense of $46,000 was recognized during the second quarter of 2010.


10




8.
Commitments and Contingencies





Legal
Matters





As
previously disclosed in earlier reports filed with the Securities and Exchange
Commission, the Company entered into an agreement in the fourth quarter of 2009
to settle for $8.0 million a purported class action lawsuit brought by former
managers Haroldo Elias, Marco Ramirez and Javier Rivera. The Company funded the
settlement on January 14, 2010 and the Superior Court of the State of
California, County of Los Angeles, granted final approval of the class wide
settlement and entered Final Judgment at a hearing on April 20,
2010.  This settlement also included and settled the previously
disclosed purported class action complaint filed by Salvador Amezcua.





In April
2007, Dora Santana filed a purported class action in state court in Los Angeles
County on behalf of all “Assistant Shift Managers.” Plaintiff alleges wage and
hour violations including working off the clock, failure to pay overtime, and
meal break violations on behalf of the purported class, currently defined as all
Assistant Managers from April 2003 to present. The parties have agreed to settle
this matter for approximately $0.8 million and have executed a Settlement
Agreement. This amount has been fully accrued for during the prior year and is
included in the accompanying condensed consolidated balance sheets in accounts
payable as of June 30, 2010.  The Court granted preliminary approval
of the settlement on February 25, 2010. A hearing for final court approval is
scheduled for August 16, 2010.





On May
30, 2008, Jeannette Delgado, a former Assistant Manager filed a purported class
action on behalf of all hourly (i.e. non-exempt) employees of EPL in state court
in Los Angeles County alleging violations of certain California labor laws and
the California Business and Professions Code including failure to pay overtime,
failure to provide meal periods and rest periods and unfair business practices.
By statute, the purported class extends back four years, to May 30, 2004.
Plaintiff’s requested remedies include compensatory and punitive damages,
injunctive relief, disgorgement of profits and reasonable attorneys’ fees and
costs. The parties have agreed to settle this matter for approximately $1.7
million and have executed a Settlement Agreement. This amount has been fully
accrued for during the prior year and is included in the accompanying condensed
consolidated balance sheets in accounts payable as of June 30, 2010. The Court
granted preliminary approval of the settlement on February 25, 2010, and the
hearing for final court approval has been set for August 20, 2010.





Martin
Penaloza, a former Assistant Manager, filed a purported class action on May 26,
2009 in Superior Court in Orange County, California. The claims, requested
remedies, and potential class in this case overlap those in the Delgado lawsuit
described above and will be included in that settlement.





In
September 2008, American International Specialty Lines Insurance Company
(AISLIC) from whom the Company acquired excess insurance coverage, filed an
action for declaratory judgment seeking to have the court determine that it is
not required to indemnify EPL for any amounts awarded against it (or paid in
settlement) in connection’s with the previously settled EPL-Mexico v. EPL-USA
trademark litigation. The court issued a tentative ruling that there was no
coverage due to the intellectual property exclusion contained in the AISLIC
policy.  In July 2010, the parties agreed to settle this matter for
payment to the Company of $75,000 and a waiver of fees and costs by AISLIC.





The
Company is also involved in various other claims and legal actions that arise in
the ordinary course of business. We do not believe that the ultimate resolution
of these other actions will have a material adverse effect on our financial
position, results of operations, liquidity and capital resources. A significant
increase in the number of claims or an increase in amounts owing under
successful claims could materially adversely affect our business, financial
condition, results of operation and cash flows.





Purchasing
Commitments





The
Company has entered into long-term beverage supply agreements with certain major
beverage vendors. Pursuant to the terms of these arrangements, marketing rebates
are provided to the Company and its franchisees from the beverage vendors based
upon the dollar volume of purchases for system-wide restaurants which will vary
according to their demand for beverage syrup and fluctuations in the market
rates for beverage syrup. These contracts have terms extending into 2011 and
2012 with an estimated Company obligation totaling $4.2 million.





In March
2010, EPL executed a chicken supply contract with a vendor that has pricing
relatively flat compared to the prior year’s expired contract.  The
agreement provides for prices and minimum quantities of chicken totaling $20.3
million that EPL must purchase from such vendor for a period of two
years.  Additionally, EPL has a balance of approximately 8 months
remaining on contracts with certain other vendors for chicken totaling
approximately $17.4 million.





EPL has a
fixed price steak supply contract with a vendor that was entered into in January
2010.  The contract requires that the Company purchase a quantity
totaling approximately $3.7 million and expires on December 31,
2010.  At June 30, 2010, our remaining obligation under the contract
was approximately $1.6 million.


11




Contingent
Lease Obligations





As a
result of assigning our interest in obligations under real estate leases in
connection with the sale of Company-owned restaurants to some of our
franchisees, we are contingently liable on six lease
agreements.  These leases have various terms, the latest of which
expires in 2015.  As of June 30, 2010, the potential amount of
undiscounted payments we could be required to make in the event of non-payment
by the primary lessee was approximately $1.2 million.  The present
value of these potential payments discounted at our estimated pre-tax cost of
debt at June 30, 2010 was approximately $0.9 million. Our franchisees are
primarily liable on the leases.  We have cross-default provisions with
these franchisees that would put them in default of their franchise agreement in
the event of non-payment under the leases.  We believe these
cross-default provisions reduce the risk that we will be required to make
payments under these leases.





9.
Senior Secured Notes (2012 Notes)





On May
22, 2009, EPL issued $132.5 million aggregate principal amount of 113⁄4% senior
secured notes due December 1, 2012 (the “2012 Notes”) in a private
placement.  EPL sold the 2012 Notes at an issue price equal to 98.0%
of the principal amount, resulting in gross proceeds to EPL of $129.9 million
before expenses and fees.  At June 30, 2010, the Company had $130.7
million outstanding in aggregate principal amount of the 2012 Notes. The
principal value of the 2012 Notes will increase (representing accretion of
original issue discount) from the date of original issuance so that the accreted
value of the 2012 Notes will be equal to the full principal amount of $132.5
million at maturity. Interest is payable each year in June and December
beginning December 1, 2009. The 2012 Notes are guaranteed by Intermediate and
are secured by a second priority lien on substantially all of the Company’s
assets, which includes all of the outstanding common stock of
EPL.  The 2012 Notes may be redeemed at a premium, at the discretion
of EPL, after March 1, 2011, or sooner in connection with certain equity
offerings. If EPL undergoes certain changes of control, each holder of the notes
may require EPL to repurchase all or a part of its notes at a price of 101% of
the principal amount.  The Indenture governing the 2012 Notes contains
a number of covenants that, among other things, restrict, subject to certain
exceptions, EPL’s ability to incur additional indebtedness, pay dividends or
certain restricted payments, make certain investments, sell assets, create
liens, merge and enter into certain transactions with its affiliates. As of June
30, 2010, EPL’s fixed charge coverage ratio was 1:24 to 1:00 which does not meet
the coverage ratio of 2:00 to 1:00 which EPL must meet in order to incur
additional indebtedness (other than indebtedness under our revolving credit
facility) and make dividend and other restricted payments in an aggregate amount
in excess of $2.9 million. A failure to comply with this ratio affects only
EPL's ability to incur additional indebtedness and make certain dividend and
other restricted payments, but does not constitute a default under the 2012
notes.




12




EPL
incurred direct finance costs of approximately $9.2 million in connection with
this offering and registration of these notes. These costs have been capitalized
and are included in other assets in the accompanying condensed consolidated
balance sheets, and the related amortization is reflected as a component of
interest expense in the accompanying condensed consolidated statement of
operations. The Company used the net proceeds from the 2012 Notes to repay
certain indebtedness and for general corporate purposes. In December 2009, we
completed the exchange of these notes for registered, publicly tradable notes
that have substantially identical terms of these notes.





10.
Senior Unsecured Notes Payable (2013 Notes)





EPL has
outstanding $106.4 million aggregate principal amount of 113⁄4% senior notes due
November 15, 2013 (the "2013 Notes"). Interest is payable in May and November
beginning May 15, 2006. The 2013 Notes are unsecured, are guaranteed by
Intermediate, and may be redeemed at a premium, at the discretion of the issuer.
The indenture contains certain provisions which may prohibit EPL’s ability to
incur additional indebtedness, sell assets, engage in transactions with
affiliates, and issue or sell preferred stock and make certain dividends and
other restricted payments, among other items.  As of June 30, 2010,
EPL’s fixed charge coverage ratio was 1:15 to 1:00 which does not meet the
coverage ratio of 2:00 to 1:00 which EPL must meet in order to incur additional
indebtedness (other than indebtedness under our revolving credit facility) and
make dividend and other restricted payments in an aggregate amount in excess of
$2.9 million.  A failure to comply with this ratio affects only EPL’s
ability to incur additional indebtedness and make certain dividend and other
restricted payments, but does not constitute a default under the 2013 notes.





In
October 2006, EPL completed the exchange of the 2013 Notes for registered,
publicly tradable notes that have substantially identical terms as the 2013
Notes. The costs incurred in connection with the offering of the 2013 Notes have
been capitalized and are included in other assets in the accompanying condensed
consolidated balance sheets, and the related amortization is reflected as a
component of interest expense in the accompanying condensed consolidated
financial statements. The Company used the proceeds from the 2013 Notes to
refinance certain indebtedness of the Company.






The
Company purchased $2.0 million in principal amount of the 2013 Notes at a price
of $1.5 million in March 2009. The net purchase price was 74% of the principal
amount of such notes and resulted in a net gain of $0.5 million which is
included in other income in the condensed consolidated statement of operations.
The gain of $0.5 million is net of the write-off of prorated deferred finance
costs of $0.1 million.





11.
Revolving Credit Facility





On May
22, 2009, EPL entered into a credit agreement (the "Credit Facility") with
Intermediate as guarantor, Jefferies Finance LLC, as administrative and
syndication agent and the various lenders. The Credit Facility provides for a
$12.5 million revolving line of credit with borrowings (including obligations in
respect of revolving loans and letters of credit) limited at any time to the
lesser of (i) $12.5 million and (ii) the Company’s consolidated cash flow for
the most recently completed trailing twelve consecutive months and, in no event,
shall obligations in respect to letters of credit exceed an amount equal to $10
million. Utilizing the Credit Facility, $6.3 million of letters of credit were
issued and outstanding as of June 30, 2010.





The
Credit Facility bears interest, payable quarterly, at an Alternate Base Rate (as
defined in the Credit Facility) or LIBOR, at EPL's option, plus an applicable
margin. The applicable margin rate is 5.50% with respect to LIBOR and 4.50% with
respect to Alternate Base Rate advances. The Credit Facility is secured by a
first priority lien on substantially all of the Company’s assets and is
guaranteed by Intermediate. The Credit Facility matures on July 22, 2012.






The
Credit Facility contains a number of covenants that, among other things,
restrict, subject to certain exceptions, the Company’s ability to (i) incur
additional indebtedness or issue preferred stock; (ii) create liens on assets;
(iii) engage in mergers or consolidations; (iv) sell assets; (v) make certain
restricted payments; (vi) make investments, loans or advances; (vii) make
certain acquisitions; (viii) engage in certain transactions with affiliates;
(ix) change the Company’s lines of business or fiscal year; and (x) engage in
speculative hedging transactions. In addition, the Credit Facility requires
the Company to maintain, on a consolidated basis, a minimum level of
consolidated cash flow at all times. As of June 30, 2010, the Company was in
compliance with all of the financial covenants contained in the Credit Facility
and had $6.2 million available for borrowings under the revolving line of
credit.


13





12.
PIK Notes (2014 Notes)





At June
30, 2010, Intermediate had $29.3 million outstanding in aggregate principal
amount of the 141⁄2% PIK notes due 2014.  No cash interest accrued on
these notes prior to November 15, 2009. Instead, the principal value of these
notes increased (representing accretion of original issue discount) from the
date of original issuance until but not including November 15, 2009 at a rate of
141⁄2% per annum compounded annually, so that the accreted value of these notes on
November 15, 2009 was equal to the full principal amount of $29.3 million due at
maturity.






Beginning
on November 15, 2009, cash interest accrued on these notes at an annual rate of
141⁄2% per annum payable semi-annually in arrears on May 15 and November 15 of
each year, beginning May 15, 2010. Principal is due on November 15, 2014. The
indenture governing these notes restricts Intermediate’s and EPL’s ability to,
among other items, incur additional indebtedness, sell assets, engage in
transactions with affiliates and issue or sell preferred stock. The indenture
governing these notes also limits the ability of Intermediate or EPL to make
payments to El Pollo Loco Holdings, Inc., the immediate parent corporation of
Intermediate.  As of June 30, 2010, the Company’s fixed charge
coverage ratio was 1:15 to 1:00 which does not meet the coverage ratio of 2:00
to 1:00 which the Company must meet in order to incur additional indebtedness
(other than indebtedness under our revolving credit facility) and make dividend
and other restricted to payments  in an aggregate amount in excess of
$2.9 million.  A failure to comply with this ratio affects only the
Company’s ability to incur additional indebtedness and make certain dividend and
other restricted payments and does not constitute a default under the 2014
notes.





These notes are effectively
subordinated to all existing and future indebtedness and other liabilities of
EPL. These notes are unsecured and are not guaranteed. If any of these notes are
outstanding at May 15, 2011, Intermediate is required to redeem for cash a
portion of each note then outstanding at 104.5% of the accreted value of such
portion of such note, plus accrued and unpaid interest, if any. This payment is
currently estimated to be approximately $10.6 million. Additionally,
Intermediate may, at its discretion, redeem for a premium any or all of these
notes, subject to certain provisions contained in the indenture governing these
notes. As a holding company, the stock of EPL constitutes Intermediate’s only
material asset.  Consequently, EPL conducts all of the Company’s
consolidated operations and owns substantially all of the consolidated operating
assets.  Intermediate has no material assets or operations; the
Company’s principal source of the cash required to pay its obligations is the
cash that EPL generates from its operations.  EPL is a separate and
distinct legal entity, has no obligation to make funds available to
Intermediate, and the 2013 notes (see Note 10) and the 2012 Notes (see Note 9),
have restrictions that limit distributions or dividends that may be paid by EPL
to Intermediate.  See Note 14 for condensed consolidating financial
statements of Intermediate and EPL.





In
October 2006, Intermediate completed the exchange of these notes for registered,
publicly tradable notes that have substantially identical terms as these notes.
The costs incurred in connection with the registration of these notes were
capitalized and included in other assets in the consolidated balance sheets and
the related amortization was reflected as a component of interest expense in the
condensed consolidated statements of operations.





13.
Income Taxes





The
Company’s taxable income or loss is included in the consolidated federal and
state income tax returns of CAC. The Company records its provision for income
taxes based on its separate stand-alone operating results using the asset and
liability method.





As of
December 30, 2009 and June 30, 2010, the Company has no material unrecognized
tax benefits.





The
Company will continue to classify income tax penalties and interest as part of
the provision for income taxes in its Condensed Consolidated Statements of
Operations. The Company has not recorded accrued interest and penalties on
uncertain tax positions as of June 30, 2010. The Company’s liability for
uncertain tax positions is reviewed periodically and is adjusted as events occur
that affect the estimated liability for additional taxes, such as the lapsing of
applicable statutes of limitations, the conclusion of tax audits, the
measurement of additional estimated liabilities based on current calculations,
the identification of new uncertain tax positions, the release of administrative
tax guidance affecting the Company’s estimates of tax liabilities, or the
rendering of court decisions affecting its estimates of tax liabilities.





The
Company recorded a full valuation allowance on its deferred tax assets in 2009
due to uncertainties surrounding the Company’s ability to generate future
taxable income to realize such deferred income tax assets.  In evaluating
the need for a valuation allowance, the Company made judgments and estimates
related to future taxable income, the timing of the reversal of temporary
differences and facts and circumstances.  The Company continues to maintain
a full valuation allowance against its deferred tax assets as of June 30,
2010.  However, subsequent changes in facts and circumstances that affect
the Company’s judgments or estimates in determining the proper deferred tax
assets or liabilities could materially affect the valuation allowance.





14




14.
Financial Information for Parent Guarantor and Subsidiary





The
following presents condensed consolidating financial information for the
Company, segregating: (1) Intermediate, the parent which has unconditionally
guaranteed, jointly and severally the 2012 Notes and 2013 Notes and has pledged
its investment in the common stock of EPL as collateral for the 2012 Notes; and
(2) EPL, the issuer of the 2012 Notes that also unconditionally guaranteed,
jointly and severally the 2012 Notes.  EPL is a wholly owned
subsidiary of Intermediate.





For the
Thirteen Weeks Ended June 30, 2010


(in
thousands)





ConsolidatedEPL
                
                
                Intermediate
                
                
                Subtotal
                
                
                Eliminations
                
                
                TotalRevenues
                
                $
                71,235
                
                
                $
                -
                
                
                $
                71,235
                
                
                $
                -
                
                
                $
                71,235Operating
      expenses
                
                
                63,978
                
                
                
                16
                
                
                
                63,994
                
                
                
                -
                
                
                
                63,994Operating
      income (loss)
                
                
                7,257
                
                
                
                (16
                )
                
                
                7,241
                
                
                
                -
                
                
                
                7,241Investment
      in subsidiary
                
                
                -
                
                
                
                865
                
                
                
                865
                
                
                
                (865
                )
                
                
                -Interest
      expense and other
                
                
                8,166
                
                
                
                1,077
                
                
                
                9,243
                
                
                
                -
                
                
                
                9,243Provision
      (benefit) for income taxes
                
                
                (44
                )
                
                
                73
                
                
                
                29
                
                
                
                -
                
                
                
                29Net
      loss
                
                
                (865
                )
                
                
                (2,031
                )
                
                
                (2,896
                )
                
                
                865
                
                
                
                (2,031
                )





For the
Thirteen Weeks Ended July 1, 2009


(in
thousands)





ConsolidatedEPL
                  
                  
                  Intermediate
                  
                  
                  Subtotal
                  
                  
                  Eliminations
                  
                  
                  TotalRevenues
                  
                  $
                  72,664
                  
                  
                  $
                  -
                  
                  
                  $
                  72,664
                  
                  
                  $
                  -
                  
                  
                  $
                  72,664Operating
      expenses
                  
                  
                  68,531
                  
                  
                  
                  (7
                  )
                  
                  
                  68,524
                  
                  
                  
                  -
                  
                  
                  
                  68,524Operating
      income
                  
                  
                  4,133
                  
                  
                  
                  7
                  
                  
                  
                  4,140
                  
                  
                  
                  -
                  
                  
                  
                  4,140Investment
      in subsidiary
                  
                  
                  -
                  
                  
                  
                  15,513
                  
                  
                  
                  15,513
                  
                  
                  
                  (15,513
                  )
                  
                  
                  -Interest
      expense and other
                  
                  
                  8,059
                  
                  
                  
                  969
                  
                  
                  
                  9,028
                  
                  
                  
                  -
                  
                  
                  
                  9,028Provision
      for income taxes
                  
                  
                  11,587
                  
                  
                  
                  8,022
                  
                  
                  
                  19,609
                  
                  
                  
                  -
                  
                  
                  
                  19,609Net
      loss
                  
                  
                  (15,513
                  )
                  
                  
                  (24,497
                  )
                  
                  
                  (40,010
                  )
                  
                  
                  15,513
                  
                  
                  
                  (24,497
                  )




15




For the
Twenty-six Weeks Ended June 30, 2010


(in
thousands)





ConsolidatedEPL
                
                
                Intermediate
                
                
                Subtotal
                
                
                Eliminations
                
                
                TotalRevenues
                
                $
                139,227
                
                
                $
                -
                
                
                $
                139,227
                
                
                $
                -
                
                
                $
                139,227Operating
      expenses
                
                
                127,552
                
                
                
                81
                
                
                
                127,633
                
                
                
                -
                
                
                
                127,633Operating
      income (loss)
                
                
                11,675
                
                
                
                (81
                )
                
                
                11,594
                
                
                
                -
                
                
                
                11,594Investment
      in subsidiary
                
                
                -
                
                
                
                5,438
                
                
                
                5,438
                
                
                
                (5,438
                )
                
                
                -Interest
      expense and other
                
                
                16,320
                
                
                
                2,155
                
                
                
                18,475
                
                
                
                -
                
                
                
                18,475Provision
      (benefit) for income taxes
                
                
                793
                
                
                
                (20
                )
                
                
                773
                
                
                
                -
                
                
                
                773Net
      loss
                
                
                (5,438
                )
                
                
                (7,654
                )
                
                
                (13,092
                )
                
                
                5,438
                
                
                
                (7,654
                )Cash
      flow used in operations
                
                
                (1,718
                )
                
                
                (2,128
                )
                
                
                (3,846
                )
                
                
                -
                
                
                
                (3,846
                )Cash
      flow used in investing activities
                
                
                (3,655
                )
                
                
                -
                
                
                
                (3,655
                )
                
                
                -
                
                
                
                (3,655
                )Cash
      flow (used in) provided by financing activities
                
                
                (2,468
                )
                
                
                2,127
                
                
                
                (341
                )
                
                
                -
                
                
                
                (341
                )Net
      decrease in cash
                
                
                (7,841
                )
                
                
                (1
                )
                
                
                (7,842
                )
                
                
                -
                
                
                
                (7,842
                )Cash
      and equivalents at beginning of period
                
                
                11,126
                
                
                
                151
                
                
                
                11,277
                
                
                
                -
                
                
                
                11,277Cash
      and equivalents at end of period
                
                
                3,285
                
                
                
                150
                
                
                
                3,435
                
                
                
                -
                
                
                
                3,435




For the
Twenty-six Weeks Ended July 1, 2009


(in
thousands)





ConsolidatedEPL
                            
                            Intermediate
                            
                            
                            Subtotal
                            
                            
                            Eliminations
                            
                            
                            TotalRevenues
                            $
                            143,297
                            
                            $
                            -
                            
                            
                            $
                            143,297
                            
                            
                            $
                            -
                            
                            
                            $
                            143,297Operating
      expenses
                            
                            135,035
                            
                            
                            77
                            
                            
                            
                            135,112
                            
                            
                            
                            -
                            
                            
                            
                            135,112Operating
      income (loss)
                            
                            8,262
                            
                            
                            (77
                            )
                            
                            
                            8,185
                            
                            
                            
                            -
                            
                            
                            
                            8,185Investment
      in subsidiary
                            
                            -
                            
                            
                            15,825
                            
                            
                            
                            15,825
                            
                            
                            
                            (15,825
                            )
                            
                            
                            -Interest
      expense and other
                            
                            12,516
                            
                            
                            1,901
                            
                            
                            
                            14,417
                            
                            
                            
                            -
                            
                            
                            
                            14,417Provision  for
      income taxes
                            
                            11,571
                            
                            
                            7,971
                            
                            
                            
                            19,542
                            
                            
                            
                            -
                            
                            
                            
                            19,542Net
      loss
                            
                            (15,825
                            )
                            
                            (25,774
                            )
                            
                            
                            (41,599
                            )
                            
                            
                            15,825
                            
                            
                            
                            (25,774
                            )Cash
      flow provided by operations
                            
                            6,846
                            
                            
                            1
                            
                            
                            
                            6,847
                            
                            
                            
                            -
                            
                            
                            
                            6,847Cash
      flow used in investing activities
                            
                            (11,085
                            )
                            
                            -
                            
                            
                            
                            (11,085
                            )
                            
                            
                            -
                            
                            
                            
                            (11,085
                            )Cash
      flow provided by financing activities
                            
                            13,757
                            
                            
                            -
                            
                            
                            
                            13,757
                            
                            
                            
                            -
                            
                            
                            
                            13,757Net
      increase in cash
                            
                            9,518
                            
                            
                            1
                            
                            
                            
                            9,519
                            
                            
                            
                            -
                            
                            
                            
                            9,519Cash
      and equivalents at beginning of period
                            
                            926
                            
                            
                            150
                            
                            
                            
                            1,076
                            
                            
                            
                            -
                            
                            
                            
                            1,076Cash
      and equivalents at end of period
                            
                            10,444
                            
                            
                            151
                            
                            
                            
                            10,595
                            
                            
                            
                            -
                            
                            
                            
                            10,595




16




As of
June 30, 2010


(in
thousands)





ConsolidatedEPL
                  
                  
                  Intermediate
                  
                  
                  Subtotal
                  
                  
                  Eliminations
                  
                  
                  TotalASSETSCurrent
      Assets
                  
                  $
                  15,989
                  
                  
                  $
                  152
                  
                  
                  $
                  16,141
                  
                  
                  $
                  (461
                  )
                  
                  $
                  15,680Investment
      in subsidiary
                  
                  
                  -
                  
                  
                  
                  123,028
                  
                  
                  
                  123,028
                  
                  
                  
                  (123,028
                  )
                  
                  
                  -Property
      and equipment
                  
                  
                  75,746
                  
                  
                  
                  -
                  
                  
                  
                  75,746
                  
                  
                  
                  -
                  
                  
                  
                  75,746Other
      assets
                  
                  
                  354,142
                  
                  
                  
                  3,241
                  
                  
                  
                  357,383
                  
                  
                  
                  (2,999
                  )
                  
                  
                  354,384Total
      assets
                  
                  
                  445,877
                  
                  
                  
                  126,421
                  
                  
                  
                  572,298
                  
                  
                  
                  (126,488
                  )
                  
                  
                  445,810LIABILITIES
      & EQUITYCurrent
      liabilities
                  
                  
                  30,591
                  
                  
                  
                  11,119
                  
                  
                  
                  41,710
                  
                  
                  
                  (2,999
                  )
                  
                  
                  38,711Non-current
      liabilities
                  
                  
                  292,258
                  
                  
                  
                  18,721
                  
                  
                  
                  310,979
                  
                  
                  
                  (461
                  )
                  
                  
                  310,518Equity
                  
                  
                  123,028
                  
                  
                  
                  96,581
                  
                  
                  
                  219,609
                  
                  
                  
                  (123,028
                  )
                  
                  
                  96,581Total
      liabilities & equity
                  
                  
                  445,877
                  
                  
                  
                  126,421
                  
                  
                  
                  572,298
                  
                  
                  
                  (126,488
                  )
                  
                  
                  445,810




As of
December 30, 2009


(in
thousands)





ConsolidatedEPL
                
                
                Intermediate
                
                
                Subtotal
                
                
                Eliminations
                
                
                TotalASSETSCurrent
      assets
                
                $
                28,516
                
                
                $
                156
                
                
                $
                28,672
                
                
                $
                (462
                )
                
                $
                28,210Investment
      in subsidiary
                
                
                -
                
                
                
                130,368
                
                
                
                130,368
                
                
                
                (130,368
                )
                
                
                -Property
      and equipment
                
                
                77,868
                
                
                
                -
                
                
                
                77,868
                
                
                
                -
                
                
                
                77,868Other
      assets
                
                
                355,541
                
                
                
                3,342
                
                
                
                358,883
                
                
                
                (3,071
                )
                
                
                355,812Total
      assets
                
                
                461,925
                
                
                
                133,866
                
                
                
                595,791
                
                
                
                (133,901
                )
                
                
                461,890LIABILITIES
      & EQUITYCurrent
      liabilities
                
                
                40,132
                
                
                
                514
                
                
                
                40,646
                
                
                
                (3,072
                )
                
                
                37,574Non-current
      liabilities
                
                
                291,425
                
                
                
                29,342
                
                
                
                320,767
                
                
                
                (461
                )
                
                
                320,306Equity
                
                
                130,368
                
                
                
                104,010
                
                
                
                234,378
                
                
                
                (130,368
                )
                
                
                104,010Total
      liabilities & equity
                
                
                461,925
                
                
                
                133,866
                
                
                
                595,791
                
                
                
                (133,901
                )
                
                
                461,890


17




15.
New Accounting Pronouncements






In
October 2009, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) No. 2009-13, Multiple-Deliverable Revenue
Arrangements—a consensus of the FASB Emerging Issues Task Force, which
amends the guidance in ASC 605, Revenue Recognition. ASU No.
2009-13 eliminates the residual method of accounting for revenue on undelivered
products and instead, requires companies to allocate revenue to each of the
deliverable products based on their relative selling price. In addition, this
ASU expands the disclosure requirements regarding multiple-deliverable
arrangements. ASU No. 2009-13 will be effective for revenue arrangements entered
into during fiscal years beginning on or after June 15, 2010. The Company’s
adoption of ASU No. 2009-13 is not expected to have a material impact on the
Company’s financial position or results of operations.





In April
2010, the FASB issued ASU No. 2010-17, Milestone Method of Revenue Recognition—a
consensus of the FASB Emerging Issues Task Force, which amends the guidance in
ASC 605, Revenue Recognition. ASU No. 2010-17 provides guidance on defining a
milestone and determining when it is appropriate to utilize the milestone method
of revenue recognition in research and development arrangements. In addition,
this ASU requires new disclosures for companies that have research and
development arrangements that are accounted for using the milestone method. ASU
No. 2010-17 will be effective on a prospective basis for milestones achieved
during interim and annual periods beginning on or after June 15, 2010 and early
adoption is permitted. The Company’s adoption of ASU No. 2010-17 is not expected
to have a material impact on the Company’s financial position or results of
operations.





16.
Restatement of Condensed Consolidated Financial Statements





We have
restated our accompanying 13 weeks ended and 26 weeks ended July 1, 2009
Condensed Consolidated Statements of Operations and 26 weeks ended July 1, 2009
Condensed Consolidated Statements of Cash Flows from amounts previously reported
to correct an income tax error associated with the accounting for a full
valuation allowance recorded during the second quarter of 2009. The error was
due to incorrectly classifying certain intangible assets as indefinite-lived
assets when the full valuation allowance was recorded.





The
correction of the error, as reflected in our 13 weeks ended and 26 weeks ended
July 1, 2009 Condensed Consolidated Statements of Operations, decreased our
provision for income taxes and net loss for the period by $2,747,000. This
correction also decreased our net loss and deferred income taxes on the
Condensed Consolidated Statements of Cash Flows for the 26 weeks ended July 1,
2009 by $2,747,000 as well.






The
following is a summary of effects of these changes on the 2009 Condensed
Consolidated Financial Statements:





Condensed
      Consolidated Statements of Operations
                                        (In
      thousands)AsPreviously13
      Weeks Ended July 1, 2009
                                      
                                      Reported
                                      
                                      
                                      Adjustments
                                      
                                      
                                      As
      AdjustedProvision
      (benefit) for income taxes
                                      
                                      
                                      22,356
                                      
                                      
                                      
                                      (2,747
                                      )
                                      
                                      
                                      19,609Net
      income (loss)
                                      
                                      
                                      (27,244
                                      )
                                      
                                      
                                      2,747
                                      
                                      
                                      
                                      (24,497
                                      )26
      Weeks Ended July 1, 2009Provision
      (benefit) for income taxes
                                      
                                      
                                      22,289
                                      
                                      
                                      
                                      (2,747
                                      )
                                      
                                      
                                      19,542Net
      income (loss)
                                      
                                      
                                      (28,521
                                      )
                                      
                                      
                                      2,747
                                      
                                      
                                      
                                      (25,774
                                      )




Condensed
      Consolidated Statements of Cash Flows(In
      thousands)AsPreviously26
      Weeks Ended July 1, 2009
                                            
                                            Reported
                                            
                                            
                                            Adjustments
                                            
                                            
                                            As
      AdjustedNet
      income (loss)
                                            
                                            
                                            (28,521
                                            )
                                            
                                            
                                            2,747
                                            
                                            
                                            
                                            (25,774
                                            )Deferred
      income taxes
                                            
                                            
                                            22,289
                                            
                                            
                                            
                                            (2,747
                                            )
                                            
                                            
                                            19,542




17.  Subsequent
Events
  On August 11, 2010,Stephen E. Carley,President, Chief
Executive Officer and director of the Company, notified the Company of his voluntary
resignation asPresident, Chief Executive Officer and director of the
Company, effective as of September
12, 2010.
  Effective as of September 12, 2010,
Stephen J. Sather, Senior Vice President of Operations of the Company, will be
appointed to serve as the acting President and Chief Executive Officer of the
Company.Mr. Sather will continue to serve in his current position
as Senior Vice President of Operations while serving as acting President and Chief Executive Officer of
the Company.


18


Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations





You
should read the following discussion together with our condensed consolidated
financial statements and related notes thereto included elsewhere in this
filing.





Certain
statements contained within this report may be deemed to constitute
“forward-looking statements” within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of
1934.  The Company intends that all such statements be subject to the
safe harbor provisions contained in those sections.  Forward-looking
statements are those that do not relate solely to historical fact. They include,
but are not limited to, any statement that may predict, forecast, indicate or
imply future results, performance, achievements or events. Forward-looking
statements generally contain words such as “believe,” “anticipate,” “expect,”
“estimate,” “intend,” “project,” “plan,” “will,” “should,” “may,” “could” or
words or phrases of similar meaning.





These
forward-looking statements reflect our current views with respect to future
results, performance, achievements or events.  Readers are cautioned
that such forward-looking statements are subject to risks and uncertainties and
many important factors, including factors outside of the control of the Company,
could cause actual results, performance, achievements or events to differ
materially from those discussed in the forward-looking statements. Except for
our ongoing obligation to disclose material information as required by federal
securities laws, we do not intend to update you concerning any future revisions
to any forward-looking statements to reflect events or circumstances occurring
after the date of this report.





Factors
that could cause actual results to differ materially from those expressed or
implied by the forward-looking statements include but are not limited to the
adverse impact of economic conditions on our operating results and financial
condition, on our ability to comply with the terms and covenants of our debt
agreements and on our ability to pay or to refinance our existing debt or to
obtain additional financing; our substantial level of indebtedness;
food-borne-illness incidents; negative publicity, whether or not valid;
increases in the cost of chicken;  our dependence upon frequent
deliveries of food and other supplies; our vulnerability to changes in consumer
preferences and economic conditions; our sensitivity to events and conditions in
the greater Los Angeles area, our largest market; our ability to compete
successfully with other quick service and fast casual restaurants; our ability
to expand into new markets; our reliance on our franchisees, who have also been
adversely impacted by the recession; matters relating to labor laws and the
adverse impact of related litigation, including wage and hour class actions; our
ability to support our  franchise system; our ability to renew leases
at the end of their term; the impact of applicable federal, state or local
government regulations; our ability to protect our name and logo and other
proprietary information; litigation we face in connection with our
operations.  Actual results may differ materially due to these risks
and uncertainties and those described in our Annual Report on Form 10-K (File
No. 333-115644) as filed with the Securities and Exchange Commission on March
30, 2010, as updated from time to time in our quarterly reports and current
reports filed with the Commission.  Although the Company believes that
the assumptions underlying the forward-looking statements are reasonable, any of
the assumptions could prove inaccurate and, therefore, the Company cannot assure
the reader that the results, performance, achievements or events contemplated by
the forward-looking statements will be realized in the timeframe anticipated or
at all.  In light of the significant uncertainties inherent in
forward-looking statement included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the Company’s objectives or plans will be
achieved.   Accordingly, readers are cautioned not to place undue
reliance on such forward-looking statements.


19




We use a
52-53 week fiscal year ending on the last Wednesday of the calendar year. In a
52-week fiscal year, each quarter includes 13 weeks of operations; in a 53-week
fiscal year, the first, second and third quarters each include 13 weeks of
operations and the fourth quarter includes 14 weeks of operations. Fiscal year
2009, which ended December 30, 2009, was a 52-week fiscal year. Fiscal year 2010
which will end December 29, 2010, is also a 52-week fiscal year.





References
to “our restaurant system” or “system-wide” mean both company-operated and
franchised restaurants. Unless otherwise indicated, references to “our
restaurants” or results or statistics attributable to one or more restaurants
without expressly identifying them as company-operated, franchise or the entire
restaurant system mean our company-operated restaurants only.





Overview





EPL
Intermediate, Inc. (“Intermediate”) through its wholly-owned subsidiary El Pollo
Loco, Inc. (“EPL” and together with Intermediate, the “Company,” “we,” “us” and
“our”) owns, operates and franchises restaurants specializing in marinated
flame-grilled chicken. Our distinct menu, inspired by the kitchens of Mexico,
features our authentic recipe flame-grilled chicken, which along with our
service format and value price points, serves to differentiate our unique
brand.  In the first half of 2010, we introduced steak products as an
additional choice for our customers.  We offer high-quality,
freshly-prepared food commonly found in fast casual restaurants, while at the
same time providing the value and convenience typically available at traditional
quick serve restaurant or QSR chains.  Our restaurants are located
principally in California, with additional restaurants in Arizona, Colorado,
Connecticut, Georgia, Illinois, Missouri, Nevada, New Jersey, Oregon, Texas,
Utah, and Virginia. Our typical restaurant is a freestanding building ranging
from approximately 2,200 to 2,600 square feet with seating for approximately 60
customers and offering drive-thru convenience.





Our store
counts at July 1, 2009, June 30, 2010 and December 30, 2009 are set forth below:





El
      Pollo Loco RestaurantsJuly 1,
                                  2009
                                
                                
                                June 30,
                                  2010
                                
                                
                                December 30,
                                  2009Company-owned
                                
                                
                                167
                                
                                
                                
                                171
                                
                                
                                
                                172Franchised
                                
                                
                                250
                                
                                
                                
                                241
                                
                                
                                
                                243System-wide
                                
                                
                                417
                                
                                
                                
                                412
                                
                                
                                
                                415





During
the 26 weeks ended June 30, 2010, the Company did not open any new restaurants
and closed one restaurant. During this same 26 week period, our franchisees
opened one new restaurant and closed three restaurants.





We plan
to open a total of two company-operated restaurants in fiscal 2010. We believe
our franchisees will open a total of three to four new restaurants in fiscal
2010, two of which opened as of July 8, 2010.  The growth in new
restaurant openings and the rate of restaurant closings have been, and are
expected to continue to be, negatively impacted by the economic climate, as
discussed below.  In response to this challenging economic
environment, we are adjusting our growth strategy for the future to focus on a
new generation (Gen3) reduced cost restaurant that we believe will appeal to
both single unit and multi-unit franchisees.  The Gen3 is designed to
offer the same features (with fewer seats and no salsa bar) of a typical 2,600
square foot free-standing drive-thru restaurant, at about half the
cost.  The Gen3, which is expected to range from 1,800 to 2,200 square
feet, is also expected to have reduced construction costs and a shorter
build-out period than our existing restaurant design.





At the
end of the second quarter of 2010, we had 19 system-wide restaurants open in
markets east of the Rockies. The 19 open stores are currently experiencing a
wide range of sales volumes, and a majority of them have sales volumes that are
significantly less than the chain average due to the lack of brand awareness in
the new markets.





Our
revenue is derived from two primary sources, company-operated restaurant revenue
and franchise revenue, the latter of which is comprised principally of franchise
royalties and to a lesser extent franchise fees and sublease rental income. A
common measure of financial performance in the restaurant industry is
“same-store sales.” A restaurant enters our comparable restaurant base for the
calculation of same-store sales the first full week after the 15-month
anniversary of its opening. For the 13 weeks ended June 30, 2010, same-store
sales for system-wide restaurants decreased 4.9% compared to the corresponding
period in 2009.  For the 26 weeks ended June 30, 2010, same-store
sales for system-wide restaurants decreased 5.7% compared to the corresponding
period in 2009. System-wide same-store sales include same-store sales at all
company-owned stores and franchise-owned stores, as reported by franchisees. We
use system-wide sales information in connection with store development
decisions, planning and budgeting analyses. This information is useful in
assessing consumer acceptance of our brand and facilitates an understanding of
financial performance as our franchisees pay royalties (included in franchise
revenue) and contribute to advertising pools based on a percentage of their
sales.  Same-store sales at company-operated restaurants decreased
3.2% for the 13 weeks ended June 30, 2010 compared to the 13 weeks ended July 1,
2009.  Same-store sales at company-operated restaurants decreased 4.3%
for the 26 weeks ended June 30, 2010 compared to the 26 weeks ended July 1,
2009.


20




Changes
in company-operated restaurant revenue reflect changes in the number of
company-operated restaurants and changes in same-store sales, which are impacted
by price and transaction volume changes.  The depressed economy and
increased unemployment, especially in California where a majority of our
company-operated restaurants are located, negatively impacted our transaction
volume in the first two quarters of 2010. Consumers are eating out less, and
when they do eat out, are more sensitive to price increases and are looking for
specials and promotions. This has an impact on both same-store sales and on
restaurant margins. We believe 2010 will be as challenging as 2009 from an
economic standpoint for QSR’s making it difficult to achieve same-store sales
growth. Many factors can influence sales at all or specific restaurants,
including increased competition, strength of marketing promotions, the
restaurant manager’s operational execution and changes in local market
conditions and demographics.





Franchise
revenue consists of royalties, initial franchise fees revenue, IT support
services fees and franchise rental income. Royalties average 4% of the
franchisees’ net sales. During 2009 and the first two quarters of 2010, due to
adverse economic conditions, some of our franchises were late in the payment of
franchise fees due us and one franchisee filed for bankruptcy in 2009 (we
purchased four of its stores and five other stores were closed).   As
of June 30, 2010, we had commitments from franchisees to open 71 restaurants at
various dates through 2024. However, the current adverse economic and liquidity
conditions have caused some franchisees to delay the opening of new restaurants
under existing development agreements or to terminate such
agreements.  As a result of these conditions, we estimate that 13
of those restaurants could open. As of June 30, 2010 we were legally authorized
to market franchises in 40 states. We have entered into development agreements
that usually result in area development fees being recognized as the related
restaurants open.  Due to the recession and associated liquidity
crisis, most of our developing franchisees are having a difficult time obtaining
financing for new restaurants. Additionally, some of our franchisees that
operate other restaurant concepts have incurred significant loss of cash flow
due to declining sales in these other concepts, as well as their El Pollo Loco
restaurants. This has had the effect of slowing development of new El Pollo Loco
restaurants, especially in new markets.  In addition, the economic
conditions have had a negative effect on our ability to recruit and financially
qualify new single-unit and developing franchisees.  We expect these
trends to continue at least through 2010.  We expect that many of the
franchisees who have development agreements will not be able to meet the new
unit opening dates required under the agreements. There were two franchise
development agreements that were terminated in the first quarter of 2010 and as
a result, the Company recognized approximately $240,000 of income related to
those terminations in the first quarter of 2010.  No franchise
development agreements were terminated in the second quarter of 2010.





We
sublease facilities to certain franchisees and the sublease rent is included in
our franchise revenue. This revenue may exceed, equal or be less than rent
payments made under the leases that are included in franchise expense depending
on the specific location.  Since we do not expect to lease or sublease
new properties to our franchisees as we expand our franchise restaurants, we
expect the portion of franchise revenue attributable to franchise rental income
to decrease over time.





Product
cost, which includes food and paper costs, is our largest single expense.
Chicken accounts for the largest part of product cost, which was approximately
11.7% of revenue for company-owned restaurants in the first twenty-six weeks
ended June 30, 2010.  These costs are subject to increase or decrease
based on commodity cost changes and depend in part on the success of controls we
have in place to manage product cost in the restaurants. We currently have three
supply contracts for chicken.  Two of the contracts have a floor and
ceiling price for chicken which expire in February 2011 and our remaining
commitments to purchase chicken under these two supply contracts totaled
approximately $16.1 million at June 30, 2010.   In March 2010, we
entered into a new two year supply contract for chicken that has a fixed price
for the term of the agreement.  This new chicken supply contract has
pricing that is relatively consistent compared to the prior year’s expired
contract and provides that we will make purchases of chicken totaling
approximately $20.3 million from the vendor over the two year term of the
contract.  We also have long-term beverage supply agreements with
terms extending into 2011 and 2012 with estimated remaining obligations at June
30, 2010 totaling $4.2 million and a fixed price steak supply contract which
expires on December 31, 2010.  At June 30, 2010, we estimate that our
remaining obligation under this steak supply contract was approximately $1.6
million.  For the near term, based upon current market conditions, we
currently believe that our overall product costs will in the  best
case remain relatively constant, although increases are possible.






Payroll
and benefits make up the next largest single expense. Payroll and benefits have
been and remain subject to inflation, including minimum wage increases and
expenses for health insurance and workers’ compensation insurance. A significant
number of our hourly staff are paid at rates consistent with the applicable
federal or state minimum wage and, accordingly, increases in the minimum wage
will increase our labor cost. Should there be any increases in minimum wages,
there is no assurance that we will be able to increase menu prices in the future
to offset any of these increased costs. Workers’ compensation insurance costs
are subject to a number of factors, including the impact of legislation. We have
seen an overall reduction in the number of workers’ compensation claims due to
employee safety initiatives that we implemented in 2002.  This has
resulted in lower workers’ compensation expenses in the twenty-six weeks ended
June 30, 2010, compared to the corresponding period in 2009. We self-insure
employee health benefits.  We cannot estimate at this time the effect
that the recently passed healthcare reform legislation will have on our self
insurance programs or on our business, financial condition, results of
operations or cash flow, although we expect that it will increase our future
health insurance costs significantly and, accordingly, have a negative impact on
us and on some of our franchisees as we currently do not believe that all such
increased costs can be passed on to our customers through higher prices given
current economic and competitive conditions.





Depreciation
and amortization expense consists primarily of depreciation of property and
equipment of our restaurants.





Other
operating expenses include restaurant other operating expense, franchise
expense, and general and administrative expense.


21




Restaurant
other operating expense includes occupancy, advertising and other costs such as
utilities, repair and maintenance, janitorial and cleaning and operating
supplies.





Franchise
expense consists primarily of rent expense that we pay to landlords associated
with leases under restaurants we are subleasing to franchisees. Franchise
expense usually fluctuates primarily as subleases expire and is to some degree
based on rents that are tied to a percentage of sales calculation. Because we do
not expect to lease or sublease new properties to our franchisees as we expand
our franchise restaurants, we expect franchise expense as a percentage of
franchise revenue to decrease over time. Expansion of our franchise operations
does not require us to incur material additional capital expenditures.





General
and administrative expense includes all corporate and administrative functions
that support existing operations and provide the infrastructure to facilitate
our growth. These expenses are impacted by litigation costs, directors and
officers insurance, compliance with laws relating to corporate governance and
public disclosure, and audit and tax fees.





2010
Initiatives





In
January 2010, we introduced steak, to our menu in a limited time offer
promotion.   The citrus-marinade and signature flame-grilling
technique on our steak products provides an additional choice for our customers
to enjoy, in addition to our flame-grilled chicken products. After evaluation of
the steak products during the first quarter of 2010, the Company added steak as
a permanent choice to our menu in the second quarter of 2010. As of the
twenty-six weeks ended June 30, 2010, steak products were approximately 6.6% of
our total sales mix as a percent of restaurant sales.





We have
“refreshed” the majority of our company-owned stores to improve the appearance
of our units. The “refresh” scope of work may have included a fresh coat of
paint to the interior and/or exterior, wallpaper, restroom finishes, replacing
lighting fixtures and ceilings and replacing tables, chairs, and artwork in the
restaurants. As of June 30, 2010, the Company had “refreshed” approximately 110
restaurants. The “refresh” of an approximate target of 115 company-owned
restaurants is expected to be completed by the end of August 2010.  We
estimate our total cost to “refresh” Company stores to be approximately $3.0
million. Additionally, over 100 franchisee-owned restaurants have been scoped
for the “refresh” program in 2010.  In order to conserve capital until
our operating results improve, the Company believes this is the best alternative
to a complete and more expensive “re-image” program at this time.





Results
of Operations





Our
operating results for the 13 weeks ended July 1, 2009 and June 30, 2010 are
expressed as a percentage of restaurant revenue below:





13 Weeks EndedJuly 1,
                  2009
                
                
                June 30,
                  2010Operating
      Statement Data:Restaurant
      revenue
                
                
                100.0
                %
                
                
                100.0
                %Product
      cost
                
                
                32.8
                
                
                
                31.2Payroll
      and benefits
                
                
                26.7
                
                
                
                26.1Depreciation
      and amortization
                
                
                4.1
                
                
                
                3.9Other
      operating expenses
                
                
                37.5
                
                
                
                34.9Operating
      income
                
                
                6.1
                
                
                
                10.9Interest
      expense-net
                
                
                12.4
                
                
                
                13.9Other
      expense
                
                
                1.0
                
                
                
                0.0Other
      income
                
                
                0.0
                
                
                
                0.0Loss
      before provision for income taxes
                
                
                (7.2
                )
                
                
                (3.0
                )Provision
      for income taxes
                
                
                28.9
                
                
                
                0.0Net
      loss
                
                
                (36.1
                )
                
                
                (3.1
                )Supplementary
      Operating Statement Data:Restaurant
      other operating expense
                
                
                23.5
                
                
                
                22.9Franchise
      expense
                
                
                1.4
                
                
                
                1.4General
      and administrative expense (1)
                
                
                12.6
                
                
                
                10.6Total
      other operating expenses
                
                
                37.5
                
                
                
                34.9





(1)
General and administrative expenses as a percent of total operating revenue for
2009 and 2010 were 11.8% and 9.9%, respectively.


22




13
Weeks Ended June 30, 2010 Compared to 13 Weeks Ended July 1, 2009





Restaurant
revenue decreased $1.3 million, or 1.9%, to $66.5 million for the 13 weeks ended
June 30, 2010 from $67.8 million for the 13 weeks ended July1, 2009. This
decrease was primarily due to a reduction of $2.2 million in restaurant revenue
resulting from a 3.2% decrease in company-operated same-store sales for the 2010
period from the 2009 period. Restaurants enter the comparable restaurant base
for same-store sales the first full week after that restaurant’s fifteen-month
anniversary. The components of the company-operated comparable sales decrease
were attributed to a transaction decrease of 11.4%, and a check average increase
of 9.2%. Check average increased and transactions decreased in the second
quarter of 2010 compared to the second quarter of 2009 mainly due to deep
discount promotions in the second quarter of 2009 that increased traffic and
lowered check averages in that period.  In addition, the
company-operated same-store sales decrease reflects intense competition and a
general sales softness in the QSR industry due to higher unemployment, the
recession and other adverse economic and consumer confidence factors that
escalated in 2009 and are expected to continue through the remainder of 2010 and
possibly into 2011.  The decrease was also due to lost sales of $0.4
million from the closure of one and two company-operated restaurants in 2009 and
2010, respectively, of which one was managed by EPL through a management
agreement with a franchisee. These decreases were partially offset by $0.6
million of revenue from four restaurants opened in fiscal 2009 and also by $0.9
million of revenue from four restaurants purchased from a franchisee in
September 2009.





Franchise
revenue decreased $0.2 million, or 3.3%, to $4.7 million for the 13 weeks ended
June 30, 2010 from $4.9 million for the 13 weeks ended July 1, 2009. This
decrease is due primarily to lower royalties and percentage rent income, which
are based on sales, resulting from a 6.0% decrease in franchise-operated
same-store sales for the 2010 period from the 2009
period.  Franchise-operated same-store sales were impacted by the same
adverse factors that affected company-operated same-store sales described above.
Additionally, franchise revenue for the second quarter of 2010 was adversely
impacted by the closure of three and thirteen franchise units in the first
half of 2010 and in 2009, respectively, which impact was partially offset by the
four openings in 2009 and one new restaurant in the first half of 2010.





Product
costs decreased $1.4 million, or 6.4%, to $20.8 million for the 13 weeks ended
June30, 2010 from $22.2 million for the 13 weeks ended July 1, 2009. This
decrease resulted primarily from the overall decline in company-operated
restaurant revenue in the 2010 period compared to the 2009 period.





Product
cost as a percentage of restaurant revenue was 31.2% for the 13 weeks ended June
30, 2010 compared to 32.8% for the 13 weeks ended July 1, 2009. This decrease
resulted primarily from certain contracts for non-ingredient items that were
renewed in the first quarter 2010 with favorable pricing compared to the prior
year, and promotions in the prior year comparable period which featured deep
discounts which were not continued in the 2010 period.  The
decreases in product costs as a percentage of restaurant revenue were partially
offset by the introduction in the first half of 2010 of our steak products which
have lower gross margins than our overall chicken products.  Overall,
we expect pressure on commodity costs to continue for the remainder of
2010.





Payroll
and benefit expenses decreased $0.7 million, or 3.9%, to $17.4 million for the
13 weeks ended June 30, 2010 from $18.1 million for the 13 weeks ended July 1,
2009.  This decrease resulted from fewer employees needed to support
the lower sales volume for the 2010 period and some enhancements we made to our
labor scheduling tool. The decrease was partially offset by the four restaurants
opened and four acquired restaurants in 2009.


23


As a
percentage of restaurant revenue, these costs decreased 0.6% to 26.1% for the
2010 period from 26.7% for the 2009 period mainly due to the reasons
mentioned above.





Depreciation
and amortization decreased $0.2 million, or 6.9%, to $2.6 million for the 13
weeks ended June 30, 2010 compared to $2.8 million for the 13 weeks ended July
1, 2009.   This decrease was mainly attributed to a portion of
our point of sale equipment in our restaurants becoming fully depreciated and no
longer having amortization expense of our franchise network intangible asset
that was fully impaired in 2009.  These decreases were partially
offset by additional restaurants opened.





Depreciation
and amortization as a percentage of restaurant revenue decreased slightly to
3.9% for the thirteen weeks ended June 30, 2010 compared with 4.1% for the
thirteen weeks ended July 1, 2009.





Other
operating expenses include restaurant other operating expense, franchise
expense, and general and administrative expense.





Restaurant
other operating expense, which includes utilities, repair and maintenance,
advertising, property taxes, occupancy and other operating expenses, decreased
$0.7 million, or 4.4%, to $15.2 million for the 13 weeks ended June 30, 2010
from $15.9 million for the 13 weeks ended July 1, 2009. This decrease is mainly
attributed to the reasons noted below.





Restaurant
other operating expense as a percentage of restaurant revenue decreased to 22.9%
for the 2010 period from 23.5% for the 2009 period. The decrease was primarily
due to lower advertising expense of $0.7 million or 1.0% as a percentage of
restaurant revenue. Advertising expense each quarter may be above or below our
planned annual rate of approximately 4% of revenue, depending on the timing of
marketing promotions and the relative weights and price of media
spending.  Additionally, other operating expenses were favorable when
compared to the comparable prior year period by $0.1 million or 0.1% as a
percent of restaurant sales due to some expenses in the second quarter of 2009
that did not occur in the second quarter of 2010, lower operating supply
purchases and the timing of services performed relating to service contracts
compared to the prior year. These expenses were partially offset by higher
repairs and maintenance expense of $0.1 million or 0.2% as a percentage of
restaurant revenue mainly due to timing and some expenses associated with our
“Refresh” program.






Franchise
expense consists primarily of rent expense that we pay to landlords associated
with leases under restaurants we are subleasing to franchisees. This expense
usually fluctuates primarily as subleases expire and to some degree based on
rents that are tied to a percentage of sales calculation. Franchise expense
remained flat at $1.0 million for the 13 weeks ended June 30, 2010 and July 1,
2009.





General
and administrative expense decreased $1.6 million, or 17.7%, to $7.0 million for
the 13 weeks ended June 30, 2010 from $8.6 million for the 13 weeks ended July
1, 2009. The decrease was mainly attributed to a decrease in legal settlements
of $3.0 million.  The decrease was partially offset by $1.3 million of
asset impairment charges which were recognized in the second quarter of 2010 for
one underperforming store that will continue to be operated.





General
and administrative expense as a percentage of total revenue decreased 1.9% to
9.9% for the 13 weeks ended June 30, 2010 from 11.8% for the 13 weeks ended July
1, 2009. The decrease was due to the decline in the relative amounts spent
during the periods, which decline was partially offset by the decline in
revenue, in each case for the reasons noted above.





Interest
expense, net of interest income, increased $0.8 million, or 10.3%, to $9.2
million for the 13 weeks ended June 30, 2010 from $8.4 million for the 13 weeks
ended July 1, 2009. Due to issuing $132.5 million aggregate principal amount of
113⁄4% senior secured notes in May, 2009 and paying off our 2009 senior secured
notes, our average debt balances for the 13 weeks ended June 30, 2010, increased
to $268.3 million compared to $253.2 million for the thirteen weeks ended July
1, 2009 and our average interest rate increased to 12.48% for the thirteen weeks
ended June 30, 2010 compared to 9.68% for the 2009 period.





The
Company had $0.6 million in other expense in the 2009 period primarily related
to the change in the fair value of the interest rate swap
agreement.  The fixed interest rate that the Company agreed to pay was
higher than the floating rate estimated for the life of the
agreement.  The Company terminated the interest rate swap agreement in
the second quarter of 2009.





Despite
having a loss for the thirteen weeks ended June 30, 2010, we had an income
tax provision of $0.03 million primarily related to the effect of changes in our
deferred taxes and the related effect of maintaining a full valuation allowance
against certain of our deferred tax assets as of June 30,
2010.   For the thirteen weeks ended July 1, 2009, we had an
income tax provision of $19.6 million as we recorded a valuation allowance
against our deferred tax assets.





As a
result of the factors noted above, we had a net loss of $2.0 million for the 13
weeks ended June 30, 2010 compared to a net loss of $24.5 million for the 13
weeks ended July 1, 2009.


24




Our
operating results for the 26 weeks ended July 1, 2009 and June 30, 2010 are
expressed as a percentage of restaurant revenue below:





26 Weeks EndedJuly 1,
                  2009
                
                
                June 30,
                  2010Operating
      Statement Data:Restaurant
      revenue
                
                
                100.0
                %
                
                
                100.0
                %Product
      cost
                
                
                32.3
                
                
                
                31.2Payroll
      and benefits
                
                
                26.8
                
                
                
                26.9Depreciation
      and amortization
                
                
                4.2
                
                
                
                4.0Other
      operating expenses
                
                
                37.8
                
                
                
                36.2Operating
      income
                
                
                6.1
                
                
                
                8.9Interest
      expense-net
                
                
                10.8
                
                
                
                14.2Other
      expense
                
                
                0.3
                
                
                
                0.0Other
      income
                
                
                (0.3
                )
                
                
                0.0Loss
      before provision for income taxes
                
                
                (4.7
                )
                
                
                (5.3
                )Provision  for
      income taxes
                
                
                14.6
                
                
                
                0.6Net
      loss
                
                
                (19.3
                )
                
                
                (5.9
                )Supplementary
      Operating Statement Data:Restaurant
      other operating expense
                
                
                23.1
                
                
                
                23.8Franchise
      expense
                
                
                1.5
                
                
                
                1.5General
      and administrative expense (1)
                
                
                13.2
                
                
                
                10.9Total
      other operating expenses
                
                
                37.8
                
                
                
                36.2





(1)
General and administrative expenses as a percent of total operating revenue for
2009 and 2010 were 12.3% and 10.1%, respectively.





26
Weeks Ended June 30, 2010 Compared to 26 Weeks Ended July 1, 2009






Restaurant
revenue decreased $3.8 million, or 2.8%, to $129.9 million for the 26 weeks
ended June 30, 2010 from $133.7 million for the 26 weeks ended July1, 2009. This
decrease was primarily due to a reduction of $5.6 million in restaurant revenue
resulting from a 4.3% decrease in company-operated same-store sales for the 2010
period from the 2009 period. Restaurants enter the comparable restaurant base
for same-store sales the first full week after that restaurant’s fifteen-month
anniversary. The components of the company-operated comparable sales decrease
were attributed to a transaction decrease of 9.3%, and a check average increase
of 5.5%. Check average increased and transactions decreased in the first 26
weeks of 2010 compared to the first 26 weeks of 2009 mainly due to deep discount
promotions in the first 26 weeks of  2009 that increased traffic and
lowered check averages in that period. The decrease was also due to lost sales
of $0.6 million and $0.7 million from the closure of one and two
company-operated restaurants in 2009 and 2010, respectively, of which one was
managed by EPL through a management agreement with a franchisee. These decreases
were partially offset by $1.6 million of revenue from four restaurants opened in
fiscal 2008 and 2009 not yet in the comparable store base and also by $1.9
million of revenue from four restaurants purchased from a franchisee in
September 2009.





Franchise
revenue decreased $0.3 million, or 3.1%, to $9.3 million for the 26 weeks ended
June 30, 2010 from $9.6 million for the 26 weeks ended July 1, 2009. This
decrease is due primarily to lower royalties and percentage rent income, which
are based on sales, resulting from a 6.7% decrease in franchise-operated
same-store sales for the 2010 period from the 2009
period.  Franchise-operated same-store sales were impacted by the same
adverse factors that affected company-operated same-store sales described above.
Additionally, franchise revenue was negatively impacted by the closure
of three and thirteen franchise units in the first half of 2010 and in
2009, respectively and which negative impact was partially offset by the five
openings in 2009.





Product
costs decreased $2.6 million, or 6.1%, to $40.5 million for the 26 weeks ended
June 30, 2010 from $43.2 million for the 26 weeks ended July 1, 2009. This
decrease resulted primarily from the decline in company-operated restaurant
revenue in the 2010 period compared to the 2009 period.





Product
cost as a percentage of restaurant revenue was 31.2% for the 26 weeks ended June
30, 2010 compared to 32.3% for the 26 weeks ended July 1, 2009. This decrease
resulted primarily from certain contracts for non-ingredient items that were
renewed in the first quarter 2010 with favorable pricing compared to the prior
year and promotions in the prior year comparable period which featured deep
discounts which were not continued in the 2010 period.  The decreases
in product costs as a percentage of restaurant revenue were partially offset by
the introduction in the first half of 2010 of our steak products which have
lower gross margins than our overall chicken products.  Overall, we
expect pressure on commodity costs to continue for the remainder of
2010.


25





Payroll
and benefit expenses decreased $0.9 million, or 2.4%, to $34.9 million for the
26 weeks ended June 30, 2010 from $35.8 million for the 26 weeks ended July 1,
2009.  This decrease resulted from fewer employees needed to support
the lower sales volume for the 2010 period and some enhancements we made to our
labor scheduling tool. The decrease was partially offset by increased labor
costs required to train our restaurant employees for our new steak roll-out in
January 2010 and the four restaurants opened and four acquired restaurants in
2009.





As a
percentage of restaurant revenue, payroll and benefits expense increased 0.1% to
26.9% for the 2010 period from 26.8% for the 2009 period due to the decrease in
restaurant revenue and relatively fixed nature of restaurant management costs
and increased training mentioned above.





Depreciation
and amortization decreased $0.4 million, or 7.8%, to $5.2 million for the 26
weeks ended June 30, 2010 compared to $5.6 million for the 26 weeks ended July
1, 2009.   This decrease was mainly attributed to a portion of
our point of sale equipment in our restaurants becoming fully depreciated and no
longer having amortization expense of our franchise network intangible asset
that was fully impaired in   2009.  These decreases
were partially offset by additional restaurants opened.





Depreciation
and amortization as a percentage of restaurant revenue decreased slightly to
4.0% for the 26 weeks ended June 30, 2010 compared with 4.2% for the 26 weeks
ended July 1, 2009.





Other
operating expenses include restaurant other operating expense, franchise
expense, and general and administrative expense.





Restaurant
other operating expense, which includes utilities, repair and maintenance,
advertising, property taxes, occupancy and other operating expense were $30.9
million for the 26 weeks ended June 30, 2010 and were unchanged compared with
the  26 weeks ended July 1, 2009.





Restaurant
other operating expense as a percentage of restaurant revenue increased to 23.8%
for the 2010 period from 23.1% for the 2009 period. The increase was mainly due
to deleverage caused by lower sales, an increase in occupancy costs of 0.3% as a
percentage of restaurant sales, an increase in natural gas of 0.2% as a percent
of restaurant revenue mainly due to higher natural gas prices, and higher
repairs and maintenance expense of $0.2 million or 0.2% as a percentage of
restaurant revenue mainly due to timing and some expenses associated with our
“Refresh” program.  These increases were partially offset by lower
advertising expense of $0.3 million or flat as a percentage of restaurant
revenue.  Advertising expense each period may be above or below our
planned annual rate of 4% of revenue, depending on the timing of marketing
promotions and the relative weights of advertising and prices of media spending.


26




Franchise
expense consists primarily of rent expense that we pay to landlords associated
with leases under restaurants we are subleasing to franchisees. This expense
usually fluctuates primarily as subleases expire and to some degree based on
rents that are tied to a percentage of sales calculation. Franchise expense
remained relatively flat at $1.9 million for the 26 weeks ended June 30, 2010
and July 1, 2009.





General
and administrative expense decreased $3.6 million, or 20.4%, to $14.1 million
for the 26 weeks ended June 30, 2010 from $17.7 million for the 26 weeks ended
July 1, 2009. The decrease was mainly attributed to a decrease in legal
settlements of $2.9 million and a decrease in asset impairment of $0.7 million.





General
and administrative expense as a percentage of total revenue decreased 2.2% to
10.1% for the 26 weeks ended June 30, 2010 from 12.3% for the 26 weeks ended
July 1, 2009. The decrease was mainly due to the decline in the relative
amounts spent during the periods, which decline was partially offset by the
decline in revenue, in each case for the reasons noted above.





Interest
expense, net of interest income, increased $4.0 million, or 28.1%, to $18.5
million for the 26 weeks ended June 30, 2010 from $14.4 million for the 26 weeks
ended July 1, 2009. Due to issuing $132.5 million aggregate principal amount of
113⁄4% senior secured notes in May, 2009 and paying off our 2009 senior secured
notes, our average debt balances for the 26 weeks ended June 30, 2010, increased
to $268.3 million compared to $254.4 million for the 26 weeks ended July 1, 2009
and our average interest rate increased to 12.51% for the 26 weeks ended June
30, 2010 compared to 9.12% for the 2009 period.





The
Company had $0.4 million in other expense in the 2009 period related to the
change in the fair value of the interest rate swap agreement.  The
fixed interest rate that the Company agreed to pay was higher than the floating
rate estimated for the life of the agreement.  The Company terminated
the interest rate swap agreement in the second quarter of 2009.





The
Company had $0.5 million in other income in the 2009 period attributed to a net
gain on the repurchase of a portion of the 2013 notes.  This gain was
net of the portion of the deferred finance costs associated with the
notes.  No bonds were repurchased in the first 26 weeks of 2010.





Despite
having a loss for the 26 weeks ended June 30, 2010, we had an income tax
provision of $0.8 million, primarily related to the effect of changes in our
deferred taxes and the related effect of maintaining a full valuation allowance
against certain of our deferred tax assets as of June 30, 2010. For the 26 weeks
ended July 1, 2009, we had an income tax provision of $19.5 million as we
recorded a valuation allowance against our deferred tax assets.





As a
result of the factors noted above, we had a net loss of $7.7 million for the 26
weeks ended June 30, 2010 compared to a net loss of $25.8 million for the 26
weeks ended July 1, 2009.





Liquidity
and Capital Resources





Our
principal liquidity requirements are to service our debt and meet our capital
expenditure needs. At June 30, 2010, our total debt was $268.4 million, compared
to $268.2 million at December 30, 2009. Assuming we do not
repurchase  any of the outstanding 2014 bonds, in May 2011
Intermediate is required to make a mandatory redemption of a portion of our 2014
Notes at an estimated cost of approximately $10.6 million along with the
interest payment that will then be due.  See “ Debt and Other Obligations”
below. Our ability to make payments on our indebtedness and to fund planned
capital expenditures will depend on our available cash and our ability to
generate adequate cash flows in the future, which, to a certain extent, is
subject to general economic, financial, competitive, legislative, regulatory and
other factors that are beyond our control. Based on our current level of
operations, we believe our cash flow from operations, available cash of $3.4
million at June 30, 2010, available borrowings under our credit facility (which
availability was  approximately $6.2 million at June 30, 2010), and
funds from Chicken Acquisition Corp. (“CAC”) will be adequate to meet our
liquidity needs for the next 12 months.  Under the covenants governing our
outstanding Notes, EPL is limited on the amount that it can distribute to
Intermediate, including amounts that Intermediate could use to fund its debt
service.    Intermediate is a wholly-owned subsidiary of El Pollo
Loco Holdings, Inc., which is a wholly owned indirect subsidiary of
CAC.   Our results of operations as well as current economic and
constrained liquidity conditions could make it more difficult or costly for us
to obtain additional debt financing or to refinance our existing debt when it
becomes necessary (assuming such financing is then available to the Company), or
could otherwise make alternative sources of liquidity or financing costly or
unavailable. See “ Debt and
Other Obligations”.






In the 26
week period ended June 30, 2010, our capital expenditures totaled $3.7 million,
consisting mainly of $2.2 million for restaurant image “refreshes” and $1.0
million for capitalized repairs of existing sites and $0.5 million for point of
sale upgrades and corporate information technology enhancements. We currently
expect our capital expenditures for 2010 to be approximately $7.0 to $8.0
million in light of a reduced number of expected new store openings in 2010
compared to prior years and increased restaurant image “refreshes” in 2010.


27




Cash and
cash equivalents, including restricted cash, decreased $7.8 million from $11.4
million at December 31, 2009 to $3.6 million at June 30, 2010. See “Working
Capital and Cash Flows” below for information explaining this
decrease.  We cannot provide assurance that our business will generate
sufficient cash flow from operations or that future borrowings will be available
to EPL under EPL’s senior secured credit facility in an amount sufficient to
enable us to service our indebtedness or to fund our other liquidity and capital
needs.  If we acquire additional restaurants from franchisees, our
debt service requirements could increase.  In addition, we may fund
restaurant openings through credit received by trade suppliers and landlord
contributions.  If our cash flow from operations is inadequate to meet
our obligations under our indebtedness we may need to refinance all or a portion
of our indebtedness, including the notes, on or before maturity.  We
cannot provide assurance that we will be able to refinance any of our
indebtedness, if necessary, on commercially reasonable terms or at all.





As
discussed in Note 8, Commitments and Contingencies in our condensed consolidated
financial statements, we are involved in various lawsuits, including wage and
hour class action lawsuits. In order to mitigate the adverse effects of these
cases, such as on-going legal expense, diversion of management time, and the
risk of a substantial judgment against us (which could occur even if we believe
we have a strong legal basis for our position), we have in the past, and may in
the future, settle these cases. Any substantial settlement payments or damage
awards against us if the cases go to trial could have a material adverse effect
on our liquidity and financial condition. In fiscal 2009 we agreed to settle
various lawsuits for payments totaling $10.4 million of which $8.7 million were
made during the twenty-six weeks ended June 30, 2010. These payments were
partially offset by a $4.5 million settlement award we received in February
2010. As of June 30, 2010, we have $2.5 million remaining to be paid on these
lawsuits.





As a
holding company, the stock of EPL constitutes our only material asset. EPL
conducts all of our consolidated operations and owns substantially all of our
consolidated operating assets. Our principal source of the cash required to pay
our obligations is the cash that EPL generates from its operations. EPL is a
separate and distinct legal entity, has no obligation to make funds available to
Intermediate and currently has restrictions that limit distributions or
dividends to be paid by EPL to Intermediate. Furthermore, subject to certain
restrictions, EPL is permitted under the terms of EPL’s senior secured credit
facilities and the indentures governing the 2012 Notes, 2013 Notes and 2014
Notes to incur additional indebtedness that may severely restrict or prohibit
EPL from making distributions or loans, or paying dividends, to us. If we are
unable to obtain cash from EPL or other sources, we will not be able to meet our
debt and other obligations. For the cash interest payment of approximately $2.1
million that was due on May 15, 2010 for the 2014 Notes, EPL made a cash
dividend distribution to Intermediate to cover this interest
payment.  As mentioned elsewhere herein, EPL may or may not make
future funds available to Intermediate to service its debt.





Working
Capital and Cash Flows





We
presently have, in the past have had, and may have in the future, negative
working capital balances. The working capital deficit principally is the result
of our interest payments, lower sales and capital expenditures.  We
are able to operate with a substantial working capital deficit mainly because
(1) restaurant revenues are received primarily on a cash or near-cash basis with
a low level of accounts receivable, (2) rapid turnover results in a limited
investment in inventories and (3) accounts payable for food and beverages
usually become due after the receipt of cash from the related
sales.  As a result, funds from cash sales and franchise revenue not
immediately needed to pay for food and supplies typically have been used for
capital expenditures and/or debt service payments. We expect our negative
working capital balances to continue to increase for the remainder of 2010 based
on the continuation of the economic downturn and its impact on our results of
operations and our plan to open two new restaurants in the second half of 2010.





During
the 26 weeks ended June 30, 2010, our cash and cash equivalents, including
restricted cash, decreased by $7.8 million to $3.6 million from the period ended
December 30, 2009. This decrease was primarily due to legal settlement payments
of $8.7 million, $3.7 million used for capital expenditures and $0.2 million of
capital lease payments partially offset by the $4.5 million in cash received
from a settlement award. The $0.7 million decline in capital expenditures for
the 26 week period ended June 30, 2010 compared to comparable period in 2009 was
mainly due to decreased spending on new restaurants as we concentrated on
“refreshing” the majority of our units.





Debt
and Other Obligations





Credit
Facility





On May
22, 2009, EPL entered into a credit agreement (the "Credit Facility") with
Intermediate as guarantor, Jefferies Finance LLC, as administrative and
syndication agent, and the various lenders. The Credit Facility provides for a
$12.5 million revolving line of credit with borrowings (including obligations in
respect of revolving loans and letters of credit) limited at any time to the
lesser of (i) $12.5 million and (ii) the Company’s consolidated cash flow for
the most recently completed trailing twelve consecutive months and, in no event,
shall obligations in respect of letters of credit exceed an amount equal to
$10.0 million.  EPL has $6.3 million of letters of credit outstanding
under the Credit Facility as of June 30, 2010.





The
Credit Facility bears interest, payable quarterly, at an Alternate Base Rate or
LIBOR, at EPL's option, plus an applicable margin. The applicable margin rate is
5.50% with respect to LIBOR and 4.50% with respect to Alternate Base Rate
advances.  The Credit Facility is secured by a first priority lien on
substantially all of the Company’s assets and is guaranteed by Intermediate. The
Credit Facility matures on July 22, 2012.


28





The
Credit Facility contains a number of covenants that, among other things,
restrict, subject to certain exceptions, the Company’s ability to (i) incur
additional indebtedness or issue preferred stock; (ii) create liens on assets;
(iii) engage in mergers or consolidations; (iv) sell assets; (v) make certain
restricted payments; (vi) make investments, loans or advances; (vii) make
certain acquisitions; (viii) engage in certain transactions with affiliates;
(ix) change the Company’s lines of business or fiscal year; and (x) engage in
speculative hedging transactions. In addition, the Credit Agreement will require
the Company to maintain, on a consolidated basis, a minimum level of
consolidated cash flow at all times. As of June 30, 2010, the Company was in
compliance with all of the financial covenants contained in the Credit Facility
and had $6.2 million available for borrowings under the revolving line of
credit.





2012
Notes





On May
22, 2009, EPL issued $132.5 million aggregate principal amount of 11 3/4%
senior secured notes due December 1, 2012 (the “2012 Notes”) in a private
placement. EPL sold the 2012 Notes at an issue price equal to 98.0% of the
principal amount, resulting in gross proceeds to EPL of $129.9 million before
expenses and fees. Interest is payable each year in June and December beginning
December 1, 2009. The 2012 Notes are guaranteed by Intermediate and are secured
by a second priority lien on substantially all of the Company’s assets. The 2012
Notes may be redeemed at a premium, at the discretion of EPL, after March 1,
2011, or sooner in connection with certain equity offerings. If EPL undergoes
certain changes of control, each holder of the notes may require EPL to
repurchase all or a part of its notes at a price of 101% of the principal
amount. The Indenture governing the 2012 Notes contains a number of covenants
that, among other things, restrict, subject to certain exceptions, EPL’s ability
to incur additional indebtedness; pay dividends or certain restricted payments;
make certain investments; sell assets; create liens; merge; and enter into
certain transactions with its affiliates. As of June 30, 2010, we had $130.7
million outstanding in aggregate principal amount under our 2012 Notes. The
principal value of the 2012 Notes will increase (representing accretion of
original issue discount) from the date of original issuance so that the accreted
value of the 2012 Notes will be equal to the full principal amount of $132.5
million at maturity.





EPL
incurred direct finance costs of approximately $9.2 million in connection with
sale of the 2012 Notes and the registration of these notes. These costs have
been capitalized and are included in other assets in the Company’s condensed
consolidated balance sheets, and the related amortization is reflected as a
component of interest expense in the condensed consolidated statements of
operations. The Company used the net proceeds from the 2012 Notes to repay
certain indebtedness of the Company.





As of
June 30, 2010, we calculated our “fixed charge coverage ratio” (as defined
in the indenture governing the 2012 Notes) at 1.24 to 1:00. The indenture
permits EPL to incur indebtedness or issue disqualified stock, and the EPL’s
restricted subsidiaries to incur indebtedness or issue preferred stock, and to
make dividend and other restricted payments to Intermediate, if, among other
things, our fixed charge coverage ratio for the most recently ended four full
fiscal quarters would have been at least 2.00 to 1:00, as determined on a pro
forma basis as if such indebtedness had been incurred or the disqualified stock
or the preferred stock had been issued or such dividend or other restricted
payment had been made at the beginning of such four-quarter period. Since EPL
does not currently meet the fixed charge coverage ratio, EPL is not permitted to
incur additional indebtedness (other than indebtedness under EPL’s revolving
credit facility) and is prohibited from paying certain dividends and restricted
payments in an aggregate amount in excess of $2.9 million under the terms of the
2012 Notes. A failure to meet the ratios affects only our ability to incur
additional indebtedness and make certain dividend and other restricted payments,
but does not constitute a default under these Notes.





2014
and 2013 Notes





On
November 18, 2005, Intermediate issued 141⁄2% senior discount notes due 2014 (the
“2014 Notes”) and EPL issued 11 3/4% senior notes due 2013 (the “2013 Notes”).
The Indentures governing the 2014 Notes and the 2013 Notes contain a number of
covenants that, among other things, restrict, subject to certain exceptions,
EPL’s, and, in the case of the 2014 Notes, Intermediate’s ability to incur
additional indebtedness; pay dividends or certain restricted payments; make
certain investments; sell assets; create liens; merge; and enter into certain
transactions with their respective affiliates.





At June
30, 2010, Intermediate had $29.3 million outstanding in aggregate principal
amount of 2014 Notes. No cash interest accrued on the 2014 Notes prior to
November 15, 2009. Instead, the principal value of the 2014 Notes increased
(representing accretion of original issue discount) from the date of original
issuance until but not including November 15, 2009 at a rate of 14 1⁄2 %per annum compounded
annually, so that the accreted value of the 2014 Notes on November 15, 2009 was
equal to the full principal amount of $29.3 million at maturity. Beginning on
November 15, 2009, interest accrues on the 2014 Notes at an annual rate of 14 1⁄2
%per annum payable
semi-annually in arrears on May 15 and November 15 of each year, beginning May
15, 2010. Principal is due on November 15, 2014. The 2014 Notes are unsecured
and are not guaranteed.  The 2014 Notes may be redeemed at a premium,
at the discretion of Intermediate. If Intermediate undergoes certain changes of
control, each holder of the 2014 Notes may require Intermediate to repurchase
all or a part of its notes at a price of 101% of the principal amount.


29




If any of
the 2014 Notes are outstanding at May 15, 2011, Intermediate is required to
redeem for cash a portion of each note then outstanding at 104.5% of the
accreted value of such portion of such note, plus accrued and unpaid interest,
if any. Based on the principal amount of the 2014 Notes outstanding at June 30,
2010, it is estimated that we will be required to pay approximately $10.6
million in May 2011 to satisfy the mandatory redemption
requirement.  As a holding company, the stock of EPL constitutes
Intermediate’s only material asset. Consequently, EPL conducts all of the
Company’s consolidated operations and owns substantially all of the consolidated
operating assets. Intermediate has no material assets or operations; the
Company’s principal source of the cash required to pay its obligations is the
cash that EPL generates from its operations. EPL is a separate and distinct
legal entity, has no obligation to make funds available to Intermediate, and the
2013 Notes and the 2012 Notes have restrictions that limit distributions or
dividends that may be paid by EPL to Intermediate. See Note 14
to our Condensed Consolidated Financial Statements for condensed consolidating
financial statements of Intermediate and EPL.





As of
June 30, 2010, we had $106.4 million outstanding in aggregate principal amount
of 2013 Notes. The 2013
Notes may be redeemed at a premium, at the discretion of EPL. If EPL undergoes
certain changes of control, each holder of the 2013 Notes may require EPL to
repurchase all or a part of its notes at a price of 101% of the principal
amount.





As of
June 30, 2010, we calculated our “fixed charge coverage ratio” and our
“consolidated leverage ratio” (as defined in the indenture governing the
2014 Notes) at 1.15 to 1 and 6.78 to 1, respectively. Similar ratios exist in
the indenture governing the 2013 Notes. Under the indentures governing the 2014
Notes and 2013 Notes, we may incur indebtedness, Intermediate and EPL may issue
disqualified stock, restricted subsidiaries of EPL may issue preferred stock,
and the Company make certain dividend and other restricted payments if, among
other things, our fixed charge coverage ratio for the most recently ended four full
fiscal quarters would have been at least 2.00 to 1, and if our consolidated
leverage ratio would have been equal to or less than 7.50 to 1, all as
determined on a pro forma basis as if such indebtedness had been incurred or the
disqualified stock or the preferred stock had been issued or such dividend or
other restricted payment had been made at the beginning of such four-quarter
period. Since we do not currently meet the fixed charge coverage ratio, EPL is
not permitted to incur additional indebtedness (other than indebtedness under
EPL’s revolving credit facility) under the
terms of the 2013 and 2014 Notes ,Intermediate is
not permitted to incur additional indebtedness under the terms of the 2014
Notes, EPL is prohibited from paying certain dividends and restricted payments
under the 2013 Notes in an aggregate amount in excess of $2.9 million and
Intermediate is prohibited from paying certain dividends and restricted payments
to its parent, El Pollo Loco Holdings, Inc., under the 2014 Notes in an
aggregate amount in excess of $2.9 million. A failure to meet the ratios affects
only our ability to incur additional indebtedness and make certain dividend and
other restricted payments, but does not constitute a default under these Notes.





Other
Obligations





At June
30, 2010, we had outstanding letters of credit totaling $6.3 million, which
served primarily as collateral for our various workers’ compensation insurance
programs.





We have
certain land and building leases for which the building portion is treated as a
capital lease. These assets are amortized over the shorter of the lease term or
useful life.





Franchisees
pay a monthly advertising fee of 4% of gross sales for the Los Angeles,
California designated market area and 5% of gross sales for other markets.
Pursuant to our Franchise Disclosure Document, we contribute, where we have
company-operated restaurants, to the advertising fund on the same basis as
franchised restaurants. Under our franchise agreements, we are obligated to use
all advertising fees collected from franchisees to purchase, develop and engage
in advertising, public relations and marketing activities to promote the El
Pollo Loco ®brand.





Critical
Accounting Policies and Estimates





The
preparation of our financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. On an ongoing basis, we evaluate our estimates and judgments, including
those related to recoverability of fixed assets, intangible assets, account
receivables, closed restaurants, workers’ compensation insurance, the cost of
our self-insured health benefits, the realization of gross deferred tax assets,
tax reserves, and contingent liabilities including the outcome of litigation. We
base our estimates and judgments on historical experience and on various other
factors that we believe to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions. A
summary of our critical accounting policies and estimates is included in our
Annual Report on Form 10-K (File No. 333-115644) as filed with the Securities
and Exchange Commission on March 30, 2010.


30




Litigation
Contingency





As
discussed in Note 8 to our Condensed Consolidated Financial Statements in
Part I of this Report, we are subject to employee claims against us based, among
other things, on discrimination, harassment, wrongful termination, or violation
of wage and labor laws in the ordinary course of business.  These
claims may divert our financial and management resources that would otherwise be
used to benefit our operations. In recent years a number of restaurant companies
have been subject to wage and hour class action lawsuits alleging violations of
federal and state labor laws.  A number of these lawsuits have
resulted in the payment of substantial damages by the defendants.  We
are currently a defendant in several wage and hour class action
lawsuits.  Since our insurance carriers have denied coverage of these
claims, a significant judgment against us could adversely affect our financial
condition and adverse publicity resulting from these allegations could adversely
affect our business. In an effort to mitigate these adverse consequences, we
have in the past, and could in the future, seek to settle certain of these
lawsuits.  The on-going expense of these lawsuits, and any substantial
settlement payment or judgment against us, could adversely affect our business,
financial condition, operating results or cash flows.   In 2009, we
accrued $10.4 million for litigation settlements of which $2.5 million remains
to be paid and is included in the accompanying condensed consolidated balance
sheets in accounts payable as of June 30, 2010.






Off-Balance
Sheet and Other Arrangements





As of
June 30, 2010 and July 1, 2009, we had letters of credit outstanding under our
Credit Facility in the aggregate amount of approximately $6.3 million and $6.3
million, respectively.





As a
result of assigning our interest in obligations under real estate leases in
connection with the sale of company-owned restaurants to some of our
franchisees, we are contingently liable on six lease
agreements.  These leases have various terms, the latest of which
expires in 2015.  As of June 30, 2010, the potential amount of
undiscounted payments we could be required to make in the event of non-payment
by the primary lessee was approximately $1.2 million.  The present
value of these potential payments discounted at our estimated pre-tax cost of
debt at June 30, 2010 was approximately $0.9 million. Our franchisees are
primarily liable on the leases.  We have cross-default provisions with
these franchisees that would put them in default of their franchise agreement in
the event of non-payment under the leases.  We believe these
cross-default provisions reduce our risk that we will be required to make
payments under these leases.





Item
3. Quantitative and Qualitative Disclosures About Market Risk





The
inherent risk in market risk sensitive instruments and positions primarily
relates to potential losses arising from adverse changes in interest rates. We
are subject to market risk from exposure to changes in interest rates based on
our financing activities. This exposure relates to borrowings under EPL’s senior
secured credit facility that bears interest at floating rates. As of June
30, 2010, we had no amounts outstanding under this facility.





We
purchase food and other commodities for use in our operations based on market
prices established with our suppliers.  Many of the commodities purchased
by us can be subject to volatility due to market supply and demand factors
outside of our control.  To manage this risk in part, we attempt to enter
into fixed price or floor/ceiling purchase commitments, with terms typically of
one to two years, for our chicken requirements.  Substantially all of our
food and supplies are available from several sources, which help to diversify
our overall commodity cost risk.  In addition, we may have the ability to
increase certain menu prices, or vary certain menu items offered, in response to
food commodity price increases. We do not use financial instruments to hedge
commodity prices, since our purchase arrangements with suppliers, to the extent
that we can enter into such arrangements, help control the ultimate cost that we
pay.





Item
4. Controls and Procedures





Our Chief
Executive Officer and Chief Financial Officer have concluded that the design and
operation of our disclosure controls and procedures are effective as of June 30,
2010. This conclusion is based on an evaluation conducted under the supervision
and with the participation of Company management. Disclosure controls and
procedures are those controls and procedures which are designed to ensure that
information required to be disclosed in the reports filed or submitted under the
Securities Exchange Act of 1934, as amended (the Exchange Act), by the issuer is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the SEC. “Disclosure controls and
procedures”  include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by an issuer in its
Exchange Act reports is accumulated and communicated to the issuer’s management,
including its principal executive and financial officers, as appropriate, to
allow timely decisions regarding required disclosure.





There
have been no changes in our internal control over financial reporting that
occurred during our 13 weeks ended June 30, 2010 that materially affect, or are
reasonably likely to materially affect, our internal control over financial
reporting.


31




PART
II – OTHER INFORMATION





Item
1. Legal Proceedings






As
previously disclosed in earlier reports filed with the Securities and Exchange
Commission, the Company entered into an agreement in the fourth quarter of 2009
to settle for $8.0 million a purported class action lawsuit brought by former
managers Haroldo Elias, Marco Ramirez and Javier Rivera. The Company funded the
settlement on January 14, 2010 and the Superior Court of the State of
California, County of Los Angeles, granted final approval of the class wide
settlement and entered Final Judgment at a hearing on April 20,
2010.  This settlement also included and settled the previously
disclosed purported class action complaint filed by Salvador Amezcua.
 
 In April
2007, Dora Santana filed a purported class action in state court in Los
Angeles County on behalf of all “Assistant Shift Managers.” Plaintiff
alleges wage and hour violations including working off the clock, failure to pay
overtime, and meal break violations on behalf of the purported class, currently
defined as all Assistant Managers from April 2003 to present. The parties have
agreed to settle this matter for approximately $0.8 million and have executed a
Settlement Agreement. This amount has been fully accrued for during the prior
year and is included in the accompanying condensed consolidated balance sheets
in accounts payable as of June 30, 2010.  The Court granted
preliminary approval of the settlement on February 25, 2010. A hearing for
final court approval is scheduled for August 16, 2010.
 
 On May
30, 2008, Jeannette Delgado, a former Assistant Manager filed a purported class
action on behalf of all hourly (i.e. non-exempt) employees of EPL in state court
in Los Angeles County alleging violations of certain California labor laws and
the California Business and Professions Code including failure to pay overtime,
failure to provide meal periods and rest periods and unfair business practices.
By statute, the purported class extends back four years, to May 30, 2004.
Plaintiff’s requested remedies include compensatory and punitive damages,
injunctive relief, disgorgement of profits and reasonable attorneys’ fees and
costs. The parties have agreed to settle this matter for approximately $1.7
million and have executed a Settlement Agreement. This amount has been fully
accrued for during the prior year and is included in the accompanying condensed
consolidated balance sheets in accounts payable as of June 30, 2010. The Court
granted preliminary approval of the settlement on February 25, 2010, and the
hearing for final court approval has been set for August 20, 2010.
 
 Martin
Penaloza, a former Assistant Manager, filed a purported class action on May 26,
2009 in Superior Court in Orange County, California. The claims, requested
remedies, and potential class in this case overlap those in the Delgado lawsuit
described above and will be included in that settlement.
 
 In
September 2008, American International Specialty Lines Insurance Company
(AISLIC) from whom the Company acquired excess insurance coverage, filed an
action for declaratory judgment seeking to have the court determine that it is
not required to indemnify EPL for any amounts awarded against it (or paid in
settlement) in connection’s with the previously settled EPL-Mexico v. EPL-USA
trademark litigation. The court issued a tentative ruling that there was no
coverage due to the intellectual property exclusion contained in the AISLIC
policy.  In July 2010, the parties agreed to settle this matter for
payment to the Company of $75,000 and a waiver of fees and costs by AISLIC.
 
 The
Company is also involved in various other claims and legal actions that arise in
the ordinary course of business. We do not believe that the ultimate resolution
of these other actions will have a material adverse effect on our financial
position, results of operations, liquidity and capital resources. A significant
increase in the number of claims or an increase in amounts owing under
successful claims could materially adversely affect our business, financial
condition, results of operation and cash flows.


Item
5.  Other Information





On August
12, 2010, the Company issued a press release reporting results of operations for
the second quarter and twenty-six weeks ended June 30, 2010.  A copy
of the press release is being furnished as Exhibit 99.1 hereto and is
incorporated herein by this reference. We do not intend for this exhibit to be
incorporated by reference into any other filings we make with the SEC. This
information is provided in this Report in response to Item 2.02, Results of
Operations and Financial Condition, and Item 9.01, Financial Statements and
Exhibits, of Form 8-K in lieu of filing a Form 8-K.


32




Item
6. Exhibits




ExhibitNumber
              
              Description of Documents31.1
              
              Certification
      Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
      Act of 193431.2
              
              Certification
      Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
      Act of 193432.1
              
              Certification
      Pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange
      Act of 193432.2
              
              Certification
      Pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange
      Act of 193499.1
              
              Press
      Release dated August 12, 2010


33




SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.






EPL INTERMEDIATE, INC.Date:
      August 12, 2010
              By:
              /s/ Stephen E. CarleyStephen
      E. CarleyPresidentBy:
              /s/ Gary CampanaroGary
      CampanaroChief
      Financial Officer and Treasurer


34




EXHIBIT
INDEX





ExhibitNumber
                      
                      Description of Documents31.1
                      
                      Certification
      Pursuant to Rule 13-a-14(a) or Rule 15d-14(a) of the Securities Exchange
      Act of 193431.2
                      
                      Certification
      Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
      Act of 193432.1
                      
                      Certification
      Pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange
      Act of 193432.2
                      
                      Certification
      Pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange
      Act of 193499.1
                      
                      Press
      Release dated August 12, 2010


35